Transcriber’s Notes:

  Underscores “_” before and after a word or phrase indicate _italics_
    in the original text.
  Equal signs “=” before and after a word or phrase indicate =bold=
    in the original text.
  Small capitals have been converted to SOLID capitals.
  Illustrations have been moved so they do not break up paragraphs.
  Typographical and punctuation errors have been silently corrected.




                              ACCOUNTING
                         THEORY AND PRACTICE

                     A TEXT-BOOK FOR COLLEGES AND
                  SCHOOLS OF BUSINESS ADMINISTRATION

                                  BY
                         ROY B. KESTER, PH.D.

                     CERTIFIED PUBLIC ACCOUNTANT;
                       PROFESSOR OF ACCOUNTING,
                          SCHOOL OF BUSINESS,
                          COLUMBIA UNIVERSITY

                               VOLUME I
                             (FIRST YEAR)

                            SECOND EDITION

                            [Illustration]

                           _Third Printing_

                               NEW YORK
                       THE RONALD PRESS COMPANY
                                 1922

                          Copyright, 1917, by
                       THE RONALD PRESS COMPANY

                          Copyright, 1922, by
                       THE RONALD PRESS COMPANY

                         _All Rights Reserved_

                        To My Father and Mother
                  AN APPRECIATION OF THEIR STEADFAST
                          INTEREST IN MY WORK




PREFACE


The basic soundness of the method of instruction in Accounting
developed in this book has received substantial demonstration
throughout five years of test. The Introduction to the first edition
contained the following statement regarding the development of the
subject:

“The method of approach as given in this volume is perhaps not orthodox
but it has seemed that the student, given an understanding of the
purpose which the accounting records are to serve, will be able to
make that record with real intelligence instead of by rule-of-thumb.
Accordingly, the balance sheet and the profit and loss statement are
presented first, as the goal towards which all record-keeping looks.
The student is taught to analyze business facts and conditions from
the very beginning. He is then led, step by step, through the use of
non-technical terms, into the ledger, where he sees the way in which
the data which he has been using are summarized. The books of original
entry are next explained, and the method by which the information is
classified as it is brought onto the books. Finally, the business
papers and documents which constitute the source of all entries are
described.”

To quote again from the original Introduction: “The subject is
developed in such a way that the student knowing something of
bookkeeping has little or no advantage over the one without such
knowledge. This book has been written for the use of students in our
colleges and universities desiring a first course in accounting. It
gives the scope of the work in accounting offered in the first year of
the School of Business of Columbia University.”

The method then advocated and used in a few institutions has become
quite generally accepted. It has justified itself by the ease and
extent to which students without any previous training in accounting
have grasped the essentials of the subject. Experience with the book
in the classroom, however, and changing ideas with regard to manner
of presentation and sequence of material, have shown as desirable a
rearrangement of some parts and an addition of new material in places.
Accordingly, a systematic revision has been made.

The arrangement of the subject matter of the first portion of the book
has been altered but slightly. The use and function of the balance
sheet and profit and loss statement have been somewhat amplified. The
working sheet has been introduced earlier than in the first edition
to afford an easy summary of the period’s results. It should later on
be made a part of the regular work of summarization. The controlling
account is also explained earlier so as to afford more practice in its
use. The accounting features of the partnership and of the corporation
are given continuous treatment. Here a new chapter has been added,
which discusses certain features of the corporation not treated in
the original book such as the issue and sale of treasury stock and of
bonds, bond interest as related to premium and discount, sinking fund,
sinking fund reserve, redemption of bonds, etc.

The material presented in the last quarter of the book deals with
the interrelations of accounting, financial management, buying, and
marketing. Thus the chapters dealing with the handling of cash, notes
receivable and payable, cash discounts, and balance sheet valuation,
treat of the relations between accounting and financial management.
Several chapters at the end treat of some special methods of accounting
practice and of the basic principles of single entry. In this portion
of the book new chapters on balance sheet valuation and on buying have
been added.

Entirely new problem material has been furnished, carefully graded and
related so far as possible to the subject matter of the chapters of the
text. For the convenience of the student this material is separated
from the text, and grouped in three appendices. A few of the problems
have been drawn from the examinations of various state boards and the
regents of the University of the State of New York, and from other
miscellaneous sources, to all of which acknowledgment is due. The
author is indebted to Mr. George B. Kelley for assistance in building
up a large part of the practice material. It need hardly be said that
a fundamentally sound knowledge of accounting cannot be gained without
ample practice work. Theory can never be sure of itself until put to
the test of practice.

The author desires to acknowledge again his debt to the many friends
whose counsel and aid counted so largely in the first writing of
this book. In the revision he finds himself still further indebted
to many instructors in all sections of the country for criticism and
suggestion. He desires especially to express his appreciation of
the active co-operation of his associates on the Columbia staff of
instructors in First Year Accounting, in particular Miss Nina Miller
and Messrs. Ralph T. Bickell and E. Gaylord Davis. In the actual work
of revision Messrs. Eskholme Wade, John Jaffee, and Raymond Gatchell
have given valuable assistance.

                                        ROY B. KESTER
  Columbia University,
    New York City,
      July 22, 1922




                             CONTENTS


    CHAPTER                                                  PAGE
         I BASIC RELATIONSHIPS—PROPRIETORSHIP                  1
        II ASSETS, LIABILITIES, AND CAPITAL                   11
       III THE BALANCE SHEET                                  22
        IV THE COMPARATIVE BALANCE SHEET                      32
         V THE ECONOMIC OR PROFIT AND LOSS ELEMENTS
             OF A BUSINESS                                    38
        VI THE PROFIT AND LOSS SUMMARY                        44
       VII INTERRELATION BETWEEN THE ECONOMIC AND THE
            FINANCIAL ELEMENTS OF A BUSINESS, AND SOME
            INTER-RATIOS                                      57
      VIII THE ACCOUNT                                        67
        IX THE ACCOUNT (Continued)                            72
         X THE PHILOSOPHY OF DEBIT AND CREDIT                 78
        XI DEBIT AND CREDIT AS APPLIED TO ASSET AND
            LIABILITY ACCOUNTS                                85
       XII DEBIT AND CREDIT AS APPLIED TO
            PROPRIETORSHIP ACCOUNTS                           91
      XIII DEBIT AND CREDIT AS APPLIED TO MIXED ACCOUNTS      97
       XIV PERIODIC WORK ON THE LEDGER                       106
        XV PERIODIC ADJUSTMENTS AND SUMMARIZATION            115
       XVI SOURCES OF DATA FOR THE LEDGER                    132
      XVII THE SUBDIVISION OF THE JOURNAL                    136
     XVIII THE PURCHASE AND SALES JOURNALS                   139
       XIX THE CASH JOURNALS                                 147
        XX THE MODERN JOURNAL                                162
       XXI BUSINESS PAPERS—NEGOTIABLE INSTRUMENTS            173
      XXII BUSINESS PAPERS—THE GOODS INVOICE AND
            BILL OF LADING                                   185
     XXIII BANKS AND THEIR METHODS                           192
      XXIV METHODS OF POSTING                                199
       XXV THE TRIAL BALANCE AND METHODS OF LOCATING
            ERRORS                                           204
      XXVI THE CLASSIFICATION OF ACCOUNTS                    213
     XXVII THE WORK SHEET AND SUMMARY STATEMENTS             221
    XXVIII ADJUSTING AND CLOSING THE BOOKS                   237
      XXIX TYPES OF ACCOUNTING RECORDS AND THEIR DEVELOPMENT 251
       XXX CONTROLLING ACCOUNTS                              264
      XXXI HANDLING CONTROLLING ACCOUNTS                     272
     XXXII PARTNERSHIP FROM A BUSINESS VIEWPOINT             284
    XXXIII PARTNERSHIP FROM THE ACCOUNTING VIEWPOINT         290
     XXXIV CAPITALIZATION OF THE PARTNERSHIP                 297
      XXXV OTHER PARTNERSHIP PROBLEMS                        305
     XXXVI PARTNERSHIP PROFITS                               313
    XXXVII PARTNERSHIP DISSOLUTION                           321
   XXXVIII THE CORPORATION                                   330
     XXXIX OPENING THE CORPORATION BOOKS                     338
        XL CURRENT AND CLOSING ENTRIES FOR THE CORPORATION   351
       XLI HANDLING THE CASH                                 366
      XLII NOTES RECEIVABLE AND PAYABLE                      376
     XLIII PROBLEMS ENCOUNTERED IN RECORDING NOTES
              RECEIVABLE AND PAYABLE                         384
      XLIV DISCOUNTS                                         392
       XLV BALANCE SHEET VALUATION                           403
      XLVI BUYING AND STOCK CONTROL                          420
     XLVII SALES                                             433
    XLVIII CONSIGNMENTS                                      447
      XLIX ADVENTURE SALES                                   460
         L ACCOUNTS CURRENT                                  468
        LI BALANCING METHODS                                 477
       LII SOME APPLICATION OF INTEREST AND PROPORTION       485
      LIII SINGLE OR SIMPLE ENTRY                            495
       LIV ILLUSTRATION OF SINGLE ENTRY                      504

  Appendix A—PRACTICE WORK FOR STUDENT—FIRST HALF-YEAR       513
           B—PRACTICE WORK FOR STUDENT—SECOND HALF-YEAR      553
           C—MISCELLANEOUS PROBLEMS FOR SUPPLEMENTARY WORK   597




                        FORMS


  FORM                                               PAGE
    1. Form of Ledger Accounts                         70
    2. Chart of Accounts                               75
    3. Accounts Balanced and Ruled                    109
    4. Transfer of Accounts to a New Page             112
    5. Personal and Notes Payable Accounts            113
    6. Standard Form of Journal                       135
    7. Purchase Journal                               142
    8. Modern Type of Purchase Journal                142
    9. Departmental Purchase Journal                  144
   10. Cash Book (Cash Receipts Journal)              148
   11. Cash Book (Disbursements Journal)              149
   12. Columnar Cash Book—Debit Side                  158
   13. Columnar Cash Book—Credit Side                 159
   14. Divided Column Journal                         164
   15. Opening Entries on Books                       166
   16. A Promissory Note                              175
   17. A Draft                                        175
   18. A Bank Draft                                   180
   19. Forms of Checks                                182
   20. Monthly Statement of Account                   191
   21. Bank Deposit Ticket                            193
   22. Cross-indexing in Posting                      202
   23. Work Sheet                                 226-227
   24. Balance Sheet—Report Form                      232
   25. Balance Sheet—Account Form                     233
   26. Statement of Profit and Loss—Report Form       234
   27. Statement of Profit and Loss—Account Form      235
   28. Profit and Loss Account in Ledger              249
   29. Standard Ledger—Divided Column                 258
   30. Standard Ledger—Center Column                  258
   31. Balance Ledger Rulings                         259
   32. Balance Ledger Rulings                         259
   33. Boston Ledger Sometimes Used for Depositors    262
   34. General Journal                                279
   35. Sales Journal Summary                          279
   36. General Journal Summary                        281
   37. Cash Book Summary Book—Receipts Side           282
   38. Cash Books Summary Book—Disbursements Side     282
   39. Petty Cash Book                                369
   40. Weekly Statement of Receipts and Disbursements 375
   41. Notes Receivable Journal                       380
   42. Discount Columns Used for Cash Balance         400
   43. Stock Control Card                             430
   44. Account Sales                                  451
   45. Form of Adjusted Account Current               470
   46. Account Marked for Analysis                    478
   47. Ledger Analysis Sheet                          480




Accounting—Theory and Practice




CHAPTER I

BASIC RELATIONSHIPS—PROPRIETORSHIP


=Records and Their Functions.=—As far back as our knowledge reaches,
records of some sort have been kept and used and they have frequently
formed the basis on which our knowledge rests. In a broad sense a
record may be defined as a written memorial, a register or history of
events, a testimony. Even though the desire to make and hand on to
the future a record of achievement is a deep-seated characteristic,
record-making has seldom been an end in itself. Knowledge of what has
been done has always been a starting point and a guide for future
achievement. The longhand or narrative record is indispensable in some
fields of knowledge; the shorthand or statistical record is equally
necessary in others. The statistical method and accounting are, without
question, most potent agencies for the advancement of human knowledge
and for the control of human relationships. They provide the basis in
fact on which judgments must largely rest. This book, therefore, may
begin by sketching the relation of accounting to some of the larger
fields of human endeavor—the economic organization of society and the
law—to point out its place in the business unit and briefly state the
basic function it performs therein.

=The Business Unit.=—To carry on its various activities, economic
society has organized itself into numberless separate units or
business organizations. These units are the means through which
society operates, their ultimate purpose being the easy and efficient
satisfaction of human economic wants. Individual business units,
conducted as they are by members of society, are under the broad
general supervision of society as a whole. This is evidenced everywhere
by the laws, licenses, and regulations by which society attempts to
regulate the activities of the individual for the larger interest of
society as a whole. As business is conducted in most parts of the
world, it is highly individualized rather than communized. There is a
growing tendency, however, for society to exercise a larger control and
supervision over all types of individual activity, particularly with
a view to conserving the welfare of its members. The business unit is
thus the medium through which society works to satisfy its economic
wants.

=Internal Organization of the Business Unit.=—Society early found that
only by means of a highly specialized division of its activities was
it possible to satisfy without waste its rapidly increasing economic
wants. Individual business units are thus organized for the purpose of
carrying on some one or more of these greatly subdivided activities.
Within itself the business unit is organized into departments or
divisions for the efficient and thrifty handling of its work. The
two large divisions in any business undertaking have to do with what
the economist calls the production and exchange of wealth, that is,
commodities, services, and so forth. In carrying on these activities
of production and exchange it has usually been found desirable to
segregate into separate departments certain major functions which are
common both to production and to exchange. What the major departments
may be depends very largely upon the size of the business unit,
its relative complexity of organization, and to some extent on the
individual ideas of its managers. Throughout the business world one
notes, however, a quite general departmentization under the following
heads:

  1. Finance
  2. Procurement or production
  3. Marketing or distribution
  4. Personnel
  5. General administration

There are two main activities under the control of the finance division
of a business: (a) the problem of original investment, including that
of location and acquisition of a plant suitable for the conduct of
a contemplated business; and (b) the problem of operating finance,
that is, of providing the business with a fund of working capital for
its efficient operation. The financing of purchases, sales, credits,
operating expenses, and so forth, comprises a large part of the work of
finance of an operating or going concern.

In the second of the major departments, that of procurement or
production, one finds these activities: (a) the purchasing of the
stock-in-trade to be dealt in, if the concern is a trading business;
or (b) the manufacture of the stock-in-trade, if the concern is a
manufacturing business.

In the department of marketing or distribution, the following
activities center: (a) those having for their purpose the creation of
a market or demand for the commodity dealt in—the sales organization,
the advertising activities, and so forth; (b) the actual selling of the
commodity; and (c) the transportation and delivery of the product.

In the personnel department are included the human relations between
employer and employee. The hiring and training of the employee, his
classification and rating, his welfare and promotion, are the major
activities here.

The function of the department of general administration is in the
main that of supervision and management of the business as a whole.
The general manager must have a view of all of the activities of the
business. He must see that the various departments through which its
activities are carried on are properly correlated, that it is so
organized that its departments function smoothly and efficiently in
the performance of their several duties. A consideration of the means
employed by the general manager for the proper performance of his duty
indicates the place of accounting in the business unit.

=Place of Accounting in Business.=—In a small business where the
owner and manager is in close and intimate contact with these several
departments, or perhaps where he focuses all of them within himself, he
has no need of special means of keeping himself informed concerning the
activities of his assistants, nor does he require an elaborate system
of records to indicate the condition and state of the business at any
time. In large businesses, however, where the volume and complexity of
the commercial activities make it impossible for the executive, on whom
rest the responsibilities for the successful conduct of the business,
to have an intimate personal knowledge of all phases of the business,
it is very necessary that some means be employed for supplying him
with this vital information. Two types of information are necessary to
him: (1) information about the business unit itself, its activities
and condition; and (2) information about general economic conditions
in the country, and particularly about other businesses in the same
line of activity as his own. It is the function of accounting to supply
information of the first type; it is the chief purpose of statistics
to supply information of the second type. The accounting department,
therefore, deals largely with the internal activities of the business,
while the statistical department provides knowledge of the external
relations of the business. A proper control and management of business
affairs cannot be exercised without the information supplied by both
departments. In the accomplishment of its function to supply the
internal information, the accounting department reaches out into all of
the main departments indicated above for data from which to make its
record of the various activities of the business unit.

=Purpose of Accounts.=—Accounts record the business history of a
concern. Their main purpose is to secure information concerning the
results of business activity and endeavor. The record required for this
purpose can be condensed and made very brief, although the full history
of every business comprises a multitude of transactions with a great
mass of details. The whole scheme and method of account-keeping is
designed chiefly to collect the detail and use it mainly for building
up a summary which shall give in rapid review the entire record for the
fiscal period.

Account-keeping is to the bookkeeper what shorthand is to the
stenographer—an abbreviated method of making the record. The uses to
which the records are put, however, differ radically. Stenography
abbreviates the writing of the spoken word with a view to its
transcription into longhand; accounting records business transactions
in abbreviated form with a view to summarizing them further so as to
secure a bird’s-eye view of the operations of the business as a whole
and to use it in the formulation of administrative judgments and
policies.

In a large business there are executive duties within each of the
five main departments. Accounting must supply the information on which
each departmental executive will base his judgments and policies. The
student will see, therefore, that the accounting department brings
together a record of the activities of each of the main departments
of a business. He will see, too, how the final output or product of
the accounting department must be a summarization and interpretation
of these departmental activities in order to provide a basis for the
various executives on which to formulate their judgments and business
policies. Accounting is, therefore, a handmaiden of the executives
in the conduct and management of the business. It is the purpose of
this volume to develop the technique of the bookkeeping and accounting
record and to indicate some of its uses in the management of business.

=Relation of Accountancy to Economics.=—Economics is sometimes defined
as the science of wealth, by which is meant a body of classified
knowledge relating to wealth in the aggregate. Under the present-day
political and social system, the ownership of wealth is very largely
private. Furthermore, the division of labor, as industry is now
organized, has been carried to a very high degree. Because of these
facts the present elaborate organizations for producing wealth have
given rise to an urgent need for some effective means of keeping record
of their activities.

The effort of every individual engaged in industry is to increase
wealth. He labors to extract the raw materials from nature, to shape
and mould them so as to supply the wants of his fellowmen. He then
distributes them by means of markets and exchanges so as to secure the
greatest possible returns for his effort. As competition becomes keener
and the margin of return per unit of product becomes smaller, he has to
increase his volume of business to secure the same amount of profit as
when he did a lesser volume of business.

To produce goods it is necessary to use the saved wealth of former
periods to pay the expenses of materials, labor, management, etc., of
the present period. One must consume wealth to produce wealth. After
his product is made, he must seek the best market for its exchange or
sale. This necessitates the use of a complex system of transportation
and communication. Finally, during the whole process of production and
exchange the estimated returns from the article must be distributed
among the several parties engaged in their creation. To make this
distribution on the basis of estimated returns, gives rise to the
need—the absolute necessity—of an accurate record of the costs of the
activities and processes all along the line. The record, then, of
the value of the rights and properties of the various parties to the
production and distribution of wealth, as society is now organized for
its economic well being, is the special field assigned to Accountancy
as related to Economics.

=Relation of Accountancy to Law.=—The determination of the rights of
the several parties to the creation, exchange, and ultimate consumption
of a product is the field of Law, more particularly Business Law. The
determination by means of its records of the value and extent of these
rights is the province of Accountancy as related to Law. Accountancy is
thus seen to be the handmaiden of both Economics and Law. None of them
can progress far without the help of the other two. All being related
to, and arising out of manifold human endeavors, their progress and
development is dependent upon, and limited only by, the progress of
these endeavors.

=The Fundamental Problem of Accountancy.=—The aim of all private
businesses being the increase of wealth, the first problem of
accountancy is to determine how much wealth is invested in a given
enterprise and what ownership or proprietorship exists at given
periods, so that by comparison the increases and decreases in the
proprietorship may be known. When accurate information is obtained, an
intelligent plan of action can be adopted to remedy such ills of the
business as are shown and to increase any profitable line of activity.
Accordingly, proprietorship and its changing values are the basic
problems of accountancy as well as of business.

=Definition of Terms.=—Before proceeding to a definition or
determination of proprietorship, it is necessary to understand what is
meant by the terms “assets” and “liabilities.” The root idea of the
word “assets” is “sufficiency.” Specifically, assets are the “entire
property of all sorts, of a person, association, or corporation
applicable or subject to the payment of debts.” Similarly, the
liabilities of a person, firm, or corporation are his or its pecuniary
obligations or debts. Proprietorship is the difference between the
value of the assets and the amount of the liabilities, and is defined
and measured by the equation:

  Assets - Liabilities = Proprietorship

This proprietorship equation is a basic formula. It is also written:

  Assets = Liabilities + Proprietorship

It will thus be seen that proprietorship represents the equity of the
owners of an enterprise in its assets. The assets are first applied in
paying the claims of creditors of the business, and whatever of them
remains belongs to the owners of the business.


=Development of the Proprietorship Equation—The Balance Sheet.=—To
indicate the basis of the standard form of the proprietorship equation,
several illustrations will be given. The equation is in its simplest
form when it indicates proprietorship in a new business immediately
after the owner has invested cash to provide the business with capital.
For example, assume that on January 1, 19—, James T. Runyon starts
business by investing $5,000 cash capital in the enterprise.

Here the proprietorship equation is:

  Assets (cash $5,000) = Proprietorship ($5,000)

As yet there are no liabilities. However, in order to carry on his
business, Runyon must purchase a stock of merchandise and equipment for
his store. Accordingly, he purchases store furniture and fixtures from
Lowell Brothers for $500, of which he pays $250 in cash, and owes the
balance. He also buys a stock of groceries for $2,500 from Reid Murdock
& Co. on 10 days’ time. He now has more assets than the original $5,000
cash, but he has become indebted for the additional amount, so that
the amount of his proprietorship has not changed—as is shown by the
following equation, somewhat more complex than the first:


  ASSETS                   -  LIABILITIES         = PROPRIETORSHIP
    Cash            $4,750    Lowell Bros.
    Furniture          500      Claim      $  250
    Merchandise      2,500    Reid Murdock
                                Claim       2,500
                    ------                 ------
                    $7,750 -               $2,750 = $5,000

Runyon now begins operations and after six months finds that his
activities have comprised the purchase of delivery equipment for
$300 cash; sale of goods amounting to $6,000; the payment of $1,000
cash for rent, clerk hire, and advertising; and sundry purchases of
stock-in-trade and other items as needed. As a result he now has $1,000
cash on hand; customers owe him $3,000; his stock of goods still on
hand is worth $2,100; he owes creditors $1,000 for goods bought and his
clerks $50 for services rendered.

It is readily seen that as the number of assets and liabilities
increases, the method of showing them that was used above becomes
awkward and cumbersome; therefore, still using the equation, we make
the following vertical tabulation to determine and show proprietorship:

              _Assets_
  Cash                       $1,000.00
  Customers                   3,000.00
  Merchandise                 2,100.00
  Furniture                     500.00
  Delivery Equipment            300.00
                             ---------
      Total Assets                      $6,900.00

              _Liabilities_
  Creditors for Merchandise  $1,000.00
  Clerks for Services            50.00
                             ---------
      Total Liabilities                  1,050.00
                                        ---------

             _Proprietorship_

  Capital                               $5,850.00
                                        =========

This method of expressing the proprietorship equation is called a
“Balance Sheet,” or “Financial Statement.”

Further analysis of the above information discloses the amount of
Runyon’s purchases and of his payments to creditors. Taking the
transactions involving cash, we find that he had $5,000 to start with
and received $3,000 from sales, or $8,000 in all. He bought furniture
and delivery equipment for $800, and paid expenses of $1,000, in all
$1,800. There is therefore a balance of $6,200 to be accounted for.
$1,000 cash is still on hand, so that he must have paid creditors
$5,200. Since he still owes creditors $1,000 for goods bought, his
purchases must have been in all $6,200.

The ability to make accounting statements and to analyze accounting
data for various purposes constitutes a very important part of the
equipment of the accountant.




CHAPTER II

ASSETS, LIABILITIES, AND CAPITAL


Before discussing the form and content of the balance sheet and some
of its major uses, the chief classes of assets, liabilities, and
proprietorship or capital will be explained so that the student will
have an intelligent notion of what is meant by each asset, liability,
and capital item.

=Kinds of Assets.=—Accounting terms are not wholly standard. An account
title is often used in one business to include items not mentioned
under that title in another business. One finds also terms and titles
peculiar to particular businesses. However, there is a tendency
towards a standardization of the terms used in balance sheets. It is
the purpose here to present and explain those which are common to
practically all businesses. These include the asset titles Cash, Notes
Receivable, Accounts Receivable, Merchandise, Investments, Deferred
Charges or Expense Assets, Furniture and Fixtures, Delivery Equipment,
Buildings, and Land.

CASH. Cash includes all kinds of money and usually whatever serves
as a medium of exchange, which is in the possession or control of
the business—deposits in banks, moneys in the safe and cash drawers,
and sometimes funds in the possession of agents. Checks received in
the regular course of business and not yet deposited in the bank are
usually classified as cash.

NOTES RECEIVABLE. The formal promises to pay, made by others for
debts owed the business, are classified under the general title Notes
Receivable. Time drafts drawn on the debtors of the business and
accepted by them may be included under this title, although they are
sometimes shown under a separate title, such as Acceptances Receivable.
This is particularly true when the acceptances are trade acceptances.
It will be seen later that the promissory note has a somewhat different
legal status from the open account claim against a debtor, and should
therefore be classified under such title as will indicate the exact
nature of the item.

ACCOUNTS RECEIVABLE. These usually represent the claims of the business
against its trade customers for goods sold on open account and not
paid for. The term is, however, broader than this, being sometimes
used—although the practice is to be deplored—to include all claims
against debtors except those which are in the form of notes.

MERCHANDISE. This asset represents the stock-in-trade in which the
business deals. It is of course a sort of revolving asset, that
is, merchandise is purchased and sold continuously, so that the
stock-in-trade is constantly being turned over. The rate of turnover is
very important, as will later be seen.

INVESTMENTS. This asset represents the stocks and bonds of other
companies, municipalities, school districts, and so forth, owned by
the business. As a usual thing there are seasons of the year when the
cash funds of a business are built up and lie idle in the bank unless
they are invested in securities of some sort. These securities can be
reconverted into cash when the business requires a larger fund of cash.

DEFERRED CHARGES. Certain types of expenditure are necessary in
every business to secure operating supplies. Fuel must be purchased
for heating and power purposes; brooms, oil, waste, and other similar
supplies are needed for cleaning and maintaining the business plant;
stationery, stamps, wrapping paper, twine, cartons, packing materials,
and so forth must always be on hand; insurance policies giving
protection against fire are usually purchased for from one to three
years and so are seldom completely used up at any given date. All items
of this sort, necessary for the operation of the business but not dealt
in as stock-in-trade, are called “expense assets.” The portions of
these assets on hand at a given time, the use of which will be deferred
to a later period, are classified as “deferred charges.”

FURNITURE AND FIXTURES. A business plant must be equipped with
furniture and fixtures suitable for the display of the stock-in-trade,
for the accommodation of customers, for the care and protection of
the necessary records of the business, for the efficient performance
of duties by the employees, and for other similar purposes. Assets of
this type which are not a permanent part of the business plant but are
removable should the business desire to change location, are listed
under the title of Furniture and Fixtures. This may be subdivided to
suit conditions. Sometimes several titles—Store Furniture and Fixtures,
Office Furniture and Fixtures, Factory Furniture and Fixtures,
Machinery and Tools—are used.

DELIVERY EQUIPMENT. If a business delivers its commodities it will
usually have its own delivery equipment. This may comprise horses,
wagons, harness, automobile trucks, and so forth. The delivery
equipment may be used for both inbound and outbound deliveries.

BUILDINGS. All buildings owned by the business, whether used for
business purposes or not, will usually be classified under the asset
title Buildings. Store, office, factory, warehouses, residences owned
and rented to employees—all assets of this type are to be listed here.

LAND. This item represents land—city lots, plant sites, and so
forth—owned in fee simple or subject to mortgage. Sometimes when a plot
of land is leased for a term of years and a lump sum payment made at
the beginning of the lease, the asset may be included either under the
title Land, or under the broader title Land and Leaseholds.

=Kinds of Liabilities.=—Just as with assets, there is not entire
uniformity in terminology for the various classes of liabilities.
The more common types of items met with are: Notes Payable, Accounts
Payable, Accrued Expenses, Mortgages Payable, Bonds Payable, and so
forth.

NOTES PAYABLE. These represent the formal promises to pay, signed
by the business or its owners. They represent the formal claims
of others, that is, creditors, against the business. Just as with
notes receivable, it is sometimes desirable to make a more distinct
classification of notes payable. In such cases the titles Acceptances
Payable, Trade Acceptances Payable, Long-Term Notes Payable, etc., are
used.

ACCOUNTS PAYABLE. Under this title are listed the liabilities to
creditors on open account, as distinguished from those formally
acknowledged by a written promise to pay. These include obligations to
trade creditors for merchandise, supplies, equipment, and property of
almost any kind purchased for use by the business. In a broad sense an
account payable includes any item for which the business is liable.

ACCRUED EXPENSES. Accrued Expenses represent usually the accumulating
but unpaid claims against the business for service rendered it, as
distinguished from the Accounts Payable, which usually represent
purchases of an asset of one kind or another. Thus the amounts due at a
given time to employees for work done since the last date of payment of
their wages, salaries, or commissions, to the landowner for the rent of
leased premises, to lenders for interest on moneys borrowed, are items
properly to be listed under this title.

MORTGAGES PAYABLE. These represent the claims of creditors against
particular properties owned by the business but against which the
creditors have been given a lien or preferred claim as security for the
borrowed or unpaid amount. Mortgages are evidenced by a formal legal
document and are usually recorded in the county clerk’s office.

BONDS PAYABLE. These are a type of long-term mortgage which is split
into lots of more or less standard amount and so made available to a
larger number of holders than is usually the case with the ordinary
mortgage payable. This type of liability is limited almost exclusively
to corporations.

The student should realize that usually the owner or owners of a
business enterprise have both assets and liabilities other than those
employed in the business. These personal properties and obligations
of the owners are not to be taken into account when showing the
proprietorship of a business unit or enterprise. They are to be
considered only in showing the total proprietorship of any individual
owner, when of course all of his properties, both inside and outside of
the business, must be listed.

=Kinds of Proprietorship.=—Proprietorship, called also Net Worth,
is shown under such titles as Capital, Investment, Capital Stock,
Surplus, Undivided Profits, Reserves, and so forth. The title used
depends largely on the type of organization under which the business is
operated.

CAPITAL. Under this title is shown the amount of the investment of each
owner in a single proprietorship or partnership business. To show each
owner’s share in the ownership the title Capital is preceded by his
name. Illustration of this is given on pages 19 and 20.

INVESTMENT. This title usually is synonymous with capital. Sometimes it
is used to indicate the amount of original investment in the business
as distinguished from the present investment.

CAPITAL STOCK. Under this title is indicated the sum total of the
portions of net worth owned by the shareholders as evidenced by stock
certificates and subject to their individual control. On page 20 is
given an explanation of the way in which the proprietorship or net
worth of a corporation may be composed of two (or more) parts: (1)
the capital paid in by the owners; and (2) the capital, representing
profits made but not distributed to the owners. While capital
stock usually represents the capital contributed by the owners, it
sometimes arises from other sources, such as the distribution of a
stock dividend; but the portion of the net worth owned and controlled
individually by the owners is the capital stock.

SURPLUS. In a corporation this represents the second portion of the
net worth, as indicated in the preceding section. Surplus is sometimes
defined as the excess of the net worth over the capital stock. In other
words, it is the difference between the assets and the sum of the
liabilities and the capital stock.

UNDIVIDED PROFITS. This is a term used chiefly in financial
institutions to indicate the portion of the net profits concerning the
disposal of which no action has been taken.

RESERVES. Under this title are included whatever portions of the
surplus are set aside or reserved for specific purposes.

Where Surplus, Undivided Profits, and Reserves appear as parts of Net
Worth, they together represent the difference between Net Worth and
Capital Stock. The reason for the careful segregation of these items
from the Capital Stock is given in the explanation of the corporate
form of organization, on page 20.

=Types of Business Organization.=—Before proceeding with a discussion
of proprietorship as it appears on the balance sheet, the three general
types of business organization will be treated briefly, because the
manner of indicating proprietorship is dependent to a certain extent
on the type of organization. These types are: (1) the single or sole
proprietorship, (2) the partnership, and (3) the corporation.

=The Single Proprietorship.=—The simplest form of business enterprise
is that conducted by a single proprietor. This form is well adapted
to businesses where the capital necessary for efficient production is
small, where the processes are simple and capable of being handled by
the average individual, and where the risks are slight. Very few legal
obstacles are placed in the way of the individual desiring to go into
business for himself, nor is a great deal required of him. In some
cases registration and a license are necessary. The observance of the
general laws, concerning the payment of taxes and of local regulations
concerning disease and fire is all that is usually expected. Subject to
the general restrictions which ordinary business acumen and foresight
impose, one can enter practically any field of enterprise, as a single
proprietor, have entire freedom and privacy in the conduct of his
business, and share with none the results of his endeavor.

On the other hand, these conditions oftentimes prove to be decided
disadvantages. As industry is at present organized, many fields of
activity demanding large capital and many kinds of technical knowledge,
are closed to the single proprietor. Freedom of action carries with it
sole responsibility, and oftentimes the counsel and advice of others
would prevent the disasters which sometimes overtake the single owner
of a business.

=The Partnership.=—A partnership is “a contract of two or more legally
competent persons to combine their money, property, skill, and labor,
or some or all of them, for the prosecution of some lawful business
and to divide the profits and bear the losses in certain proportions.”
There are different kinds of partnerships, as will later be shown, but
the essence of each from the point of view of a working organization is
mutual agency, each partner being the agent of the others, and, within
the limitations of the partnership agreement, capable of acting as a
principal for the firm. The partnership is subject to practically as
few restrictions as the individual. In some localities, to secure the
right to sue and be sued in the firm name, it is necessary to file in a
public office a brief statement of the firm name and the names of its
members.

The chief advantages of the partnership are larger capital and
therefore access to fields closed to the individual; the combining of
the business wisdom, skill, and knowledge of several individuals; the
subdivision of duties and therefore the opportunity for specialization.
While in the view of the business community the partnership is an
entity or a business unit, it is not so in the sight of the law, each
member of the firm being held liable to creditors for the entire debts
of the partnership as if it were his sole business. If any one member
has to pay the firm debts, he has a claim against his copartners for
contribution.

Some of the disadvantages of this type of organization are the
possibility of friction among the partners and consequent delay of
action; the extension to the firm of credit based not on the firm
property but rather on the total property of the members, and the
consequent liability of each partner and his entire private fortune for
the debts of the firm.

It is important to note that the partnership agreement should be very
carefully drawn to cover in detail the relations of the partners, their
duties and their rights, particularly as to their shares in the profits
or losses of the firm.


=The Corporation.=—The corporate type of business organization is
distinguished from the other types discussed:

  1. By the freedom of each owner from the personal
      liability for the debts of the business to
      any greater extent than his stock interest in
      the business, though frequently in financial
      corporations, and in a few states for all
      corporations, his liability is double that stated.

  2. By each share of ownership being evidenced by a
      formal document called a certificate of stock.

  3. By each owner being allowed a voice in the affairs
      of the business only to the extent of his stock
      ownership therein.

  4. By the necessity of securing from the proper
      authorities permission to do business.

  5. By the necessity of complying strictly with the
      terms of this permit and submitting to certain
      requirements such as the filing of annual reports,
      payment of special taxes, and the like.

The owners of a corporation, or its stockholders as they are called,
conduct the business through a board of directors which they elect
for that purpose and they review its management periodically, usually
annually. In this way they exercise indirect supervision over the
business. This remoteness of personal interest and supervision has
been somewhat overcome by electing to the board only those largely
interested in the business, and by retaining on the board those whose
ability as managers has been tried and proved. The board usually hires
and delegates to others the active management of affairs.

The advantages of the corporate form of organization are: (1) it
limits the liability of its owners; (2) it lends itself well to
accumulation of the large funds of capital necessary for the promotion
of large-scale enterprises; and (3) it secures through its board of
directors a convenient and effective means of centralized control and
management.


=Showing the Proprietorship of These Types=.—The methods of showing
in the balance sheet the proprietorship for these three types of
organization differ somewhat. The title under which proprietorship is
listed is Capital. In a single proprietorship such title is preceded by
the proprietor’s name, as shown in the following illustration:

                      _Assets_
  Cash                           $2,000.00
  Accounts Receivable             5,000.00
  Merchandise                     3,000.00
  Furniture and Fixtures            500.00
                                 ---------
        Total Assets                        $10,500.00

                   _Liabilities_
  Accounts Payable               $4,450.00
  Due Clerk                          50.00
                                 ---------
        Total Liabilities                     4,500.00
                                            ----------
                  _Proprietorship_
  James Runyon, Capital                     $ 6,000.00
                                            ==========

In a partnership the capital is not shown in one item, each partner’s
interest being stated separately, thus:

                    _Assets_
  Cash                      $ 2,500.00
  Accounts Receivable        10,250.00
  Merchandise                 8,750.00
  Furniture and Fixtures        625.00
                            ----------
        Total Assets                    $22,125.00

                 _Liabilities_
  Notes Payable             $ 1,660.00
  Accounts Payable            5,465.00
                            ----------
        Total Liabilities                 7,125.00

               _Proprietorship_
     Represented by:
  James Runyon, Capital     $ 8,000.00
  Philip Adams, Capital       7,000.00  $15,000.00
                            ----------  ==========

In a corporation, proprietorship is shown by the aggregate of the
outstanding shares of stock, which are valued at a fixed par, or cost,
under the single title Capital Stock, and if the proprietorship is
greater than that indicated under this title, the excess is listed
separately under the title Surplus or some of the other proprietorship
titles already explained. This method of showing proprietorship is
prescribed by law and is an effort to inform creditors, or those who
may become creditors, that the corporation has observed the legal
requirement not to distribute to stockholders any of its original
capital. Hence, the capital stock of the corporation must be listed
separately from the other items of proprietorship. Any changes in
proprietorship during the life of the corporation are taken care of
under these other titles, somewhat as illustrated below.

                    _Assets_
  Cash                            $ 1,850.48
  Notes Receivable                  1,645.65
  Accounts Receivable              15,285.35
  Merchandise                      10,045.94
  Supplies                          1,145.37
  Furniture and Fixtures            1,636.97
  Delivery Equipment                1,427.50
  Buildings                         8,000.00
  Land                              2,000.00
                                   ---------
        Total Assets                          $43,037.26

                   _Liabilities_
  Accounts Payable                $ 5,762.26
  Notes Payable                     4,250.00
  Salaries Due but Unpaid              25.00
  Mortgage on Land and Buildings    3,000.00
                                  ----------
        Total Liabilities                      13,037.26

                 _Proprietorship_
      Represented by:
  Capital Stock                   $25,000.00
  Surplus                           5,000.00  $30,000.00
                                  ----------  ==========




CHAPTER III

THE BALANCE SHEET


=Purpose and Use.=—The balance sheet of a business is designed to show
its financial condition at a given time. As previously illustrated, it
marshals the assets in one list or schedule, and the liabilities in
another. The difference between the totals of the two schedules gives
the present or net worth of the business. In compiling a balance sheet
it is not sufficient to give simply the figures of proprietorship or
net worth; schedules of assets and liabilities must be drawn up to show
the items making up that net worth. From the viewpoint of a prospective
investor or purchaser, a banker to whom the business has applied for a
loan, or a concern considering the advisability of extending it credit
on a bill of goods, it makes all the difference in the world to know
that with a net value of $10,000 the business has assets of $15,000 and
liabilities of $5,000; or to know that its assets are $260,000 and its
liabilities $250,000.

The ratio of total assets to total liabilities is almost as important
information to an investor, purchaser, banker, or creditor as is
the character of the assets and liabilities. If the assets are in
properties for which there is not a ready market and the liabilities
are claims which mature soon and will have to be met, the situation
is unfavorable. If there are large values invested in easily salable
assets; if there is a large balance of cash on hand after meeting
current claims and providing for those which will soon mature; if
other liabilities are of a more permanent nature, such as mortgages or
long-time notes not requiring immediate attention—the situation may
show evidence of too large a capital, or of inefficient management
as indicated by the failure to invest a part of the surplus cash in
properties from which some return might be secured.

=Form and Content.=—Questions of the kind raised above are not
usually capable of definite answer from the information contained on
the balance sheet alone. Oftentimes information as to the volume of
business done, future plans for expansion or contraction of business
operations, and so forth, is needed in addition to that supplied by the
balance sheet. Of immediate interest to us, however, is the information
contained in the balance sheet. Here two main problems are met: that
relating to the form of the balance sheet, and that concerned with the
content of the balance sheet.

By form of the balance sheet is meant its physical appearance—the
arrangement and classification of its items. The form is not standard.
In this country there are few legal regulations governing the way in
which the records of a business are to be kept or its reports are to
be made. Some efforts have been made, however, to establish a more or
less standard form of balance sheet and to secure the use of standard
titles in the balance sheet so that wherever found those titles can be
relied upon to mean one and only one thing. Because balance sheets are
not always drawn up for similar purposes, such regulations should not
be too inflexible. The form of any business statement or report should
always have regard to the purposes it is to serve. Standardization of
form is desirable within this limitation.

By content of the balance sheet is meant the items that are admitted to
it and the basis of their valuation.

These two problems of the balance sheet—form and content—are
fundamental and will be briefly considered here.

=Titles—Main and Group.=—Instead of “Balance Sheet,” other terms are
used as names for the statement itself, such as “Financial Statement,”
“Statement of Resources and Liabilities,” “Statement of Assets and
Liabilities.” Within the statement, Resources is an alternative
title for Assets; and Net Worth, Present Worth, and Net Assets, for
Proprietorship. For the present, use of the terminology previously
employed will be continued, with the substitution, however, of the term
Net Worth for Proprietorship.

The title of a statement should be full; it should include the name of
the business enterprise and date, and should appear somewhat as follows:

  SHONGOOD & GOODWELL
     BALANCE SHEET
    December 31, 19—

As stated, this should be followed by the schedules of Assets,
Liabilities, and Net Worth. Since the statement is a formal one, due
regard should be had for its general appearance, which should be neat
and attractive. Further consideration will be given to some of these
features in Chapters XXVI and XXVII.

=Classification and Arrangement.=—As indicated above, the balance sheet
is used to picture the financial condition of a business at a given
time. Some of the questions which arise in determining the financial
condition of a business have already been mentioned. The chief use to
which a balance sheet is put is the determination of the solvency of
the business for purposes of getting credit extensions. By solvency is
meant the ability of the business to pay its debts when due. Regardless
of how great the excess of assets over liabilities is, if it is tied up
in assets which cannot be used for the payment of debts, the creditors
of the business will become impatient and may ask a court to take the
control of the business away from its owners and place it in the hands
of a representative of the court and the creditors, who will conduct
the business for the purpose of converting assets into cash to a
sufficient extent to pay all debts.

A balance sheet should therefore be so arranged that the condition
of the business, viewed from the standpoint of its ability to pay its
debts, will be clearly and easily determinable. Cash is usually the
only medium used for the payment of debts. In the regular course of
business, debts are incurred which come due at different dates. Hence
it is not necessary to have on hand at a given time cash sufficient
to pay all of the debts of the business. Certain classes of debts
will not wait. The sums owed employees for services must usually be
paid when due. The debt to the government for taxes, to the public
service company for heat, light, and power, to the landlord for rent,
to the bank for money borrowed—all these debts must usually be paid
immediately as they come due.

The cycle of business operation includes the purchase of merchandise,
the payment of operating expenses, and the conversion of merchandise
into cash through sale, either directly, as when the sale is for cash,
or indirectly as when credit is extended a customer and cash is later
collected from him. This cycle or turnover of merchandise recurs
constantly in the management of the financial affairs of a business.
It is necessary so to order the buying and selling of goods and the
collection of accounts from customers that there will be on hand at all
times sufficient cash to pay the expenses of operating the business and
the debts contracted in the purchase of merchandise. This is the vital
and fundamental problem of the business executive. In the solution
of that problem it may sometimes be necessary to borrow funds from
the bank. Before lending money, the banker assures himself that the
business will be in a position to repay the borrowed money when due.

The balance sheet, accordingly, should be so arranged that the
condition of the business as related to its ability to pay its debts
will be apparent. This requires a classification or marshaling of the
assets which are concerned in the trading cycle on the one side, and
the liabilities which must be assumed in conducting the business during
the trading cycle, on the other.

At the head of the list of assets is the item Cash, the most liquid
of all, as it can be used directly for the payment of debts. Following
Cash come in order Notes Receivable, which, with proper indorsement,
can be sold to the banker and converted into cash almost immediately;
Accounts Receivable, which represent the claims against customers for
merchandise sold and which are collectible within the term of credit
extended to the customer; and finally, the Merchandise on Hand, which
must be sold either for cash or on credit and then converted into
cash by the collection of the outstanding accounts. Sometimes, also,
there is included in this group the asset Investments, representing
stocks and bonds of other companies which can be converted into cash
by sale on a stock exchange. On such securities, and also on the
notes receivable, there is usually at the date of the balance sheet
some interest which has accrued and may not yet be collectible. It is
customary to include the amount of this interest receivable in the same
group with the assets from which it arises.

This group of assets, comprising Cash, Notes and Accounts Receivable,
Merchandise, and so forth, is called the group of Current Assets. Asset
items are classified as current if conversion into cash is expected
within three to six months. These are the assets to which the current
creditors of the business will have to look for the payment of their
claims.

The claims of current creditors are usually included under the titles
Notes Payable, Accounts Payable, and Accrued or Unpaid Expenses. The
classification of a creditor in the current liability group is usually
determined on a time basis. Thus, all debts that will have to be met
within six months’ or one year’s time from the date of the balance
sheet are usually classed as Current Liabilities.

The excess of current assets over current liabilities is called the
working capital of the business; that is, an amount of the current
assets equal to the current liabilities will have to be used for the
payment of these debts, leaving the excess or difference free for use
within the business. While it is not possible to determine, without
considering all the circumstances in a given case, how large this
working capital should be, the standard rule-of-thumb is that it should
equal the amount of the current liabilities. It will thus be seen that
the standard ratio of current assets to current liabilities is two to
one. The solvency of a given business is always judged by a comparison
of the current asset group with the current liability group.

The next main group of assets is given the title Deferred Charges. The
content of this item was explained on page 12. Thus, if a management
has paid some of its expense bills in advance—rent for January paid
during December, for example—when showing its financial condition as
at the end of December it is proper and necessary, in order to make an
accurate showing, that all such prepaid expenses be listed as assets;
for, had the payment not been made until the service which it purchased
had been used up, the asset cash would have been larger by the amount
of the prepaid expenses.

Similarly, with regard to the Accrued Expenses mentioned on page 14,
whatever expenses have been incurred that properly belong to the past
period, such as wages due but unpaid, are liabilities; for the cash
would be smaller by the amount of such postponed or accrued items had
the claims been met during the period. The close relationship of both
deferred charges and accrued expenses to cash is thus apparent—the one
as an indirect addition to the cash, the other as an indirect deduction
from or claim against cash. Accordingly, deferred charges are shown on
the balance sheet immediately following the group of current assets,
whereas accrued expenses are listed with the current liabilities as
noted above.

The next group of assets is called Fixed Assets. Under this title are
listed those assets which are used for carrying on the business but
are not bought for the purpose of being resold. A certain amount of
capital must be invested in the physical business plant. Furniture and
fixtures, delivery equipment, buildings, land, machinery and tools, and
so forth, must be purchased before the business can commence operating.
It is assets of this type that comprise the class of fixed assets.
There is a corresponding group among the liabilities which are known
as Fixed or Long-Term Liabilities. All debts maturing a year or more
after the date of the balance sheet are classed as fixed liabilities.
As examples of this class, we have long-term notes payable, mortgages
payable, bonds payable, and so forth.

The difference between the fixed assets and the fixed liabilities
indicates the amount of owner’s capital which has been invested in the
business plant.

The final group of assets is called simply Other Assets, and includes
all assets which cannot be classified in any other groups, such as
good-will, patents, trade-marks, accounts and notes receivable having a
credit term longer than six months, and other similar items. If there
are any liabilities not capable of classification in the two groups
of liabilities given above, they may be put in a group called Other
Liabilities.

For the purpose of an easy showing of these various groups and their
titles, it is customary to list the amounts of the several detailed
items of each group in an inner money column, and to extend the total
into the adjoining money column on the line of the last item in the
group. A similar arrangement is made of the groups of liabilities so
that not only the items in the various groups but the group totals as
well are available. The totals of the various groups give the grand
totals for the assets and the liabilities respectively.

The balance sheet as now classified and arranged provides first a
formal title, giving the name of the business and the date of the
balance sheet; then the assets, under which appear the groups Current
Assets, Deferred Charges, Fixed Assets, and Other Assets; under the
liabilities appear the groups Current Liabilities, Fixed Liabilities,
and Other Liabilities. The showing of Proprietorship or Net Worth under
the three different kinds of ownership has already been set forth. The
illustration on page 31 shows a typical form of classified balance
sheet. This should be studied carefully, as it is the type which will
be used hereafter.

=The Problem of Content.=—The form of the balance sheet serves the
purpose of making easily available the information contained in the
balance sheet. Form is of little value unless the content is accurate.
What a balance sheet contains is, after all, far more important
than its form. The problem of content comprises a consideration of
two points: (1) the proper inclusion of all items, both assets and
liabilities, belonging in the balance sheet; and (2) the correct
valuation of the items so included.

With regard to the first, it may be said briefly that care must be
exercised to see that all assets belonging to the business and having
value, and that all claims against the business of whatever nature, are
included.

Assuming that a given balance sheet contains a list of _all_ the
assets and _all_ the liabilities, the further problem of the proper
valuation of these items must be considered. A balance sheet in
which the title Cash includes counterfeit bills, N. G. (that is,
uncollectible) checks and other similar items, would not be considered
a reliable balance sheet. Similarly, the basis for the valuation of
each of the asset items must be investigated and determined correct
before the balance sheet may be considered to represent the true
financial condition of the business. It is the experience of every
business that it cannot collect all of the credits extended to
customers. Regardless of how carefully credit is granted, it will be
found that some customers do not pay their debts. Accounts and notes
receivable must, accordingly, be valued with a proper consideration
for the estimated amount of the uncollectible portion. The stock of
merchandise on hand must be valued according to the standard formula,
at cost or market, whichever is the lower. The deferred charges group
of assets will show the value of the unconsumed portions of the assets
purchased, with due regard to the time element. Thus, a three-year
insurance policy purchased at the beginning of the year will at the
close of the year be valued at two-thirds of its original cost. The
fixed asset group will be valued at cost less depreciation, which
represents the amount of the loss in value of the assets due to wear
and tear, lapse of time, and obsolescence.

In determining liabilities, providing they have all been included,
there is not the danger of an understatement, because their amount is
subject to verification on the basis of the creditors’ claims. For
obvious reasons the liabilities are seldom overstated.

=General Principles Governing Form and Content.=—In drawing up a
balance sheet, the form must be flexible enough to meet whatever
requirements for information may be placed upon it. Thus, a balance
sheet to be presented to the banker as the basis of a loan should be
carefully classified so as to show clearly the financial condition,
and sufficient detail should be given to indicate the basis used in
valuing the various items. A balance sheet drawn up for publication
may, on the other hand, contain less detailed information and less
attention need be given to its form. A balance sheet drawn up for use
within the business itself may well contain very full information
and its form should be such as will accurately portray the status of
affairs. A balance sheet which shows on its face that cognizance is
taken of uncollectible accounts and of the loss in fixed assets due
to depreciation, is much more valuable as a financial statement than
one lacking that information, provided of course it is to be used to
indicate that consideration has been taken of those elements. Excepting
for the general remark that regard must always be had to the purpose
for which the balance sheet is drawn up, no hard-and-fast rule can be
laid down in the matter of the relative fullness of detail with which
it should be made.

=Illustration.= To illustrate the features of the balance sheet
discussed in this chapter, the following statement showing the
financial condition of the partnership of Jackson & Edwards is given:

                    JACKSON & EDWARDS
                      BALANCE SHEET
                      June 30, 19—

                           _Assets_
  Current Assets:
    Cash                                        $ 2,365.00
    Accounts Receivable              $8,500.00
    _Less_—Reserve for
              Doubtful Accounts         170.00    8,330.00
                                        ---------
    Merchandise                                  10,425.00  $21,120.00
                                                 ---------
  Deferred Charges:
    License Fees Paid in Advance                $   175.00
    Unexpired Insurance                              75.00
    Supplies                                         80.00      330.00
                                                 ----------
  Fixed Assets:
    Furniture and Fixtures           $  750.00
    _Less_—Reserve for Depreciation      75.00  $   675.00
                                      ---------
    Buildings                        $9,680.00
    _Less_—Reserve for Depreciation     242.00    9,438.00
    Land                                          2,500.00   12,613.00
                                                  ---------  ---------
          Total Assets                                      $34,063.00

                        _Liabilities_
  Current Liabilities:
    Notes Payable                    $2,500.00
    Accounts Payable                  6,750.00
    Wages Accrued                       250.00
    Interest Accrued                     75.00  $ 9,575.00
                                      ---------
  Fixed Liabilities:
    Mortgage on Land and Buildings                2,500.00
                                                 ----------
          Total Liabilities                                 12,075.00
                                                             ---------
                         _Net Worth_
  Represented by:
    S. J. Jackson, Capital                      $10,267.00
    P. R. Edwards, Capital                       11,721.00  $21,988.00
                                                ----------  ==========




CHAPTER IV

THE COMPARATIVE BALANCE SHEET


=Comparison of Net Worths.=—The aim of every business enterprise is to
increase its net worth. If James Runyon at the beginning of the year
is worth $5,000 and at its close $7,500, it is evident that he has
increased his wealth by $2,500. Very little information is given him or
anyone else as to the manner in which the increase took place, except
that it came about in the ordinary course of business. No criterion is
given by which to compare effort with result. An increase of $2,500 may
or may not be commensurate with the labor expended in effecting it.
However, since a business is not likely to remain stationary, there is
a degree of satisfaction in knowing merely the extent of the change in
its net worth. The taking of an inventory, the appraising of the value
of the assets from time to time, and the setting of the liabilities
for the same dates over against them, is the method of determining
the corresponding net worths. A comparison of these net worths shows
their increase or decrease during the period. A further analysis of
the individual items may be made. A comparison of each asset at the
beginning of the period with its value at the end of the period, shows
the increase or decrease in that item. A similar comparison of each
liability item brings out the increase or decrease during the period.

=How a Gain or Loss May Be Evidenced.=—During a period a gain or
increase in net worth may come about in one of four ways:

  1. The assets may remain the same and the liabilities
      may decrease.
  2. The liabilities may remain the same and the assets
      may increase.
  3. The assets may decrease but the liabilities suffer
      a greater decrease.
  4. The assets may increase but the liabilities undergo
      a smaller increase.

Provided no more money has been invested in the business, and none has
been withdrawn, there has been in all the above instances an increase
in net worth, that is, a profit has resulted. If the reverse of the
above relationships obtains, there has been a decrease in net worth, or
a loss.

The following statements illustrate the points discussed above.

                 AARON CONNERS
                 BALANCE SHEET,
                 June 30, 1921

               _Assets_
  Cash                     $ 1,000.00
  Notes Receivable             250.00
  Accounts Receivable        5,250.00
  Merchandise                8,500.00
  Store Fixtures               525.00
                           ----------
        Total Assets                   $15,525.00

             _Liabilities_
  Accounts Payable         $ 5,365.00
  Notes Payable              1,250.00
                           ----------
        Total Liabilities                6,615.00
                                       ----------

             _Net Worth_
  Aaron Conners, Capital               $ 8,910.00
                                       ==========

One year later Conners’ financial condition is shown to be:

                 AARON CONNERS
                 BALANCE SHEET,
                 June 30, 1922

               _Assets_
  Cash                     $   850.00
  Notes Receivable             100.00
  Accounts Receivable        6,425.00
  Merchandise               10,260.00
  Store Fixtures               472.50
  Delivery Equipment           350.00
                           ----------
        Total Assets                   $18,457.50

             _Liabilities_
  Accounts Payable         $ 6,192.75
  Notes Payable                950.00
  Accrued Salaries              50.50
                           ----------
        Total Liabilities                7,193.25
                                       ----------

             _Net Worth_
  Aaron Conners, Capital               $11,264.25
                                       ==========

The various types of information essential to judging the financial
condition as disclosed by the above balance sheets will now be
discussed.

=Comparison of Balance Sheets.=—A comparison of balance sheets gives
more information than merely the amount of profit for the year. It
indicates trends in the business. Thus a comparison of the notes and
accounts receivable for the two years may give some indication of the
vigor with which collections are pressed. If the volume of business
done, that is, the amount of sales made, was about the same during the
two years, and if there are more uncollected accounts at the close
of the second year than at the close of the first, it would tend to
show that collections were less satisfactory during the second year.
Investigation may show that this is due to general conditions of
business in the country rather than to failure to push collections
vigorously. If there is any marked change in the amount of the stock
of merchandise on hand it would invite inquiry. If the stock is much
larger at the end of the second year than at the end of the first, it
might indicate that the business man is speculating in merchandise,
that he considers the buyer’s market during the year particularly
favorable and has laid in an abnormally large stock. A banker with
large experience in similar businesses can formulate a fairly accurate
judgment of how much working capital a concern should have invested in
merchandise. With that as a criterion he can tell the normal amount of
merchandise the business should carry.

A comparison of current liabilities for the two periods will indicate
the extent to which borrowed working capital is being used. Thus,
an unusual increase in stock-in-trade may be offset by an equally
large increase in current liabilities, and so would indicate that the
merchant has done his buying on credit or has used borrowed working
capital to increase his stock. The danger of this is apparent in a
fluctuating merchandise market, particularly if the swing is generally
downward. A comparison of the working capital for the two periods gives
useful information. A decrease in the amount of working capital may
indicate an investment of it in fixed plant which, if continued, will
lead to trouble with current creditors. An increase in working capital
may point to the advisability of greater sales effort.

A comparison of fixed assets for the two periods will show the
increase or decrease in the plant investment. If this has been offset
by a corresponding increase or decrease in fixed liabilities, no
additional capital of the owners has become tied up in fixed plant,
while the reverse is true if there is not that correspondence between
fixed assets and fixed liabilities. Where the ratio between current
liabilities and fixed liabilities has increased, it may point to
the desirability of funding some of the current debt. Short-term
liabilities have apparently been incurred for the purpose of extending
the fixed plant. It is usually desirable to convert, that is, fund
these current liabilities into long-term liabilities in order to
conserve working capital to pay current debts.

Thus it is seen that a proper understanding of the items in the two
balance sheets and of their various interrelationships will oftentimes
give very valuable information. Banks and business houses which
are called upon to extend credit, maintain regular files of credit
information, including periodic balance sheets, concerning their
present and prospective customers, so that they can judge fairly
accurately the condition of the businesses.

=The Comparative Balance Sheet—Its Content and Form.=—A comparison of
the above balance sheets shows an increase of net worth of $2,354.25
during the year. It shows also that this profit is accounted for by an
increase of $2,932.50 in the assets, which is offset by an increase of
$578.25 in the liabilities, leaving a net increase of $2,354.25.

The two statements thus separated do not lend themselves easily to a
comparison of individual items. Accordingly, a method of showing the
comparison known as the “Comparative Balance Sheet” form is used. This
brings all the data into juxtaposition and so makes comparison easy.
The balance sheet for the current year is shown first, followed by
that for the preceding year. The increase and decrease column uses the
current year as a basis for comparison with the preceding year.

                      AARON CONNERS
                COMPARATIVE BALANCE SHEET
             June 30, 1922 and June 30, 1921

                                                         Increase
                                                           and
         _Assets_                 1922        1921       Decrease
    Current Assets:
    Cash                     $   850.00  $ 1,000.00  -  $  150.00
    Notes Receivable             100.00      250.00  -     150.00
    Accounts Receivable        6,425.00    5,250.00  +   1,175.00
    Merchandise               10,260.00    8,500.00  +   1,760.00
                             ----------  ----------     ---------
                             $17,635.00  $15,000.00  +  $2,635.00
                             ----------  ----------     ---------
  Fixed Assets:
    Store Fixtures           $   472.50  $   525.00  - $   52.50
    Delivery Equipment           350.00              +    350.00
                             ----------  ----------    ---------
                             $   822.50  $   525.00  + $  297.50
                             ----------  ----------    ---------
        Total Assets         $18,457.50  $15,525.00  + $2,932.50
                             ----------  ----------    ---------

         _Liabilities_
  Current Liabilities:
    Accounts Payable         $ 6,192.75  $ 5,365.00  + $  827.75
    Notes Payable                950.00    1,250.00  -    300.00
    Accrued Salaries              50.50              +     50.50
                             ----------  ----------    ---------
        Total Liabilities    $ 7,193.25  $ 6,615.00  + $  578.25
                             ----------  ----------    ---------

          _Net Worth_
    Aaron Conners, Capital   $11,264.25  $ 8,910.00  + $2,354.25
                             ==========  ==========    =========

While it is true that a great deal of valuable information can be
secured from a comparative balance sheet, and that this form of balance
sheet locates definitely the changes in the asset and liability items,
summarizes those changes, and shows the net profit, it nevertheless
fails to disclose the forces within the business organization which
have brought about the changes—it sets forth effect or result but not
cause. A supplementary or rather a complementary statement is needed to
show the reasons for the changes. This is discussed in the following
two chapters.




CHAPTER V

THE ECONOMIC OR PROFIT AND LOSS ELEMENTS OF A BUSINESS


=Fuller Information Needed.=—As indicated in Chapter IV, in the
summarization of the business transacted during a given period, it
is not usually sufficient to know how much net worth has changed;
nor is the whole story told when it is known exactly what items are
responsible for the change, that is, which of the properties are worth
more and which are worth less at the end than at the beginning of the
period. Additional information is necessary to account for the changes
shown by the comparative balance sheet.

The proprietor who knows simply that his cash is $1,000 less now than
it was at the corresponding time in the last fiscal period, has not
the kind of control over his business that his competitor has who
knows that the $1,000 was expended for an increased stock of goods, or
that an outstanding liability of that amount has been settled, or that
his expenses for the period have been larger by $1,000 than for the
former period. His competitor may be worse off but he at least has the
advantage of knowing the reason for his being so. He has made a correct
diagnosis of the pulse beat of his business. If he cannot heal its ills
or secure aid for it, he can at least have the satisfaction of giving
it a respectable burial, and the autopsy will then disclose that he
failed to take advantage of his information until it was too late.

However, the point should be clearly held in mind that the proprietor
who knows exactly what is happening in his business is in a position
to exercise a definite and sure control over it. Hence, the accounting
department, to justify its existence, should aim to give full
information as to what is taking place within the business and what
eventually will be the result in its financial life. Only in this way
can the department serve as a means of control.

=Kinds of Records.=—A business must have assets and usually must incur
liabilities; a plant must be used, stock-in-trade must be bought,
and sold, and usually sufficient capital must be provided for the
extension of credit to customers. Capital for the payment of the
operating expenses of the business, the maintenance of the plant, the
payment of salaries and wages of employees, and so forth must at all
times be provided. While it is true that the balance sheet shows the
financial condition of the business, it gives little information as to
the volume of business operations. It indicates the net worth and may
even indicate the increase or decrease in net worth if the comparative
balance sheet is used. Yet as to how that increase or decrease in net
worth came about, little or no information is given. The balance sheet,
in other words, is static; it indicates a quiescent state. It is a
snapshot, showing the wheels of business momentarily stopped.

To give a full survey of the operations during a given period, a
motion picture of the events between the dates of the balance sheets
must be shown. Such a picture is dynamic. It gives a realization of
the whirl and bustle of business being carried on. It pictures volume,
content, and extent, whereas the balance sheet indicates the state
arrived at as of a given moment. For purposes of management, which
must control all the phases of business activity, a balance sheet
is insufficient. A review of the factors producing results up to a
given time must be had. Accordingly, the accounting department must
supply not only information as to the present state of the assets and
liabilities, but also information which indicates how the changes
in assets and liabilities since the last fiscal period were brought
about—what volume of transactions occurred, what expenditures of assets
and energy were necessary to accomplish the results attained. This
information, for purposes of internal management, is more vital than
that concerning simply the present status of assets and liabilities. It
is complementary to that obtained by a comparison of net worths and it
is therefore explanatory of the changes in net worth.

=The Net Worth Section Expanded.=—In its operation of buying
and selling goods, a business executes many different types of
transactions. As was indicated in Chapter I, in the development of the
proprietorship equation, some types of transactions have no effect on
proprietorship, that is, they involve neither a profit nor a loss;
while other types of transaction—the really vital types, because it
is for these that the business is carried on—involve a change in
proprietorship, either increasing or decreasing it. Goods are bought
for one price and sold at a price sufficiently higher to pay for
all the expenses of operating the business and leave a reasonable
margin of profit. For example, goods may be bought for $1,000 and
sold for $1,800, bringing about an increase of $800 in the sum total
of the assets. This $800 may represent temporarily an increase in
proprietorship but the increase must be used first to meet the expenses
of operating the business during the period in which the sale is made,
after which the net result represents the real or permanent increase in
proprietorship. The temporary increase of $800 is offset by a temporary
decrease of, say, $600 for operating expenses. It is vital to business
management to have information not only concerning the net increase
in proprietorship but also concerning these temporary increases and
decreases. To give this information the net worth section of the
balance sheet might be expanded as in the illustration given below.

                         EDWIN MARKHAM
                         BALANCE SHEET,
                         December 31, 19—

                         _Assets_
  Cash                                         $ 5,000.00
  Accounts Receivable                           75,000.00
  Merchandise                                   20,000.00
  Plant                                         50,000.00
                                               ----------
          Total Assets                                     $150,000.00

                       _Liabilities_
  Accounts Payable                             $30,000.00
  Accrued Expenses                               5,000.00
  Mortgage on Plant                             30,000.00
                                                ----------
  Total Liabilities                                          65,000.00
                                                             ---------
                       _Net Worth_
  Edwin Markham:
    Capital at the beginning
          of the year                          $70,000.00
    Profits during the year:
      Sales                       $200,000.00
      Cost of Goods Sold           140,000.00
                                  -----------

      Temporary Increase in
             Proprietorship       $ 60,000.00
      Operating Expenses            45,000.00
                                  -----------
      Net Increase in Proprietorship            15,000.00
                                               ----------
    Capital at the end of the year                         $ 85,000.00
                                                           -----------

In the net worth section of this balance sheet, the capital with which
the owner started operations for the year is given first. To this is
appended a summary of the operations for the year resulting in a net
increase in proprietorship which, added to the beginning capital, gives
the capital in the business at the end of the year. This method of
setting up the information concerning the operations of the business
is not used to any extent because the information is of such vital
importance that it deserves more display. Accordingly, a separate
statement, known as the “Statement of Profit and Loss,” or “Statement
of Business Operations,” is drawn up to explain the balance sheet net
worth item, Net Increase in Proprietorship for the year, which shows
just the amount of the net profit. The detail of this item is given in
this complementary statement. The above illustration is given merely
for the purpose of pointing out the relationship between the statement
of operations and the balance sheet. From this it will be seen that the
statement of profit and loss is really a part of the net worth section
of the balance sheet.

TEMPORARY PROPRIETORSHIP RECORDS.—The proprietorship records,
indicating as they do the sources of changes in net worth, are kept day
by day as transactions take place, are summarized at the close of the
period, and the net result is determined. They are called temporary
because, as is seen, they do not at the time of record have regard for
the final change in proprietorship. At the end of the regular periods,
to determine the total or final change, the temporary proprietorship
records are closed or transferred to the summarized record called the
“Profit and Loss Summary.”

Referring to the case of Aaron Conners discussed in Chapter IV, assume
that the accounting department furnishes the following additional
information from its records:

  During the year from July 1, 1921 to June 30, 1922, Conners
  bought $22,362.50 worth of goods; his sales amounted to
  $28,465.20; he paid for help $3,050.50; his other expenses
  were $2,405.45; and he estimated the wear and tear on
  furniture at 10%, or $52.50. As shown in his statement for
  1922, he had $10,260 worth of merchandise on hand on June
  30, 1922.

  The analysis of this information explains the changes in
  his net worth during the year. The goods he started with
  plus those purchased during the year are the total goods to
  be accounted for, which amounted to $30,862.50 ($8,500 +
  $22,362.50 = $30,862.50). These goods were accounted for by
  his sales during the year and the amount on hand. Knowing
  how much was on hand June 30, 1922, viz., $10,260, he
  determined that the goods sold must have been the difference
  or $20,602.50 ($30,862.50 - $10,260 = $20,602.50). The price
  which he received for these goods sold was $28,465.20;
  hence, his profits from sales were $7,862.70, the difference
  between selling price and cost.

  We find, also, that the expenses he incurred in selling his
  goods and conducting his business generally were $3,050.50
  for clerk hire, office help, delivery boys, etc.; and other
  expenses, such as rent, taxes, repairs, delivery upkeep,
  supplies, heat, light, and the like, amounted to $2,405.45.
  He estimated that his store fixtures depreciated in value
  $52.50. All these items, representing costs of doing
  business, amounted to $5,508.45 ($3,050.50 + $2,405.45 +
  $52.50 = $5,508.45), which subtracted from his profits from
  sales, $7,862.70, gives him a net gain of $2,354.25
  ($7,862.70 - $5,508.45 = $2,354.25). This gain tallies with
  the increased proprietorship of that amount shown by the
  balance sheet of June 30, 1922.

Without regard to a form which would be technically correct, the data
of the preceding paragraphs may be shown as follows:

  Goods on hand at the beginning, July 1, 1921          $ 8,500.00
  Goods bought during the year                           22,362.50
                                                        ----------
  Total goods to be accounted for                       $30,862.50
  Goods accounted for, now on hand                       10,260.00
                                                        ----------
  Goods accounted for, by being sold                    $20,602.50
                                                        ==========

  Selling price of goods sold                           $28,465.20
  Cost price of goods sold, as above                     20,602.50
                                                        ----------
  Profit from sales                                     $ 7,862.70
  Expenses of doing business:
    Clerk hire                               $3,050.50
    Other expenses                            2,405.45
    Depreciation                                 52.50
                                             ---------
          Total expenses                                  5,508.45
                                                        ----------
  Net profit, or increase in net worth                  $ 2,354.25
                                                        ==========

The technical form of the summary of the temporary proprietorship
elements will be presented in the next chapter.




CHAPTER VI

THE PROFIT AND LOSS SUMMARY


=Type of Information Needed.=—The need and purpose of the information
to be furnished by the temporary proprietorship records was pointed
out in Chapter V. Without information of this sort, proper control
of business operations cannot be exercised. These records supply a
summarized picture of the activities of the business during a definite
period, which have as their goal the increase in proprietorship—the
making of a profit. In attaining this goal, two main types of
activities or operations are entered into, usually classified under
the heads of: (1) income or earnings, by which is meant those
activities which immediately and directly increase proprietorship;
and (2) expenses or outgo, comprising those activities which decrease
proprietorship. Expenses are the costs incurred in securing income, and
are therefore deductions from it. A fuller explanation of these terms
will now be given.

=Income.=—Income is usually of two types: operating and non-operating.
These terms are always relative; that is, what is an operating income
in one business may be a non-operating income in another business.
The term “operating income” is used to indicate the main sources of
income in a given business. It is always the duty of the accounting
department to indicate the sources of income. Thus in a trading or
mercantile business, the selling of goods to customers is the main
source of income. In a professional business, the selling of services,
often titled “professional fees,” is the main source; in a brokerage or
commission business, commissions earned; in institutions, tuition and
other fees; in a financial business, interest earnings; in a society,
membership fees. These are typical titles for indicating the main
source of income in the several kinds of undertakings mentioned.

While sales are the major source of income in a trading concern,
there may be supplementary sources. It may own stocks and bonds from
which income may be derived. In a manufacturing or mining enterprise
the company may own dwelling houses and rent them to its employees.
Conditions of travel and communication may also force it to provide
stores, places of amusement, and so forth for its workers. From all
these supplementary activities it will derive income. As it was not
organized primarily for these purposes, but chiefly to manufacture,
or mine a commodity, the income from these collateral activities is
classed as non-operating income.

The distinction, then, between operating and non-operating income is,
as mentioned above, always a relative one and will be determined in
any given instance on the basis of major activities and supplementary
or minor activities. Some of the titles under which income is recorded
will now be explained:

SALES. Under this title is recorded the amount of sales of the
stock-in-trade in a merchandising or manufacturing concern. The two
elements included here, namely, the decrease of the asset merchandise
and the increase of proprietorship—the true income element—will be
discussed later.

SALES RETURNS. This title does not represent income but, as its name
indicates, shows the amount of the goods sold which have been returned
because of dissatisfaction with the quality or condition of the goods
or some error in sending the wrong kind.

SALES ALLOWANCES. These are similar to sales returns in that they
indicate a deduction from the sales income for the allowances made
to the purchasers who for one reason or another have just cause to
be dissatisfied with the goods but agree to retain them providing an
allowance from the original selling price is made.

INTEREST INCOME. Under this title is recorded the income from money
loaned or credit extended. Notes receivable and bonds are the usual
sources. Sometimes open accounts receivable also bring interest.

RENTAL INCOME. Under this title is recorded income received from the
lease of premises, lands, or buildings.

PROFESSIONAL FEES. Under this title is recorded the income from charges
made for professional services.

COMMISSIONS EARNED. Included under this title is the income received
from services rendered in the selling of commodities for a principal.

PURCHASE DISCOUNT. This represents the deduction allowed from the
original charge for paying a debt in advance of the date named in the
purchase contract.

=Expenses.=—Expenses are also of two types: operating and
non-operating. The same distinction is made here as with income. Those
expenses incurred in securing operating income are operating expenses,
while those incurred in securing non-operating income or for other
purposes are called non-operating expenses.

To secure control over the operating and non-operating types of
activities, it is necessary to compare operating income with operating
expenses, and non-operating income with non-operating expenses, in
order to measure the return by the effort expended in securing that
return. Some of the more common titles under which the record of
expenses is made are as follows:

SALARIES (WAGES). Under this title is included the cost of the services
rendered by employees. This may be classified in accordance with the
department in which the service is rendered; for example, factory
wages, salesmen’s salaries, office salaries, and so forth.

TRAVELING EXPENSES. The costs of railroad fare, entertainment, and so
forth, when traveling in the interests of the business.

ADVERTISING. The cost of publicity in making known the commodities
offered for sale by the business.

BUYING EXPENSE. The costs incurred in making purchases for the
business. These may comprise the salaries of buyers and all expenses in
connection with maintaining a purchasing department.

RENT. The cost for the use of premises not owned.

PLANT MAINTENANCE. The cost of upkeep, repairs, and so forth, on the
plant used by the business. The cost, by purchase or manufacture, of
light, heat, and power is included here.

DEPRECIATION. The decrease in value of a fixed asset due to wear and
tear, lapse of time, obsolescence, etc.

BAD DEBTS. The amount of outstanding accounts receivable which have
proven or are judged to be uncollectible.

SALES DISCOUNTS. The cost incurred because of the financial policy
of charging a customer a smaller amount than the amount of the bill,
provided he pays by a given date.

TELEPHONE, TELEGRAPH, STATIONERY, POSTAGE, INTEREST COST, COMMISSIONS
PAID, AND SO FORTH. These all indicate by their titles the nature of
the expense or cost items.

The student should understand that expenses may be set up in very
much greater detail than that indicated by the above titles. Usually
the title under which record of an expense is made will indicate with
sufficient clearness its character.

=The Profit and Loss Summary.=—As indicated in Chapter V, the profit
and loss summary shows the manner in which the net worth of the
business has been changed as the result of operations of the business,
as distinguished from changes brought about through withdrawal or
investment of capital. Although it is really a part of the balance
sheet, which shows financial condition, because of its importance it
is, however, set up as a separate statement. It amplifies and fills out
the record shown by the balance sheet. It is a supplementary record
because it gives additional information, and is complementary to the
balance sheet because it rounds out and completes the story of business
life there recorded.

Just as with the balance sheet, the main problems of the profit and
loss summary relate to: (1) its form; and (2) its content. After an
explanation of some of the terms used in connection with the summary,
these two problems will be discussed.

=The Fiscal Period.=—Because of the work involved and the frequent
incompleteness of the records at the close of each day, a daily
statement of condition is very seldom made up. The business experience
of a particular enterprise determines the frequency of preparation of
these statements. Whatever the period may be between statements, be
it a month, three months, a half-year, or a year, it is called the
fiscal period, i.e., it is the period at the end of which records are
summarized for the purpose of ascertaining the profit or loss for the
period. For purposes of comparison with preceding and following fiscal
periods, under similar conditions, the fiscal period should be, and
usually is a period of regular length—a half-year or year being perhaps
the most common, though in many enterprises it is customary to draw up
supplementary monthly statements.

=Need for the Physical Inventory.=—Again, because of the work
involved, especially where the product dealt in is small in value and
sales are numerous—as in stores dealing in clothing, food, and the
like—no record of the cost of each article is kept as it is sold,
only the sale price being recorded. It is not possible, therefore, to
determine from the records as usually kept, the cost of the goods on
hand at a given time. The records are kept in this way, not because
systems of accounting cannot be devised to make both records, but
because the results obtained by such systems are not justified by their
cost when other and less expensive means can be used with almost as
satisfactory results.

The customary method of finding the cost of goods sold was indicated in
Chapter V. Summarized, it requires that from the sum of goods on hand
at the beginning and those purchased since, there be subtracted the
goods on hand and unsold at the close of the period. This last item,
the goods on hand and unsold, is secured by making an actual count
and valuation of such goods at the close of the fiscal period. The
expedient of physical inventory-taking is therefore brought in as an
aid to the accounting records, but only in the interests of economy.


Form of Profit and Loss Summary

GENERAL PRINCIPLES GOVERNING MAKE-UP. The profit and loss statement, as
the complement of the balance sheet, is just as formal in character and
the same general considerations govern as the make-up of the balance
sheet, viz.: (1) the general purpose it is to serve; (2) the likelihood
of obscuring essential facts through too great detail; and (3) the
general appearance is to legibility, clearness of form and expression,
and arrangement on the page.

TITLE. The heading of the summary must show the name of the business,
followed by the title of the summary and the statement of the exact
period covered by it. It was noted in Chapter V that whereas the
balance sheet is a statement of financial condition as at a given date,
the profit and loss summary is a statement of operations which have
taken place during a given period. Hence, it is not sufficient merely
to state the date of the close of the period. If, as is usually the
case, the fiscal periods are of uniform length in a given business,
the phraseology “For the Period Ending ...” will be sufficient for
use within that business. It is better, however, for all statements
of operation to indicate the length of the period covered. A typical
heading for the profit and loss summary is indicated below:

         JAMES R. ROBINSON & COMPANY
         STATEMENT OF PROFIT AND LOSS
  For the Six Months’ Period Ending December 31, 19—

ARRANGEMENT. The arrangement of the summary has already been indicated.
The income from operations, that is, the operating income, is shown
firsthand, and is followed by the operating expense, and then by the
amount of the difference or the net result of operation. Next is shown
the non-operating income, followed by the non-operating expense. The
net result of this combined with the net result from operations gives
the net result for the period, which is the figure shown on the balance
sheet, the detail of which is explained by the profit and loss summary.

=Content of Profit and Loss Summary.=—The content of the profit and
loss summary is determined by the need of information for purposes
of management. A profit and loss summary which is sufficient for a
small business, where the proprietor is in intimate contact with all
phases of the business, would not give sufficient information for the
proper control of a large business, where the managing executives are
dependent for their information as to the various phases of business
activity on reports made to them. There is, however, a fairly standard
outline or skeleton in accordance with which this summary is usually
drawn up. It is the purpose here to explain that outline.

The first section of the statement has for its purpose the separation
of the sales item into its two elements, referred to above: (1) the
Cost of Goods Sold, which indicates the amount by which the asset
merchandise has been decreased through sale of goods; and (2) the Gross
Profit or the excess of selling price ever cost, out of which must
be met the costs of operating the business before the net change in
proprietorship can be determined. This section is usually spoken of
as the “trading” section of the statement. The set-up of this section
shows, accordingly: (1) the Sales item, from which is shown deducted
the amounts of sales returns and sales rebates and allowances in order
to arrive at the figure of net sales; and (2) the Cost of Goods Sold,
under which is listed the cost of goods sold as explained in Chapter V.
This cost requires the showing of the initial inventory, the purchases
for the period, the inward costs of laying down the merchandise at the
place of business, such as insurance on goods in transit, freight and
cartage costs, and so forth. From the sum of these items will be shown
deducted the returned purchases and the amount of the final inventory,
the difference indicating the cost price of goods disposed of by sale.
With the “inward” cost of goods is sometimes included the sum total
of all buying expenses. In other cases, particularly where a complete
purchasing department is maintained, a separate buying expense section
is set up to summarize these costs.

Following this trading section comes the formal statement of operating
expenses which are usually classified for purposes of information into
the groups: Selling Expenses, General Administrative Expenses, and
Financial Management Expenses. Under each one of these groups should be
listed the detailed items. Thus, under the selling expense group should
be shown such items as salaries to salesmen; the traveling expenses
incurred by them; the cost of publicity, advertising, and so forth; the
sales management expense; and the delivery expenses, although these
expenses are sometimes set up in a group by themselves.

The student will note that under the head of selling expenses are
grouped all of the direct costs incurred in making sales.

Under the general administrative expenses should be shown such items
as office salaries, stationery and supplies, postage, telephone and
telegraph, light, heat, insurance, depreciation, and all other items
which cannot be charged to definite departments of the business but
must be borne by the business as a whole.

Under financial management expense should be listed the various items
of expense which represent the financial activity of the business as
related to its major purposes and which are operating financial expense
items. Here will be shown such items as interest on money borrowed for
operating the business; sales discounts granted customers in order to
secure cash payments from them at an earlier date than the limit of the
normal credit period allowed them; collection costs, and so forth.

A final section of the _operating_ portion of the profit and loss
statement lists the items of income arising out of the management
of the working capital finances of the business. Interest received
on customers’ notes and on cash balances in the bank, and purchase
discounts, are usually the only items of income under this head.

The difference between gross profit on sales and the sum of these
operating expenses minus the financial income, is the operating profit
of the business, sometimes called Net Operating Profit.

The section following this is devoted to the marshaling of the items
of Non-operating Income and Expense. Whichever of these two groups is
the larger is set up first, and from its total is deducted the total of
the other group. The net amount is then shown extended under the item
of net operating profit, to which it is added if it is a net income
item and from which it is subtracted if it is a net expense item. The
resulting figure is the Net Profit for the period.

Occasionally there are extraordinary items of profit or loss not to
be classified under any of the above heads, which have to be shown in
additional sections of the profit and loss statement. These are matters
which will be taken up later.

It should be noted that the above paragraphs outline a simple
statement of profit and loss for a commercial or trading business as
distinguished from an industrial or manufacturing enterprise, the
statement for which is somewhat more complex even in its general
outlines.

=Algebraic Content of the Profit and Loss Statement.=—An algebraic
presentation of the profit and loss statement is oftentimes valuable.
The cost-of-goods-sold portion becomes:

  (1) Initial Inventory + Purchases - Final Inventory
                                                  = Cost of Goods Sold

  (2)  Sales - Cost of Goods Sold = Gross Trading Profit

The rest of the statement is covered by the following equation:

  (3) Gross Trading Profit
           - (Selling Expenses
           + General Administrative Expenses
           + Financial Management Expense
           - Financial Management Income)
           ± (Non-operating Income - Non-operating Expense)

           = Net Profit

=The Disposition of the Net Profit.=—The net profit for the period
belongs to the proprietor and constitutes an increase in his
proprietorship or investment, unless he has already drawn out some
of these profits as they accrued. In this case, his drawings must be
subtracted from the net profit indicated before showing the increment
to his net worth. Accordingly, a final section of the profit and
loss statement may give the disposition of the net profit and its
appropriation or addition to the previous net worth or proprietorship
item. This section, when used, is known as the appropriation section.
If the business is a partnership, this section should show in detail
the distribution of net profit among the several partners according to
the agreement among them as to the proportions in which they are to
share gains or losses. If a corporation, it should give the disposition
made of the net profit in the way of dividends to the stockholders, and
any other appropriation made of these profits, including transfer to
surplus.

Two illustrations—one very simple, the other more complex—typical of
profit and loss summaries are given for the guidance of the student.

                    _Illustration 1_

                      AARON CONNERS
               STATEMENT OF PROFIT AND LOSS
             For the year ending June 30, 1922

  Sales for the year                                      $28,465.20
  Goods on Hand July 1, 1921   $ 8,500.00
  Purchases during the year     22,362.50     $30,862.50
                                ---------
  Goods on Hand June 30, 1922                  10,260.00
                                               ---------
  Cost of Goods Sold                                       20,602.50
                                                           ---------
  Gross Trading Profit                                    $ 7,862.70

  Clerk Hire                                  $3,050.50
  General Expenses                $2,405.45
  Depreciation                        52.50    2,457.95     5,508.45
                                  ---------   ---------    ---------
  Net Profit for the year                                  $2,354.25
                                                           =========

                       _Illustration 2_

                    KIMBALL AND MOREY
               STATEMENT OF PROFIT AND LOSS
             For the Year Ending June 30, 19—

  Sales                                       $525,600.00
      _Less_:
    Sales Returns                $  5,000.00
    Sales Rebates and Allowances      600.00     5,600.00
                                 -----------  -----------
  Net Sales                                                $520,000.00

  Cost of Goods Sold:
    Inventory, July 1, 19—      $ 96,670.00
    Purchases during the year     350,000.00
    Freight-In                      1,000.00
    Insurance (Goods in Transit)      750.00  $448,420.00
                                 -----------
      _Less_:
    Purchase Returns             $  1,750.00
    Final Inventory,
        June 30, 19—             105,000.00   106,750.00
                                 -----------  -----------
          Cost of  Goods Sold                               341,670.00
                                                            ----------
  Gross Profit                                             $178,330.00

  Selling Expenses:
    Salesmen’s Salaries          $ 20,000.00
    Advertising                    25,000.00
    Delivery Expense                5,000.00  $ 50,000.00
                                 -----------

  General Administrative Expenses:
    Office Salaries              $ 10,000.00
    Stationery and Supplies         1,500.00
    Postage                           250.00
    Telephone and Telegraph           750.00
    Light and Heat                  1,750.00
    Insurance (Stock and Fixtures)  1,500.00
    Depreciation:
      Furniture and
        Fixtures         $2,000.00
      Buildings           1,500.00  3,500.00
                         ---------
    Miscellaneous Expenses            750.00    20,000.00
                                 -----------

  Financial Management Expenses:
    Interest Paid                $    250.00
    Sales Discounts                 5,000.00
    Bad Debts                       1,000.00
    Collection Costs                  250.00     6,500.00
                                 -----------  -----------
          Total Operating Expenses            $ 76,500.00

  Financial Management Income:
    Interest Received            $  1,350.00
    Purchase Discounts              3,500.00     4,850.00
                                 -----------  -----------
          Net Operating Expense                              71,650.00
                                                           -----------
  Net Operating Profit                                     $106,680.00

  Non-Operating Expense and Income:
    Income--Interest on Liberty Bonds         $  2,000.00
    Expense--Loss on Stocks Sold                   900.00     1,100.00
                                              -----------  -----------
  Net Profit for the year                                  $107,780.00
                                                           ===========
  Appropriation of Net Profit:
    J. H. S. Kimball, ⅖ share                 $ 43,112.00
    H. F. C. Morey,   ⅗ share                   64,668.00  $107,780.00
                                              -----------  ===========

=The Two Methods of Determining Net Profit.=—It is particularly
important to note that the profit shown by the profit and loss
statement must be the same as that developed by the comparative balance
sheet, since both cover the same period and constitute merely two
ways of developing the same result. For this reason they are valuable
in proving the correctness of results, acting as checks against each
other. The student must bear in mind, however, that the increase or
decrease in net worth as shown by the comparative balance sheet must
always be adjusted by taking account of additional investments or
withdrawals of capital before the net profit for the period can be
determined, and therefore before this figure can be used as a check
against the amount of net profit shown by the statement of profit and
loss.

The accounting department keeps both classes of records, viz., the
asset and liability records and the temporary proprietorship or income
and expense records, not because both are needed to develop the amount
of net profit—either class would do this—but because both are needed
for the additional information which they give and which is valuable
and necessary for the intelligent management of the business.




CHAPTER VII

INTERRELATION BETWEEN THE ECONOMIC AND THE FINANCIAL ELEMENTS OF A
BUSINESS, AND SOME INTER-RATIOS


=Various Aspects of the Temporary Proprietorship Records.=—The profit
and loss statement has been explained as a summary of the temporary
proprietorship records kept for the purpose of registering the changes
in net worth as they occur from day-to-day, and also for the purpose
of noting the source or cause of many of the changes in assets and
liabilities. The temporary proprietorship records may be regarded as
the chronicle or history of the economic life of the business. The
efforts of the business to produce income with the least possible outgo
in the form of costs or expenses, may be viewed as the work of forces
or agencies striving towards that end. Every effort is offset by the
cost of that endeavor, and unless the result of the effort be more than
its cost, its aim, viz., the increase of net worth, is not accomplished.

=Relation between Profit and Loss and Financial Elements.=—These
income-producing efforts are the agencies that bring about the changes
in the values of assets and liabilities. Expenses and costs are
incurred for the purpose of securing income. Every expense or cost that
is settled causes a diminution of business assets, usually of the asset
cash. If not settled, it causes an increase in the liabilities, usually
the accounts payable, for the business becomes bound by or liable for
it. Both of these conditions result in a decrease in the net worth.

On the other hand, every item of income, as when a sale of goods
is made, is reflected in an increase of assets or a decrease of
liabilities. The result of every sale is usually an increase in the
cash or in the claims against persons, the accounts receivable. The
sale may sometimes result in a lessening of liabilities through a
cancellation of the claims of creditors by means of the claims against
customers arising out of the sale. This would be true when goods are
bought from, and sold to, the same person. Thus there is constantly
a direct interrelation between the financial and the profit and loss
elements of every business.

=Exchanges within the Asset and Liability Groups.=—All changes in
individual assets and liabilities, however, are not always the result
of business or economic forces. There may be an even exchange of one
asset for another asset, as when delivery equipment is purchased for
cash. The asset Delivery Equipment is increased by the same amount
as the asset Cash is diminished. Or if a bill of goods is purchased
on credit, an increase of assets is exactly offset by an increase in
liabilities. These changes are illustrated in the second example in
Chapter I, showing Runyon’s proprietorship.

It is seen, therefore, that the changes in individual assets and
liabilities are not so certain an index of changes in proprietorship
as those registered by the temporary proprietorship records. The vital
history of a business is its profit and loss record, the story of
its economic life. As a means of control this is of first importance
because it chronicles the causes of most changes in financial
condition. The statement of financial condition may be looked upon as
a picture of the framework, the skeleton of the business personality,
upon which is superimposed its economic structure. When both the
financial framework and the profit and loss summary are given, it is
possible with reasonable accuracy to tell the whole history of the
business activities for the period covered.

=Confusion between Profit and Loss and Balance Sheet Items.=—The
beginner frequently has trouble in making a proper classification of
income items and sometimes of expense items. Take Interest Income as an
example. The asset Cash Received is confused with the title Interest
Income, which denotes the source of the cash received. The accounting
department maintains both types of records. The receipt of cash arising
out of interest income would be classified and recorded under two
heads: (1) the asset Cash, to indicate the increase in that asset; and
(2) the temporary proprietorship record Interest Income, to give the
profit and loss information necessary for purposes of management.

Similarly, the beginner oftentimes confuses the sales income record
with the cash record of a cash sale transaction. Also, when cash
is disbursed for expense purposes, the decrease in the asset is
often confused with the expense record. When an expense is incurred
it brings about either a decrease in assets, usually cash if the
transaction is settled at once; or an increase in liabilities, usually
an accrued expense item if the transaction is not immediately settled.
Accordingly, in making the record the accounting department must
show the decrease in the asset or the increase in the liability in
the balance sheet group of records and the source of that decrease
or increase under some expense title in the profit and loss group of
records. Familiarity with the titles appearing in the profit and loss
statement should prevent this confusion.

=Illustration.=—To show the interactions between the balance sheet
and the profit and loss groups of records, the following illustration
is given. There is shown first a comparative balance sheet, indicating
the condition of a business at the beginning and the end of a period.
This comparative balance sheet, it will be noted, shows a net profit of
$33,250. There is also given a statement of profit and loss, showing
the sources of the income and the expenses of the business. The
statement indicates a net profit of $33,250 for the period. By starting
with the financial condition as indicated by the balance sheet at the
beginning of the period and working into it the operations for the year
as shown by the statement of profit and loss, and by using the balance
sheet at the end of the period as a goal, we can trace the probable
interaction of the two types of records for the period.

                     JACKSON L. GORDON
                 COMPARATIVE BALANCE SHEET
          December 31, 1922 and December 31, 1921

                                                           Increase
                                                             and
             Assets              1922         1921         Decrease
  Cash                          $ 10,000.00  $ 15,000.00  - $ 5,000.00
  Accounts Receivable            100,000.00   119,000.00  -  19,000.00
  Merchandise                     70,000.00    65,000.00  +   5,000.00
  Unexpired Insurance              1,000.00       250.00  +     750.00
  Plant and Equipment            350,000.00   325,000.00  +  25,000.00
                                -----------  -----------    ----------
      Total Assets              $531,000.00  $524,250.00  + $ 6,750.00
                                -----------  -----------    ----------
           _Liabilities_
  Notes Payable                 $ 30,000.00  $ 35,000.00  - $ 5,000.00
  Accounts Payable                50,000.00    40,000.00  +  10,000.00
  Accrued Sales Salaries           2,500.00     1,500.00  +   1,000.00
  Mortgage Payable               150,000.00   200,000.00  -  50,000.00
  Depreciation Reserve Plant
    and Equipment[1]              50,000.00    32,500.00  +  17,500.00
                                -----------  -----------    ----------
  Total Liabilities             $282,500.00  $309,000.00  - $26,500.00
                                -----------  -----------    ----------
               _Net Worth_
  Jackson L. Gordon, Capital    $248,500.00  $215,250.00  + $33,250.00
                                ===========  ===========    ==========

[1] The student should note the manner of showing depreciation reserves
in the comparative balance sheet. This is done solely for the purpose
of eliminating the detail column in the assets needed to handle the
subtraction item. This method of showing is countenanced only in
comparative statements where saving of space is a chief consideration.

                  JACKSON L. GORDON
             STATEMENT OF PROFIT AND LOSS
        For the Year Ending December 31, 1922

  Sales                                      $470,000.00
    Sales Returns                              20,000.00
                                              ----------
  Net Sales                                               $450,000.00

  Cost of Goods Sold:
    Merchandise on Hand December
      31, 1921                  $ 65,000.00
    Purchases                    305,000.00
    Inward Freight and Cartage    15,000.00  $385,000.00
                                -----------
    _Deduct_—Merchandise on Hand
      December 31, 1922                        70,000.00
                                              ----------
          Cost of Goods Sold                               315,000.00
                                                          -----------
  Gross Profit                                            $135,000.00

  Selling Expenses:
    Sales Salaries              $ 20,000.00
    Advertising                   30,000.00
    Sundry Sales Expense          10,000.00  $ 60,000.00
                                -----------
  General Administrative Expenses:
    Office Salaries             $ 10,500.00
    Insurance                      3,000.00
    Sundry Office Expense          2,000.00
    Depreciation                  17,500.00    33,000.00
                                -----------
  Financial Management Expenses:
    Interest Cost               $ 10,000.00
    Sales Discounts                7,000.00    17,000.00
                                -----------  -----------
  Total Operating Expenses                   $110,000.00

  Financial Management Income:
    Interest Income             $    250.00
    Purchase Discounts             8,000.00     8,250.00
                                -----------  -----------
          Net Operating Expenses                           101,750.00
                                                          -----------
  Net Profit for the year                                 $ 33,250.00
                                                          ===========

INTERRELATION BETWEEN SALES INCOME, ACCOUNTS RECEIVABLE, AND CASH. In
these two statements, if to the outstanding accounts at the beginning
of the period we add the net sales for the period as shown in the
profit and loss summary, and if from their sum we deduct the sales
discounts allowed customers and the accounts outstanding at the close
of the period, as shown by the comparative balance sheet, we arrive at
the amount of cash received from customers during the year. This is
shown by the following statement:

  Accounts Receivable, December 31, 1921    $119,000.00
  Net Sales for the year                     450,000.00  $569,000.00
                                            -----------
  _Deduct_:
    Sales Discounts                         $  7,000.00
    Accounts Receivable, December 31, 1922   100,000.00   107,000.00
                                            -----------  -----------
  Cash Received from Customers during year               $462,000.00
                                                         ===========

INTERRELATION BETWEEN PURCHASES, ACCOUNTS PAYABLE, AND CASH. The
amount of cash paid for merchandise during the year may be arrived at
similarly, as indicated by the following statement:

  Accounts Payable, December 31, 1921      $ 40,000.00
  Purchases during the year                 305,000.00  $345,000.00
                                           -----------
  _Deduct_:
    Purchase Discounts                     $  8,000.00
    Accounts Payable, December 31, 1922      50,000.00    58,000.00
                                           -----------  -----------
    Cash Paid for Merchandise during year               $287,000.00
                                                        ===========

INTERRELATION BETWEEN CASH AND OTHER BALANCE SHEET AND PROFIT AND LOSS
ITEMS. If to the amount of cash on hand at the beginning of the period
we add the cash received from customers, as determined above, and that
received from interest income, as indicated by the profit and loss
statement, we arrive at the total cash available for use during the
period.

Cash expenditures have been made for the following purposes:

  1. Payments to creditors for merchandise of $287,000
      as above.
  2. Inward freight and cartage $15,000, as shown by the
      profit and loss statement.
  3. Sales salaries $19,000. (This amount is determined
      by considering the expense of $20,000, as shown
      by the profit and loss statement, in conjunction
      with the unpaid sales salaries, as shown by the
      comparative balance sheet. Thus, if to the unpaid
      sales salaries amounting to $1,500 at the beginning
      of the period, we add the sales salary expense of
      $20,000 incurred during the period and from their
      sum we subtract the amount of unpaid salaries,
      $2,500, at the end of the period, we arrive at the
      amount of $19,000 spent for salaries during the
      period.)
  4. Advertising $30,000.
  5. Sundry selling expense $10,000.
  6. Office salaries $10,500.
  7. Insurance $3,750. (This amount is also determined
      by considering the amount of unexpired insurance
      as shown by the comparative balance sheet in
      conjunction with the cost of insurance used during
      the current period, as shown by the profit and
      loss statement. It will be noted that $250 worth
      of insurance was in force at the beginning of the
      period, that $3,000 worth of insurance was used
      during the period—hence it must have been
      necessary to buy additional insurance amounting to
      $2,750 during the period. When we find, however,
      that there is unexpired insurance at the end of the
      period amounting to $1,000, it will be seen that
      there must have been purchased during the period
      $3,750 worth of insurance.)
  8. Sundry office expense $2,000.
  9. Interest cost $10,000.
  10. Plant and equipment $25,000. (It will be noted from
      the comparative balance sheet that there has been a
      net increase of only $7,500 in plant and equipment.
      While $25,000 was added to the plant and equipment
      asset during the year, there was a decrease in
      value due to depreciation, amounting to $17,500,
      as shown by the profit and loss statement. This
      depreciation expense is reflected as a decrease in
      the value of the asset Plant and Equipment and does
      not therefore decrease the asset Cash.)
  11. Notes payable $5,000—the decrease being shown by
      the comparative balance sheet.
  12. Mortgage payable $50,000—also shown on the
      comparative balance sheet.

If from the total cash available for use there is deducted the cash
expended, as indicated above, the difference should indicate the amount
of cash on hand at the close of the period. This balance of $10,000, as
indicated by the tabulated statement below, is the amount shown by the
comparative balance sheet as being on hand.

  Cash Receipts:
    Balance on Hand December 31, 1921               $ 15,000.00
    From Customers, as above                         462,000.00
    Interest Income                                      250.00
                                                    -----------
  Total Cash available for use                      $477,250.00

  Cash Expenditures:
    For Purchases as above             $287,000.00
    Inward Freight and Cartage           15,000.00
    Sales Salaries                       19,000.00
    Advertising                          30,000.00
    Sundry Selling Expense               10,000.00
    Office Salaries                      10,500.00
    Insurance                             3,750.00
    Sundry Office Expense                 2,000.00
    Interest Cost                        10,000.00
    Plant and Equipment                  25,000.00
    Notes Payable                         5,000.00
    Mortgage Payable                     50,000.00   467,250.00
                                       -----------  -----------
  Balance of Cash on Hand
    December 31, 1922, per Balance Sheet.           $ 10,000.00
                                                    ===========

By a careful study of the interrelations between various items as
explained above, the student will see that the interactions between
all of the transactions for the year as set forth in the comparative
balance sheet and the profit and loss statement, have been indicated
and proved. The proof is secured in the tie-up between the figure of
cash as shown by the cash statement, and that shown in the comparative
balance sheet statement as cash on hand at the end of the period.

=Inter-Ratios and Their Uses.=—Before leaving the study of the balance
sheet and profit and loss statement and their interrelations, it
is desirable to explain certain ratios between items found on both
statements. These are ratios which are watched very carefully in
judging the financial condition of a business. Their significance is
apparent.

1. MERCHANDISE TURNOVER. By merchandise turnover is meant the rate
at which the merchandise stock is moved or turned over by sale during
the fiscal period. The ratio expressing the rate of turnover is found
by dividing the cost of goods sold, as shown in the profit and loss
statement, by the average inventory carried for the year. Where there
are available only the figures of opening and closing inventory,
the amount of the average inventory is taken as one-half of the sum
of these two inventories. The rate of turnover varies in different
businesses, ranging as high as 15 or 20 in some and as low as 1 or 2 in
others. The value of a rapid turnover is apparent. One dollar invested
in merchandise where the rate of turnover is 10 is equivalent to $10
invested where the rate is only 1. The more work a dollar does, the
greater the profit possibilities.

2. WORKING CAPITAL TURNOVER. The amount of sales as indicated by the
profit and loss statement, divided by the working capital—the excess of
current assets over current liabilities—as determined from the balance
sheet, is called the “working capital turnover.” This indicates the
rate at which the working capital is used in securing sales. Where the
amount of working capital on hand varies markedly at different periods
of the year, the average should be used as the basis for estimating the
rate of turnover.

3. ACCOUNTS RECEIVABLE TO SALES. The fraction represented by dividing
the amount of outstanding accounts at the end of the year by the
volume of sales during the year, indicates the portion of sales which
has not yet been collected in cash. If this fraction is multiplied
by the length of the fiscal period, expressed in months, and the
result compared with the normal credit term allowed customers, it will
indicate the trend of collections. For example, if the outstanding
accounts at the close of the period are $150,000, the sales for the
year are $1,200,000, and the normal credit period is 30 days, it will
be seen that by the above ratios the $150,000 of outstanding accounts
represents on the average the sales for approximately 1½ months

  ( 150,000                         )
  (--------- × 12 months = 1½ months).
  (1,200,000                        )

Since the credit term is only 30 days, the indication is that
collections are slow and should be pushed more vigorously. It must be
understood that this ratio indicates merely a trend and must be judged
in the light of other significant facts in the business.

4. PROFITS TO NET WORTH. The net profit for the period divided by the
net worth at the beginning of the period is used to indicate the per
cent of earnings on the capital invested.

=Other Ratios.=—For the purpose of watching the progress of business
operations, it is customary to develop the following ratios:

  1.  Cost of goods sold to net sales.
  2.  Gross profit to net sales.
  3.  Selling expenses to net sales.
  4.  General administrative expenses to net sales.
  5.  Net financial management expenses to net sales.
  6.  Net profit to net sales.

These ratios, set up each fiscal period and compared with similar
ratios for previous periods, indicate very definitely the trend of
income and expenses and are useful in the determination of business
policies.




CHAPTER VIII

THE ACCOUNT


=The Goal of Account-Keeping.=—Throughout the preceding chapters
constant reference has been made to records or data of the business
furnished by the accounting department. Knowing the use made of
these data in the compilation of financial and profit and loss
summaries, we shall trace the process of gathering that information
in exactly reverse order; first, through the ledger, where it is
grouped and summarized in accounts and made ready for the preparation
of statements; then into the books of original entry, where the
information is first sorted and classified for posting to the proper
ledger accounts, with a view always to fit it ultimately into the final
statements of financial and business condition; and finally, to the
business papers arising out of the transactions, which are the basis or
first source of all accounting records.

=The Ledger and Its Content.=—The ledger may be defined as the book
of accounts. In it are collected most of the data needed for the final
statements showing the financial condition of the business. By means of
its account titles, it makes an analytical record of all transactions,
according to the information desired, and through the mechanism of the
account it groups and summarizes all data affecting each particular
account, thus furnishing the proprietor with totals instead of items.
In the ledger, therefore, must be kept two main classes of accounts,
viz., those used for making up the balance sheet and those used for
making up the profit and loss statement. The one group shows assets
and liabilities, and the other temporary proprietorship increases
and decreases brought about by the receipt of income and the payment
of expenses. The ultimate or net proprietorship is determined by the
summarization of all temporary accounts in the way shown in preceding
chapters.

THE LEDGER ACCOUNT DEFINED.—An account may be defined as a record of
one or more items, either similar or dissimilar, relating to the same
person or thing, kept under an appropriate heading or title. The record
is kept in such a way as to make easy the addition of similar items
and the subtraction of dissimilar items. Accounts are kept both with
persons, as the accounts receivable and payable already mentioned, and
with things, such as land, buildings, machinery, merchandise, cash, and
the like. Some asset accounts and some accounts kept with persons are
usually composed of both similar and dissimilar items. For example, the
cash account is composed of both cash received and cash paid out items;
the accounts receivable record both the items for which the person
is in debt to the business and those which show the cancellation or
settlement of the debt, in part or in full; and the accounts payable
record the items for which the business is in debt to the person
and those which show cancellation of the debt or settlement by the
business. Accounts which record income and expenses usually comprise
only similar items, as where all sales of merchandise are recorded
under one head or account and all purchases under another.

THE ACCOUNT TITLE.—The title given to an account is important. It
should indicate clearly the content of the account. Accuracy is a
basic necessity in accounting. Correct titles are therefore essential.
A title which does not clearly and truthfully indicate the nature of
the account, or one which is so chosen that under it may be recorded
items of various and doubtful kinds, gives prima facie evidence of an
imperfect knowledge of accounting principles or of a desire to hide
data which will not bear close scrutiny. Therefore, care should be
exercised in the selection of titles.

=The Two Sections of the Account.=—To separate similar from dissimilar
items, the account is divided into two sections, a left and a right
section, as we shall call them for the present, which are shown in the
standard form given in Form 1.

The account head or title is placed in the center over the division
line. At the extreme left of each section are the date columns—year,
month, and day. Note particularly where the “year” is shown. The space
following is for explanatory matter; the next column, left blank in the
illustration, is a reference column whose use will be explained later;
and the last column in each section is the money column, where the
dollar subsection column is further divided into columns for each digit
of the amount. Care must be exercised to observe such rulings when
writing in the amounts. The account with Cash in the illustration shows
on the left a receipt of $150.25 from J. B. Givens, and on the right,
the payment of $5.50 for stationery. These two items are entirely
dissimilar. Another receipt of $72.69 on January 3 from cash sales is
shown on the same side of the account as the record of the previous
receipt and directly under it. Note that the name of the month is not
repeated.

=The Mechanism of the Account.=—Thus the mechanism of the account
is designed not only to give a brief history of each item entered
therein, but primarily to bring together all items of the same kind
relating to that account, so that they may be summarized. It should be
thoroughly understood that all items on each side of the account are
similar items, though the two sides themselves are of exactly opposite
kinds. Where the account has entries on both sides, i.e., is composed
of dissimilar items, a comparison of the totals of each group shows the
condition of the account. In the Cash account given, the total of the
left side, $222.94, showing receipts, compared with the total of the
right, $5.50, showing disbursements, indicates that there is $217.44
cash now on hand. It is evident, therefore, that the account is a
mathematical device for holding on one side all items to be added and
on the other all items to be subtracted. Only in this way can addition
and subtraction be performed within the account.

[Illustration: Form 1. Form of Ledger Accounts]

=The Number of Accounts.=—The number of accounts to be kept in the
ledger is determined by the minuteness of detail desired for the
guidance of the management of a business. The financial and profit
and loss statements usually lack detail and for this reason the items
appearing thereon are frequently subdivided in the ledger into numerous
accounts.




CHAPTER IX

THE ACCOUNT (Continued)


=The Balance of the Account.=—As stated in Chapter VIII, the account
is divided into two sections, a left and a right, for the purpose of
separating items relating to the same account which are dissimilar,
and thus affording a comparison between the totals of these dissimilar
groups. An account containing dissimilar items may have the same total
on both sides, in which case it is said to balance, i.e., the class of
items on one side exactly balances or cancels those on the opposite
side; or one side of the account may be larger than the other, in which
case the amount of the excess is called the “balance” in the account,
or of the account. An account takes its nature or classification from
the larger side, on which the balance appears. The account balances are
shown in summarized form on the balance sheet or the profit and loss
statement.

=The Account Title Indicative of Its Classification.=—The account
title or name should be so plain as easily to indicate its main
classification. The two main classes of accounts are, as stated above,
those relating to assets and liabilities, or property—things owned and
things owed; and those relating to proprietorship—those showing the
increases or decreases in net worth. The title of an account should
clearly indicate whether the account belongs to the asset or liability
class, or to the proprietorship class.

The accounts called Cash, Accounts Receivable, Mortgages Payable,
Accrued Wages, clearly show assets and liabilities; while those
entitled Sales, Rent Income, Wages, Expenses, indicate factors
affecting proprietorship.

=The Meaning of Account Balances.=—In the asset accounts the larger
side, and therefore the balance of the account, is normally on the
left, i.e., the balance of Cash, Land, Buildings, Furniture and
Fixtures, Notes Receivable, and the like are normally left-side
balances. It follows, therefore, that all entries showing the
acquisition or increase of assets are made on the left side of their
accounts, and all entries showing the disposal or decrease of assets
are made on the right side of the accounts. Very seldom are the
cancellations listed on the right side in excess of the assets listed
on the left.

In the liability accounts the balance is normally on the right side
because liabilities are subtraction items from the assets and should,
therefore, normally be on the opposite side of the account. Notes
Payable, Accounts Payable, Mortgages Payable, Interest Payable, Rent
Payable, and the like, have normally right-side balances. It follows,
therefore, that all entries showing the assumption of liabilities are
made to the right side of the account, and all entries showing the
cancellation of these liabilities are made on the left side. Rarely are
liability cancellations in excess of the liabilities owed.

As will be explained in Chapter XII, in the group of accounts
indicating decreases in proprietorship, the balance, or larger side, is
normally on the left; in the group showing increases in proprietorship
the balance is normally on the right. The balances of the accounts,
Wages, Salaries, Rent Expense, and all other expenses, are normally
left-side balances. It follows, therefore, that entries showing the
cost of such expenses to the business are made on the left side of
suitably named expense accounts, and entries showing a reduction in
the expenses are made on the right side. Items for wages, for example,
are shown on the left side of the Wages account, and any subtractions
because of overpayment or for other reasons, are shown on the right
side of the account.

The balances of the accounts Sales, Rent Income, Interest Income, and
other kinds of income, are normally right-side balances. From this it
follows that entries showing income are made on the right side of a
suitable account, and entries indicating a reduction or subtraction
from the income shown are made on the left side of the account. For
example, income from sales is shown on the right side of the Sales
account, while any reduction of that income, as when goods are returned
by customers, is shown on the left side.

Knowing, therefore, to what main class each account belongs—asset,
liability, expense, or income—one always knows on which side the
balance is normally, and also that the items on the opposite side are
subtraction items. Subtraction can be shown in the account only by thus
separating dissimilar items.


=Relation of the Account to the Financial Statements.=—The equation
of the balance sheet is the equation of the ledger. The fundamental
proprietorship equation is written in two ways:

  (1) Assets - Liabilities = Proprietorship
  (2) Assets = Liabilities + Proprietorship

The ledger (that is, the accounts in the ledger) is constructed in
accordance with the second form of the proprietorship equation. In
it are found all the accounts of the business, which are included
under the classes Assets, Liabilities, and Proprietorship. Under
Proprietorship are the subgroups: (a) Net Worth, or capital at the
beginning of the period, and (b) Current Profit or Loss. The Current
Profit or Loss is in turn shown by the two groups of accounts: (1)
Income, and (2) Expense. This classification of the accounts and their
relation to the balance sheet are illustrated graphically in the chart
shown in Form 2.

The asset accounts have net left-side balances, as previously
explained. Hence, if all the detailed accounts which record assets are
brought together, the sum total of the left-side balances of these
accounts will represent the total assets of the business. Liability
accounts have right-side balances, as also explained. Therefore, if all
the accounts that record the liabilities of the business are brought
together, the sum total of their right-side balances will represent
the total liabilities of the business. The proprietorship accounts
have right-side and left-side balances. The _net total_ of all the
proprietorship accounts will be a right-side balance, however, and will
show the present net worth of the business.

[Illustration: Form 2. Chart of Accounts]

Accordingly, when one views the accounts in the ledger in
their fundamental groupings—namely, assets, liabilities, and
proprietorship—it is seen that the equation of the balance sheet is
also the equation of the ledger. The account is thus seen to be an
integral part of the balance sheet. It is so arranged, however, as to
sort and handle additions and subtractions and to furnish a net result
for use in the balance sheet.

The asset portion of the proprietorship equation is in the ledger
broken up into the various kinds of assets, record of which is
desirable and necessary for purposes of adequate control of the
business. In keeping the record, all the transactions affecting—that
is, either adding to or subtracting from—a given asset are recorded
in the account kept with that asset. In this way each account brings
about a sorting of the transactions affecting it. It separates these
transactions into two kinds, those which add to and those which
subtract from its value, and by means of its net balance at any given
time it summarizes the numberless transactions which have affected it
during a period and gives a net result showing its present status.

In much the same way the liability item of the proprietorship equation
is broken up in the ledger for purposes of detailed information, into
a large number of individual liability accounts. The sum total of the
balance of these accounts is the liability item of the proprietorship
equation.

The proprietorship section of the equation is a little more complex
when split up, as it is in the ledger. In accordance with the chart
given in Form 2, it will be seen that proprietorship is classified
in the two main groups: (1) capital at the beginning of the period,
and (2) changes of capital during the period. It is this latter group
of accounts which, as they are carried in the ledger, have both
right-side and left-side balances. The income accounts, which tend
to increase capital and which, when merged with the capital accounts
at the beginning of the period, add to that capital, have right-side
balances. The accounts which tend to decrease capital, that is, the
expense accounts, because they are subtraction items, have left-side
balances. The net increase (or decrease) in capital for the period is
the excess (or deficit) of the total income accounts over the total
expense accounts. The summarized result therefore of current changes in
capital added to the capital at the beginning of the period, gives the
proprietorship of the business at any given time.

At the beginning of a business enterprise the accounts in the ledger
will be an opening balance sheet of the business. Day by day by day as
transactions take place, there will be a constant change in the values
of the assets, liabilities, and the proprietorship account which will
thus express the changing financial condition of the business. Some
assets will be increased while others will be decreased; liabilities
will also change; and with these changes there will be brought about
a change in proprietorship—an increase or a decrease. The ledger must
record these changing values as they take place, so that the condition
of the business can be determined practically at any time.

The ledger is thus seen to contain and comprise the balance sheet
of the business at all times. Certain groupings, summarizations,
and adjustments may be necessary before a balance sheet technically
correct as to form and content can be taken from the ledger, but the
fundamental balance sheet equation is always contained in the ledger.
This is pictured graphically in the chart shown in Form 2. A further
consideration of the relationships between assets, liabilities,
and proprietorship leads us to an explanation of the principles or
philosophy of debit and credit, a matter which will be taken up in the
next chapter.




CHAPTER X

THE PHILOSOPHY OF DEBIT AND CREDIT


=Double-Entry Bookkeeping.=—Several systems or methods of keeping
business records have at various times been in use. The method which
at the present time is used by all businesses, excepting those of the
simplest sort, is called “double-entry bookkeeping” and is the method
which is being set forth here. It is based on the proprietorship
equation expressed in the form: Assets = Liabilities + Proprietorship.
It is possible to make a balance sheet if only asset and liability
records are kept, because proprietorship is always the difference
between them. Such a system of record-keeping would fail completely in
giving the information as to the current increases and decreases in
proprietorship and the causes of such changes. As was indicated in an
earlier chapter, such a system would have the disadvantages which the
comparative balance sheet has as a means of managing and controlling a
business enterprise. The information which is given by the profit and
loss records of the business would be entirely lacking.

Double-entry bookkeeping, accordingly, keeps a record not only of
assets and liabilities, but also of proprietorship and its constantly
changing value. The advantages of such a system were discussed when the
need for the information furnished by the profit and loss statement was
pointed out (see page 39). Not only does double-entry bookkeeping give
this full and complete information, but it ties this information into a
system whose mathematical accuracy and correctness can be proved. It is
an invention or device whose purpose is definitely to give the desired
information and to demonstrate the mathematical correctness of that
information.

As already stated, the system of double-entry bookkeeping is based on
the proprietorship equation. An equation is an expressed equality. The
ledger kept by double-entry bookkeeping always maintains this equality.
The sum total of the entries on the left side of all the accounts must
equal the sum total of the entries on the right side of the accounts.
The way in which the ledger becomes an expanded or detailed balance
sheet was explained fully in the previous chapter. There it was shown
that the sum of the net balances of all asset accounts, as carried in
the ledger as left-side balances, at all times equals the sum of the
net balances of the liability and the proprietorship accounts carried
in the ledger as right-side balances.

It is evident that, if in place of the net balances of each group of
accounts, the gross left- and right-side totals are substituted, the
equation would still be maintained, inasmuch as the net balance in each
instance is secured by subtracting the same amount, namely, the lesser
total, from both sides of the account.

Under double entry, therefore, the equality of the left side of the
ledger, that is, the total of the left-side amounts of all of the
accounts, is constantly maintained with the right side of the ledger,
that is, the total of the right-side amounts of all the accounts. The
vertical division of the ledger separating an account into its left and
right sides, may with little stretch of the imagination be considered
an equality sign, which thus makes one big equation out of all the
accounts in the ledger. Under double-entry bookkeeping, therefore, the
principles of entry in the ledger are based on no logic or philosophy
other than that which attaches to the fundamental proprietorship
equation of the balance sheet. Double entry is an invention, a device,
and its use requires adherence to the principles of entry necessary to
maintain its equation. What these principles are will now be explained.

=The Business Transaction Defined.=—Reference has constantly been
made to business transactions. It may be well to show the idea at the
bottom of such transactions. We may define a business transaction as an
exchange of values. It may be between persons, as when a sale is made,
or it may be between accounts within the business itself, as when a
transfer is made between accounts, i.e., when an item is taken from one
account and transferred to another for the sake of more clearly showing
its nature. Some authors further analyze transactions as _complete_
when the bargain is fully consummated between the parties, as when
delivery is made and the money is paid in cash; or _incomplete_ as
where something still remains to be done by either or both parties to
the transaction. In this latter case, claims or rights of action at law
arise to protect the parties until the transaction is consummated. But,
since from the accounting standpoint a claim or right is one kind of
property or asset, there is little need of this finer analysis.

=Analyzing the Transaction as to Its Accounting Record.=—When a
transaction occurs in a business, it must first be classified before
proper record can be made of it under the account title which groups
transactions of a like nature. Its elements must be analyzed, its
effect on assets and liabilities, or on expenses and income, must
be determined. Has the transaction increased or decreased assets
or liabilities, or has it increased or decreased proprietorship,
or has it resulted in simply a transfer between accounts—these are
the first questions to be determined. The basis of all fundamental
classifications is the effect of the transaction upon the balance
sheet and profit and loss statements. They are the goal towards which
all records look, but the principle which determines the subdivisions
in the main classes of accounts and the titles to be given to the
accounts which are to be carried in the records, is the amount and
kind of information desired by the management throughout the fiscal
period. After the transaction has been properly classified, it is
merely a matter of recording it according to the standards or forms of
good accounting, which is merely a device for abbreviating the work of
recording, i.e., the transaction is translated into correct accounting
language.

=The Use of Debit and Credit.=—To show the side of the account affected
by a transaction, the words “debit” and “credit” are used, indicating
left and right respectively. The use of these words had its origin
with transactions between persons and the accounts kept with them.
The person owing was charged or debited, while the person to whom the
business owed a debt was credited. Through use the terms have come
to have the meaning stated first above, though still retaining their
original connotation when applied to persons.

=Fundamental Principle of Debit and Credit.=—As stated in Chapter V,
every transaction is recorded from two viewpoints, viz., its effect
on the assets and liabilities and its effect on the proprietorship
or net worth. Sometimes, however, the transaction may require merely
a transfer entry, i.e., a transfer of an amount from one account
to another without affecting the fundamental classes, as was shown
above when defining the transaction as an exchange of values. If it
is remembered that from long-continued custom asset accounts are
debit accounts, i.e., normally have debit or left-side balances, and
liability accounts are credit accounts; that expense accounts are
debit and income accounts are credit, the fundamental principles for
determining the debit and credit involved in every transaction become
pretty well established in one’s mind.

Starting, therefore, with the original investment, whatever form it may
have, the transaction is reducible to the fundamental equation:

  Assets = Liabilities + Proprietorship

in which “liabilities” may or may not be a “zero” quantity, depending
on the nature of the investment. All transactions thereafter must
be viewed according to their effects on the three terms of the
equation above. We may summarize the effects produced by the various
transactions of the business as:

  Increase or decrease of assets
     ”      ”    ”     ”  liabilities
     ”      ”    ”     ”  proprietorship

with this qualification: that some transactions result in transfers
only without affecting the totals of any of the three groups above, as
when an asset is transferred from one account to another for purposes
of more accurate classification.

=The Debit and Credit Schedule.=—Bearing in mind the customary
distinction between debit and credit, and the fact that entry of a
transaction is always made from a double viewpoint—that of cause and
effect—every transaction may have its debit and credit determined by
the following schedule:

  =================================================================
  _Debit_:                        | _Credit_:
  (1)  Increase of Assets         | (a)  Decrease of Assets
  (2)  Decrease of Liabilities    | (b)  Increase of Liabilities
  (3)  Decrease of Proprietorship | (c)  Increase of Proprietorship

=Debit and Credit Determination Illustrated.=—Examples illustrating
the various classes of transactions and the manner of determining
their debit and credit will now be given. The student should strive
to understand the double point of view necessary in determining debit
and credit. It is perhaps well to call attention to the fact that
the illustrations are entirely unrelated, i.e., do not constitute a
sequence of events in any business. It should also be kept in mind that
transactions are recorded always from the standpoint of the business
whose records are being kept.

1. The purchase of merchandise for cash. The result is an increase
of the asset Merchandise caused by the decrease of the asset Cash.
Accordingly, the debit and credit of the entry for the transaction are
shown by the above schedule under (1) and (a), i.e., debit Merchandise
and credit Cash. The transaction is also an illustration of the
transfer entry, in which there is no increase or decrease of total
assets, liabilities, or proprietorship.

2. The purchase of merchandise on account. This results in an increase
of assets caused by the increase of liabilities. The schedule above
shows under (1) and (b) a debit to Merchandise and a credit to the
personal account payable, indicated by the name of the creditor.

3. The receipt of cash for services performed, as when a broker
receives the amount of his commission in cash. The result here is an
increase of the asset Cash, caused by the increase of proprietorship,
as the performance of services is the chief source of the broker’s
income. The schedule shows under (1) and (c) a debit to Cash and a
credit to some temporary proprietorship account by name, as Commissions
Earned.

4. The payment of a note payable in cash. This results in a decrease of
the liability, Notes Payable, caused by the decrease of the asset Cash.
Accordingly, debit Notes Payable and credit Cash, (2) and (a).

5. The settlement of a personal account payable by giving a note
payable. The effect here is simply a cancellation of one kind of
liability with another kind; it is a transfer entry. Debit the personal
account payable; credit Notes Payable, (2) and (b).

6. The rendering of a business service to a creditor, thereby canceling
an indebtedness to him; as when a physician renders medical aid to his
creditor from whom he has purchased supplies. The effect is a decrease
in liabilities and an increase in proprietorship. Debit the personal
account payable, by name, and credit some temporary proprietorship
account, by name, as Fees or Services, (2) and (c).

7. A workman is paid his wages in cash. The result is a decrease in
proprietorship and a decrease in the asset Cash. Wages are a cost
of doing business and therefore decrease Proprietorship. They are
a service rendered to the business instead of by it—an expense as
distinguished from an income. Debit the temporary proprietorship
account, Wages, and credit Cash, (3) and (a).

8. The account of a lawyer is credited for the amount of his fee. A
decrease of proprietorship, for the service rendered the business, and
an increase in liabilities. Debit Legal Expense and credit the personal
account payable, (3) and (b).

9. Transfer the net gain shown by the Profit and Loss account to the
Surplus account. The result is a simple transfer, causing a decrease in
proprietorship as shown in the Profit and Loss account and an increase
in proprietorship as shown in the Surplus account. Debit Profit and
Loss and credit Surplus, (3) and (c).

In a similar manner, all transactions may be analyzed and their entry
in the accounts determined.


=Necessary Equilibrium of Debits and Credits.=—Before passing to
more detailed rules for debit and credit, the necessary equality of
debits and credits should again be pointed out. Starting with the
proprietorship equation expressed in this form:

  Assets = Liabilities + Proprietorship,

of which the left side is represented in the accounts by debits and
the right side by credits, the equality of the debit balances and the
credit balances of the accounts in the ledger is readily seen. If, now,
for all succeeding transactions an entry is made having an equal debit
and credit, evidently the equilibrium of the total debits and credits
in the accounts is maintained and the two sides of the ledger are in
agreement. The making of an equal debit and credit for every entry is
fundamental and must be strictly observed.




CHAPTER XI

DEBIT AND CREDIT AS APPLIED TO ASSET AND LIABILITY ACCOUNTS


=Student’s Use of Working Rules.=—In order to indicate the more
usual types of transactions which affect the asset, liability, and
proprietorship accounts, a set-up of the various groups of accounts
will be given, under which will be shown transactions recorded as
debits and those recorded as credits. Accounts will be shown in the
order in which they appear in the balance sheet. The accounts under
each group will, of course, bear their own individual titles and not
the title of the group. Only such entries as are more frequently met
with will be given. Since in the group accounts given as guides only
those entries appear which affect these group accounts, it is deemed
impracticable to attempt to show the contra, or other side of each
entry arising out of the transactions. However, the student should
always supply mentally the contra of each entry shown in the group
reference account. For the sake of clarity, the personal pronouns “we”
and “us” will be used instead of the impersonal name.

=Accounts with Cash and Notes Receivable.=—Entries to the Cash and
Notes Receivable accounts are comparatively simple and are shown in the
following schedule:

                          (NAME OF ACCOUNT)
  ===================================================================
  _Debit_:                       | _Credit_:
  (1) For all receipts           | (a) For all disbursements
        or incoming items.       |       or outgoing items.

Transactions with cash are self-explanatory.

The accounts representing transactions with notes require some
explanation. When, in the course of business, we receive a note, Notes
Receivable is debited and the person who gives it is credited, because
our asset Notes Receivable is increased and the claim against the open
account of the person giving the note is decreased. Similarly, when
that note is disbursed by us, i.e., goes out of our possession, the
asset is diminished and therefore Notes Receivable is credited.

A note receivable can be disposed of in several ways:

  1. Through its release on payment by the maker,
  2. Through its transfer by us to another person
      in settlement of a claim against us, or
  3. Through its sale to the bank.

In all of these cases the credit goes to Notes Receivable. In cases 1
and 3, the asset increased, viz., Cash, is debited; and in case 2 the
liability canceled or decreased is debited. It may be stated, however,
that in cases 2 and 3, instead of making the credit direct to the asset
account Notes Receivable, it is better carried to a supplementary
account, Notes Receivable Discounted, in order to show the liability
arising from the fact that, through our indorsement, we guarantee to
pay the note at its maturity in case the maker fails to do so. This is
later explained in detail.

Accounts with Customers

                        (NAME OF CUSTOMER)
  ====================================================================
  _Debit_:                     |  _Credit_:
  (1)  For amount he owes us   | (a) For money he pays us on account.
          at beginning.        | (b) For notes he gives us on account.
  (2)  For goods we sell him   | (c) For goods he returns to us.
           on account.         | (d)  For discounts we give him.
                               | (e)  For claims we allow him.

The balance owing us by a customer is an asset, and therefore a debit
item.

Goods sold on account are charged to the customer because our claim
against him constitutes an asset; at the same time the income account,
Sales, is credited.

When a customer pays us on account, his account is credited and Cash
is debited, showing an increase of the asset Cash and a decrease of the
asset Accounts Receivable. Such an entry is simply a transfer from one
account to another, an increase of one asset offset by a decrease of
another asset.

When a customer gives us his note, his account is credited and Notes
Receivable is debited, usually, with the face of the note.

When a customer returns goods to us, he is credited to decrease
the original charge to his account and Sales or Returned Sales is
debited to reduce the income originally credited to Sales. It is not
necessary to make any other record of the returned goods, because, as
was explained in Chapter VI, no day-to-day record is kept to show the
decrease of the asset Merchandise through Sales. So, when goods are
returned by a customer, the increase of the asset Merchandise will be
shown at the end of the fiscal period when the merchandise inventory is
taken, and no other record than that indicated is necessary.

When a customer is allowed a discount for the early payment of his
bill, he is credited to reduce the original charge by the amount of the
discount, and some temporary proprietorship account, as Discount on
Sales, is debited to show the decrease in proprietorship resulting from
the allowance of the discount.

When a customer is allowed a claim for reduction in his bill on account
of damaged goods or the like, the entry is similar to the one next
above—debit Claims and Allowances and credit the customer.

The Merchandise Account

                                 MERCHANDISE
  ====================================================================
  _Debit_:                            | _Credit_:
  (1) For merchandise on hand at the  | (a) For sales of merchandise.
        beginning.                    | (b) For returns of merchandise
  (2) For purchases of merchandise.   |       purchased.
  (3) For all costs necessary to      |
        bring the merchandise from    |
        its place of purchase to its  |
        place of sale.                |
  (4) For goods returned by customers.|

Entries in the Merchandise account require no explanation excepting
the debit entry (3). The value of the asset Merchandise is not the
price paid for it at the point where purchased, for it is of no value
to the business until it is placed on the shelves ready for sale.
Accordingly, the value of the asset Merchandise is not determined
merely by the price paid the vendor, but by this price plus all of the
costs necessary to bring the merchandise to the store. Inasmuch as the
merchandise is sold normally for more than it cost, the credit entry
in the Merchandise account includes two items: (1) the decrease of the
asset, as indicated by the cost price of the goods sold; and (2) the
amount of profit on the sale, that is, the amount of the increase in
proprietorship.

The record of merchandise transactions is thus seen to be rather
complex and will be explained fully in Chapter XIII. The above schedule
is simply an indication of the types of transactions recorded in the
Merchandise account and will be sufficient for the present. It will
be seen that the sale of goods results in a debit to the customer’s
account and a credit to Merchandise.

=Accounts with Fixed Assets.=—Accounts with fixed assets are those with
land, buildings, and equipment of all sorts.

                             (NAME OF ACCOUNT)
  =========================================================
  _Debit_:                          | _Credit_:
  (1) For full cost to the business | (a) For sale or loss,
        in position ready for use.  |        at cost price.

The debit to this account is not for invoice or first cost only,
but should include all expenditures necessary to secure full title
or to place the equipment in position for use by the business, such
as abstract of title costs, freight, drayage, and, in the case of
machinery, setting-up and placement costs. The corresponding credit is
usually to Cash, or to Notes or Accounts Payable.

The account is credited for the sale of all or a portion of the
asset at the same price at which it was originally charged, so that
the balance in the account shows the pro rata cost of the part left.
A loss from fire or otherwise is treated similarly. If the asset is
sold at a profit (an unlikely occurrence), the account is credited
with its cost price, while the excess of the sale price over the cost
price is credited to a proprietorship account, such as Profit on Sale
of Machinery. The debit corresponding to these two credits is usually
to Cash or some other asset received in payment. Where the asset is
sold at a loss, the account is credited with: (1) the sum received, and
(2) the difference between this sum and the cost of the asset, which
difference represents a loss. The loss or deficiency is debited to a
proprietorship account, such as Loss on Sale of Machinery, and the
additional debit is to Cash or some other asset received. This latter
debit amount plus the debit to Loss on Sale of Machinery must, of
course, equal the two amounts credited to the fixed asset account and
representing the cost of the asset sold.

Fixed asset accounts are further considered in Chapter XIII, where the
manner of recording loss through depreciation is shown.

=Accounts with Notes Payable.=—When we issue our own note, the credit
is to Notes Payable and the debit is either to the liability account
reduced or to the asset account increased. When we call the note in,
either by paying it or by canceling our claim against the person
returning the note, Notes Payable is debited and Cash or the person
returning the note is credited.

Accounts Payable

                                (NAME OF CREDITOR)
  =================================================================
  _Debit_:                              | _Credit_:
  (1) For money we pay him on account.  | (a) For amount we owe him
  (2) For notes we give him on account. |         at beginning.
  (3) For goods we return to him.       | (b) For goods he sells us
  (4) For discounts he gives us.        |         on account.
  (5) For claims he allows us.          |

As will be noted by reference to the customer’s account, the entries
to the creditor’s account, being viewed from the opposite standpoint,
are exactly the reverse of the entries to the customer’s account.

=Other Liability Accounts.=—Accounts with other liabilities, such as
Mortgages, Bonds, Expenses Payable, and the like, follow in the main
the general principles laid down (pages 81 to 83). Specific treatment
will be given them as they are met in the discussion. In the case of
long-time notes payable supported by mortgages, record should be made
under the title “Mortgages Payable” rather than “Notes Payable.”




CHAPTER XII

DEBIT AND CREDIT AS APPLIED TO PROPRIETORSHIP ACCOUNTS


=Proprietorship Accounts Defined.=—Proprietorship accounts are the
accounts which record the effects, both temporary and ultimate, of
business transactions upon proprietorship. The study of the two
preceding chapters has made clear the fact that transactions which
involve the receipt of income or the payment of expenses result
respectively in an increase or decrease of proprietorship, and that
these increases or decreases are temporarily recorded in suitable
income and expense accounts until the close of the fiscal period, at
which time the accounts are summarized to determine the net effect of
all transactions upon proprietorship or the capital invested in the
business. Therefore, the proprietorship accounts are of two general
kinds: temporary and vested. Temporary proprietorship accounts make
temporary and immediate record of the results of the agencies or forces
at work within the business to produce a profit. They set forth the
efforts to increase the net worth of the business. They record the
costs of the effort and its yield in earnings, the record being made
under appropriate titles to show the kind of cost and the source of the
yield. Vested proprietorship accounts record the ultimate or summarized
results of business transactions. They therefore record the original
investment and its subsequent net increases and decreases.

=Fundamental Consideration of Proprietorship Debits and
Credits.=—Income and expenses comprise the temporary proprietorship
items which, after being summarized, show their ultimate effect upon
vested proprietorship. In other words, they are proprietorship items
set up temporarily to furnish detailed information for aiding in
efficient management and control and are later transferred to the
ultimate or vested proprietorship records. Since, from the mathematical
necessity of the proprietorship equation, proprietorship items normally
have credit balances, it is evident that all income, or earnings,
must be placed on the credit side of their appropriate accounts. Cost
of management and all expenses of operation are deductions from that
income and must therefore be recorded on the left or debit side of
appropriately named accounts.

=Income Debits and Credits.=—With regard to their debits and credits,
income accounts follow this rule:

                    INCOME (under appropriate titles)
  =============================================================
  _Debit_:                        | _Credit_:
  (1) For all deductions from the | (a) For the yield.
        yield shown contra.       |

Income accounts normally have entries only on the credit side. They are
debited, however, for the purpose of deducting from the yield shown
on the credit side, (1) because of overstatement of the amount of the
yield in the first place; (2) because of error in the original placing
of the item of income, which is now transferred to its proper account;
and (3) for the purpose of summarizing when it becomes necessary
to transfer all income and expense items to one summary account.
The entries made for the purposes of transfer and summarization are
sometimes called “adjusting” and “closing” entries.

=Expense Debits and Credits.=—With regard to their debit and credit,
expense accounts follow this rule:

              EXPENSE (under appropriate titles)
  ================================================================
  _Debit_:                 | _Credit_:
  (1) For the cost.        | (a) For all deductions from the cost,
                           |         shown contra.

Expense accounts normally have entries only on the debit side. Their
credits are for purposes similar to the debits to income accounts as
stated just above.

Examples of temporary proprietorship items can be found in Chapters V,
VI, and VII, where the profit and loss summary is treated.

=Vested Proprietorship Debits and Credits.=—Two accounts should be kept
on the ledger with the proprietor, a capital and a personal account,
i.e., “John Doe, Capital” and “John Doe, Personal.” The capital account
records the original investment or the amount of capital now in the
business as shown by the last financial statement. The personal account
shows all direct changes made in the capital during the fiscal period
either through withdrawal or the additional investment of funds or
properties. The capital account, therefore, shows no change until the
close of the fiscal period, when the increase or decrease in net worth
is transferred to it.

An exception to this is sometimes made when there is evident intention
to withdraw during the period some of the invested capital, in which
case such withdrawal is shown in the capital account as a debit or
subtraction item. Also, if there is evident intention to increase the
investment during the fiscal period, record of it is sometimes made in
the capital account. Practice in this regard is not uniform.

The ordinary transactions with the proprietor, such as more or less
regular withdrawals of cash or goods and other similar transactions,
are recorded in his personal account. This is his current account as
distinguished from his more permanent capital account. Both of these
accounts may be termed vested proprietorship accounts. Their debit and
credit schedule appears as follows:

                      (NAME OF ACCOUNT)
  ========================================================
  _Debit_:                   | _Credit_:
  (1)  For amounts or values | (a) For amounts or values
           withdrawn.        |         invested.

The capital account usually shows only one item throughout the
period until its close; the personal account shows both debits and
credits, made according to the above schedule. The personal account
ordinarily shows transactions of the following kind: on the debit
side, withdrawals in funds or goods, the payment or assumption by the
business of the personal debts of the proprietor, and his retention of
any funds or properties belonging to the business, such as collections
from customers; on the credit side, the investment in the business of
any funds or properties, the retention by the business of any funds or
properties belonging to the proprietor, as where the business collects
and retains a debt due him personally, and the payment or assumption by
him personally of any debts of the business.

=Further Consideration of Expense Items.=—In explaining the debits
to fixed asset accounts it was pointed out that all costs necessary
to place the asset in position for use by the business constituted a
part of the value of the asset and should be recorded in the asset
account. Similarly, it was explained that in the Merchandise account
there was included as a part of the value of the merchandise all the
costs incident to putting the merchandise in position for sale by the
business. Costs of this kind are classed as incoming costs and are
almost without exception treated as additions to the value of the
asset. The costs incurred from this point on, in the course of business
operations, are classed as expenses or proprietorship decreases.

It might sometimes appear that all these operating costs—the kind
shown in the profit and loss statement—also add to the value of the
assets of the business. Such is not the case. In a mercantile concern,
business is conducted for the purpose of selling merchandise. Profit
arises through the purchase of merchandise at one price and its sale
at a price sufficiently higher to pay for all operating expenses and
leave a margin. The cost of merchandise to the customer reimburses
the proprietor for his original outlay in merchandise and for a fair
portion of the operating expenses incident to the maintenance of the
store. The customer is willing to pay this additional amount because
it is cheaper for him to pay the merchant a margin over the cost of
the merchandise sufficient to induce the merchant to conduct a market
for merchandise, than to undergo the necessary expenditures—of time,
expense, and inconvenience—entailed in making the purchase from the
original vendor.

The economic organization of business is based on this hypothesis. In
the management of a business there is a very large element of risk.
The sale price of commodities at a given time is not always determined
on the basis of the original cost of the commodity plus the costs of
maintaining a store for its sale. Competition sometimes enters in to
drive the price down below this amount. While every merchant _expects_
in the long run to receive from the sale of his merchandise not only
what he himself has paid for it but also the cost of conducting his
store and a fair margin of profit, for a given period and for a given
item of merchandise he may not be so fortunate.

In recording business transactions, therefore, prudence demands that
the costs of operating the business be not recorded as increases in
the value of the merchandise dealt in, but rather that they be set
up separately and charged against the income received from the sale
of the merchandise before the increase (or decrease) in the value
of the assets is determined and made a part of the asset record. As
merchandise is converted into cash the amount received is recorded as
an increase in the asset cash. This cash includes the original cost of
the merchandise plus some of the costs of operating the business. These
are costs which must be incurred and they add value to the business as
indicated by the willingness of the customer to pay the merchant for
them. Because the added value is problematical at the time the costs
are incurred, they are recorded as expenditures which must be made good
out of the sale of the merchandise at a sufficiently enhanced price
to cover them, i.e., they are _expenses_ which are to be treated as
deductions from sales income.

The net difference between the income and the cost of securing the
income, as indicated by the expense accounts, will represent the value
added to the assets of the business, and will therefore be reflected
tangibly in an increase in the value of the assets by that amount. This
increase will usually be reflected either in the cash holdings or in
claims against customers.

It may not be out of place at this point to call attention to the
fact that, as the bookkeeping record is usually handled, the only
relationship between asset increases, liability decreases, and
expenses (proprietorship decreases) arises from the fact that all of
them are debits and are so placed because of the mathematics of the
fundamental equation on which double entry rests. Assets, liabilities,
and proprietorship are three distinct and separate groups of accounts
related only by the logic of the proprietorship equation. As the
subject of accounting is developed the student will see the increasing
importance of drawing sharply the lines of division among these groups
and he will see also the difficulty at times of maintaining this
distinction.




CHAPTER XIII

DEBIT AND CREDIT AS APPLIED TO MIXED ACCOUNTS


=Mixed Accounts Defined.=—In the course of business operations certain
accounts which at the beginning of the period belong definitely to
some one of the three groups, asset, liability, and proprietorship,
with the progress of the period take on a mixed character. That is,
included under one account title there is a mixed record of asset and
expense, or other combination of two or more groups. For example, the
machinery which belongs to the asset group at the beginning of the
period depreciates in value day by day, both through use and the lapse
of time. This daily decrease in value is of slight amount and in the
management of the business it is not necessary that it be shown on the
books. While it is theoretically possible to record this daily loss,
practically nothing would be gained by so doing. Hence, the machinery
account is allowed to carry both the asset value of the machinery at
a given time and the amount of its depreciation. Only periodically,
usually at the close of each fiscal period, is the account separated
into its two parts, the one which shows the true asset value and the
other which indicates the amount of depreciation and which is therefore
the expense or proprietorship-decrease portion of the account.

In the previous chapter the way in which the Merchandise account takes
on a mixed character was briefly explained. It was shown that the
credit side reflected both a decrease of the asset and an increase of
the proprietorship by the amount of the gross profit on the goods sold.
Thus, because of the way in which accounts are kept practically, as
distinguished from a theoretically correct method, which would maintain
at all times a sharp line of division between assets, liabilities, and
proprietorship, certain accounts are allowed to become mixed. It is
the purpose of this chapter to discuss the proper handling of the more
common mixed accounts.

=Analysis of a Sale Transaction.=—The impracticability of immediately
separating each sale of goods into its two elements of cost and profit
and the taking of a physical inventory as a means to this end, was
discussed in Chapter VI. The necessity for this later separation may be
made clear by analyzing a sale transaction.

Suppose an article costing $10 is sold for $12. At the time of its
purchase a debit was made to Merchandise account and a credit, say, to
Cash. When the article is sold, it would seem that the credit should be
to Merchandise to show the decrease in that asset. However, in the sale
price of $12 is included something more than the amount by which the
stock of merchandise is decreased. This additional amount is the profit
of $2. Hence, a credit to Merchandise of $12 would result in too large
a subtraction from the asset Merchandise, if it is intended that the
Merchandise account shall always show by its balance the value of the
unsold stock. Theoretically the best method of entering this sale would
be to debit Cash for $12, and to credit Merchandise with $10 and Profit
with $2.

=The Old Merchandise Account, Its Content and Significance.=—It is
impracticable, however, to compute and record the cost of every unit
sold. Using the above illustration, instead of crediting Merchandise
with $10 and Profit with $2, the entire $12 may be credited to the
Merchandise account. There is a disadvantage in this procedure, in
that the Merchandise account then no longer represents the one asset
Merchandise, but is a mixture of an asset element, merchandise, and a
proprietorship element, profit; two elements which must be separated at
the close of the period.

Originally, the Merchandise account was kept in this way; it was a
_mixed_ account and followed the rules of debit and credit as shown
below, the amounts being given for purposes of illustration:

  (A)                          MERCHANDISE
  ==================================================================
  _Debit_:                          | _Credit_:
  (1) For goods on hand             | (a) For sales        25,000.00
        at beginning      10,000.00 | (b) For returned
  (2) For purchases,                |        purchases      2,000.00
       sometimes including          | (c) For purchases
         freight-in,                |        rebates and
         drayage-in,                |        allowances       100.00
         etc.             20,000.00 |
  (3) For returned sales   1,000.00 |
  (4) For sales rebates             |
        and allowances       500.00 |

Where the account is kept in this manner it is usually burdened with
the additional data listed under (3), (4), (b), and (c). Sales being
a credit item, it is plain that subtractions from sales (3) and (4),
must appear on the debit side, and, purchases being a debit item,
subtractions from purchases (b) and (c) must appear on the credit
side. If these subtractions were actually performed instead of being
indicated in the account, the debit side would show net goods to be
accounted for, viz., goods on hand at the beginning, $10,000, plus
_net_ purchases, $17,900, making a total of $27,900; and the credit
side would show _net_ sales, $25,000 minus $1,500, or $23,500.

If, now, the cost value of the goods on hand at the close of the
period (as determined by a physical inventory) equals $8,000, it is
evident that the cost price of the goods sold is equal to the cost
value of the goods to be accounted for, minus the cost value of the
goods left on hand, that is, $27,900 minus $8,000, or $19,900. To
secure this subtraction within the account, it is necessary to enter
on the credit side this $8,000, the cost value of the final inventory.
Accordingly, an additional credit item (d) is inserted, after which the
account will show:

  (B)                          MERCHANDISE
  ==================================================================
  _Debit_:                          | _Credit_:
  (1) For goods on hand             | (a) For sales        25,000.00
        at beginning      10,000.00 | (b) For returned
  (2) For purchases,                |        purchases      2,000.00
         sometimes including        | (c) For purchases
         freight-in,                |        rebates and
         drayage-in,                |        allowances       100.00
         etc.             20,000.00 | (d) For goods on hand
  (3) For returned sales   1,000.00 |        at end         8,000.00
  (4) For sales rebates             |
        and allowances       500.00 |

The account is now a pure proprietorship account, the balance showing
the gross profit on sales, amounting to $3,600.

=Modern Practice in Showing Merchandising Transactions.=—Actual
subtraction, however, within the account is contrary to the method of
showing subtractions in the account. Therefore, the mixed Merchandise
account cannot show the figures representing “net purchases,” “net
sales,” “total goods to be accounted for,” and “cost of goods
sold”—information which is very essential to proper management. While
containing all the data necessary to give the final information, viz.,
the “gross profit,” the mixed account does not show the separate
factors leading up to it. Analysis of the mixed account is necessary to
find the elements of which it is composed. The best accounting practice
provides for this analysis as the transaction takes place. The old
Merchandise account is no longer used; in its place separate accounts
are set up to represent the various elements mentioned above. Each
account thus contains only one kind of item as indicated by its title.
These accounts are:

  (1)                    MERCHANDISE INVENTORY
  =================================================================
                                   |
                                   |
                                   |

  (2)                          PURCHASES
  =================================================================
                                   |
                                   |
                                   |

  (3)                  INWARD FREIGHT AND DRAYAGE
  =================================================================
                                   |
                                   |
                                   |

  (4)                       RETURNED PURCHASES
  =================================================================
                                   |
                                   |
                                   |

  (5)               PURCHASES REBATES AND ALLOWANCES
  =================================================================
                                   |
                                   |
                                   |

  (6)                            SALES
  =================================================================
                                   |
                                   |
                                   |

  (7)                         RETURNED SALES
  =================================================================
                                   |
                                   |
                                   |

  (8)                  SALES REBATES AND ALLOWANCES
  =================================================================
                                   |
                                   |
                                   |

Accounts (1), (2), (3), (7), and (8) correspond to the four classes of
debits shown above in the mixed Merchandise account, and accounts (1),
(4), (5), and (6) correspond to the credits. Explanation of the use
of account (1) for both the initial and final inventories is given in
detail in Chapter XV.

The advantage of the use of these accounts instead of the one
Merchandise account is in the availability of the information they
contain and in the saving of labor, because now there is no need to
analyze the Merchandise account for information relating to returns,
allowances, and so forth. By later transferring the totals of the
Returned Sales and of the Sales Rebates and Allowances to the Sales
account, the balance of this account will show the “net sales.” A
similar transfer of the Inward Freight and Drayage, the Returned
Purchases, and the Purchases Rebates and Allowances to the Purchases
account, and a transfer to it of the initial and final inventories,
make it show by its balance the “cost of goods sold” which set over
against “net sales” shows the figure of “gross profit.”

The student will understand that the use of these detailed accounts
does not free the record of merchandise transactions from the mixture
of different elements, decrease of the asset and increase of the
profits. It does, however, make the record more valuable because of the
information it makes available.

=Accounts with Assets Subject to Depreciation.=—Another kind of mixed
account requiring explanation is that of the fixed asset subject to
depreciation. Due to ordinary wear and tear, and some other causes,
most fixed assets lose part of their value as time goes by. At the end
of each fiscal period the amount of this loss and the present value of
the asset must be estimated, after an inventory has been taken, when
necessary, of their number, weight, or other units of measurement.
Such an estimate is called an appraisal. The difference between the
present appraised value of the asset and its former cost or appraised
value constitutes the loss from wear or other causes, and is termed
depreciation.

Since depreciation takes place day by day, but for practical reasons
cannot be recorded daily, fixed asset accounts, as they stand valued
in the ledger, represent true asset values only for the date of their
entry. Except on that date, these accounts, then, include depreciation
and hence are mixed accounts including both asset and proprietorship
elements. As with the Merchandise account, an adjustment is made
periodically to separate the two elements. Since the asset account is
a debit account, entry of the amount of the depreciation to the credit
side would result in the account showing, by its balance, the appraised
value of the asset at any given time. It is, however, desirable to
leave the account in its original condition, in order not to lose sight
of the cost of the asset. Therefore the usual practice is to enter this
figure of depreciation to the credit side of a separate account called
Depreciation Reserve for the particular asset, using the word “reserve”
in the sense of “estimate.”

If the latter method is followed, each asset has two accounts, one
showing original cost and the other estimated depreciation, and it is
necessary for a true valuation of the asset to read the two accounts
together; that is, from the asset account showing original cost, the
amount credited to the reserve account must be deducted to show the
true value of the asset. Because of this, the reserve account is often
called a valuation account or an offset account, as it gives the amount
of the offset to the original asset account necessary to show its
correct value. Similarly, when an increment in the value of an asset is
kept separate from its face or par value—as when the premium paid for
stock or bonds is shown separately from the par value of the stock or
bonds—the account showing the increment is called an adjunct account
and must be read with the asset account to secure true valuation. The
offset account, then, is a subtraction item and the adjunct an addition
item to the corresponding asset account. The showing of the asset and
its periodic valuation is made as follows:

                               MACHINERY
  =================================================================
  1921                             |
  Jan. 1                  5,000.00 |

                    DEPRECIATION RESERVE MACHINERY
  =================================================================
                                   | 1921
                                   | Dec. 31                 500.00
                                   |
                                   | 1922
                                   | Dec. 31                 500.00

A reading of the two accounts taken together shows the original value
of machinery as $5,000, the value after one year’s use $4,500 and after
two year’s use $4,000. The contra debit for the credit in the reserve
account is made to an account called Depreciation, which represents
the expense of the depreciation for the period, that is, the deduction
from profit or proprietorship. Sometimes, this charge is made direct to
Profit and Loss, as will be shown in a later chapter.

=Capital and Revenue Expenditures.=—The fixed asset accounts usually
show the investment of some of the original capital and therefore are
sometimes called capital asset accounts. A fundamental distinction
must be made between expenditures for the purchase and installation of
the asset itself and expenditures for expenses in connection with its
repairs, maintenance, and upkeep. These two classes of expenditures
are usually called “capital expenditures” and “revenue expenditures”
respectively.

The asset account itself is chargeable with all costs incurred up to
the point of putting the asset in shape for use in the business. It may
be charged also with subsequent expenditures resulting in an increase
in its value. Expenditures, however, which are for the purpose of
repairs or of keeping the property from too rapid depreciation without
adding anything to its original value, must be charged to a properly
labeled _expense_ account. These revenue expenditures for expenses,
such as repairs, maintenance, upkeep, together with depreciation, are
subtractions from profit and proprietorship, while asset expenditures
usually constitute an exchange of the asset cash for some other asset,
which exchange has no effect on proprietorship.

Sometimes two items of expenditure are seemingly of the same nature,
while in fact they belong to separate groups, as the original painting
cost of a building and the cost incurred later for repainting. In the
first instance the expenditure is an asset, a part of the original
cost necessary to put the building in a finished condition; in the
other instance, it is an expense necessary to maintain the asset in
something near its original condition. In order to secure accuracy
in the records, careful discrimination between capital and revenue
expenditures is a matter of great importance.




CHAPTER XIV

PERIODIC WORK ON THE LEDGER


The work preliminary to summarizing the record of transactions for a
period and preparing the balance sheet and profit and loss statement
is comprised under three heads: (1) the Trial Balance, (2) Adjusting
Entries, and (3) Closing Entries. These three steps will be discussed
at this point sufficiently for practice work in closing the ledger.
Fuller treatment of the subject is reserved for later chapters, after
the nature of the transactions that may complicate the closing of the
ledger have been explained.

=The Trial Balance.=—When all transactions for the fiscal period have
been entered on the ledger, it is desirable to make sure that the
ledger is in equilibrium, i.e., to make sure that for every entry on
the debit side there is an equal credit entry, and that for every
credit entry there is an equal debit entry; in other words, that the
ledger equation explained in Chapters IX and X is maintained. This
proof of the mathematical correctness of the ledger is accomplished
by means of a device called the “Trial Balance,” which consists of a
debit and credit list of either all account totals or of all account
balances. If the total debits equal the total credits, the mathematical
equilibrium is demonstrated. A trial balance is usually set up somewhat
as follows:

                    TRIAL BALANCE, June 30, 19—

                                            Dr.          Cr.
  Cash                                  $ 1,000.00
  Notes Receivable                        1,500.00
  A. B. Casey                               500.00
  B. C. Darby                               450.00
  C. D. Ebbets                              200.00
  D.  E. Field                              300.00
  E.  F. Gall                               150.00
  F.  G. Hiller                             350.00
  Merchandise Inventory                   4,000.00
  Store Equipment                           500.00
  Depreciation Reserve Store Equipment              $    75.00
  Notes Payable                                       1,000.00
  Hill & Innes                                          350.00
  Jones & Kanter                                        175.00
  Lunt & Mason                                          200.00
  Noble & Oberly                                        150.00
  P. I. Richards, Capital                             5,000.00
  P. I. Richards, Personal                1,000.00
  Sales                                              20,000.00
  Purchases                              12,000.00
  Salaries                                2,500.00
  Insurance                                 500.00
  General Expenses                        2,000.00
                                        ----------  ----------
                                        $26,950.00  $26,950.00
                                        ==========  ==========

=Work Preliminary to the Trial Balance.=—Before taking a trial balance,
the accounts should be totaled on each side. These totals are shown in
small but legible pencil figures immediately beneath the last entry,
sufficient space being left for a regular entry on the line immediately
below the pencil footing. Reference to the illustration in Form 3 makes
this bookkeeping detail clear. The difference between the totals of the
account should now be shown in pencil in the explanation column on the
side of the larger amount. Taking the trial balance thus becomes merely
a transcription of pencil balances, debit or credit as the case may be,
from the list of accounts.

=Balancing an Account.=—Sometimes it is desirable, as in the Cash
account, to show on the face of the account the difference between the
total debits and credits, i.e., the balance of the account. This may be
accomplished by writing the balance on the side with the smaller total,
and by formally ruling up the account and entering in ink the totals on
both sides, which totals, of course, are now equal. It should be noted
that the total rules in the money columns are drawn on the same line
on both sides of the account, thus leaving several blank lines on the
debit side. This is done so that the entries in the new section of the
account will start on the same line for both debits and credits. On the
next line below the double ruling, the balance item is brought down
to its proper side. The account is now said to have been closed as to
all items above the rulings and shows its open balance in the one item
beneath the rulings. The method of balancing and ruling accounts is
illustrated in the Cash account shown in Form 3.

It is important to bear in mind that the closing balance of the account
is on the side showing the smaller _pencil_ total, whereas the opening
balance which appears beneath the ruling is on the opposite side. The
only purpose of the entry on the smaller side is to force an equality
of the two sides, thus formally closing all entries to that point
and showing the “balance” as a single item in the new portion of the
account.

It should be noticed that this “balance” entry does not disturb the
equilibrium of the books, because it is entered on both the debit and
credit sides of the same account.

=Use of Red Ink.=—The total and closing rulings and the balancing
entry are sometimes made in red ink, but black ink is preferable. The
use of red ink is usually reserved for recording subtraction items in
the same column with those from which the subtraction is to be made.
Where red ink is so used, the total of the “red” is subtracted from the
total of the “black” amounts and the net result is shown in the total
of the column. When there are only a few “red” items, this method of
recording obviates the use of a separate column for them. Such red ink
entries are not found in the standard ledger, being confined to special
ledgers and columnar statements of various kinds.

[Illustration: Form 3. Account Balanced and Ruled]

=Rulings.=—The single lines above the totals, indicating the addition,
extend only through the money columns and are on the same line on both
debit and credit sides. The closing rulings beneath the footings are
double and extend through the date columns, the money columns, and the
posting reference columns. The diagonal line on the debit side from the
total line to the date column for the last entry is for the purpose of
filling all blank lines, and preventing any further entries on them
after the account is formally closed, as such entries would have the
effect of falsifying the totals shown. Thus the diagonal line which may
be on either debit or credit side serves as a safeguard against fraud.
Diagonal rulings, however, are not used so extensively as formerly.

=Transferring.=—When for any reason it is desirable to transfer an
account from one page to another, the transfer is made by means of an
entry similar to the “balance” entry shown in the Cash account above.
Instead of the word “Balance,” the word “Transfer” or “Forward” is
used, and in the column between the explanation and money columns
is entered the number of the page to which the transfer is made. On
that page the account name appears, and the first entry is the amount
transferred from the old account, with a page reference to the old
account in the reference column. In making the transfer it is customary
to close the portion of the account on the old page in the manner
explained above, and to transfer only the balance.

Sometimes an entry may be made in an account in error and for this
or some other reason may need to be transferred. Assuming, for the
purpose of illustration, that such an entry is a credit, its amount
is first written as a subtraction item on the debit side in the old
account, with proper reference to the page to which it goes. On the new
page it appears on the credit side, like the original item, and may be
considered as the contra to its transfer record in the old account. In
the new account the old page number must be entered. Great care should
be exercised in all transfer entries to show correct cross-indexing.

Sometimes it is desired to transfer not the balance but the total
debits and credits of an account. In this case the total debit amount
may be entered on the credit side of the old account and the total
credit amount on the debit side, with proper page and explanatory
references. This forces the equality of the two sides and the account
may now be totaled and ruled off. The total debit amount of the old
account is then entered on the debit side and the total credit amount
on the credit side of the new account.

A much simpler and more workable method, however, is to treat the
new account as a continuation of the old. There is then no necessity
of formally balancing the old account. The transfer is effected by
totaling both sides of the old account and indicating the new page to
which these totals are transferred, taking care to enter the totals on
the proper side of the new account, with proper references to the old
account page. This procedure is illustrated in Form 4.

=Rulings and Entries in Personal and Note Accounts.=—Some peculiarities
met with in the entries and rulings of personal and note accounts, both
receivable and payable, will be discussed here.

In John Adams’ personal account (Form 5) notice that his address is
included in the heading, that the terms of credit extended to him on
each sale are shown in the explanation space on the debit side, and
that his payments are entered on the credit side according to the date
on which they are received. If a payment appears directly opposite the
corresponding charge, with no other credits intervening, lines are
ruled underneath both the debit and the credit items to show that down
to that point the account balances. The record of dealings with each
customer should be as full as possible in order to furnish an accurate
basis for credit rating. If he is prompt in his payments, taking
advantage of the discounts offered him, the account should show this.

[Illustration: Form 4. Transfer of Account to New Page]

[Illustration: Form 5. Personal and Notes Payable Accounts]

A convenient method of showing clearly the taking of discounts, without
the need of calculating the time between dates of charge and payment,
is to enter the discount in small ink figures above the net amount
received. When two partial payments are made, as on October 1 and 15,
to settle the charge of September 20, and there are no other credits
intervening, the two credits, with the total in small figures, may be
ruled off against the single charge. At the time the trial balance
is taken—in the illustration on August 31, September 30, and October
31—the balance of the account is calculated and shown in pencil on its
proper side, debit or credit, just to the left of the reference column
on the line of the last entry on that side.

Sometimes, when payments are made out of order or on account and it
is desired to show to what particular charges they apply, an index
number or letter showing the cross-reference is used, as shown in the
Notes Payable account. As notes are issued by the business, they may be
numbered, and when it pays a particular note, the entry should show the
number of that note.

These remarks apply also to notes receivable. If full payment is
received on each note as it comes due, the entry may be made on the
same line on which the note was first recorded. This may result in the
entries to the account appearing out of chronological order, but it
assists in an easy determination of the outstanding notes. Numbering,
or preferably lettering, the entries in an account may be applied with
advantage also to the entries in personal accounts, as it aids in
locating unpaid items, especially where payments cannot be recorded in
the order in which the items to be settled have been entered.

The method of ruling and thus canceling items as explained above, is
usually limited to notes and accounts receivable and payable, that
is, to the accounts on which particular payments are received or made
and the balance of which it is desirable to ascertain at frequent
intervals. On the other hand, it is advisable that the method of
showing periodic balances, by means of small pencil figures for use in
the trial balance, be applied to all accounts.




CHAPTER XV

PERIODIC ADJUSTMENTS AND SUMMARIZATION


=Why Current Records of the Ledger Need Adjustment.=—At the end of the
fiscal period the ledger does not present a true record of financial
condition. The fixed assets of the business are constantly depreciating
in value; merchandise tends to become out of date, shopworn, stale, or
soiled; some merchandise has been sold, while some is still on hand;
some of the accounts receivable may prove uncollectible, and some of
the notes receivable may be dishonored. Also, at the end of the period
liabilities such as taxes, salaries, rent, and the like may have been
incurred, but because there is no creditor’s invoice or other business
paper as evidence of such liability they are not usually entered on the
books until payment is made.

Again, it may be that the services paid for during this period, as
shown by the various expense accounts, have not been entirely used, as
where a supply of coal for heating purposes remains on hand, or when,
as in the case of insurance bought for a given period of time, a part
of the protection period extends beyond the close of the current fiscal
period. In these and similar cases, the items must be separated into
their two component elements, one part belonging to the current period,
and the other part to a later period. The part of the expense to be
deferred and used up in a later period represents an asset at the close
of the current period and must therefore appear on the balance sheet
under the heading of “Deferred Charges.”

Similarly, income is sometimes received in advance to cover services
which have not yet been rendered, or rendered only in part, as when
rent is received in advance to cover a given number of months, some of
which belong to the next fiscal period. Consequently, only a part of
this income applies to the current period, the balance being deferred
to later periods.

For these reasons certain asset accounts need to be adjusted and
certain liability accounts must be opened to bring the ledger into
accord with the actual condition of things and show the true financial
status of the business. The entries required for this purpose are
called “adjustment entries” to distinguish them from the closing or
summarizing entries to be described later in this chapter.

First in importance among the adjusting entries are those required to
show the correct value of the stock-in-trade, the fixed assets, and
the accounts receivable. Whether the merchandise items are kept in
one or several accounts, the value of the stock on hand is not shown
at any given time during the fiscal period. Goods have been purchased
at one price and sold at another, and no record of the value of the
merchandise inventory on hand is available. Similarly, no current
record has been made of the depreciation of buildings, furniture,
fixtures, or other equipment, nor has any provision been made for the
accounts receivable that may prove uncollectible.

=Basis of Adjustment Entries.=—These items, then, merchandise, asset
depreciation, bad debts, prepaid and accrued expenses and income,
are the occasion of the adjustment entries. An inventory is required
to find the value of the stock-in-trade; an appraisal is made of the
depreciating assets to determine the amount of depreciation for the
current period; and proper consideration must be given to the prepaid
and accrued income and expense items for the period under review. The
following illustrations are concerned with the several classes of
adjustment entries. The detail of the account is not shown in each
case, but only the balance.

=Adjusting and Closing the Merchandise Records.=—Unlike the method
shown in the debit and credit schedule for merchandise in Chapter
XIII, the modern practice is to keep the merchandise record by means
of the separate accounts used in the profit and loss statement, viz.,
Merchandise Inventory, Purchases, Inward Freight and Cartage, Returned
Purchases, Purchases Rebates and Allowances, Sales, Returned Sales,
and Sales Rebates and Allowances. It should be understood that this
detailed record of merchandise transactions is preferable to the
single merchandise account only because it gives more information.
The detailed record does not in any way maintain a sharper separation
of the asset and income elements of the merchandise transactions
than does the single merchandise account. It does, however, make
immediately available information as to volume of business, purchases,
returns, and so forth—items which in any well-managed business are
watched carefully. These detailed accounts taken together comprise the
merchandise record and are equivalent to the single merchandise account.

It is apparent from a consideration of the single merchandise account
that at any given time it includes these three items: (1) the net cost
of the total goods to be accounted for; (2) the decrease in the asset
merchandise brought about by sale; and (3) the profit on the goods
sold. In order to bring about the separation of the merchandise records
into the two elements (a) goods still on hand, that is, the asset
element, and (b) the profit on goods sold, that is, the income element,
it is necessary to bring the detailed accounts together for the purpose
of summarization. This summarization is accomplished in much the same
way as in the profit and loss statement. The net amount of sales and
the net cost of goods sold are determined and set up against each
other in order to indicate the gross profit. In arriving at the cost
of goods sold it is necessary to bring together the opening inventory,
the purchases, the inward freight and cartage, and from their sum to
subtract the purchase returns, the purchase rebates and allowances,
and the final inventory. How this is accomplished in the ledger is
explained by an illustration, in which the adjustments or transfers
between accounts are traced by means of cross-index letters.

Assume the following facts: Goods on hand January 1, 19—, $10,125.67;
purchases for six months $47,897.42; inward freight and cartage
$560.25; returned purchases $2,125.40; purchase rebates and allowances
$267.92; sales $65,283.21; returned sales $3,924.83; sales rebates and
allowances $392.48; and goods on hand June 30, 19—, $11,267.40. Each
of these items appears as the first entry on the proper side of its
account, and is distinguished by not being marked with a bracketed
letter. The items comprise the ledger record previous to summarization
at the close of the fiscal period.

                        MERCHANDISE INVENTORY
  ==================================================================
  19—                            | 19—
  Jan.  1              10,125.67 | June 30 Purchases (B)   10,125.67
                       --------- |                         ---------
  June 30  (E)         11,267.40 |

                             PURCHASES
  ==================================================================
  19—                            | 19—
  June 30                        | June  30
   (Total purchases)   47,897.42 |   Returned Purchases
    Inward Freight               |                 (C)      2,125.40
    and Cartage                  |   Pur. Rebates &
    (A)                   560.25 |        Allow    (D)        267.92
    Mdse. Inventory,             |   Inventory,
     Jan. 1 (B)        10,125.67 |     June 30     (E)     11,267.40
                                 |   Profit & Loss (F)     44,922.62
                       --------- |                         ---------
                       58,583.34 |                         58,583.34
                       ========= |                         =========

                   INWARD FREIGHT AND CARTAGE
  ==================================================================
  19—                            | 19—
  June 30 (Total)         560.25 | June 30 Purchases (A)      560.25
                          ------ |                            ------

                         RETURNED PURCHASES
  ==================================================================
  19—                            | 19—
  June 30 Purchases (C) 2,125.40 | June  30  (Total)        2,125.40
                        -------- |                         ---------

                 PURCHASES REBATES AND ALLOWANCES
  ==================================================================
  19—                            | 19—
  June 30 Purchases (D)   267.92 | June 30 (Total)            267.92
                          ------ |                            ------

                               SALES
  ==================================================================
  19—                            | 19—
  June 30                        | June 30
   Returned                      |        (Total)          65,283.21
    Sales (G)           3,924.83 |
   Sales Rebates &               |
    Allow (H)             392.48 |
   Profit & Loss (I)   60,965.90 |
                       --------- |                         ---------
                       65,283.21 |                         65,283.21
                       ========= |                         =========

                          RETURNED SALES
  ==================================================================
  19—                            | 19—
  June 30 (Total)       3,924.83 | June 30 Sales (G)        3,924.83
                        -------- |                          --------

                    SALES REBATES AND ALLOWANCES
  ==================================================================
  19—                            | 19—
  June 30 (Total)         392.48 | June 30 Sales (H)          392.48
                          ------ |                            ------

                          PROFIT AND LOSS
  ==================================================================
  19—                            | 19—
 June 30 Purchases (F) 44,922.62 | June 30 Sales (I)       60,965.90
                       --------- |                         ---------

To show the total cost of goods bought during the period, the
freight-in of $560.25 is transferred or closed into Purchases. To
show the “_gross_ cost of goods to be accounted for,” amounting to
$58,583.34, the inventory of January 1 of $10,125.67 is transferred
to the debit side of Purchases account. To show the _net_ cost of
goods to be accounted for, the returned purchases and allowances are
deducted from this gross cost by being transferred to the credit side
of Purchases. The balance in Purchases account at this point, viz.,
$58,583.34 minus $2,393.32, or $56,190.02, indicates the net cost of
goods to be accounted for.

This item of $56,190.02 is not indicated in the account, however,
but is given here simply to make the discussion intelligible. Part of
this $56,190.02 (net cost of goods to be accounted for), amounting
to $11,267.40, is the cost value of the unsold goods according to
the inventory of June 30, and the balance of $44,922.62 ($56,190.02
minus $11,267.40) constitutes therefore the _cost of the goods sold_.
This final inventory is also shown as an asset on the debit side of
Merchandise Inventory in the new section of the account, i.e., the
portion of the account following the _initial_ inventory section which
has now been closed and ruled off as shown on page 118.

Put in a somewhat different form, we may say that the cost of
goods sold is found by subtracting from the gross cost of goods to
be accounted for, $58,583.34, first the returns and the rebates,
$2,393.32, and then the amount of the closing inventory of June 30,
$11,267.40. The balance left of $44,922.62 represents the _cost of
goods sold_. This balance is now transferred to the debit of Profit and
Loss account.

All the transfer entries given above have their debits and credits
determined as explained in Chapter XIV. The student should note that
the same additions and subtractions are thus brought about in the
Purchases account as are made arithmetically in the section of the
profit and loss statement given over to cost of goods sold.

The Sales account is debited with the balances of the Returned, Sales
and Sales Rebates and Allowances, thus showing a balance of net income
from sales which is transferred to the credit of Profit and Loss.
The Profit and Loss account then shows net income from sales on the
credit side, and cost of goods sold on the debit side. The difference
between the two sides is gross profit on sales. All of the merchandise
accounts, except the Inventory account, are now balanced, and should be
ruled off in the manner explained in Chapter XIV.

The second illustration covers the case where the stock-in-trade
record is kept in one mixed account called Merchandise. Using the same
data as in the other illustration, the account appears as follows:

                               MERCHANDISE
  ====================================================================
  19—                               | 19—
  Jan.  1 Inventory       10,125.67 | June 30 Sales          65,283.21
  June 30 Purchases       47,897.42 |   Returned Purchases    2,125.40
          Returned Sales   3,924.83 |
          Sales Rebates             |   Purchases Rebates
            and Allow        392.48 |     and Allow             267.92
          Inward Freight            |
            and Cartage      560.25 |   Inventory,  June 30  11,267.40
          Profit and Loss 16,043.28 |                        ---------
                          --------- |
                          78,943.93 |                        78,943.93
                          ========= |                        =========
  June 30 Inventory       11,267.40 |

When the merchandise record is kept under separate accounts the
freight-in is _transferred_ to the debit of the Purchases account;
but when a single mixed account is kept with merchandise, freight-in
is usually entered directly to the debit of that account. To adjust
the account when kept in this manner, the new inventory is entered to
the credit of Merchandise. The balance of the Merchandise account now
shows the gross profit on sales, $16,043.28. This is transferred to the
credit of Profit and Loss. (It will be noted that this _transferred_
item is identical with the _balance_ of the Profit and Loss account of
the first illustration.) The Merchandise account is now totaled and
ruled off. On the debit side, beneath the ruling, the new inventory is
entered, being the contra to the credit entry of $11,267.40 above the
ruling. The equilibrium of debits and credits is thus maintained. In
this open item of $11,267.40 the account shows an asset, the goods on
hand June 30.

The handling of merchandise transactions according to the second
illustration is not considered good accounting but is shown because it
is frequently met with in bookkeeping practice.

=Underlying Theory in the Adjustment of Merchandise Records.=—Careful
analysis and study of the adjustment of the merchandise records should
be made in order to see the way in which the logic of the trading
section of the profit and loss statement is worked out in the ledger.
The record of the merchandise asset should be kept, in strict theory,
in the same way as that of every other asset, namely, the accounts
should be charged with the full cost of the asset and credited at cost
price with the portion sold, the profit or loss on the sale being
carried in a separate account. The balance of the Merchandise account
would then show the value of the asset merchandise on hand at any time.

Theory, however, gives way to the practical difficulties of handling
the account in this way. Therefore, periodically the mixture of
asset decreases and income increases brought about through this
practical method of handling merchandise records must be corrected,
or “unmixed,” so that these elements will appear separately. The
Purchases account, after the opening inventory, the inward freight,
and the purchase returns, rebates, and allowances are transferred to
it, gives the net total of the merchandise asset for the period. This
net total represents two things: (1) merchandise still on hand, and
(2) merchandise sold. By way of adjusting the records, the goods on
hand, as shown by the physical inventory, are separated from the total
and put into the Merchandise Inventory account, which shows by its
title that it is an asset. That leaves in the Purchases account the
cost of goods sold. The credits which should indicate the decrease
in the asset, equal to the cost of goods sold, are found in the net
merchandise sales, as shown by the Sales account after transferring
to it the sales returns, rebates, and allowances. But these credits
are here mixed with the gross profit. The portion of the net sales
representing the cost of sales of merchandise should now, in strict
theory, be transferred from the Sales account to the Purchases account.
This transfer would effect the balancing of the Purchases account,
indicating that there are no merchandise asset values in that account,
these having been transferred to the Merchandise Inventory account. The
result of this theoretically correct procedure would be to bring about
a segregation of the merchandise records into their two elements, the
asset element as shown by the Merchandise Inventory account and the
income element as shown by the remaining balance in the Sales account.

Once again, however, strict theory gives place to the more practical
need of requiring the accounts to give full information for management
purposes. Accordingly, instead of handling them in the way just
indicated, the adjustment procedure explained on pages 118 to 120 is
followed.

=Handling Depreciation of Fixed Assets.=—As shown in Chapter XIII, the
method of handling depreciation of assets consists of nothing more
than separating the expense element from the asset element, both of
which are carried currently under the title of the asset. For reasons
explained in Chapter XIII, the credit to the asset which effects the
separation is not recorded in the asset account but in a supplementary
account entitled “Depreciation Reserve” for the particular asset. This
reserve account is an integral part of the asset record and must always
be considered in connection with the asset account in determining
the value of the asset. The credit entry in the reserve account is a
sort of suspended credit, recorded there temporarily for purposes of
information. The offsetting debit to this credit is made in the expense
account Depreciation.

The adjustment entry thus effects a separation of the asset account
into the two elements, (1) present value of the asset as shown by the
asset account and its depreciation reserve account, and (2) the expense
element recorded under the Depreciation expense account. The following
illustration indicates the bookkeeping procedure:

                         FURNITURE AND FIXTURES
  =================================================================
  19—                            |
  Jan. 1                  750.00 |

               DEPRECIATION RESERVE FURNITURE AND FIXTURES
  =================================================================
                                 | 19-
                                 | June 30 (A)                75.00

                            DEPRECIATION
  =================================================================
  19—                            | 19—
  June 30 (A)              75.00 | June 30 Profit & Loss (B)  75.00
                           ----- |                            -----

                           PROFIT AND LOSS
  =================================================================
  19—                            |
  June 30 Depreciation (B) 75.00 |

The asset Furniture and Fixtures, valued at $750 at the beginning of
the year, is estimated by appraisal to have depreciated 10%, or $75,
during the half-year. This cost or expense is charged to an account
called Depreciation, and credited not to Furniture and Fixtures, but to
the valuation account “Depreciation Reserve Furniture and Fixtures.”
The Furniture and Fixtures account and its valuation account, _taken
together_, show the appraisal value of $675. Thus the credit adjusting
entry is made to record a decrease in asset values. The Depreciation
account, carrying the debit of $75, is an expense account and is closed
into Profit and Loss, just as any other expense account is closed.

=The Estimate for Doubtful Accounts.=—At the close of a fiscal period,
when an accurate statement of the financial condition of the business
is to be drawn up, all assets must be very carefully valued. The
bookkeeping procedure necessary to show the correct value of fixed
assets subject to depreciation has been explained. The outstanding
claims against customers also require evaluation. Every business man
knows from past experience that he will be unable to collect all of his
outstanding accounts. He may not know which of the accounts will prove
uncollectible, but he does know that there will be a loss in the sum
total of these claims against customers. The amount of this estimate is
based on past experience in each business.

A standard basis for the estimate is not possible because in some
businesses credit is extended much more carefully than in other
businesses and in some collections are followed up more vigorously
than in others. In making the estimate two methods are used, one
being a certain percentage of the outstanding accounts, the other
being a certain percentage of the sales made during the period. Where
experience shows the necessity, the loss from both outstanding accounts
and notes receivable is provided for.

The same bookkeeping procedure is used here as with the estimate of
depreciation. An expense account, usually entitled “Bad Debts,” is
debited, and an account called “Reserve for Doubtful Accounts” is
credited for the amount of the estimated loss. The effect of the entry
is to separate the claims against customers into their two elements,
namely, the true asset element, represented by the difference between
the asset account and its valuation reserve account, and the expense
element as indicated by the Bad Debts account.

The following illustration sets forth the method of handling bad debts
on the books of account:

                         ACCOUNTS RECEIVABLE
  ==================================================================
  19—                            |
  June 30             100,000.00 |

                     RESERVE FOR DOUBTFUL ACCOUNTS
  ==================================================================
                                 | 19—
                                 | June 30 (A)              2,000.00

                             BAD DEBTS
  ==================================================================
  19—                            | 19—
  June 30 (A)           2,000.00 | June 30
                        -------- |      Profit and Loss (B) 2,000.00
                                 |                          --------

                          PROFIT AND LOSS
  ==================================================================
  19—                            |
  June 30 Bad Debts (B) 2,000.00 |

It is known, from past experience, that the asset Accounts Receivable,
$100,000 in this instance, will not be collected in full. To bring this
book value down to its real value, the estimated loss, which it is
thought will be 2% of the outstanding accounts, is reserved from their
value, that is, credited to a reserve account, which is to be taken
in conjunction with the asset account. The offsetting debit is to Bad
Debts, an expense account. It represents an expense which the current
period has to bear, and is closed into Profit and Loss with other
expense accounts.

=Handling Prepaid and Accrued Expenses and Income.=—The method of
handling the estimates or inventories of prepaid and accrued expenses
and income is very similar to that shown for handling the mixed
Merchandise account. Illustrations follow:

                                INSURANCE
  ====================================================================
  19—                               | 19—
  Jan.  1 (Paid)             150.00 | June  30 (Unexpired)      125.00
                                    |          Profit and Loss   25.00
                             ------ |                           ------
                             150.00 |                           150.00
                             ====== |                           ======
  June 30 (Deferred)         125.00 |

                               RENT INCOME
  ====================================================================
  19—                               | 19—
  June 30 (Unearned)         250.00 | June 15  (Received)       300.00
          Profit and Loss     50.00 |
                             ------ |                           ------
                             300.00 |                           300.00
                             ====== |                           ======
                                    | June 30  (Deferred)       250.00

                                  WAGES
  ====================================================================
  19—                               | 19—
  June 30 (Paid)           2,125.00 | June 30 Profit and Loss 2,325.00
         (Accrued, unpaid)  200.00  |                         --------
                           -------- |
                           2,325.00 |                         2,325.00
                           ======== |                         ========
                                    | June 30 (Accrued)         200.00

                             INTEREST INCOME
  ====================================================================
  19—                               | 19—
  June 30 Profit and Loss    145.00 | June 30 (Received)        127.50
                                    |         (Accrued, due us)  17.50
                             ------ |                           ------
                             145.00 |                           145.00
                             ====== |                           ======
  June 30 (Accrued)           17.50 |

The first account, Insurance, shows the method of handling a deferred
or prepaid expense. At the close of the period the account is a mixed
account, the unexpired portion of the insurance representing an asset
to be shown on the balance sheet as a deferred charge, the expired or
consumed portion representing an expense for the period to be closed
into Profit and Loss. Insurance has been paid, in this case for a
three-year term; hence only one-sixth of it is chargeable to the first
half-year, the remainder being deferred to later periods. The amount
of the inventory or unexpired portion is entered to the credit of the
account in order to effect subtraction of the amount, the balance of
$25 thereby showing the insurance cost for the current period. This
balance is carried to Profit and Loss. After closing the account, the
inventory is entered to the debit side below the ruling, thus showing
the so-called “deferred asset” portion which will appear in the balance
sheet.

The next account, Rent Income, is a mixed account with income and
liability elements. It shows that rent has been received for a period
which extends beyond the current fiscal period. On June 15, rent
for the period of, say, June 15 to September 15 was received. Only
one-sixth of this income applies to the term January 1 to June 30;
therefore the balance of $250 must be deferred or carried over to the
next fiscal period. The adjustment is made by an entry of $250 for
unearned rent on the debit side to effect its subtraction from the
earnings for the current period, thus reducing them to $50. This income
of $50 is transferred to the credit of the Profit and Loss account.
After the Rent account is ruled off, the deferred income is entered
below the ruling on the credit side, forming a part of the earnings of
the next period. It is shown among the liabilities in the balance sheet
for the current period, usually under the caption of “Deferred Income.”

The third account, Wages, shows wages paid to June 30 of $2,125. At
that date wages earned but not yet paid, perhaps because the pay-day
did not coincide with the date of closing the books, amounted to $200.
This item is obviously an expense of the current period incurred during
the short interval between the last pay-day in June and June 30. The
adjustment is therefore made by entering $200 on the debit side of the
Wages account, to effect the _addition_ of this sum to the expense
already shown there. The total amount of the account is transferred
to Profit and Loss and the account is ruled off. The amount of unpaid
wages, $200, is shown on the credit side beneath the ruling. In the
balance sheet it appears as a liability, usually under the caption of
“Accrued Expense.”

Similarly with the fourth account, Interest Income. Income to date
is $127.50; earned but not yet due on June 30, $17.50, showing full
earnings of $145 for the current period. This total is transferred
to Profit and Loss, the account is ruled off, and the earned but not
received portion is shown as a debit beneath the ruling, and as an
asset in the balance sheet.

Great care must be exercised in the adjustment of all inventories to
maintain the equilibrium of the ledger by the entry of each amount to
both the debit and credit sides.

Besides the four illustrations given above, there are many other
accounts requiring the same kind of adjustment entries. In certain
special cases it may be necessary to make adjustments on both sides, as
for example in a general expense account or in a mixed interest account
showing both interest income and interest expense. For illustration
a mixed interest account is shown. The debit opening item of $100 in
the new section of the account represents an asset, an interest claim
against outsiders, while the credit opening item of $50 represents the
liability to others for interest due them but not yet paid. For the
sake of accuracy and clarity, however, the better bookkeeping practice
is to keep separate accounts for Interest Income and Interest Cost.

                              INTEREST
  ==================================================================
  19—                             | 19—
  June 30 (Paid)           400.00 | June 30 (Received)        500.00
          (Unpaid)          50.00 |         (Accrued, due us) 100.00
          Profit and Loss  150.00 |
                           ------ |
                           600.00 |                           600.00
                           ====== |                           ======
  June 30 (Accrued)        100.00 | June 30 (Unpaid)           50.00

=Summarizing the Ledger—The Profit and Loss Account.=—After all the
types of adjustments have been made, the accounts in the ledger
are restored to their fundamental classifications, namely, assets,
liabilities, and proprietorship. There is now no intermixture of these
basic elements. The proprietorship group of accounts shows both the
vested proprietorship, that is, the capital at the beginning of the
period, and the temporary proprietorship, that is, the increases and
decreases (as indicated by the income and expense accounts) which have
taken place during the current period.

At the close of the fiscal period, when the temporary proprietorship
accounts have served their purpose by showing the day-to-day changes in
proprietorship and the results must be summed up, these accounts are
closed for the current period so as to keep the records separate from
those of the next period. For the purpose of summarizing the profit and
loss group of accounts, an _account_ called Profit and Loss is opened
in the ledger and to it the balances of all temporary proprietorship
accounts are transferred.

The Profit and Loss _account_ in the ledger must not be confused with
the formal _statement_ of profit and loss, made up outside the ledger
just as is the balance sheet. On the credit side of Profit and Loss
will appear all credit or income account balances, and on the debit
side will appear all debit or expense account balances. Accordingly,
if the balance of the Profit and Loss account is a credit balance, it
shows a net profit for the period; if a debit balance, it shows a net
loss for the period.

The net profit or net loss shown by the Profit and Loss account
represents either an increase or decrease in proprietorship, and as
such is transferred to the proprietor’s personal account. As explained
in Chapter XII, this account usually shows his drawings during the
period against these profits as they were assumed to be accruing. The
personal account thus indicates whether the amount which he has drawn
out is larger or smaller than the net profits as determined by the
Profit and Loss account. If his profits are larger than his drawings,
his capital has been increased by the amount of the credit balance in
his personal account and the transfer of this balance to the credit
side of his capital account will then show the total net worth of
the business. If his drawings are larger than the profits, there is
a decrease in capital, as shown by the debit balance of his personal
account, and the transfer of this balance to the debit side of the
capital account reduces the former capital amount.

The summarization of results at the close of a period is called
“closing the ledger.” The procedure consists, first, in a transfer,
i.e., in a closing out, of all the temporary proprietorship accounts
to the Profit and Loss account; second, in the transfer of the balance
of this account to the owner’s personal account; and third, in the
transfer of the balance of the personal account to the owner’s capital
account. After all temporary proprietorship accounts, the Profit and
Loss account, and the owner’s personal account have been closed, the
only accounts remaining open on the ledger are those showing either
assets, liabilities, or capital. A formal statement of the balances
of these accounts constitutes the balance sheet. The accounts through
which the income and expense records of the business are closed,
summarized, and transferred to the vested proprietorship account, are
shown below, with typical entries:

                          PROFIT AND LOSS
  ==================================================================
  19—                            | 19—
  June 30                        | June  30
   Purchases (Cost               |   Sales (Net income
     of Goods Sold)    15,000.00 |        from sales)      30,000.00
   Sales Salaries       5,000.00 |
   Delivery Expense       500.00 |
   Office Salaries      2,400.00 |
   Supplies, Postage,            |
     etc.                 200.00 |
   Insurance              150.00 |
   Bad Debts              500.00 |
   Interest               150.00 |
   Depreciation           200.00 |
   John Doe, Personal            |
     (Balance)          5,900.00 |
                       --------- |                         ---------
                       30,000.00 |                         30,000.00
                       ========= |                         =========

                        JOHN DOE, PERSONAL
  ==================================================================
  19—                            | 19—
  Jan.  5 Cash            300.00 | June 30 Profit and Loss
  Feb. 10  ”              250.00 |           (Net  profit)  5,900.00
  Mar.  3  ”              150.00 |
  Apr.  1  ”              200.00 |
  May  10  ”              300.00 |
  June  3  ”              250.00 |
    30 John Doe, Capital         |
            (Balance)   4,450.00 |
                        -------- |                          --------
                        5,900.00 |                          5,900.00
                        ======== |                          ========

                          JOHN DOE, CAPITAL
  ==================================================================
                                 | 19—
                                 | Jan.  1                 75,000.00
                                 | June 30 John Doe,
                                 |         Personal
                                 |       (Net increase
                                 |       in proprietorship) 4,450.00




CHAPTER XVI

SOURCES OF DATA FOR THE LEDGER


=Insufficiency of the Ledger Record.=—In an earlier chapter a business
transaction was defined as an exchange of values, and the ledger as
the book in which transactions are grouped under predetermined titles
or names. Thus, all transactions relating to machinery are grouped
under the title “Machinery”; those relating to cash under the title of
“Cash”; those to purchases under the name “Purchases”; etc. Even in
a small business the ledger may contain a large number of accounts,
all necessary to give a clear-cut presentation of the volume and
significance of business transactions.

The ledger record presents an analysis of transactions into their
component elements, each transaction being classified and recorded,
usually, in at least two ledger accounts, and frequently in more.
Consequently, in order to learn the nature of a given transaction, to
see it in its entirety, it may be necessary to refer to a number of
separate ledger accounts. This process, even if the ledger is small,
is not always easy; and when the ledger contains a large number of
accounts, it becomes practically impossible. Accordingly, another kind
of record is needed.

=The Book of First Record.=—This other record shows in one place the
transaction in its entirety; it gives a complete statement of the
conditions and all other data relating to the transaction. It also
shows the fundamental analysis of the transaction into its debit and
credit elements under appropriate titles. It is called the original
or first record. Usually it is not the very first record made of the
transaction but it is the first record made in the books of account.
The book in which this record is kept is called the “Journal.” The
record as kept in the ledger is a secondary record based on the
original or first record in the journal. Because of its secondary
nature, courts will not accept the ledger as evidence without
verification.

=Posting to the Ledger.=—The act of transferring the original entry
from the journal into the ledger is called posting to the ledger. In
order not to lose sight of the original record in the journal it is
important that the ledger entry show by letter and number the book and
page where the original entry can be found. This index is entered in
what is called the reference column of the ledger account, which is
just to the left of the money column. In this manner every entry in a
ledger account has a reference to the original entry pertaining thereto.

=The Journal.=—A journal may be defined as a diary or log in which the
happenings or transactions of a business are recorded in chronological
order; that is, consecutively day by day as they arise. Formerly it
was sometimes called a day-book or blotter. As usually operated,
however, the day-book or blotter contained a rough record giving all
the essential data relating to each transaction without regard to
accounting terminology, i.e., without regard to the formulation of
the debit and credit of each transaction. The day-book entry was a
sort of memorandum from which a formal record was made in the journal.
This day-book or blotter, though still in use in some places, has very
largely been discarded and only the formal journal is used. This latter
was originally a single book but in modern accounting practice it has
become separated into many special journals.

=Characteristics of the Journal.=—1. Being of the nature of a diary,
the journal shows each day’s transactions in consecutive order with
little regard to grouping. The first characteristic, therefore, of the
journal is that it is a book of chronological entry, a record of each
transaction just as it took place, with the entries made according to
the dates of the transactions.

2. Another characteristic of the journal entry is that it is an
analytical and classifying record. Before the entry is made, the
transaction is analyzed into its two elements of debit and credit,
determined according to the effect the transaction has in increasing
and decreasing assets, liabilities, or proprietorship. The account
titles used in the journal are the same as those used in the ledger and
are selected on the basis of a detailed subclassification of the three
fundamental groups of accounts. The degree of detail in classification
depends on the desired minuteness of the information required. The
guiding principle in giving these titles is to use such names as will
tell truthfully and accurately what kind of information is recorded
under each head. A journal entry is therefore an analytical record as
to debit and credit, which classifies the different elements of the
transaction under such titles as will later be used in the ledger.

3. A final and a very essential characteristic of the journal is that
every entry should carry in addition to account titles, with their
debit and credit amounts, a brief but complete summary of all the
conditions and data relating to the transaction, so that, if referred
to in the future, the journal record will call to mind the essentials
of the entire transaction.

Because of these three characteristics, and particularly the last two,
the journal record is of prime importance.

=Equilibrium of the Journal Entry; Compound Entries.=—As explained in
a preceding chapter, the debit and credit elements of all transactions
must be equal in amount. Since the journal entry is an analysis of the
transaction, it must obviously show equal amounts in the debit and
credit columns. In case the analysis and classification require an
entry consisting of more than one debit and one credit item, the total
of the several debit items must equal the total of the several credit
items. Such an entry is called a compound journal entry.

=Standard Form of Journal.=—The standard form of journal provides
spaces for the following information: date, classification as to
debit and credit, ledger index column, money columns to show both the
debit and credit amounts, and full record of the essentials of the
transaction. The following form illustrates a complete journal entry:

   ==================================================================
   19— |    |                              |    |          |
   Jan.| 10 | Notes Receivable             | 10 | 1,000.00 |
       |    |   James Jackson              | 14 |          | 1,000.00
       |    |     60-day note, payable at  |    |          |
       |    |     First National Bank,     |    |          |
       |    |     Perryville, Maryland,    |    |          |
       |    |     with interest at 6% per  |    |          |
       |    |     annum. Due March 10, 19— |    |          |

Form 6. Standard Form of Journal

The date is sometimes shown in the middle of the first blank line; but
it is better to place it at the extreme left. The account titles are
placed on separate lines unencumbered with other data, because they are
of first importance in posting. The name of the debit account is shown
on the extreme left of the explanation column, with a uniform margin
to the right for the credit account. The debit and credit amounts are
placed in the left and right money columns respectively. Data giving
full explanation of the entry are shown directly below the classified
debit and credit entry, slightly to the right of the margin of the
credit account title, and a uniform margin is maintained down the page.
The column to the left of the money columns shows the ledger pages to
which the entry is posted. The entry is read thus: Notes Receivable,
debit; James Jackson, credit, $1,000.00.




CHAPTER XVII

THE SUBDIVISION OF THE JOURNAL


=Inadequacy of the Old Journal.=—As explained in the previous chapter,
every business transaction was formerly entered in the journal. This
necessitated the making of a formal debit and credit entry for every
item, many of which were of the same kind. As the object of every
business is to sell something, during any business day a large number
of sales, in consequence, had to be analyzed, classified, and entered
separately. The entry in each case was a credit to Sales, and either
a debit to the customer if the sale was “on time,” or a debit to Cash
if the sale was for cash. It was soon perceived that instead of making
a separate entry for each sale, one entry could be used for bringing
into the books all the sales for a given day. This was accomplished by
carrying a memorandum of the individual transactions until the close
of the day when a formal summary or compound entry was made in the
journal. Such a summary or compound journal entry is illustrated below:

  A. Jackson                          175.00
  D. Hayes                             25.00
  J. M. Marshall                      132.50
  T. P. Pollard                        79.40
  I. M. Cranston                       93.20
  M. V. Johnson                        17.15
        Sales                                 522.25
          To record the day’s sales.

The memorandum of each sale was made in a blotter to record the
quantities and kind of goods sold but such entry formed no part of the
double-entry record, being merely the source of information for the
formal summary entry.

=The Special Journal a Labor-Saving Device.=—This use of the journal
can also be made in connection with other transactions, with similar
great saving of labor. Throughout the day in every business there is
a large number of cash transactions—receipts and disbursements—which
require a debit and credit record. Also purchases of merchandise,
although not numerous for any particular day, comprise a large number
of entries during the course of a month or year. To save the labor
of so many entries, the original journal is divided into separate
books known as special journals, each containing the original entries
for a particular group of similar transactions, the number of
books corresponding to the number of groups into which the various
transactions are divided.

For instance, where the policy of the business is to encourage the
settlement of outstanding customers’ accounts by notes, the use of a
notes receivable book or journal effects a very appreciable saving of
labor. Through the use of such a book, limited to a record of nothing
but notes receivable, it is unnecessary to write each time a note is
received, a complete journal entry as follows:

  Notes Receivable      1,500.00
        James Jackson             1,500.00

Instead, the entry of Jackson’s name in the notes receivable journal
is in itself evidence of a debit to Notes Receivable account. Thus
only the credit side of the entry need be shown, with appropriate
explanation and detail, the formal debit being suppressed. When,
however, the books are closed at the end of each regular period, the
total of all these entries in the notes receivable journal is formally
labeled “Notes Receivable, Dr.” and posted to the debit of the Notes
Receivable account. This procedure brings on the ledger one debit entry
for the transactions of the entire month. The corresponding credits
have been posted in detail day by day from their journal record.

So also, when it is the practice of the business to issue many of its
own notes either in payment of purchases or for discount purposes,
a “Notes Payable Journal” may be used. The method of handling this
book is similar to that of handling the notes receivable journal as
described above. A similar procedure is followed in the case of sales,
purchase, and cash transactions referred to above. The method of
handling these four groups of transactions will be explained in detail
in the chapters which follow.

=Basis of Subdivisions.=—The basis for dividing the one general journal
into special journals is the relative frequency with which transactions
of a similar nature occur. It would evidently be of no utility to
create a special journal if the number of transactions to be recorded
in it was small, as the saving in the labor of making the entries would
be more than offset by the trouble of using an extra book.

=Customary Subdivisions.=—The special journals most frequently met
with are those for purchases, sales, and cash. The Purchase Journal
contains the original entry of purchases, the Sales Journal the
original entry of sales, and the Cash Journals the original entry of
cash transactions. All _other_ original entries are made in the general
journal. For the sake of brevity, the general journal is usually
designated by the single term “Journal.”

It should be thoroughly understood that no matter how many special
divisions of the journal may be in use, such books combined with the
general journal comprise the _journal_ record of transactions. None
of them is merely a memorandum record to be summarized and to be
formally recorded later. The record made in each is formal, although
abbreviated, and each must be posted completely, both debit and
credit, in order to secure in the ledger a full record of all business
transactions.

A brief explanation will be given in following chapters of the more
simple forms of special journals.




CHAPTER XVIII

THE PURCHASE AND THE SALES JOURNALS


=Types of Purchase Journal.=—For recording purchases of stock-in-trade,
a separate special journal called “Purchase Journal” is used. Sometimes
this special journal takes the form of what is called an “Invoice
Book,” explanation of which is given in a later chapter. The purchase
journal is sometimes used to record all sorts of purchases, as for
example, purchases of store and office supplies, of advertising and
printing, and even of services such as labor, and of uses, such as
the use of a building. Such use of the journal is more commonly made
by manufacturing concerns than by mercantile houses and the journal
is then known as a “Voucher” or “Accounts Payable Register,” which
is explained in Volume II. The present discussion is limited to the
purchase journal as a record of purchases of stock-in-trade by a
mercantile firm.

=Analysis of the Purchase Transaction.=—The debit and credit analysis
of a transaction covering a purchase of stock-in-trade may result in
either one of two groups of entries: (1) if the transaction is on
credit, a debit to Purchases and a credit to either a personal account
payable or to Notes Payable account; or (2) if the transaction is for
cash, a debit to Purchases and a credit to Cash. Whether the purchase
is on open account, on a note, or for cash, it is often desirable to
keep the accounts in such a way as not only to indicate the vendor in
each instance, but also to show the volume of business done with each
creditor. This is accomplished when the purchase is for cash or for a
note, by opening an account with the creditor in much the same way as
when it is on open account.

Thus every purchase transaction is first recorded as follows:

  (1) Purchases
            Vendor

If the purchase is a cash purchase, the liability to the vendor is
immediately canceled by the entry:

  (2) Vendor
            Cash

The vendor’s account is canceled by being credited and then immediately
debited with the same amount. This leaves on the books as the net
result of these two entries a debit to Purchases and a credit to Cash.
This record of the transaction is seen therefore to agree with the
analysis of the cash purchase transaction as previously explained.

Instead of opening individual accounts with each vendor, in the case
of cash purchases, the same result is sometimes accomplished by the
use of one account called “Sundry Cash Creditors.” To it all such cash
purchase transactions are posted both from purchase journal and cash
book. This method records the combined liability to all vendors in one
account. It does not, however, show the volume of business done with
each creditor.

If the purchase is on a note, the liability to the vendor as set up in
entry (1) is immediately canceled by the entry:

  (3) Vendor
            Notes Payable

The net result of these entries, (1) and (3), is seen to be a debit to
Purchases and a credit to Notes Payable—a record which corresponds with
the original analysis of the transaction.

Since a purchase on open account also results in a debit to Purchases
and a credit to Vendor, it is seen that all types of purchase
transactions may be recorded as a debit to Purchases and a credit to
Vendor. Accordingly, in making the current record in the purchase
journal, the debit element may be omitted, since it is always the same,
and only the credit element, which differs in each case, may be set up.
Periodically, usually at the close of each month, the debit element is
formally set up for the total amount of purchases for the period. (See
Form 7, a typical purchase journal.) Thus the one formal debit is made
to offset the numerous credits set up during the month. The purchase
journal is thus seen to be as fully a debit and credit journal as the
general journal, even though in making its day-to-day record the debit
element is, for the sake of economy in labor, omitted.

Other methods of handling the cash and note purchase transaction are
explained on page 152.


=Form and Method of Using the Purchase Journal.=—The simplest form
of purchase journal is the same as that of the standard journal. It
provides space for date, classification, explanation, ledger index,
and two money columns. In the purchase journal the money columns do
not have “debit” and “credit” significance, but the first may be used
for the detailed extensions and the other column for the total of each
purchase. Assume, for the sake of illustration, that the following
purchases have been made:

  January 10, 19—, from S. C. Bontell, terms 2/10, n/30:
    5 tons hay      @ $12.00
    100 bu. corn    @    .90
    1,000 bu. wheat @   1.10
    30 tons coal    @   4.50
  January 18, 19—, from P. V. Stewart, terms 2/10, n/30:
    50 tons hay     @ $12.00
    130 tons coal   @   5.00
  January 22, 19—, from I. S. Van Doren, terms n/30:
    100 tons coal   @ $ 4.50
    600 bu. wheat   @   1.00
  January 28, 19—, from S. M. Sax, terms 2/10, n/60:
    510 bu. wheat   @ $ 1.10

The purchase journal record, using the simple form of the standard
journal, would be as follows:

[Illustration: Form 7. Purchase Journal]

Usually, however, a form of purchase journal is used which is better
adapted to its purpose. In this, instead of giving the detailed
explanation, the file number of the original invoice is written as
part of the explanatory matter, which usually comprises only this file
reference and the terms of the purchase. This modern type of journal is
illustrated below.

[Illustration: Form 8. Modern Type of Purchase Journal]

=Posting the Purchase Journal.=—In posting the purchase journal, it is
customary to post daily the credits to the various vendor accounts as
they are entered from day-to-day in the journal. In this way the true
status of the amounts due these creditors may be known at any time by
reference to their ledger accounts. The offsetting debit to Purchases
account is posted only at the end of the month when the purchase
journal is summarized. In the meantime the ledger is out of equilibrium
because only the credit side of all purchase transactions has been
entered in the ledger. This equilibrium is restored, however, by the
monthly posting of the debit to Purchases account which must always be
made before the trial balance is taken.

An essential part of posting is the cross-indexing of the two records,
the journal and the ledger. The cross-reference column in the ledger
account must show the initial and page of the journal from which each
item is posted. For example, “P. 10” in the ledger would refer to
purchase journal, page 10. Likewise the ledger folio (L.F. or Folio)
column in the journal must show the ledger page of the account to which
the item has been posted. Thus, in the illustration, Stewart’s account
is on page 125 of the ledger, where he is credited with $1,250. At the
end of the month the purchase journal is footed and the summary entry,
“Purchases, Dr.,” is made and posted to the debit of Purchases account
on page 10 of the ledger. This one debit item in the ledger brings
about the equilibrium with the individual credits posted to the various
personal accounts payable. The purchase journal is then ruled off and
thus made ready for new entries for the next month immediately below
the rulings.

=Departmental Analysis of Purchases.=—When it is desirable to
separate various classes of purchases so as to determine the profit
from each class, particularly in a business which is departmentized,
a purchase journal similar to the one shown in Form 9, which has an
additional money column for each class of purchases, may be used. If
there are three classes or departments, at least four money columns
are required. The entry in the first column is for the total amount of
the purchases; and the entries in the other three columns, which are
headed each with the name of a class or department, are for the total
purchases of the respective departments. It is evident that the totals
of these three columns, added together, must at all times be equal to
the total of the first column. This affords a check on the accuracy of
the distribution. At posting time a separate account is opened in the
ledger corresponding to each of these classes of purchases. The summary
entry in a purchase journal of this kind appears as follows:

[Illustration: Form 9. Departmental Purchase Journal]

Purchases are classified under separate titles, usually because it is
desirable to make a corresponding classification of sales and so secure
departmental results of operation.

=The Sales Journal—Analysis of the Sales Transaction and Method of
Record.=—For recording sales of stock-in-trade, a record called the
“Sales Journal” is used, which is limited to sales of merchandise. A
sales journal practically identical in form with the purchase journal
serves this purpose. Its columns are ruled and current entries are made
in it just as in the purchase journal.

The analysis of a sales transaction shows a credit to Sales and a
debit either to Customer, Cash, or Notes Receivable, according as the
sale is “on time,” for cash, or against a note given by the customer.
In handling cash sales and sales against the customer’s note, the same
procedure is followed as with purchases, i.e., accounts with customers
are opened for _all_ sales, and are immediately closed off if cash or a
note is received at the time of the sale.

The current entry in the sales journal shows only the debit item, i.e.,
the charge to the customer’s account, the credit to Sales account being
omitted. At the end of the month, however, the total of all sales is
indicated by the summary entry and is posted to the credit side of the
Sales account in the ledger. In order to keep the customers’ accounts
up to date, the current entries in the sales book, giving the names
of the customers and the amounts, are transferred to the customers’
accounts in the ledger at the close of each day.

=Summarization of the Sales Journal.=—At the end of the month or other
posting time, the sales journal is totaled and the summary entry is
made and posted, thus bringing the ledger into equilibrium by one
credit to Sales account for the sum of all the debits to customers
accounts made day by day. The closing rulings are then made. The
treatment is exactly similar to the work in the purchase journal, the
only difference being in the summary entry, where “Sales, Cr.” takes
the place of “Purchases, Dr.” If it is desired to keep the sales record
by departments or classes of commodities, analysis columns will effect
the distribution. In this type of sales record the closing summary
indicates the various departmental or other sales accounts to which
postings are to be made, instead of the one general account, Sales,
precisely as the departmental purchase journal (Form 9) indicates the
departmental or other purchases accounts to which purchase entries are
to be posted.

=Goods Sold to the Owner.=—The treatment of goods sold to the owner
of the business requires brief consideration. The proprietor usually
withdraws goods at cost price. There is thus no element of profit
in the transaction as there is in other sales. A strict analysis of
the transaction shows that it brings about only a decrease of the
asset unmixed with any element of income. Theoretically, then, such
transactions should not be recorded with the regular sales, but should
be shown as a credit to Purchases account. In practice, however,
entering them in the sales journal is the easiest method of recording
them, and since they are not usually large in volume, this method
does not vitiate the total sales figure as a basis for estimating
percentages of profit. This matter is discussed in detail on page 273.




CHAPTER XIX

THE CASH JOURNALS


=The Cash Book.=—For recording transactions involving cash, two
journals are used. One of these records receipts and the other
disbursements of cash. They are known respectively as the “Cash
Receipts Journal” and the “Cash Disbursements Journal.” Instead of
being separate books, however, they are usually bound together and
comprise what is called the “Cash Book.” When bound together their
pages alternate throughout the book. The cash receipts journal occupies
the left-hand pages, i.e., the even numbered pages—2, 4, 6, etc.—and
the cash disbursements journal the right-hand pages—3, 5, 7, etc.—page
1 not being used. This method sets up the cash record, receipts and
disbursements, on facing pages and the movement of cash is thus under
easy and constant review.

=The Cash Receipts Journal—Analysis of a Cash Receipt.=—If $100 cash
is received on account from John Doe, a customer, an analysis of the
transaction shows “Cash” debit and “John Doe” credit.

  Cash                   100.00
        John Doe                 100.00

So with all receipts of cash; the “cash” element is a debit. The
record of cash receipts being made in a journal devoted exclusively to
receipts of cash, the “Cash, Dr.” element of the entry may be omitted
and only the “credit” element need be shown; the very fact that the
entry is made in the cash receipts journal is sufficient to indicate
that “Cash” is a debit. The cash receipts journal (Form 10)—the left or
debit side of the cash book—is operated, therefore very much like the
purchase journal.

[Illustration: Form 10. Cash Book (left-hand page) (Cash Receipts
Journal)]

=The Cash Disbursements Journal—Analysis of a Cash Disbursement.=—If
$10 is paid for expenses of some kind, the analysis gives “Expense”
debit and “Cash” credit.

  Expense                      10.00
        Cash                          10.00

So with all disbursements of cash. A separate journal being devoted
exclusively to cash disbursements, the “Cash, Cr.” element of the entry
may be omitted and only the debit shown. The cash disbursements journal
is thus seen to be operated in the same way as the sales journal.

Thus, all left-hand pages in the cash book show receipts and all
right-hand pages show disbursements. Because it is unnecessary to
_write_ the debit element of cash received and the credit element of
cash paid out, a great saving of labor is effected. Nevertheless, it
must be remembered that the entry on either side of the cash book is
essentially a journal entry, and that the missing elements—cash debit
on the left page and cash credit on the right page—are supplied at the
end of the period by the totals when the two journals are summarized in
preparation for posting to the Cash account in the ledger.

[Illustration: Form 11. Cash Book (right-hand page) (Cash Disbursements
Journal)]

=Form of the Cash Journals.=—In the cash journals, just as in all
other journals, provision is made for date, account classification,
explanation, ledger posting index, and money columns. In a simple form
of cash book, just as in the purchase and sales journals, two money
columns are usually provided, the one for detail—a day’s or week’s
detail—and the other for totals. Such a form is shown in Forms 10 and
11. The student should note carefully how the cash receipts journal
is summarized. The balance of cash brought forward from the previous
week is entered in the second or total column so that the detail column
shows only the current week’s receipts. Inasmuch as the Cash account
in the ledger already shows the balance of cash at the beginning
of the week, i.e., $5,000, this amount must not be included in the
summary entry for the current week. In summarizing the cash receipts
journal, therefore, the total only of the detail column, showing the
cash received since the last summary, is set up as a “Cash, Dr.”
item. In summarizing the cash disbursements journal, since there is
normally no balance carried over from the previous week, the total of
the journal—representing the cash disbursed since the last summary—is
set up as a “Cash, Cr.” item. This is shown as $365, the amount being
posted to the credit of the ledger Cash account on page 1.

=Cash Book Taking the Place of the Cash Account.=—Because the two cash
journals are set up on facing pages, the record contains essentially
the same information as a detailed Cash account in the ledger. The
double page record brings together both the receipts and the deductions
from receipts—cash being normally a debit account. For this reason
the cash book record is itself sometimes used as a ledger account and
when it is so used its totals are not posted to the ledger account.
The balance of the cash book must, however, be included in the trial
balance of the ledger, because when so used the cash book is not only a
_journal_ but a _ledger account_ as well.

When, however, the totals of both cash receipts and disbursements are
posted to a Cash account in the ledger, the balance used in the trial
balance is taken from the ledger account and not from the cash book,
although of course the balances in both are the same.

Whichever of these two methods is used, it must always be remembered
that the cash book is essentially a journal and that therefore its
classifications of business transactions must be transferred to their
proper accounts in the ledger.

Best accounting practice, however, requires that a Cash account be
carried in the ledger so that the ledger will be a complete record of
all transactions and will be independent of all other records for proof
of its equilibrium.

=Posting the Cash Book.=—In posting the debit side of the cash book to
the ledger, it is important to remember that the debit element of the
transaction is merely indicated by the fact that the entry appears on
the left-hand page of the cash book. The account name written in the
Account Classification column is the credit element and must be posted
to the credit of the corresponding account in the ledger. Similarly, on
the right-hand side of the cash book, the cash credit element of the
entry is suppressed and the named account should be posted to the debit
of the corresponding ledger account.

After the posting of the individual items has been completed, the
“Cash, Dr.” and the “Cash, Cr.” as shown by the summary entries must be
posted to the ledger Cash account, as explained on page 143.

As stated above, each side of the cash book is, in reality, a journal
in itself—a cash receipts journal and a cash disbursements journal—and
it is only because these two journals are shown side by side that the
cash book is sometimes made to serve the purpose of a ledger Cash
account.

=Balancing and Ruling the Cash Book.=—The cash book in its simple form
is balanced and ruled in the same manner as a ledger account. When the
balance is brought down to the new section it is usually entered in the
second or total column, thus reserving the first or detail column for
the daily or weekly cash receipts, and separating these items from the
balance brought down from the previous period. (See Forms 10 and 11.)

When the record is to be transferred to a new page, either the current
page (double page) is balanced and ruled and only the balance is
carried forward, or the current page is totaled and both debit and
credit footings are carried forward as shown in Chapter XIV for the
ledger cash account. The cash book is closed, ruled, and transferred as
of the same date and on the same line for both sides, although usually
there is room for more entries on one side or the other, which may be
closed by diagonal ruling. This is done in order to keep the record
of the receipts of a given period and that of the disbursements in
nearly exact juxtaposition, and thereby facilitate a review of the cash
movements for that period.

=The Cash Short and Over Account.=—It sometimes happens that when the
cash book is balanced, the amount which ought to be on hand as shown by
this balance, does not agree with the amount of cash on hand as shown
by actual count. The discrepancy may be due to failure to enter some
items of receipts or disbursements in the cash book, or to errors in
making change; or it may be due to petty thieving by the cash clerk.
If the error cannot be rectified at the time, an entry is made in the
cash book, on whichever side necessary, in an amount sufficient to
bring the book balance into agreement with the actual cash balance.
The account to be debited or credited, as the case may be, is entitled
“Cash Short and Over.” If the correct charge or credit is afterwards
determined, the item or items should be transferred from Cash Short and
Over to their proper accounts. Usually the Cash Short and Over account
is treated as an income or expense account and closed into Profit and
Loss at the close of the period. Sometimes it is treated as an asset or
liability account, depending upon the nature of its contents, i.e., the
amount of the discrepancy shown and its probable cause.

=The Cash Purchase and Sales Transactions.=—A standard method of
handling the cash purchase transaction when it is desired to keep a
record of the volume of business done with each vendor, was explained
on page 140, where the purchase was shown to be “washed” or cleared
through the vendor’s account. A more direct method is sometimes used.

When purchases are made for cash, a complete record of the transactions
is made by the entry:

  Purchases
        Cash

Here there is evidently a conflict of places of original record. The
transaction being a purchase, record should be made in the purchase
journal; and since it is also a cash transaction, record should also
be made in the cash book. However, if an independent record were made
in both places, a duplication of the transaction would result, since
entry in either journal is a complete debit and credit record. The
transaction would be entered twice in full, causing an inflation of the
purchases and cash disbursements. In the purchase journal, the credit
to Cash would be set up at the time of the transaction and at the time
of summarization the debit to Purchases would be included in the total
of the Purchases, thus completing the ledger record. In the cash book
the debit to Purchases would be set up at the time of the transaction,
and when the summary was made the credit to Cash would be in the Cash
total. Entry in both journals would, when posted to the ledger, bring
about two debits and two credits for the same transaction.

To overcome this difficulty the following methods are commonly employed:

1. The record is made complete in both journals, but the credit to
Cash from the purchase journal record is not posted, because that
credit will be posted from its record in the cash book. Similarly,
when posting the cash disbursements journal, the debit to Purchases is
_not_ posted, because that will be posted from the purchase journal.
In this way original record may be made in both journals and each
journal will then show by its total what it is intended to show,
viz., total purchases and total cash disbursed, respectively. In the
secondary record, the ledger, only half of each journal entry is set
up, the debit to Purchases from the purchase journal and the credit to
Cash from the cash book. This prevents the inflation mentioned above
and does not destroy the equilibrium of the ledger because there is
omitted, when posting from the cash book, a debit equal in amount to
the credit omitted when posting the purchase journal.

2. The method explained on page 140 is used with this variation: The
record in each journal shows the individual vendor’s account, but at
posting time no vendor account is set up in the ledger, neither the
credit to the vendor’s account shown in the purchase journal nor its
offsetting debit shown in the cash disbursements journal being posted.

It is necessary, when making the original entries in the journals,
to indicate all postings which are to be omitted, by entering a check
mark, ✔, or a cross, ❌, in the ledger folio column of the journal.

The purchase on a note payable, one method of recording which was
explained on page 140, may also be handled more directly by either of
the methods explained above for a cash purchase. In the case of the
note, however, the journals used are the purchase and general journals.

Similar methods are employed, also, for handling the cash sale and the
sale against a customer’s note.

=Columnar Analysis of Cash Receipts and Disbursements.=—As illustrated
in the chapters on purchase and sales journals, additional money
columns are often used for the purpose of analyzing the purchases and
sales by departments or classes of commodities. A similar analysis of
both the cash receipts and cash disbursements may aid in segregating
certain classes of cash items and thus save labor in posting. Of cash
receipts, two classes are usually more active than all others combined.
More cash is received from cash sales and from customers on account
than from any other source. Accordingly, two additional columns may be
used with these headings. _All_ cash receipts must be entered in the
Total, Bank, or Net Cash column, as it is variously termed, and then
distributed into any special columns provided. Thus all “Cash Sales”
would be extended, both in the Net Cash and in the Sales column, and
all receipts from customers would be entered in the Net Cash and in the
Accounts Receivable column.

In the case of cash disbursements, the number of columns depends upon
the degree of analysis desired. At least two additional columns are
frequently found, one for creditors and one for expenses. Where cash
purchases are numerous they may be segregated, or where any particular
_class_ of expense is of frequent occurrence it may be shown in a
separate column. Where one ledger is used for customers, creditors, and
general accounts, there is little gain in segregating customers and
creditors by special columns in the cash book, except as a slight aid
in posting. Where separate ledgers are used, it is important to have
separate customers and creditors columns in the cash book, as will be
shown later in connection with the subject of controlling accounts.
Illustration and explanation of the columnar cash book are given on
pages 158 and 159.

=Cash Discounts Analyzed.=—Sales and purchase discounts are another
class of transactions best handled through the cash book, although,
strictly speaking, they are not cash transactions. When a customer
buys goods on account, he is usually offered two bases of settlement,
depending on the length of the credit term allowed. Thus, 2% off is
frequently allowed if payment is made within 10 days; otherwise the
full amount of the invoice must be paid. Because the vendor does not
know, at the time of entry on his books, on which basis settlement
will be made, he makes the charge at the full invoiced amount. If the
customer takes advantage of the discount offered, he pays less than the
amount at which his account stands debited, yet the vendor must credit
his account for the full amount of the original charge, in order to
cancel his entire claim against the customer. To illustrate, a customer
buys $100 worth of merchandise, with 2% off if paid within 10 days. On
the 10th day he pays $98. The sale entry would be:

  (1) Customer       100.00
           Sales            100.00

The cash entry would be:

  (2) Cash            98.00
         Customer            98.00

But this does not cancel in full the $100 claim against the customer.
The $2 discount, an allowance for early payment, is an expense to
the business and must be charged to an expense account called “Sales
Discount,” and the customer must be given $2 additional credit, the
entry being:

  (3) Sales Discount   2.00
             Customer         2.00

Entries (2) and (3) are usually combined in one as follows:

  (4) Cash            98.00
      Sales Discount   2.00
             Customer       100.00

Entry (4) is known as a compound entry. If entry (2), which is the part
involving cash, is made in the cash book, then the additional entry (3)
will have to be made in the general journal because there is no cash
element in it and theoretically nothing but cash should be recorded in
the cash book.

=Handling Discounts in the Cash Book.=—This recording in two separate
places of what is really one transaction has led to the introduction
into the cash book of a non-cash column in order to bring the whole
transaction together. The customer’s payment being a receipt of cash,
the record must be made on the debit side of the cash book. Reference
to entry (4) shows that Sales Discount is also a “debit.” Where the
cash book is limited strictly to cash transactions, the cash debit
record shows only the “credit” element of the entry. The use of a Sales
Discount column on the debit side of the cash book for the sake of
making a complete record in one place thus introduces an extraneous
element, one out of harmony with the other entries made there. In
posting, great care must be exercised not to transfer Sales Discount to
the credit side of its ledger account but to the _debit_ side.

=Alternative Treatment for Cash Discounts.=—Sometimes another treatment
of sales and purchase discounts in the cash book is met with. This
treatment for sales discount is based on the fiction that the full
amount of the original charge is received from the customer and that an
immediate return is made to him of the amount of the discount. To use
the example cited on page 155, the entries would be:

  Cash               100.00
        Customer            100.00

showing receipt of the full invoice price and therefore full credit to
the customer; and

  Sales Discount  2.00
        Cash            2.00

representing the fictitious payment in cash of a discount on sales of
$2. In the cash book these two entries would appear as follows:

  Dr.        CASH                            CASH      Cr.
  ==========================    ==========================
  Customer            100.00    Sales Discount        2.00

This method of entering discount on sales would have the same ultimate
result in the ledger as the columnar method, but the objection to it
is that it makes the cash book show more money received and paid out
than has actually been the case, thus making it difficult to check the
cash against the bank record of deposits and checks. Another objection
is that by this method the cash book does not show in one place a full
record of the transaction, since the two items are shown on opposite
sides of the cash book. Moreover, these items are seldom on contiguous
lines because one side of the cash book is often considerably “ahead”
of the other. Cash discount on purchases is sometimes handled by a
similar unsatisfactory method.

The first method shown, requiring special discount and net columns on
either side of the cash book, is the approved method.

=Illustration and Explanation of the Analytic Cash Receipts
Journal.=—An example of a columnar cash book debit side is given (Form
12) for the purpose of illustrating some points in the discussion.
It should be understood that there is little uniformity in the
columnization of cash books. The needs of the business govern the
ruling suitable in any given case. The illustration shown is therefore
not presented as a standard form but is given only for the purpose of
illustrating the method of analysis of cash receipts.

[Illustration: †This balance is taken from the credit side of the cash
record appearing on page 159.

Form 12. Columnar Cash Book—Debit Side]

[Illustration: Form 13. Columnar Cash Book—Credit Side]

As shown in the illustration, all _actual cash receipts_ are entered
in the Net Cash column, which in connection with the Sales Discount
column comprises the total corresponding to the Total column of the
other subsidiary journals when an analytic record is made. All items
received from customers are entered in the Accounts Receivable column;
but it is important to note that the _amount_ entered in that column
is not the _actual cash receipt_ but the _full amount_ of the original
charge to the customer. Sales discount, if any, is entered in the Sales
Discount column, and the _net_ amount, the actual cash received from
the customer, is the amount appearing in the Net Cash column. Cash
sales are entered in the Cash Sales column and also in the Net Cash
column. All other kinds of receipts are extended to the Sundry column.

In the ledger folio column, checks are placed for the individual cash
sales entries, the posting usually being made from the summary in the
sales journal, as explained a little later, or from the total of the
Cash Sales column in the cash book if the other method is not employed.
In the summary entry of the illustration, it is assumed that a Cash
account is kept in the ledger. Hence “Cash, Dr.” is shown posted to
ledger Cash account on page 4; and the total Sales Discount, also
_debit_, on page 20. The student should note the method of showing the
amount of cash received during the current week, this amount comprising
the “Cash, Dr.” posting to the ledger Cash account. Of course, the
itemized credits, except the cash sales, are posted to their respective
accounts, as indicated in the ledger folio column.

The use of the Sundry column for extension of the miscellaneous items
makes proof of the distribution possible. The sum of “Net Cash” and
“Sales Discounts”—both debit items—must equal the sum of all the other
columns.

=Handling Columnar Analysis of Cash Sales.=—If all sales, both cash
and “on time,” are entered in the sales journal, the totals of these
two classes of sales are posted to the ledger Sales account from the
summary in the sales journal. In this case there is no need of a
separate Cash Sales column in the cash book, because such a column
would simply duplicate the Cash Sales entry in the sales journal.
Needless to say, cash sales always appear in the Net Cash column of the
cash book, because they are cash receipts, but the “Ledger Folio” must
be checked.

Sometimes two sales accounts are kept in the ledger, one for cash and
the other for “time” sales. Here, also, if there is a Cash Sales column
in the sales journal, no posting of cash sales from the cash book is
necessary. On the other hand, if cash sales are omitted from the sales
journal, then the cash book should provide for a Cash Sales column and
the posting must be made from the total of this column in the cash book.

=Illustration and Explanation of the Analytic Cash Disbursements
Journal.=—The cash disbursements columnar record corresponding to the
cash receipts shown above, would appear as in Form 13. As with cash
receipts, the illustration is not presented as a standardized form but
merely for the purpose of showing the method of analysis. Postings are
made or omitted, and the same considerations govern the making and
posting of the summary entry, as in cash receipts. Being few in number,
cash purchases are not shown in a separate column. The treatment of
discounts received on purchases is exactly parallel to that of sales
discount.

Since all net cash appears in Net Cash column on either side of the
cash book, the cash balance is found by taking the difference between
these two columns. The two sides must be ruled up and closed on
corresponding lines and as of the same date.




CHAPTER XX

THE MODERN JOURNAL


=Matter Left for Record in the Journal.=—By the use of a cash receipts,
a cash disbursements, a purchase, and a sales journal, four principal
classes of transactions are taken out of the old-time journal and
entered in separate books of record. If transactions of any other class
are numerous enough to justify the use of a separate book of record,
such a record should be set up. Although the number of subsidiary
journals, each recording one kind of transaction, may become very
large, nevertheless in practically all cases it is necessary to retain
the general journal (often referred to simply as “the Journal”), in
order to take care of such miscellaneous items as are not recorded in
any of the special journals.

The standard form of journal was illustrated in Chapter XVI, where it
was stated that a journal must provide space for date of entry, account
classification, ledger folio index, debit and credit money columns,
and explanation. As an explanation of the form, method of use, proper
observance of margins, etc., was made there, it need not be repeated
here.

=Kinds of Transactions Recorded in the Journal.=—When the number
of subsidiary journals used is limited to the cash receipts, cash
disbursements, purchase, and sales journals, as is frequently the
case, all items not affecting these four books should be entered in
“the Journal”; i.e., transactions involving notes receivable and notes
payable; adjustments with customers and creditors resulting from return
of goods or claims and allowances thereon; and all formal opening,
adjusting, and closing entries. Furthermore, there is usually a number
of other transactions, which because of their special and unusual
nature cannot be grouped with the items of the special journals and
must therefore be entered in the general journal.

=Journal Explanations.=—When these various classes of transactions are
entered in the Journal, a very complete explanation should be given the
entry. In fact, all entries covering settlements and adjustments with
outsiders and within the business itself are of primary importance and
the explanation should be so carefully worded as to make the intent of
the entry plain and intelligible.

=Closing and Posting the Journal.=—No particular formality attaches to
the closing and posting of the ordinary standard form of journal. There
is no summary entry, no totaling, and there are no rulings to be made.
Ordinary care must be exercised to see that the debits and credits
are correctly posted. Since the entry in the Journal is given in its
complete form and no debits or credits are suppressed, as is the case
in the special journals, posting is not difficult.

=The Analytic Journal with Divided Columns.=—One form of the journal
has its debit and credit columns separated, the debit money column
appearing at the extreme left of the page, followed in order across
the page by columns for date, account classification, ledger folio,
and credit money amount. This kind of journal is called a divided or
split-column journal and is ordinarily used to collect the totals to
be posted to controlling accounts and thus to secure control over
subsidiary ledgers. This matter will be fully discussed in later
chapters. When the journal is so used it is provided with additional
debit and credit analysis columns on each side according to the
subsidiary ledgers employed. A divided-column journal with three debit
and three credit columns is shown in Form 14. There is always a general
money column on each side, the other columns depending on the kind of
analysis required by the business.

[Illustration: Form 14. Divided Column Journal]

In the illustration referred to, an Accounts Receivable and an Accounts
Payable column are provided. It is obvious that the Accounts Receivable
column should usually appear on the credit side and the Accounts
Payable column on the debit side; although in some cases provision
is also made for an Accounts Receivable column on the debit and an
Accounts Payable column on the credit side. The account of S. J. White,
a customer, which is paid by his note, should be credited for the
amount of $510.20 and consequently the item is extended to the Accounts
Receivable column.

=Illustrations—Opening Entries.=—Illustration will be given of a few
typical transactions requiring journal entry. The standard two-column
journal will be used.

For the purpose of illustrating opening entries, assume the following
data:

  On September 30, 19—, Jack Gibson started in business,
  with the following assets and liabilities: Cash $3,500;
  Notes Receivable $800; Merchandise $4,000; Furniture
  and Fixtures $450; Accounts Receivable $2,100; Accounts
  Payable $1,500; and Notes Payable $1,200.

An analysis of this transaction shows that no part of it belongs to
either the purchase or sales journals. The part relating to cash is
entered in the cash receipts journal. However, in order to show the
complete investment in one place, the entire transaction including the
cash part, is entered in the Journal and posted from there, with the
exception of the cash item. The reason for this exception is that the
cash investment is also entered in the cash book and will find its way
to the ledger Cash account through the total cash debits at the end of
the period. Because of this the cash item in the _Journal_ should be
checked and not posted to the Cash account in the ledger.

Likewise, the investment item in the _cash book_, showing a credit
of $3,500 to Jack Gibson, Capital account, should be checked and not
posted to the credit of his account in the ledger because this item
forms a part of the total investment of $8,150 posted to his credit
from the Journal entry.

If the student has difficulty in determining the debits and credits of
entries of this kind, it may be helpful to set up the data informally
first, in the form of a balance sheet. Using this as a _guide_, he
should then make his journal entry, debiting the asset items and
crediting the liability and net worth items.

[Illustration]

[Illustration: Form 15. Opening Entries on Books]

The above entries bring the transaction completely on the books of
original entry and show the ledger folios to which the various items
are posted. Notice the check in the L. F. column in the Journal
opposite “Cash” and in the cash book opposite “Jack Gibson, Capital,”
which is inserted to prevent posting the same item twice.

For opening entries full explanation and details, where necessary,
should be given in the Journal, covering lease agreements and contracts
entered into when commencing business, and other similar data. It
should be noted that with _opening_ entries it is customary for the
explanation to precede the formal showing of debits and credits, rather
than to follow it as in the case of all other journal entries.

=Adjusting and Closing Entries.=—Other typical entries to be
illustrated are those made at the close of a fiscal period: (1)
to adjust the books in accordance with certain data that were not
obtainable before; (2) to transfer all temporary proprietorship
accounts to the summary account, Profit and Loss; and (3) to transfer
the net profit, i.e., the balance of the Profit and Loss account, to
the proprietor’s personal account, and the balance of this latter
account to the proprietor’s capital account.

The debits and credits of the entries necessary to effect the record
of the data and transfers mentioned, can be determined as in the
operations with ledger accounts previously shown.

The following data relate to Jack Gibson’s business and are given to
illustrate the three classes of entries mentioned above:

  During the year, sales amounted to $33,000; purchases
  to $25,000; selling expenses to $3,500; and general
  administrative expenses to $2,025. It is estimated that
  of outstanding accounts $350 are uncollectible; that
  furniture and fixtures have depreciated in value $45.
  Merchandise inventory shows $5,000 on hand. Gibson drew
  $1,000 during the year.

The first thing necessary is to make the adjustments on account
of depreciation, bad debts estimate, and present inventory. These
adjustment entries are made in the Journal as follows:

   19—
  Sept. 30 Depreciation                         20     45.00
           Depreciation Reserve Furniture
               and Fixtures                      6               45.00
             To bring on the books the expense
             due to estimated depreciation and
             to effect the proper valuation of
             Furniture and Fixtures.
        Bad Debts                               21    350.00
           Reserve for Doubtful Accounts         3              350.00
             To bring on the books the expense
             due to estimated loss from
             uncollectible accounts.
        Purchases                               16  4,000.00
           Merchandise Inventory                 4            4,000.00
             To transfer the goods on hand at
              the beginning of the year to
              Purchases.
        Merchandise Inventory                    4  5,000.00
           Purchases                            16            5,000.00
             To transfer the inventory of
             merchandise now on hand to
             Merchandise Inventory account.

The first two entries, when posted, will bring on the book valuation
accounts for furniture and fixtures and accounts receivable, and will
set up the expense accounts, Depreciation and Bad Debts. The third
Journal entry, when posted, will transfer the goods on hand at the
beginning of the year so that they can be added to the Purchases made
during the year. In this connection it will be remembered that the
sum of these two items, old inventory plus purchases during the year,
constitutes the primary factor of “cost of goods to be accounted for.”
The fourth entry shows the asset Merchandise now on hand and, by its
credit to Purchases, effects a subtraction from Purchases, so that the
balance of Purchases, $24,000, shows the “cost of goods sold.”

The books are now adjusted and ready for summarization by means of the
Profit and Loss account. The following Journal entries, transferring
all temporary proprietorship items to the Profit and Loss account, will
effect the closing operation:

  19—
  Sept. 30
    Sales                                    15  33,000.00
      Profit and Loss                        14             33,000.00
        To close.
    Profit and Loss                          14  29,920.00
      Purchases                              16             24,000.00
      Selling Expense                        18              3,500.00
      General Administrative Expense         19              2,025.00
      Bad Debts                              21                350.00
      Depreciation                           20                 45.00
        To close.                                           29,920.00
    Profit and Loss                          14  3,080.00
      Jack Gibson, Personal                  11              3,080.00
        To transfer net profit for the year.
    Jack Gibson, Personal                    11  2,080.00
        Jack Gibson, Capital                 10              2,080.00
          To transfer the portion of the
          year’s net gain left in the
          business.

The first entry transfers the sales income to the credit of Profit and
Loss. The second entry charges the Profit and Loss account with the
cost of goods sold and all other expenses for the fiscal year. When
the posting has been completed up to this point, the balance of the
Profit and Loss account shows a net gain of $3,080, which, belonging to
the proprietor, is transferred to the credit of his personal account,
as shown by the third entry. He has drawn against prospective profits
to the extent of $1,000, leaving $2,080 of profit remaining in the
business as an addition to his permanent investment. Hence, this
balance is transferred to Gibson’s capital account by the fourth entry.

=Objection to the Direct Ledger Method of Adjusting and Closing
the Books.=—These adjustment and closing transactions are sometimes
recorded directly in the ledger without first entering them in the
Journal. Usually this is not satisfactory because it does not show in
one place a complete record of all the adjustment and closing summaries
necessary at the close of a fiscal period. These summaries are matters
of sufficient concern to the business to warrant their entry in the
Journal where full and complete explanations can be given. The more
complex entries often needed to adjust and close the books of a
business where numerous income and expense accounts are kept, follow
the same general principles as those discussed above. Adjusting and
closing entries are given fuller treatment in Chapters XXVII and XXVIII.

The two illustrations given above cover certain types of Journal
entries which are of a more difficult character than the customary
purchases, sales, and cash entries. A keen analysis is often required
to formulate the debits and credits of these entries, and the
explanatory matter should be worded with sufficient care to render them
intelligible even after the immediate interest in them has been lost
and their recording ink has become “cold.”


=Entries Affecting Several Journals.=—Transactions sometimes require
entry in two or more journals. A basic principle of bookkeeping is
that there should be no duplication of entry in the various journals.
A transaction that can be completely entered in one journal should not
be entered in any other journal. The one exception to this principle
is made in the case of an investment transaction, as explained on page
171. Sometimes, however, there may be a conflict of places of entry, as
in the case of cash purchases and sales, already explained, where entry
is made in both journals in order to allow each journal to perform its
proper function. Two examples will illustrate the proper method of
handling such transactions.

  PROBLEM 1. Assume that a customer, James
  Robbins, buys $1,000 worth of goods, paying $300 cash,
  giving a note for $500 and leaving the balance on open
  account.

  The following entries should be made:

  (a) James Robbins            1,000.00
            Sales                        1,000.00
  (b) Cash                       300.00
            James Robbins                  300.00
  (c) Notes Receivable           500.00
            James Robbins                  500.00

  It will be noted that three journals are involved.
  Entry (a) is recorded in the sales journal; entry (b)
  in the cash receipts journal; and entry (c) in the
  general journal. The net effect of the three entries is:

  James Robbins                  200.00
  Cash                           300.00
  Notes Receivable               500.00
  Sales                        1,000.00

  Because special journals are used, however, the
  transaction must be split up as indicated above.

  PROBLEM 2. Assume that the business purchases
  from the Investment Trust Co. a building site valued at
  $5,000, paying for it $2,000 cash and a note for the
  balance supported by a mortgage.

  Two methods are used to record this transaction,
  neither having any special advantage over the other.

  FIRST METHOD:
  (a) Land                          2,000.00
            Cash                              2,000.00
  (b) Land                          3,000.00
            Mortgage Notes Payable            3,000.00

  Entry (a) is made in the cash disbursements journal,
  and entry (b) in the general journal. This method of
  entry requires the splitting of the land value into two
  parts and breaks up what is really a unit transaction
  by recording it in two places. Because of this, the
  general journal portion of the entry should be followed
  by a very full explanation of the _entire_
  transaction, in which reference to the partial cash
  payment should be made. In the cash disbursements
  journal the only explanation needed will be a reference
  to the general journal entry.

  SECOND METHOD.—To bring about a complete
  record of the land item in one place, the following
  method is often used:

  (a) Land                          5,000.00
             Investment Trust Co.             5,000.00
  (b) Investment Trust Co.          2,000.00
             Cash                             2,000.00
  (c) Investment Trust Co.          3,000.00
             Mortgage Notes Payable           3,000.00

  Entry (a) in the general journal sets up an account
  with the vendor, the Investment Trust Co. Entry (b) in
  the cash disbursements journal and entry (c) in the
  general journal show the cancellation of the liability
  to the vendor through the payment of cash in the one
  case and the giving of a mortgage in the other. The net
  effect of the entries is:

  Land                              5,000.00
             Cash                             2,000.00
             Mortgage Notes Payable           3,000.00

  It will be noted that this method sets up a formal
  account with the vendor—a desirable thing—but that it
  requires one more entry than the first method.

  The other entries recorded in the Journal ought not to
  give the student any particular difficulty.




CHAPTER XXI

BUSINESS PAPERS—NEGOTIABLE INSTRUMENTS


The books of original entry, i.e., the journals, having been explained,
the attention of the student will be directed next to the sources
of information on which the entries in the various journals depend.
Accordingly, some of the important papers and methods used in business
will be discussed, after which further accounting principles and
methods will be given adequate treatment.

=Use of the Note Receivable.=—The purpose of sales is the ultimate
conversion of stock-in-trade into cash to provide for the payment of
services and for the purchase of commodities for future sale. This
conversion of stock-in-trade into money may be immediate, as when goods
are sold for cash, or deferred, as when goods are sold on account. In
the latter case the conversion is indirect, because the charge against
the customer must be collected before conversion is complete.

Frequently the “note receivable” acts as an intermediate step in the
process of converting stock-in-trade into cash. It is an instrument in
which the customer formally promises to pay his debt at a fixed time
in the future. The kind of claim represented by a note receivable is,
legally, different from the open account claim; generally speaking,
a note is considered _a better_ claim than an open account. This
is because the note implies a prima facie acknowledgment of the
correctness of the original charge, and in event of suit relieves the
holder from proving the original items of the claim.

Accordingly, when a promissory note is received from a customer, the
open account claim against him ceases to exist and a different kind of
claim evidenced by his promissory note is acquired. Therefore the open
account is credited to show cancellation of the original charge, and
Notes Receivable is debited to show the new claim. It may be well to
remark here that the same instrument which is a _note receivable_ to
the vendor is a _note payable_ to the customer.

In some businesses, it is the policy to encourage customers to give
notes. In such cases it is often advantageous, particularly for the
credit information shown, to set up the note transactions with each
customer under individual names, e.g., “John Doe, Notes Receivable.”
Such a title plainly indicates the nature of the items listed under it;
viz., claims against John Doe, witnessed by his promissory notes. As a
general rule, however, the notes received from any one customer or all
customers are usually relatively small in number and for this reason
they are for the most part brought together under one class title,
Notes Receivable.

=Negotiable Instruments—Their Use and Requisites.=—Notes receivable
belong to a class of business papers termed negotiable instruments, the
distinctive feature of which is that in many ways and for many purposes
they _take the place of money_. The negotiable instrument, usually of
small size but often representing a large sum of money, is used in the
commerce of the world as a _medium of exchange_, in place of heavy and
bulky coin or valuable bank notes which when lost or stolen can be
passed as currency.

From a legal standpoint a negotiable instrument is one which gives a
bona fide holder an absolute right to it, whether the preceding holder
had acquired it lawfully or not. It is in this respect distinguished
from other objects of value, as a horse, for example, the present
possessor of which is the legal owner only if he acquired it in good
faith from one who in turn had acquired it lawfully.

To be negotiable, an instrument must have the following requisites:

  1. It must be in writing and signed by the maker or
      drawer.

  2. It must contain an unconditional promise or order
      to pay a fixed sum of money—and the payment must
      be made in legal tender.

  3. It must be payable on demand or at a time which is
      either fixed or can be determined.

  4. It must be payable to bearer or to order.

=Negotiable Instruments—Kinds and Definitions.=—Any formal or informal
written promise to pay possessing these essentials is a negotiable
instrument. Examples are: promissory notes—notes receivable and notes
payable—drafts, checks, money orders and, with certain restrictions,
warehouse receipts.

A promissory note may be defined as an unconditional promise to pay a
specified sum of money at a certain time. It usually has a form similar
to the following:

[Illustration: Form 16. Promissory Note]

=The Draft.=—A draft is a written order by one party on a second party
to pay to a third party the amount of money named. To be negotiable,
it must be so drawn as to meet the requirements of negotiability named
above. A draft may have a form similar to the following:

[Illustration: Form 17. A Draft]

It will be noticed that there are three parties to a draft—the drawer,
the drawee, and the payee. The drawer is the person who draws the
draft and whose signature appears at the lower right-hand corner of
the draft. The drawee is the person on whom the draft is drawn, George
S. Perkins, above. He is sometimes called the payer. The payee is the
person who is to receive the payment ordered, James Stanley Jackson &
Co.

To understand the use of the draft as an instrument of business,
suppose the following relations exist between the three parties named
above:

  1. George S. Perkins bought goods from Bert V. Robbins
     on account for $175.

  2. Robbins bought goods from James Stanley Jackson & Co.
     to the amount of $125.75 on account.

The problem will be discussed from the standpoint of Bert V. Robbins.
From the above data it is clear that Robbins has a claim against
Perkins for $175 and owes $125.75 to Jackson & Co. Instead of
collecting the claim against the former and paying his debt to the
latter, he writes out a draft for $125.75 on Perkins, with Jackson &
Co. as payee, thereby requesting (or ordering) Perkins to pay $125.75
to Jackson & Co. This draft he sends to Jackson & Co. and they present
it through their bankers to Perkins. Under ordinary circumstances
Perkins acknowledges the correctness of the draft and writes his
acceptance _on the face of it_, thereby promising to pay the amount
when due. Acceptances are usually worded in the following manner:

        Accepted, Oct. 6, 19—
  Payable at First National Bank
         of Providence
       GEORGE S. PERKINS

It should be said that the three-party draft is not usually made
use of without the consent of the drawee previously obtained, as in
the case of a bank check, which is a draft on the bank drawn by the
depositor. Very often in ordinary drafts, particularly when drawn
against an export of goods, the drawer makes out the draft in favor of
himself and indorses it in blank, thus making it transferable to bearer.

=The Accepted Draft.=—When accepted, the draft becomes, to all intents
and purposes, an ordinary promissory note—Perkins’ promise to pay
Jackson & Co. $125.75. Until the draft is accepted by Perkins, it
simply constitutes a request from Robbins to Perkins to pay the amount
named and the draft as such does not bind Perkins in any way. Hence, no
entry is made on the books of account of any of the three parties until
acceptance. Of course, a memorandum is kept of all drafts drawn.

=Illustrative Entries.=—Upon acceptance by Perkins, the following
entries are made:

  1. On the books of Jackson & Co., the payee:

     Notes Receivable                                  125.75
           Bert V. Robbins                                     125.75
             Robbins’ draft on G. S. Perkins,
             accepted by Perkins, payable December 5.

Perkins’ acceptance, in possession of Jackson & Co., constitutes
a claim against Perkins, and Jackson & Co. therefore debit Notes
Receivable. They credit Robbins because this draft was sent to them by
Robbins in payment of Jackson’s open claim against Robbins for $125.75.

  2. On the books of Perkins, the drawee:

     Bert V. Robbins                                   125.75
       Notes Payable                                           125.75
       Accepted Robbins’ draft at 60 days’ sight,
       favor of J. S. Jackson & Co.

This entry cancels Perkins’ liability on open account to Robbins, and
shows as a substitution therefor the amount of his acceptance in favor
of Jackson & Co. at Robbins’ request.

  3. On the books of Robbins, the drawer:

     James Stanley Jackson & Co.                       125.75
           George S. Perkins                                   125.75
             To record the cancellation of our liability
             to Jackson & Co. on open account, and to
             credit Perkins with his acceptance of our
             draft on him at 60 days’ sight.

From the point of view of Bert V. Robbins, the acceptance by Perkins
means two things: (1) the cancellation of a part of Robbins’ claim
against Perkins, and for this reason Robbins credits Perkins with
$125.75; (2) the cancellation of Robbins’ debt to Jackson & Co., hence
Jackson & Co. is debited on Robbins’ books for $125.75.

It is important to note here that in case Perkins fails to pay the
note at maturity, Robbins becomes liable to Jackson & Co. Robbins may
therefore be considered the first indorser of the accepted draft. The
discussion of the manner of booking Robbins’ liability contingent upon
Perkins’ failure to pay is deferred to Chapter XLIII.

=Entries After Payment of the Draft.=—Upon payment by Perkins, the
following entries are made:

  1. On Perkins’ books, a debit to Notes Payable and
     a credit to Cash.

  2. On Jackson & Co.’s books, a debit to Cash and
     a credit to Notes Receivable.

=Draft and Cash Compared as Instruments of Payment.=—The following
two diagrams may further illustrate the utility of the draft as an
instrument of trade.

1. Showing the settlement of the several claims in _cash_—in case
Robbins had collected $125.75 from Perkins and had paid $125.75 to
Jackson & Co., the payments being made independently in each case:

[Illustration]

2. Showing a settlement by draft—a clearing house method:

[Illustration]

The commercial, three-party draft is little used now. With the larger
function of banks in the conduct of modern business, other kinds
of drafts as discussed below have come into use. The three-party
relationship is the basis of all draft transactions, however, and must
therefore be thoroughly understood.

=Classification of Drafts.=—There are several kinds of drafts, which
may be either sight or time instruments. A draft drawn “at sight”
is a request on the drawee to pay at sight, i.e., immediately upon
presentation to him. The use of the sight draft in making collections
is quite common. A delinquent customer is drawn on at sight and
collection is attempted through the bank. The method is oftentimes
effective because refusal to pay may reflect on the drawee’s credit
with his own bank. Usually no formal book entry is made of such drafts
until paid. A draft drawn, say, “at 60 days’ (or 30 days’) sight” is a
request to pay 60 (or 30) days after presentation. Hence, the dating of
the acceptance of such a draft is of prime importance. Such a draft is,
of course, a time draft.

A draft drawn “60 (or other number) days after _date_” is called a date
draft and is payable 60 days from the date of the instrument—not, as in
the first case, 60 days after presentation or acceptance. It also is a
time draft. It is not necessary, although customary, to present time
drafts for acceptance.

Drafts may be “commercial” or “bank” according as the drawee is a
merchant or a bank, respectively. B. V. Robbins’ draft on Perkins shown
above is a merchant’s draft. A bank draft is a request by one bank on a
correspondent bank to pay a given amount of money to a named payee. A
customary method of remitting money is by the purchase and remittance
of a bank draft, for the issuing of which banks usually charge a
fraction of a per cent. To illustrate its use, take the following
situation:

L. W. Roberts of Denver owes Field & Co. of Chicago $210 on account.
Roberts goes to his Denver banker and buys a bank draft which may read
as follows:

[Illustration: Form 18. A Bank Draft]

Before sending this draft to Field & Co., Roberts indorses it in favor
of Field & Co., who upon its receipt deposit it with their own bank and
through it secure its collection from the Second National Bank. Roberts
pays his bank for the draft $210 plus exchange.

Drafts may be foreign or domestic. They are domestic when they are
drawn and payable within the same state or country; otherwise they
are foreign. According to the present usage, the term “draft” is used
whenever the parties concerned live within the United States, although
they may reside in different states, and the term “bill of exchange” is
applied to all such instruments where some of the parties live abroad.

=The Trade Acceptance.=—The Federal Reserve Board defines a trade
acceptance as “a bill of exchange drawn by the seller on the purchaser
of goods sold and accepted by such purchaser.” The chief characteristic
of this document as contrasted with the ordinary draft is the showing
on its face of the origin of the transaction giving rise to the draft,
usually by means of the following statement: “The obligation of the
acceptor hereof arises out of the purchase of goods from the drawer.”
The following requirements to make a trade acceptance eligible for
rediscount by the federal reserve banks have been laid down by the
Federal Reserve Board:

  1. It must have arisen out of an actual commercial
      transaction, usually the purchase and sale of
      commodities.

  2. It must have been drawn under a credit opened for
      the purpose of conducting or settling accounts
      resulting from business transactions involving the
      shipment or storage of goods.

  3. At the time of presentation to a federal reserve
      bank for discount or as collateral for the loan of
      money, it must have a maturity of not more than
      three months exclusive of days of grace.

Trade acceptances are promissory notes just as are any other accepted
drafts. Because they comprise a very liquid asset, it is not unusual to
record them in an account, Trade Acceptances, and so distinguish them
from other notes and drafts. If they are few in number, they are more
usually recorded as Notes Receivable.

=Checks.=—A check is a draft on a depositary bank. It is an
individual’s order to his bank of deposit to pay a named or designated
payee a certain sum of money. Two illustrations are given below,
somewhat different in form but identical in nature. In the first,
likeness of the check to a draft is very evident.

[Illustration: Form 19. Forms of Checks]

The _certified check_ is usually an individual’s or firm’s check
bearing the certification of the bank’s cashier that the check is good.
This certification is evidenced by writing across the face of the check
these or similar words:

             Good
      when properly indorsed
       FIRST NATIONAL BANK
      F. G. MOFFITT, CASHIER

Such a certification makes the bank responsible for its payment.

A cashier’s check is a bank’s own check drawn on itself in favor of a
third party and signed by its cashier. As a medium of exchange it ranks
higher than the check of a private person, due to the superior credit
of the bank and to the fact that the bank is usually more generally
known in a community.

=Other Negotiable Instruments.=—_Express_ and _postal money orders_ are
drafts payable at sight, drawn respectively by one express agent on
another and by one postmaster on another.

A warehouse receipt is a receipt from a warehouse, elevator, or other
storage concern acknowledging the receipt of goods or property. Such
a receipt usually contains the contract agreements entered into by
the parties, covering the conditions according to which the goods are
accepted for storage. The warehouse receipt is usually negotiable, or
partially so, in that title to the property may pass with its transfer.

=Principles Governing the Writing of Commercial Paper.=—Ordinary
prudence requires commercial paper to be drawn in a way that will make
forgery difficult if not impossible. To this end the following two
rules should be observed:

  1. Leave no blank spaces, particularly where the
      amount is written. This is not so important when
      the amount is perforated, with a perforated star at
      each side.

  2. Write the indorsement at the top margin. Unless
      this is done, some statement might be inserted
      which would change materially the effect of the
      signature; e.g., the payer might later write above
      the signature that the check is accepted in full
      payment for a definite bill.

=Kinds of Indorsement.=—An indorsement is usually for the purpose of
transferring title. There are several kinds of indorsement, as follows:

  1. A _blank_ indorsement, which consists only of
      the payee’s signature; this renders the instrument
      payable to bearer.

  2. A _full_ indorsement, which reads as follows:
      “Pay to the order of .........,” giving the
      name of the indorsee, i.e., the person to whom
      the instrument is transferred, and followed by
      the signature of the indorser, who before his
      indorsement was the payee.

  3. A _qualified_ indorsement, which is either a
      blank or full indorsement with the words “without
      recourse” added to it. This kind of indorsement
      transfers title with no liability attaching to the
      transferor in case of non-payment by the maker at
      maturity.

  4. A _restrictive_ indorsement, giving the name
      of the party to whom the check is transferred, the
      words “for collection” or “for collection and
      deposit” being added and followed by the signature.
      This indorsement does not transfer title but merely
      appoints the person or bank named as agent for the
      purpose of collection.




CHAPTER XXII

BUSINESS PAPERS—THE GOODS INVOICE AND BILL OF LADING


=Definition.=—When a business transaction takes place, a record or
memorandum of its amount and nature is usually made out. Thus, the
amount of cash received for a sale may be rung up on the cash register
or a sales clerk may make out a duplicate sales ticket and turn over
the carbon copy as a sales memorandum to the bookkeeper; for cash
disbursed a receipt, to be the basis for formal entry on the books, may
be demanded from the person to whom the payment is made.

These memoranda of business transactions are called “business papers.”
They comprise all of the more or less formal and informal documents
which constitute the firsthand evidence of most transactions. Among the
most common business papers may be mentioned: the goods invoice for
purchases or sales; negotiable paper, including the check, note, draft,
money order, and warehouse receipt; the statement and account sales;
the shipping order and bill of lading; the bill of sale; the lease
agreement; and contracts of all sorts. A few of the business papers
most frequently used will be explained.

=The Invoice.=—When a merchant sells goods to a customer he writes
out an itemized “bill” which is sent along with the goods. This bill,
loosely called an “invoice,” is from the seller’s viewpoint more
accurately described as a sales invoice, and from the customer’s or
buyer’s viewpoint as a purchase invoice. It is an itemized statement of
goods bought or sold, and should state the names of vendor and vendee,
the address of the vendor and the date of sale, the quantities, kinds,
and prices of the goods, the terms of sale, and additional information
as to method of shipment, etc.

=Handling the Purchase Invoice.=—When goods are bought the purchase
invoice should be verified or audited. The method of audit depends upon
the organization of the business. In a small business, if the invoice
is received before arrival of the goods, it is usually held till their
arrival and then checked against them as to quantities, quality, and
price. The extensions and total are verified and entry made in the
purchase journal, using the audited invoice as a basis. The invoice
should then be placed in a temporary file till paid, after which it is
usually filed under the vendor’s name for future reference. The check
in payment of the invoice, when returned canceled by the bank, is
frequently attached to the invoice for which it was issued as evidence
of its settlement. At any rate the paid invoice should bear on its face
a notation to show the payment.

In a large business where the clerical work is divided among
departments, several copies of the original purchase order sent to the
vendor are usually made out—one copy, for instance, for the purchasing
department, one for the receiving room, one for the auditing department
and so on. The procedure of auditing is then more complex. The copy
furnished the receiving room is usually left blank as to quantities,
and sometimes the description of the goods ordered is also omitted.
When the goods are received, quantities and kinds are filled in by the
receiving department, and the copy is sent to the auditing department
where it is checked against the auditor’s copy of the original order
and the purchase invoice from the vendor. If found correct as to
quantity, kinds of goods, extensions, and additions, the invoice
becomes the basis for entry in the purchase record—journal or voucher
register as the case may be—after which it follows the customary
routine as to filing. The invoice remains in a temporary file as long
as it is unpaid. Upon payment it is placed in a permanent file, either
under the name of the vendor, by invoice number, or according to
whatever system may be in use.

=Handling the Sales Invoice.=—Practically all systems of handling
sales require that at the time of the sale some record or memo of the
transaction be made. In retail establishments the use by each salesman
of a book of sales tickets with provision for duplicate or triplicate
impression is very general, whether the sale be cash or charge. The
cash and charge tickets are usually put up in separate books and a
different color of paper is used for each. At the close of the day the
total cash tickets are checked against the cash received from cash
sales, and the total charge tickets give a controlling figure for
charges to customers. The total of the cash tickets plus that of the
charge tickets gives the total credit to Sales.

These sales tickets are usually entered on a daily sales sheet provided
with distributive columns for analysis according to departments or
kinds of commodities. A recapitulation giving the totals of each of
these columns is made and posted to the ledger, while the customers
ledger accounts may receive their charges direct from the sales ticket.
This recapitulation really constitutes the sales journal record, as is
explained in Chapter XLVII.

Where the number of charge accounts is not large, a folder system is
sometimes used. Each charge sales ticket is placed in the folder which
takes the place of that customer’s account, thus avoiding the necessity
of making a formal entry on the ledger. When the customer pays this
bill, the sales ticket is so marked and is either left in the folder
or transferred to a permanent file. The successful operation of the
folder system presupposes that the customer will pay the exact amount
of his bills shortly after the date of the ticket, no provision being
made to care for overlapping credits. Whatever the system, the sales
ticket is the original record of the transaction and therefore valuable
as evidence in case of dispute. These tickets should be filed away and
kept until all danger of dispute is past.

=Credits and Returned Goods Invoices.=—If for any reason goods
purchased prove unsatisfactory and are returned, record of their return
should be kept by the shipping clerk and used as a basis for securing
proper credit from the vendor. The vendor usually sends a returned
goods invoice, which, though similar in form to the purchase invoice,
constitutes a _credit_ to the purchaser instead of a charge. These
credit memos, as they are termed, are always of some distinctive color,
frequently red, in order to distinguish them readily from the regular
invoice.

Similarly, when dissatisfied customers return goods, or when the
business makes them an allowance on goods sold, a credit invoice or
credit memo is sent them and the duplicate copy of this memo retained
in the office becomes the basis for entering the transaction on the
books.

=Shipping Goods—The Bill of Lading.=—The purchase and sale of goods
usually involve dealings with railroads. It is not the purpose of this
chapter to give an extensive system or method of handling shipments,
but merely to explain the purpose of the railroad documents and their
use as business papers.

A shipment of goods is evidenced always by a “bill of lading,” a
contract under which the railroad accepts freight for carriage, defines
its liabilities as a transportation company or warehouseman, and states
its duties and those of the shipper. Its standard content is prescribed
by the Interstate Commerce Commission, although any additions to it not
in conflict with the standard content are not forbidden. If the shipper
so desires, he may have bills of lading printed to conform in size with
his own files, instead of using those furnished by the railroad. There
are two standard forms, the _straight_ bill of lading which is not
negotiable and the _order_ bill of lading which is negotiable.

The bill of lading is always made out in triplicate, the original and
the two copies being identical except as to titles and signatures.
The original is signed by the shipper and the railway agent, and
constitutes the shipper’s receipt for the goods delivered to the
railroad. The second copy called the “shipping order,” is signed by the
shipper only. It is his order to the railroad to ship the goods, and
is held by the railroad as evidence of its authority. The third copy
or memo is an exact duplicate of the original. Like the first copy,
it is signed by the shipper and the agent, and is held by the shipper
as a duplicate receipt. Sometimes it is forwarded with the invoice to
the customer, but otherwise should be filed by the shipper with the
original bill of lading. In case of claim against the railroad for loss
or damage to goods in transit, the original bill of lading is required
as evidence and should therefore always be kept in the shipper’s
possession.

=Freight Notice and Expense Bill.=—A notice, called “freight notice,”
is sent by the railroad to the consignee upon arrival of the goods. A
more or less formal order is given by the consignee to the teamster
or drayage company to call for the freight. This order authorizes
the railroad to deliver it to the teamster or drayage company. Upon
its delivery, an “expense” or freight bill is sent to the consignee
itemizing the freight charges due on the shipment. The freight notice
and the freight bill are usually made at one impression, the heading on
the one being a notice of the arrival of freight, while on the other
the heading is that of an ordinary invoice or bill showing the freight
charges on the designated goods. Some railroads make three copies at
one impression, consisting of (1) the freight notice, (2) the delivery
receipt, and (3) the freight bill. Copy (2) is a receipt surrendered by
the consignee upon delivery of the goods.

=C. O. D. Shipments.=—C. O. D. shipments are handled through the
agency of an express company, the post-office, or a bank. Express
companies accept for shipment freight which is to be paid for upon
delivery, agreeing to collect and remit the amount of the invoice to
the consignor less collection and remittance charges. This method of
shipping sometimes gives the consignee the privilege of examination
before acceptance. It is used with customers who are unknown to the
shipper or with those whose credit is doubtful.

When the parcels post service is used for shipping goods C. O. D., the
post-office makes the collection for the shipper. The shipper must,
of course, always prepay the postage, although this may by agreement
become a charge against the customer.

When a bank is made the shipper’s agent to collect on delivery, a draft
is drawn on the consignee and sent to the bank along with a special C.
O. D. bill of lading, the _order_ bill referred to above. This original
C. O. D. bill together with the attached draft is sent by the bank
to its correspondent located in the same city as the consignee. The
correspondent bank presents the draft to the consignee for acceptance
or payment, as the case may be, and thereupon delivers the special bill
of lading to him. The shipper’s order to the railroad provides that the
goods are to be delivered only upon presentation by the consignee of
this special bill of lading. In the use of the order bill of lading,
it is customary for the original copy to show the goods consigned to
the order of the shipper himself. This copy, indorsed by the shipper,
and the attached draft are the documents used by the bank in making the
collection.

=Duties of the Traffic Department.=—In a large business a special
department known as the traffic department is authorized to handle all
shipments. Briefly, its duties are to look after all incoming freight,
its receipt in good condition and its proper distribution to the
several departments; to handle all outgoing freight, its proper routing
so as to secure lowest tariffs and speedy delivery; and to secure the
adjustment of claims for damage or loss of goods in transit.

=The Statement of Account.=—When goods are sold, an invoice or bill
showing terms of sale, quantities, items, prices, and total amount of
sale is sent to the customer. Periodically, frequently the last of the
month, a statement is rendered each customer whose account shows a
debit balance. Frequently the date of sending the statement is recorded
in the explanation column of the ledger account, which, from a credit
point of view, is a desirable practice.

The statement of account is a transcript, sometimes a summary, of
the customer’s ledger account, i.e., it contains all charges and all
credits for the period covered. If there is a balance outstanding
at the beginning of the month, the current statement opens with the
balance item and is followed by lists of all charges, payments, and
other credits for the current period; the total credits are subtracted
from the total charges and the balance constitutes the amount now due
and owing. Sometimes a statement of account is made out in detail,
giving a copy of the original invoices which evidence the several sales
transactions. Statements of account are issued in many different forms,
but the following illustration shows all the essentials:

[Illustration: Form 20. Monthly Statement of Account]




CHAPTER XXIII

BANKS AND THEIR METHODS


=Service of the Bank to the Community.=—Practically all business houses
at the present time take advantage of the banking facilities to be
found in every community where there is enough business transacted
to justify the establishment of a bank. A bank is sometimes defined
as an institution which deals in money and credit. One of its chief
functions and the one on which its main income is _based_ is that of
acting as a place for the deposit of moneys, these deposits forming the
basis for its loans and discounts. Among its other important functions
and services are to collect drafts and checks drawn on other banks;
to issue and sell its own drafts on other banks, thereby enabling
its customers to make payments to out-of-town creditors; to discount
commercial paper, i.e., to loan money to its patrons on approved
security; and to issue paper currency.

=Opening an Account with the Bank.=—Because so much of the bank’s
business is based on the honor and integrity of its customers, a
prospective depositor is usually required to present a card of
introduction signed by a customer of the bank or someone else known to
it. A depositor who wishes to open a checking account is asked to file
a “signature” card bearing the signatures which he will use in signing
checks. As considerable expense attaches to handling depositors’
accounts, some banks require that the balance of the account shall
never fall below a fixed minimum.

=The Deposit Ticket.=—When an account is opened, the depositor is
provided with a pass-book and check book. All deposits are made by
means of deposit tickets, discount memoranda, or collection notices.
The deposit ticket is in form similar to the following:

[Illustration: Form 21. Bank Deposit Ticket]

All moneys and checks deposited are listed on this ticket under the
indicated classifications. The deposit is handed to the receiving
teller of the bank, who, after verifying the ticket, makes an entry of
the amount in the depositor’s pass-book. Duplicate deposit tickets are
usually kept by the depositor. It is important to note that checks must
be indorsed before they are deposited, so as to make them collectible
by the bank.

=The Pass-Book.=—The pass-book is the record of the depositor’s
dealings with his bank and, although written up by the bank teller,
it is usually kept from the depositor’s viewpoint, i.e., the bank is
debited with all deposits and credited with all checks presented for
payment. At stated intervals, say monthly, the book is left with the
bank for balancing, at which time the _total_ amount of checks paid
by the bank is entered in the pass-book and the canceled checks are
returned to the depositor. Sometimes the pass-book is kept in account
form, the left page indicating deposits, and the right page payments by
the bank. More frequently, however, the pages of the pass-book do not
have debit and credit significance but constitute a continuous record.
In this case, at the end of the period, the deposits are footed and
the total of the checks is _subtracted_ from the total deposits, thus
showing the balance due the depositor.

A method coming into quite general use among banks is to send a monthly
statement of account just as trading concerns do. This statement is
a transcript of the bank’s ledger account kept with each depositor,
showing deposits and withdrawals. When this is done, withdrawals are
not entered on the pass-book, which thus serves only as a memo or
receipt of the moneys deposited.

=The Check Book.=—The check book is provided either with a stub,
counterfoil, or interleaf, for making a duplicate record of the check
drawn. Provision is usually made in the check book for the entry of the
deposits. Sometimes each check is subtracted from the previous balance
and the amount of the new balance shown; more often, total checks and
total deposits are shown separately and in this way, while it is an
easy matter to find the balance by subtracting the total checks from
the total deposits, the actual figure does not appear and hence is not
available to curious eyes.

The balance shown in the monthly statement or by the periodic balance
of the pass-book is seldom the same as that shown in the depositor’s
check book, due to the fact that certain checks issued by the depositor
have not yet been presented for payment to the bank. The method of
reconciling the pass-book with the bank balance is treated in Chapter
L, “Accounts Current.”

=Securing a Loan through the Discount of a Note.=—A common practice
of business men in borrowing money is to discount or sell to their
bank or to a broker their own promissory notes and those received
from customers. When merchants discount their own notes at a bank,
the notes bear only one signature, that of the merchant, and for this
reason they are called “one-name” paper. If a merchant receives a note
from a customer, indorses it, and then discounts it at the bank, two
signatures appear on it—that of the original maker and that of the
indorser. Notes of this kind are called “two-name” paper. Banks usually
prefer two-name paper because, if the maker fails to pay the note at
maturity, the indorser can be held liable for its payment, while in the
case of one-name paper the bank has recourse to no one except the maker.

When a merchant makes out a promissory note of, say, $1,000 due 90 days
after date, and discounts it at his bank, the bank usually deducts
interest at, say, 6%, from the face of the note; i.e., the merchant is
credited not for the full $1,000 but only for $985, and when the note
matures he either pays the amount, $1,000, or his account is debited
with it. The $15 is called “discount” because it is “subtracted” from
the face of the note; but since this item is paid for the use of the
amount loaned by the bank, it is of the same nature as interest. There
is no reason, therefore, for keeping two separate ledger accounts, one
for discount and one for interest paid, the two usually being combined
under one title, “Interest and Discount” or “Interest.”

=Principles to be Observed in the Calculation of Interest.=—In
connection with interest computations it is important to observe the
following points, the principles involved in each case being best
explained by making use of suitable illustrations.

1. In commercial practice, when the interest period is expressed in
months, the interest for each month is one-twelfth of the annual
interest, i.e., a note for $1,000 dated April 11, 19—, due “three
months from date,” matures July 11 and the interest at 6% is 6% of
$1,000 divided by 12 multiplied by 3, or

      $1,000 × .06 × 3
      ---------------- = $15
             12

2. Were the same note worded “ninety days from date,” it would mature
_July 10_ instead of July 11, the number of intervening days being 19
in April, 31 in May, 30 in June, and 10 in July; total 90 days. The
interest would amount to

      $1,000 × .06 × 90
      ----------------- = $15
              360

3. If a note is dated March 6, 19—, and matures, say, on April 30, the
interest period is 55 days (25 in March and 30 in April). Usually, in
computing the number of days in the interest period the opening date
is omitted but the closing date is included. In some instances the
practice is to include both days.

It is important to note that it is almost a universal custom to use
360 as a denominator in all these cases, although the theoretically
correct number is 365. This is done for the reason that the use of
360 greatly facilitates the computation. The government of the United
States makes an exception to this rule and counts the year as 365 days,
and disregards the month as a unit base; i.e., instead of counting the
month of January as ¹/₁₂ of a year, its computation requires the use of
the fraction ³¹/₃₆₅ as the multiplier. Interest on $1,000 for, say, 12
days, by this method, amounts to

      $1,000 × .06 × 12
      ----------------- = $1.97
            365

instead of

      $1,000 × .06 × 12
      ----------------- = $2
            360

The incorrectness resulting from the commercial method (using 360
days as denominator) usually is negligible and is fully justified by
the economy of time in computation. It may be noted that under this
practice the amount of annual interest is ¹/₇₂ more than under the
method used by the government.

4. When paper is discounted by a bank, even though its term be given
in months, the bank invariably counts the exact number of days in
estimating the amount of the discount. Take a note dated June 25 with a
term of 3 months and due therefore on September 25, but discounted at
the bank on July 25. The term of discount, instead of being 2 months,
would be for 62 days, a gain to the bank of 2 days on a 360-day basis.

=Short Methods of Interest Computation.=—In calculating interest
or discount, the so-called 12% or 6% method seems the easiest of
application. Its base is taken as $1. In the 12% method the interest
for a year is therefore 12 cents, for a month 1 cent, and for a day ⅓
mill. In the 6% method, the interest for a year is 6 cents, for a month
½ cent, and for a day ⅙ mill. Using these fractions with the years,
months, and days as multipliers, the result is the interest on $1 for
the given period. This result multiplied by the face of the note gives
the required interest, assuming that the interest rate is 12% or 6%.

A variation of the above gives the following rule, somewhat easier
to apply. Reduce the time to days—using a 360-day year, 30-day month
basis; multiply the time by the face, point off three places (i.e.,
treat the product as mills), and divide by 3 or 6 according as the
calculation is on a 12% or 6% basis. If the basis used is 6%, but the
actual rate is different, add or subtract whatever aliquot part the
given rate is more or less than 6%; i.e., if the rate is 8%, add ²/₆ or
⅓; if 5%, subtract ⅙; etc. The following example will illustrate:

  A note for $1,000 dated June 10, 19—, for 4 months,
  with interest at 7%, was discounted July 30 at 8%.
  Find the net proceeds. The note when due will be worth
  $1,000 plus 4 months’ interest at 7%. That becomes the
  basis for the discount calculation.

Applying the 6% method:

  4  months =                              120    days
  Multiplied by                          1,000     (face of note)
                                       -------
                                       120,000
  Marking off 3 points                     120
  Take ¹/₆ (index for 1 day)               ¹/₆
                                           ---
                                            20    = interest @ 6%
  Add ¹/₆                                    3.33
                                             ----
                                            23.33 = interest @ 7%
  Add                                    1,000
                                         --------
  Value of note on October 10            1,023.33
                                         --------
  This amount (1,023.33) is the basis on
  which the discount is to be figured.

  Multiply by the term of discount (72 days[2])

                                         1,023.33
                                               72
                                        ---------
                                         2,046.66
                                        71,633.1
                                        ---------
                                        73,679.76
                                        ---------
  Marking off 3 points                      73.68
  Take ¹/₆ (day index)                        ¹/₆
                                        ---------
                                            12.28 = discount @ 6%
  Add ²/₆ or ⅓                               4.09
                                        ---------
                                            16.37 = discount @ 8%
                                        ---------
  Value of note on October 10            1,023.33
  Less discount                             16.37
                                        ---------
  Net proceeds on July 30                1,006.96
                                        =========

[2] The 72 days are arrived at as follows:

   1 day in July
  31 days in August
  30  ”   ” September
  10  ”   ” October
  --
  72




CHAPTER XXIV

METHODS OF POSTING


=The Journal and Ledger Records Differentiated—Posting.=—When a
correct and complete record of business transactions has been made in
the various journals, practically all the current information needed
by the business has been secured. However, because this information
is recorded in chronological order, it is not available for use. It
requires sorting, grouping, and indexing. To meet this requirement the
original chronological record must be transferred to other records
which provide for the desired grouping. The separation of the general
journal into journals for different classes of transactions such
as sales, purchases, and cash, results in making certain kinds of
information somewhat more available, but more than this is required
for business management. The original records must be grouped and
summarized under proper account titles, so that the total results for
the period may be had under review at one time. The book containing
these account titles is called the ledger, and the transfer of the
original record to the ledger is called posting.

=Time of Posting.=—Where subsidiary journals are used, it is not
customary to post all entries at the same time. The entries affecting
personal accounts, i.e., those of customers and creditors, should
be posted daily. Inquiries from customers as to their balances are
received every day, and in order that this information may be given
promptly and correctly, customers ledger accounts should be kept up to
date in every respect. This is a matter of great importance because, if
the information desired by the customer is not given promptly, or if
an error is made in giving it, thus calling for correction at a later
date, the customer’s good-will may be lost and his trade transferred
to others. For this reason personal accounts, especially those with
customers, should be posted daily, and great care should be exercised
in doing the work.

All other accounts may have their postings made periodically—once a
week or once a month—the frequency depending upon the need of the
business for the information furnished by the accounts. The flow of
cash—always of importance—is shown daily by the cash book record;
the volume of sales each day can be had from the sales journal; but
information as to expenses can usually be had only from the ledger
after completing the weekly or monthly postings.

=Methods of Posting.=—Knowing that errors in posting are easily made
and that when made they may cause great confusion, it is important for
the bookkeeper to know what kinds of errors occur most frequently,
and to study means of avoiding them. Certain methods of posting have
been found to produce a minimum of error. Some points in connection
therewith will be considered here.

One of the chief errors in posting is to make entry on the wrong side
of the account, i.e., to post a debit as a credit, or vice versa. The
use of subsidiary journals has done away with a large part of errors of
this kind, yet it is advisable to keep the following points constantly
in mind when posting:

1. The sales journal is a “charge” journal, i.e., the individual items
represent debits and must therefore be posted to the debit side of the
proper ledger accounts. The sales _summaries_, however, are credits and
must be posted as such.

2. The purchase journal is a “credit” record and all postings, except
summaries, are made to the credit side of the respective accounts.

3. In the cash receipts journal, each individual item represents a
credit, as explained in a previous chapter, and each individual item
in the cash disbursements journal represents a debit. Hence, postings
of the individual items on the debit side of the cash book must be
made to the credit side of the ledger account, and postings of items
on the credit side of the cash book must be made to the debit side of
the ledger accounts. The posting of the summary entries of the cash
book follows the debit and credit designation made at the time of
summarization. The principles here involved were fully discussed in
Chapter XIX.

4. In the Journal the debits and credits of each entry are fully
expressed, i.e., neither element is suppressed. In posting from this
record it is best to transfer all the debits consecutively and then all
the credits. The possibility of posting a debit item as a credit is
thereby greatly reduced.

=Cross-Indexing the Entries.=—An essential part of posting, in addition
to recording the date and the amount, is to cross-index every entry,
i.e., to index it both in the book of original entry and in the ledger.
The “folio” column in each book is used for this purpose. The index in
the ledger consists of the first letter of the book of original entry
followed by the page number, and the index in the book of original
entry shows the number of the ledger page to which the item is posted.
(See Form 22.)

In this way, when the indexing in both books is completed it is
possible without loss of time to trace the entry from the journal to
the ledger, and vice versa. Usually the ledger folio is entered in the
book of original entry immediately after each item is posted. When this
is done the absence of a reference number in the journal indicates that
the item has been omitted in posting. This check is frequently helpful
in tracing errors. Some bookkeepers, however, before doing any posting,
go through the book of original entry and from the account index of the
ledger enter in the ledger folio column of that particular journal the
ledger page numbers. By this method, much time is saved in finding the
account in the ledger, but a _check mark_ should be placed after each
item as soon as it is posted, to indicate the fact. Then the absence of
the _check mark_ indicates an unposted item.

[Illustration: Form 22. Cross-Indexing in Posting]

=Explanatory Matter in the Ledger.=—In posting personal accounts it is
customary to show the terms of credit in the explanation column of the
account. In this way the face of the account shows whether the customer
pays promptly or not, and affords a basis for his credit rating.

Notes Payable and Notes Receivable accounts in the ledger should show
essential data, such as due date, interest rate, etc. However, when a
separate note or bill book is used, these data are given therein and
may be omitted from the account in the ledger.

With all other accounts, except sometimes the Profit and Loss account,
little or no explanatory matter is carried. However, when a posting is
made that is at all unusual, it is well to enter explanatory matter in
the ledger. From the business man’s point of view, the ledger is the
most important book of account, and if its record can be so made as to
require a minimum of reference to original books, it serves its purpose
so much the better. Where possible, the Profit and Loss account should
carry the names of the accounts closed into it; in fact all transfers,
whether made on the face of the ledger or by journal entry, should
carry the account title and the ledger folio to which and from which
the item is transferred. It is a fundamental principle that every entry
must be indexed in such a way as to render reference to it easy at any
time.




CHAPTER XXV

THE TRIAL BALANCE AND METHODS OF LOCATING ERRORS


=The Trial Balance.=—In Chapter XIV the trial balance was defined as
a list of account _totals_, debit and credit, or account _balances_,
debit or credit, for all the _open_ accounts in the ledger. This
list is set up in two columns, debit and credit, and if the original
entries in the journals and the postings to the ledger have been done
correctly, the totals of these two columns should be the same.

Neither method of showing the trial balance has any inherent advantage
over the other. Some concerns desire the account totals to be shown
in the trial balance, as that indicates to some extent the volume of
business. This would be true of all accounts which had been opened
during the current period. As to those carried over from a previous
period little current information would be given. As a general thing,
however, the status of _customers’_ accounts is better indicated when
both total charges and total credits are shown. Where only the balance
is shown, it does not provide any basis for determining whether that
balance is normal for that particular account. In judging a request
for a further extension of credit there is a rather close relationship
between the volume of trade with a customer and the amount of his
unsettled balance.

Sometimes, even the totals of accounts that _balance_ are shown in
the trial balance, thus giving the status of _all_ accounts appearing
in the ledger. Again, concerns desirous of knowing the net amount
owing on customers’ accounts and the net amount owed on creditors’
claims, require _balances_ of all personal accounts and cash, but
debit and credit _totals_ of all other accounts. No unalterable rule
can be given. The manner of showing the accounts in the trial balance
is governed by the way in which the trial balance is to be used and
the purpose it is to serve. Manifestly, however, the trial balance
cannot give information of every kind desired by a manager. As personal
accounts are usually handled by canceling offsetting credits against
corresponding debits and carrying only balances forward, the trial
balance cannot well show at the same time both total transactions and
outstanding balances. Only in small concerns could the trial balance
give the information which in larger concerns would be gathered
statistically and furnished in addition to the trial balance.

The tendency in modern accounting is to make the ledger record so
detailed that all accounts are _currently_ “uniphase,” i.e., have
entries on but one side, and in connection with such accounts the
two methods of entering them in the trial balance are identical,
because the total of the one side of the account is at the same time
the balance of the account. It must be observed that as a matter of
course this modern tendency does not apply to personal accounts nor to
adjustment and closing accounts.

=Errors in the Trial Balance.=—The manner of entering the small pencil
footings of both sides of each account and also the account balances
previous to taking the trial balance, was explained in an earlier
chapter. This preliminary work should be done carefully so as to reduce
errors to a minimum.

It is not purposed here to discuss all the kinds of errors that find
their way into the accounting records. Errors are frequently made in
the original analysis and classification of the transaction, which, as
previously stated, result in an entirely incorrect showing of financial
condition. Such errors do not affect the balance of the books and are
not detected by the trial balance. Their detection is one phase of the
professional auditor’s work. This discussion has been qualified by
saying that _if_ the work of original and secondary entry has been done
correctly, then the ledger should prove. Some points in connection with
errors which often occur in posting will be treated here.

The equality of the two totals of the trial balance proves that for
every debit entry on the books there has been made an equal credit, or
at any rate that the sum of all debit entries equals the sum of all
credit entries; i.e., it proves only the _mathematical_ correctness of
the work.

It might happen that an item, though posted to the _correct side_ of
the ledger, has been entered in the _wrong account_. The trial balance
would not detect an error of this kind. For example, John Doe’s account
might be debited with a charge belonging to Richard Roe, both being
customers. This of course would make the books show wrong balances in
those particular accounts, but would not cause an incorrect showing
in the _total_ assets. However, more serious results may come from an
error caused by posting to the wrong account.

According to the schedules shown earlier, all transactions bring about
increases and decreases in the three main groups of accounts, viz.,
assets, liabilities, and proprietorship. A transaction resulting
in an increase of assets may have its credit in any of the three
classes—decrease of assets, increase of liabilities, or increase
of proprietorship. A credit entry in any one of these would result
in an exact offset to the debit and would therefore so far as that
transaction was concerned, result in equal debits and credits in the
trial balance; but were entry made to the wrong group of accounts, it
would bring about absolutely false results. This would be the case
if a proprietorship account were credited, resulting in an increased
profit, when the credit should have been to the liability group with a
resulting increase of the liabilities—two divergent results.

Thus, while the trial balance does not detect errors in posting to the
wrong account, it has great value in that its equality is considered
as good evidence of the correctness of the books. This is so because
errors of the kind just referred to are not of so frequent occurrence
as those involving only the mathematics of the work.

=Suggestions for Locating Errors.=—Where trial balance totals do not
agree, it is certain that one or more errors have been made somewhere.
The following suggestions may be useful in locating them:

1. If there is a difference of 1 in any column, i.e., .01, .10, 1.00,
10.00, etc., the error very likely results from wrong addition. Check
additions of the trial balance and if the error is not located there,
those of the ledger accounts must be checked as well.

2. If the difference between the two trial balance totals is an even
number, divide this difference by two and look through the trial
balance for an item of that amount but entered as a debit instead of a
credit or vice versa. The amount of the error must be divided by two
because the placing of a given item in the wrong column would result in
a difference of _twice_ this amount in the totals of the trial balance.
If the error is not located in the trial balance, it may be necessary
to look through the ledger accounts because the wrong placing may have
occurred there.

In checking through the ledger for an error of this kind, some aid is
afforded by the fact that all postings from _even_ pages in the cash
book (i.e., the cash receipts) appear on the _credit_ side of the
ledger accounts, and all postings from the _odd_ pages in the cash book
appear on the _debit_ side of the ledger accounts. If, therefore, in
any of the _credit_ reference columns in the ledger is seen a reference
like “C 13” or “C 29,” or in any of the _debit_ reference columns an
index like “C 40” or “C 58,” it is probable that the error is due to
posting to the wrong side.

3. If the mistake has not been found in this way, the trial balance
should be checked against the ledger to be sure that no open accounts
have been omitted. Examine all closed accounts to see that they balance.

4. Examine the posting index column of all books of _original_ entry to
see that no items have been omitted in posting.

5. When the totals of the trial balance are unequal, the error may lie
either in the debit total or in the credit total, or both may be wrong.
Even when the trial balance “proves,” both totals may contain the same
error. In order to determine what is the correct footing, the following
method may sometimes be applied: Take the total of the previous trial
balance, add to it the current totals from the several journals, and
deduct the total of all accounts closed during the period. The result
shows the correct footing for the present trial balance. Where the
number of accounts closed during the period is large, the work entailed
by this method may be prohibitive. The method is of easy application
only when the trial balance is taken by means of debit and credit
totals.

It may be left to the student to prove why this is a correct method for
determining the present trial balance total. Suffice it to say that it
is based on the fundamental fact that for every credit item in any of
the journals there is of necessity a debit or group of debits the total
of which corresponds with the credit item. Duplicating entries in two
or more journals must be eliminated from the journal total.

The following table will serve to illustrate the above method:

  Previous trial balance total               $12,967.30
  Sales    journal total for current period    8,429.60
  Purchase    ”      ”    ”     ”      ”       5,627.40
  General     ”      ”    ”     ”      ”         564.90
  Cash receipts      ”    ”     ”      ”       2,572.60
  Cash disbursements      ”     ”      ”       1,962.75
                                             ----------
                                             $32,124.55
  Closed accounts total                        1,211.41
                                             ==========
  Correct trial balance total                $30,913.14

6. If the difference between trial balance totals is divisible by
9, the error may be due to a _transposition_ of figures or to a
_transplacement_, sometimes called a _slide_. A transposition is an
interchange of figures, as 96 for 69, 215 for 512, 6,274 for 4,276,
etc. The first is called a simple or one-column transposition, the
second a two-column, and the last a three-column transposition.
One-column transpositions may also occur in numbers of three or more
figures, as 172 for 712, or 3,129 for 1,329.

=Transpositions.=—The following rules will be of help in locating
errors of transposition. To determine divisibility by 9, the easiest
way is to “cast out” the 9’s.

(a) If the difference between the trial balance totals is divisible
by 9 and consists of less than three figures, i.e., 9, 18, 27, 36, a
one-column transposition may be the cause of the error. Divide this
difference by 9. If the quotient is 1, the difference between the two
transposed figures is 1. If the quotient is 2 or 3 or 4, the difference
between the transposed figures is 2 or 3 or 4, etc. For instance:

  Correct  Transposed
   Number    Number    Difference

    54        45            9      divided by 9 = 1
    87        78            9         ”    ”  9 = 1

    75        57           18         ”    ”  9 = 2
    97        79           18         ”    ”  9 = 2

    30        03           27         ”    ”  9 = 3
    85        58           27         ”    ”  9 = 3

Thus the figures in the last column indicate the difference between the
figures of the original item.

(b) If the difference is divisible by 9 and consists of two significant
figures followed by one or more naughts, the error may be caused by
a _one-column_ transposition between columns of a higher order. For
instance:

  The correct amount being    6,394
  and the transposed amount   3,694
                              -----
  the difference is           2,700

which divided by 9 gives 300. This indicates a transposition between
figures in the “100” and “1,000” columns, the difference between these
figures being 3. Reference to the example given will show this to be
the case.

(c) When the difference between the trial balance totals is divisible
by 9 and lies between 99 and 1,000, the error may be due to a
_two-column_ transposition. Here the middle figure of the error is
always a 9, e.g., an error of 297 resulting from writing 512 as 215.
Dividing the number (27) formed by the two outside figures of the
difference by 9, the quotient (3) is the difference between the two
transposed figures, i.e., the 5 and the 2. For instance:

  Correct  Transposed
  Number     Number    Difference

    514        415         99       9 divided by 9 = 1
    735        537        198      18    ”    ”  9 = 2
    981        189        792      72    ”    ”  9 = 8

Thus, the figures in the last column (1, 2, 8) indicate the difference
between the two transposed figures in the correct item. Instead of
dropping the middle figure of the difference and dividing by 9 as
above, the entire difference figure may be divided by 99 with the same
result.

(d) Similarly, when the difference is 999 or a four-figure amount with
two 9’s in the middle, a three-column transposition may be indicated
thereby. For instance:

  Correct  Transposed
  Number     Number    Difference

   5,174      4,175      0,999      09 divided by 9 = 1
   6,392      2,396      3,996      36   ”      ” 9 = 4
   7,081      1,087      5,994      54   ”      ” 9 = 6

the figures in the last column (1, 4, 6) again indicating the
difference between the transposed figures in the original.

Instead of dividing the number formed by the outside digits (9, 36, 54)
by 9, we might divide the full amount of the difference (999, 3,996,
5,994) by 999; this would give the same result.

The reason for the divisibility of this difference by 999 in an error
of this kind is apparent when a number is given algebraic notation
instead of Arabic. The Arabic number 2,197 expressed algebraically
would be 2,000 + 100 + 90 + 7. Generalizing, we may formulate any
number of four figures by 1,000a + 100b + 10c + d, in which a, b, c,
and d may have values from 0 to 9 inclusive. A transposition between
the thousands and units digits, the “a” and the “d,” would result
in the following number: 1,000d + 100b + 10c + a. The error would
therefore be:

  Original number        1,000a + 100b + 10c + d
  Transposed number           a + 100b + 10c + 1,000d
                         ----------------------------
  Difference               999a               -  999d

This error is plainly divisible by 999, and the resulting quotient
(a-d) is the difference between the two transposed digits.

It may be shown similarly why 99 is a divisor of the error cited under
case (c) above.

=Transplacements.=—A transplacement or slide occurs when some or all
of the digits of a number are moved one or more places to the right
or left without change in the order of the figures; for instance,
736 written as 73.60, as 7.36, or as 700.36. The first is called a
one-column slide, the second and third two-column slides. The error
caused by a one-column slide is always divisible by 9, a two-column
by 99, a three-column by 999, etc. The division by 9, 99, 999, etc.,
disregarding decimals, always gives the figures whose transplacement
has caused the error. Thus the error caused by writing 736 as 73.60
is 662.40, which divided by 9 is 736; or 736 written as 7.36 produces
an error of 728.64, which divided by 99 gives 736; or 736 written as
700.36 causes an error of 35.64, which divided by 99 gives 36, the
part transplaced. The reason is similar to that given above for the
transposition.

When a whole number of dollars is written as cents, the resulting error
is divisible by 9 and moreover the cents _added to_ the dollars gives
99 in each case. For instance in writing:

  .73 instead of 73.00, the resulting error is 72.27
  .58     ”   ”  58.00,  ”      ”       ”    ” 57.42
  .16     ”   ”  16.00,  ”      ”       ”    ” 15.84

When the error in the trial balance is of this kind, the amount
transplaced may be found by subtracting the cents of the error from
100. In the above examples this difference would be 100-27, 100 -42,
100-84, or 73, 58, and 16 respectively, which are in each case the
figures of the transplaced amount as seen in the example. Having
determined this, the trial balance and ledger accounts should be gone
over to look for a slide of the given number.

=Checking the Postings.=—From the above discussion, the impossibility
of determining in all cases the nature of the error is quite
evident—particularly as to whether it is one caused by a transposition
or a slide. Unless the kind of error is readily discernible, it is
usually advisable to employ the method of checking, i.e., going over
all the work of posting to determine its correctness—or other methods
to be discussed in Chapter LI. After all, careful work in making the
record with legible figures and in proving additions and subtractions,
wherever possible, more than pays for itself in the time saved hunting
for errors caused by slovenly and inaccurate work.




CHAPTER XXVI

THE CLASSIFICATION OF ACCOUNTS


=Accounting Routine Related to Account Classification.=—The basic
relationships between the accounts and the statements of financial
condition were explained in Chapter IX, where a chart of accounts
was given to illustrate the fundamental equation of the ledger. The
complete record-making routine, comprising the use of business papers
for memorandum entry, the use of the journals for the first formal
record of transactions, and the use of the ledger for the classified
entry, has now been explained. There remain, however, two classes
of entries, the adjusting and closing, whose relationship to the
journal-ledger routine has not yet been fully discussed although their
relationship to each record has been separately considered. Since
the closing of the books contemplates the drawing up of financial
statements and since all record-keeping must have in view from the
very beginning a proper classification of accounts giving the desired
information to be reflected finally in the statements, it seems best
at this point to consider some phases of account classification before
proceeding with a detailed explanation of the method used in adjusting
and closing the books.

=The Need for Classification.=—As explained in preceding chapters,
accounts may be broadly classified into the three main divisions of
assets, liabilities, and proprietorship. This threefold division,
however, is inadequate for the purpose of presenting detailed
information as to the kinds of assets owned by the proprietor, the
nature of his liabilities, and the causes that have produced increases
or decreases of proprietorship. Subdivisions of the three main
groups must, therefore, be made, the minuteness of subdivision being
determined by the amount of detailed information desired.

One of the main purposes of account-keeping is to summarize results on
the financial statements. The items which appear on these statements
represent the balances of one or more groups of accounts. Items, for
instance, such as “Land” and “Buildings,” may each represent a single
ledger account recording the value of the land, the factory, and the
office buildings respectively; whereas the item “Accounts Receivable”
represents the group of customers’ accounts, the number of which may
run into the hundreds and even thousands and which may be kept in
a ledger devoted exclusively to the recording of their detail. The
reasons for grouping assets and liabilities on the basis of degree of
liquidity, and the advantages resulting from such grouping when drawing
up the summary statements of the period, were discussed and illustrated
in Chapter III.

It is evident from the above that the classification or grouping of the
ledger accounts is reflected in the items on the financial statements;
and that, conversely, the kind of information which it is desirable to
present on the statements will to a large extent govern the groupings
in the ledger. This dependence of the account titles and groupings in
the ledger upon the end and aim in view makes it necessary to draw
up the original classification with great care. To aid in securing a
record correct in the first instance, certain fundamental groupings or
classification of accounts must always be made.

=Basic Classification.=—While other groupings of accounts have been
made, the classification used here has been from the beginning a
three-phase one, consisting of an asset, liability, and proprietorship
nomenclature. The third group of accounts, proprietorship, is further
divided into the two subclasses, temporary and vested, as explained in
Chapter XII. At the end of the fiscal period, after the ledger has been
closed, there appear only asset, liability, and vested proprietorship
accounts; but during the fiscal period, the temporary proprietorship
accounts come into being and certain asset and liability accounts take
on a mixed character resulting from the method in which the record is
kept. This method is dictated not by a pure accounting theory, but by a
theory designed to accommodate itself to the practical requirements of
the average business. It is because the practical method of making the
record falls short of the theoretically exact method, that adjustments
must be made before summarizing.

For this reason, a record is not made daily of the portion of
assets which has been consumed each day, but the asset accounts are
adjusted at the close of each fiscal period to separate their asset
and proprietorship elements. Also, when a note is discounted at
the bank, its entire face value is set up as a liability. From the
standpoint of accurate accounting, however, the face value of the
note overstates the liability for the current fiscal period, if the
note falls due in the following period, by the amount of the prepaid
interest charge belonging to that next period. Only on the due date
of the note does the record show the true condition of the liability.
Thus, a “practical” method of keeping the record necessitates the use
of certain “mixed” accounts. Fundamentally, however, the three-group
classification given answers every necessary purpose.

=Fundamentals of a Good Classification.=—In judging the fitness of
a particular classification, the end and purpose for which it is
made must always be the criterion. Any classification of accounts
must, therefore, have in view the fact that all accounts lead up to
the balance sheet and profit and loss statement, and that they must
provide the data necessary for the summaries of these statements.
Classifications may be made from many different viewpoints and for
many different purposes, but a classification which is logical and
carries titles clearly indicating the purpose for which the accounts
are intended, and which therefore needs little or no explanation, is
a satisfactory classification. The three-group classification—assets,
liabilities, and proprietorship—meets these requirements.

A two-group classification—real and nominal—is frequently used. Under
this classification, asset and liability accounts are grouped as
real, and proprietorship accounts comprise the nominal class. This is
the standard classification. The student should be familiar with it,
although the meaning of the groups is not so apparent as in the case of
the three-group classification, referred to above.

=Classifying Business Transactions.=—When making the record of business
transactions on the books of account, it is necessary, first, to
determine the main account group or groups affected by the transaction.
After this is done, it is usually easy to determine which particular
account in the group is affected. Great care must be used in the
determination of the main groups, since a wrong classification results
in an incorrect showing in the summary statements at the close of the
fiscal period.

To illustrate, in Chapter XIII reference was made to the fundamental
distinction between capital and revenue expenditures. When making the
original entry of some transactions this difference is frequently lost
sight of and what should be charged to an asset account is charged to
some expense account or vice versa. This charging to an asset account,
of items which are rightly expense items and therefore cut down the
proprietorship element of the business, is one of the easiest ways of
inflating the profits for a period and so of making a better showing
than would be the case if the facts were recorded correctly.

Correct classification of transactions is a matter of vital
importance. An accurate analysis of every transaction must therefore
be made before bringing it on the books. After determining the _main_
group of accounts in which record is to be made, further analysis as
indicated above is necessary in order to fit a particular transaction
into its place under a suitable _account_ title belonging to the main
group.

=Detailed Classification.=—In dealing with account classification, the
more detailed groupings must also be considered. Such consideration
deals, (1) with account titles in detail and even with the kinds and
classes of transactions to be recorded under particular titles, and
(2) with the arrangement and use of these detailed accounts in the
various sections of the summary statements at the close of the fiscal
period. Certain broad principles have already been laid down which are
to be followed in the selection of the account title, and the objection
to the inclusion of unlike items under the same title, and the care
to be exercised against a more detailed analysis than is required by
the needs of the business, have also been explained. That system of
accounts which groups only one kind of data under each particular
account title is better than a system which mixes its records by
grouping dissimilar data under a single head. Yet, caution is always to
be exercised against too great detail and an unnecessary multiplication
of accounts. Oftentimes essential facts and forces of business activity
are lost sight of in a maze of detail.

Below is given a somewhat detailed classification of accounts in
accordance with the two considerations stated above. No attempt is
made at completeness; only the more usual titles are presented. This
classification will be used throughout the rest of the volume.

                    CHART OF ACCOUNTS
                     _Asset Accounts_

  CURRENT
      Cash
      Petty Cash
      Notes Receivable
      Accounts Receivable
     _Reserve for Doubtful Accounts_[3]
      Merchandise Inventory
      Stocks and Bonds (for current investment)
      Accrued Income
  DEFERRED CHARGES TO OPERATION
      Shipping Supplies
      Insurance
      Interest
      Office Supplies
      Etc.

  FIXED
      Furniture and Fixtures
     _Depreciation Reserve Furniture and Fixtures_
      Delivery Equipment
     _Depreciation Reserve Delivery Equipment_
      Buildings
      Depreciation Reserve Buildings
      Good-Will
      Etc.

_Liability Accounts_

  CURRENT
      Notes Payable
      Accounts Payable
      Dividends Payable
      Accrued Expenses

  DEFERRED INCOME
      Rentals
      Interest
      Subscriptions
      Etc.

  FIXED
      Mortgages Payable
      Long-Time Notes Payable
      Bonds Payable
      Debentures
      Etc.

_Proprietorship Accounts_

  VESTED
      Proprietors, Capital
      Proprietors, Personal
      Capital Stock
      Surplus (Profit and Loss)
      Reserves of Profit (not valuation items)

  TEMPORARY
      Income, Operating
        Sales
       _Sales Returns and Allowances_

            _Cost of Sales_:
          Initial Inventory
          Purchases
          Inward Freight and Cartage
         _Purchases Returns and Allowances_
         _Final Inventory_

      Expenses, Operating
        Selling Expenses
          Salesmen’s Salaries and Commissions
          Salesmen’s Traveling and Entertainment Expenses
          Delivery Expense (wrapping, shipping room, horse  and
                            motor expenses, delivery salaries, etc.)
          Outward Freight
          Sales Management Salaries and Expense
          Advertising
          Depreciation on Salesroom Equipment,
                          Delivery Equipment, etc.
          Sundry Selling Expenses

        General Administrative
          Officers’ Salaries
          General Salaries
          Stationery and Printing
          Legal Expense
          Postage
          Telephone and Telegraph
          Sundry Office Expense and Supplies
          Depreciation on Office Building, Equipment, etc.
          Light, Heat, and Power[4]
          Taxes
          Insurance[5]
  Financial Management Expense and Income
    Interest Expense
    Rent[6]
    Bad Debts
    Sales Discount
    Collection Expenses
   _Interest Income_
   _Purchase Discount_
  Non-Operating Expense
  Non-Operating Income

[3] The items in italics in this chart are to be handled as subtraction
items from the account below which they are placed or from the group in
which they appear.

[4] Light, heat, and power expense should in strict theory be
distributed over the departments using it; the selling department to be
charged with its share and the general administrative with its share.
Where such procedure is difficult or undesirable, the expense is best
classified as above.

[5] These items are sometimes distributed partly to Selling and partly
to General Administrative where an equitable basis for distribution can
be determined.

[6] These items are sometimes distributed partly to Selling and partly
to General Administrative where an equitable basis for distribution can
be determined.

=Method of Arranging Accounts in the Ledger.=—As to the order of
arrangement of accounts in the ledger, one principle governs: Arrange
all accounts in such a manner as to facilitate the drawing up of the
final statements. Thus, assets should come first, arranged in the
degree of their liquidity or availability, and each valuation account
following its particular asset. Liabilities, coming as they do after
the asset accounts, should be arranged in a similar order. Next should
come the proprietor’s accounts, the summary Profit and Loss account,
and the income and expense accounts in the order in which they are to
be used in the statement of profit and loss. Where only one ledger is
kept, the personal accounts receivable and payable are usually recorded
in distinct groups, after all the other accounts, towards the back part
of the ledger rather than in the position required by the principle
just stated.

A trial balance taken from a ledger in which the order of arrangement
of the accounts is strictly in accordance with this principle, is
called a “classified trial balance.”




CHAPTER XXVII

THE WORK SHEET AND SUMMARY STATEMENTS


=Procedure Preliminary to Adjusting and Closing.=—Before tracing
the detail of the adjusting and closing entries through the books,
explanation will be given of the usual method of insuring the accuracy
of this periodic work preliminary to the formal closing of the books.
This preliminary work comprises the technical procedure employed in
drawing up the balance sheet and profit and loss statement before the
books are closed. It thus brings about a summarization of the period’s
results made _outside_ the books instead of _in_ them. Therefore, a
proof of the accuracy and correctness of the work of adjusting and
closing can be secured before the summarization entries are made in the
books. After proof of accuracy has thus been secured, the statements
are used as a guide in making the formal adjusting and closing entries.

The information for the balance sheet and profit and loss statements
comes mostly from the regular monthly trial balance taken at the end
of the period just _before_ the adjusting entries are made. This trial
balance must of course be modified in order to include the effect of
the adjustments. For the purpose of incorporating the adjustments
in the trial balance and then separating the accounts into the two
groups, namely, those which are to be summarized in the profit and
loss statement and those which are to be used for the balance sheet, a
regular form is used known as the accountant’s “work sheet.” This form
and the method of its use will now be explained.

=The Work Sheet.=—For the work sheet “analysis” paper is used, which
is ruled in its simple form as shown in the illustration on pages 226
and 227, space being provided for:

  1. Account titles
  2. Trial balance items
  3. Adjustment items
  4. Profit and loss items
  5. Balance sheet items

For the purpose of illustration, a trial balance and a list of
adjustments are given below, followed by the work sheet and the
necessary explanatory detail.

The student must understand that the work sheet is no part of the
formal accounting record, nor is the procedure employed by it a part
of the formal work of closing the books. It is only a means by which
a rough summarization of the period’s results may be made _outside_
the regular accounting records and all the data needed for the formal
statements be brought together. Its purpose is to secure and prove
the accuracy of results before the formal adjusting and closing work
is entered on the books. Where many or complicated adjustments are to
be made, with a resulting probability of error and difficulty in an
orderly arrangement of the adjusting entries, the method of the work
sheet is almost indispensable. The formal adjusting entries are then
made up from the adjustment columns of the work sheet.

=Illustration=

                 TRIAL BALANCE, December 31, 19—

   1 New York National Bank                   $ 17,600.00
   2 Petty Cash                                    100.00
   3 Notes Receivable                           15,000.00
   4 Trade Customers                            35,000.00
   5 Reserve for Doubtful Accounts                         $   875.00
   6 Liberty Bonds                               3,000.00
   7 Merchandise Inventory                      30,000.00
   9 Office Furniture and Fixtures               2,800.00
  10 Depreciation Reserve Office Furniture and
       Fixtures                                                700.00
  11 Store Furniture and Fixtures               12,000.00
  12 Depreciation Reserve Store Furniture and
       Fixtures                                              3,000.00
  13 Delivery Equipment                          4,500.00
  14 Depreciation Reserve Delivery Equipment                 2,250.00
  15 Buildings                                  35,000.00
  16 Depreciation Reserve Buildings                          7,000.00
  17 Land                                       15,000.00
  18 Notes Payable                                          12,000.00
  19 Trade Creditors                                        25,000.00
  20 Mortgages Payable                                      17,500.00
  21 U. R. Smart, Capital                                   90,000.00
  22 U. R. Smart, Personal                      10,500.00
  24 Sales                                                 195,000.00
  25 Sales Returns and Allowances                1,850.00
  26 Purchases   135,000.00
  27 Purchases Returns and Allowances                        5,400.00
  28 In-Freight and Cartage                      1,350.00
  29 Salesmen’s Salaries                        13,500.00
  30 Selling Supplies and Expense                1,600.00
  31 Advertising                                 4,800.00
  32 Out-Freight                                   400.00
  33 Delivery Expense                            3,300.00
  34 Office Salaries                             5,000.00
  35 General Expense                             2,000.00
  36 Office Expense                              4,500.00
  37 Printing and Stationery                       750.00
  38 Taxes                                       2,840.00
  39 Insurance                                   1,750.00
  40 Interest Cost                                 900.00
  41 Collection and Exchange                        85.00
  42 Sales Discount                                850.00
  43 Interest Income                                         1,500.00
  44 Purchase Discount                                       1,300.00
  45 Sub-Rentals Income                                        650.00
  46 Special Police on Strike Duty               1,200.00
                                              ----------- -----------
           Total                              $362,175.00 $362,175.00
                                              =========== ===========

                  ADJUSTMENT DATA, December 31, 19—

      Inventory of Merchandise                             $26,500.00

      Estimated Depreciation:
      Office Furniture and Fixtures, 10% of original cost
        Store Furniture and Fixtures, 10% of original cost
        Delivery Equipment, 16⅔% of original cost
        Buildings, 4% of original cost
      Doubtful Accounts, ¼% of Net Sales

      Accrued Income:
        Interest Accrued on Notes Receivable                   150.00

      Deferred Expenses:
        Insurance Unexpired                                    250.00
        Advertising Paid in Advance                            300.00
        Printing and Stationery Supplies on hand               150.00
        Selling Supplies and Expense                           200.00

      Accrued Expenses:
        Taxes                                                  340.00
        Salesmen’s Salaries                                    175.00
        Interest on Notes Payable                               50.00

    Special Police on Strike Duty                              150.00
    Office Salaries                                            100.00

  Deferred Income:
    Sub-Rentals Paid in Advance                                 50.00

The initial step in the use of the work sheet is to enter the trial
balance in the first two columns, as shown on pages 226, 227. The
accounts in the trial balance should be arranged in classified form
before being entered on the work sheet, as this aids greatly in
drawing up the statements. The various adjustment entries, debit and
credit, which are almost the same as in the ledger, are then entered
in the adjustment columns. The work sheet may be looked upon somewhat
as a ledger, entries in whose accounts are to be made horizontally
instead of vertically. The analogy to the ledger cannot be carried
too far, however. It should be noted that when it is necessary to
adjust any account in the trial balance by increasing its debit, this
is accomplished by entering the item in the debit adjustment column
on the same line with the account to be adjusted. On the other hand,
if a subtraction is to be made from a debit amount shown in the trial
balance, the amount to be deducted is entered in the credit adjustment
column. A complete debit and credit entry must be made in the
adjustment columns for each adjustment.

There is given below a debit and credit _list_ of these entries
as they are to appear on the work sheet. The manner of making
and cross-indexing these adjustment entries is indicated by the
cross-reference letters used. It will be noted that, while in most
instances these entries are exactly the same as the formal adjusting
journal entries, there is a difference in the case of the merchandise
inventories.

The student should understand that the _list_ of adjustment entries
given below does not appear anywhere in the formal accounting records.
It is shown here in _journal form_ only to indicate the debits and
credits of the entries to the work sheet. Entries of the adjustment
transactions are always made direct to the work sheet, never being set
up in journal form. Each of these entries should be traced into the
adjustment columns of the work sheet. The figures in parentheses just
preceding the debit and credit amounts are, of course, not _ledger
folios_ but refer to the similarly numbered items on the work sheet so
that the student will have no difficulty in tracing them.

  (a) Merchandise Inventory—Final            ( 8) 26,500.00
          (a) Merchandise Inventory—Final    ( 8)           26,500.00
  (b) Depreciation Office Furniture and
                          Fixtures            (51)              280.00
          (b) Depreciation Reserve Office
                Furniture and Fixtures        (10)    280.00
  (c) Depreciation Store Furniture and
                         Fixtures             (51)  1,200.00
          (c) Depreciation Reserve Store
                  Furniture and Fixtures      (12)            1,200.00
  (d) Depreciation Delivery Equipment         (51)    750.00
          (d) Depreciation Reserve Delivery
                Equipment                     (14)              750.00
  (e) Depreciation Buildings                  (51)  1,400.00
          (e) Depreciation Reserve Buildings  (16)            1,400.00
  (f) Bad Debts                               (50)    482.88
          (f) Reserve for Doubtful Accounts   ( 5)              482.88
  (g) Interest Income (Accrued)               (52)    150.00
          (g) Interest Income                 (43)              150.00
  (h) Insurance (Deferred)                    (53)    250.00
          (h) Insurance                       (39)              250.00
  (i) Advertising (Deferred)                  (53)    300.00
          (i) Advertising                     (31)              300.00
  (j) Printing and Stationery (Deferred)      (53)    150.00
          (j) Printing and Stationery         (37)              150.00
  (k) Selling Supplies and Expense (Deferred) (53)    200.00
          (k) Selling Supplies and Expense    (30)              200.00
  (l) Taxes                                   (38)    340.00
          (l) Taxes (Accrued)                 (54)              340.00
  (m) Salesmen’s Salaries                     (29)    175.00
          (m) Salesmen’s Salaries (Accrued)   (54)              175.00
  (n) Interest Cost                           (40)     50.00
          (n) Interest Cost (Accrued)         (54)               50.00
  (o) Special Police on Strike Duty           (46)    150.00
          (o) Special Police on Strike Duty
                (Accrued)                     (54)              150.00
  (p) Office Salaries                         (34)    100.00
          (p) Office Salaries (Accrued)       (54)              100.00
  (q) Sub-Rentals Income                      (45)     50.00
          (q) Sub-Rentals Income (Deferred)   (55)               50.00

[Illustration]

[Illustration: Form 23. Work Sheet]

In order to set up some of these adjusting entries, it becomes
necessary to add some new accounts on the work sheet. The student will
note these appended at the end of the regular trial balance shown on
the work sheet. They are, first, Bad Debts and Depreciation, under the
latter of which the detail of the fixed assets subject to depreciation
is given, and then follow in order the balance sheet classifications
of Accrued Income, Deferred Charges to Operation, Accrued Expenses,
and Deferred Income, provision being made to show under each of these
titles the detail of the accounts involved.

It will be noted that some of the adjusting entries are not set up
in the adjustment columns in exact accord with the way in which the
same items are entered on the ledger, but rather in accord with the
use to be made of the particular items in drawing up the periodic
statements. The purpose of the columns is not to make the adjustments
and summarization in a formal manner as is done in the books, but to
gather together all the adjusting data so that a correct separation
of the balance sheet and profit and loss items can be made for use
in the formal summary entries and in the statements. Thus, instead
of transferring the initial inventory to the Purchases account, it
is allowed to remain under its own title, because it will be needed
as a separate item in drawing up the cost-of-goods-sold section of
the profit and loss statement. Similarly, the final inventory is not
shown deducted from Purchases, but is set up, debit and credit, in the
adjustment columns, opposite the title “Merchandise Inventory—Final,”
which is inserted immediately following the account “Merchandise
Inventory—Initial.” At the time of summarizing, the debit item goes
into the balance sheet, while the credit item goes into profit and
loss. This method of handling provides in the profit and loss columns
the detailed information needed for the cost-of-goods-sold section of
the statement, comprising Initial Inventory, Purchases, In-Freight,
Purchases Returns and Allowances, and Final Inventory.

The bad debts adjustment is entered in the adjustment columns as a
debit to Bad Debts and a credit to Reserve for Doubtful Accounts.
Similarly, the depreciation entry is shown as a debit to Depreciation
in detail, the credits going to the various depreciation reserve
accounts.

The adjustments covering deferred charges are shown as debits to
the “Deferred Charges to Operation” classification in detail, the
offsetting credits being to the various expense accounts as shown in
the trial balance. These credits in the adjustment column will, when
combined with the corresponding debit in the trial balance column,
indicate the net amount of the charge to profit and loss. The other
classes of adjustment entries follow the same procedure.

After all adjustments have been made, a complete distribution of the
items in the trial balance and adjustment columns is made either to the
profit and loss or the balance sheet columns. The difference between
the profit and loss columns will thus show the net profit or loss for
the period and must be transferred to the balance sheet as a vested
proprietorship item. Instead of being shown as a definite addition
to the proprietor’s capital, the transfer is indicated as the final
item on the work sheet, being a debit in the profit and loss columns
to balance them, and a credit in the balance sheet columns. This
difference, $14,747.12 in our illustration, constitutes the net profit
for the period, and when added to the credit side of the balance sheet
columns should give a total equal to the total of the debit balance
sheet column. This transfer of net profit effects a proof of the
accuracy of the work.

When this proof has been secured, the formal profit and loss statement
should be drawn up, all of the material for which will be found in the
profit and loss columns of the work sheet, where it is arranged in
almost the exact order needed for the formal statement. The information
for the balance sheet is found similarly in the balance sheet columns,
all of the detail being properly grouped but a rearrangement of the
order of some items being necessary. Thus, while the detail of the
deferred charges to operation has been gathered together in one place
in the work sheet, in the formal balance sheet this group of items must
appear immediately after the current asset section. See page 234 for
the profit and loss statement and page 232 for the balance sheet.

It is thus seen that the work sheet provides a convenient method of
passing through the trial balance the adjustments necessary to a
summarization of the results of the period and of effecting a rough
summarization of these results. The work sheet becomes the source of
information for the formal statements and a preliminary stage to the
adjustment and closing of the books.

The purpose of the formal adjusting entries and the manner of framing
them are fully explained in Chapter XXVIII. After the information on
which they are based is brought together and entered on the work sheet
and after the work of summarization has been proven, the adjustment
columns of the work sheet are made the source for these entries. The
formal adjusting entries as they appear in the journal are given on
page 245. They should be compared with the debit and credit list for
the work sheet as given above and the differences noted.

=Need for the Summary Statements.=—Before setting up the formal journal
entries necessary to adjust and close the books, the balance sheet
and statement of profit and loss will be shown. These two periodic
statements do not form an integral part of the books of account. They
are drawn up periodically and submitted to the proprietor, because
the latter does not always have ready access to the books of account
and often lacks sufficient knowledge of accounting to interpret
correctly the information shown by the journal and ledger. The periodic
statements are intended to show the results of the year in a concise,
non-technical form, so that a proprietor, even though not versed in the
science of accounts, can readily understand them.

=The Two Forms of Balance Sheet.=—The balance sheet may be arranged in
either of two forms. The first form (illustrated on page 232) follows
the principles already laid down in Chapter III. This is called the
“report form” and is based on the proprietorship equation when written

          Assets - Liabilities = Proprietorship

Being non-technical, it is perhaps more favored by executives not
versed in technical account-keeping.

The second form (illustrated on page 233) follows the proprietorship
equation when written

          Assets = Liabilities + Proprietorship

This form shows financial condition by means of the account form, the
subtraction of the liabilities from the assets being indicated by
their respective debit and credit positions in the account. It will be
noticed, however, that this method of showing the subtractions is not
strictly adhered to, some deductions being actually performed, as for
instance in the case of the valuation reserves which are subtracted
from the respective assets to which they apply. This is done in order
to render the statement more intelligible. The same principles govern
the arrangement of the items and groups of items as in the first form,
viz., degree of liquidity for the assets and a similar arrangement
for the liabilities. The account form is used almost always when the
statement is submitted for publication.

=Two Forms for the Profit and Loss Statement.=—The statement of profit
and loss is also made up in either of two forms, called the report form
and the account form, based on the same principles as the two forms
of balance sheet just discussed. Explanation of the report form has
already been given in Chapters V and VI. The account form (illustrated
on page 235) is very nearly a transcript of the ledger Profit and Loss
account. It differs chiefly in that the information concerning “sales”
which is summarized in the Sales account on the ledger is here set up
in an inner column and shown summarized on the face of the statement.
The information as to cost of goods sold is similarly summarized.

[Illustration]

[Illustration: Form 24. Balance Sheet—Report Form]

[Illustration: Form 25. Balance Sheet—Account Form]

[Illustration]

[Illustration: Form 26. Statement of Profit and Loss—Report Form]

[Illustration: Form 27. Statement of Profit and Loss—Account Form]

=Interim Statements.=—In many businesses, where the fiscal period
is six months or a year, it is often desirable and important that at
least approximate results be secured at interim periods. This can
be accomplished by means of the work sheet without entailing the
burdensome work involved in a formal closing of the books. At the time
of the taking of any trial balance, the work sheet can be used as a
means of making the necessary adjustments before securing results as
to financial and operating condition. Accurate results would of course
require as careful work as at the end of the regular fiscal period. The
purpose of interim summaries is to indicate trends rather than to show
accurate and definite results. At such times, therefore, the inventory
is usually estimated, oftentimes the same amount being used as at
the beginning of the period. Accruals and deferred items are not so
carefully estimated nor in so great detail. Bad debts and depreciation
must be taken into account. In this way approximate results for any
period—frequently every month—may be secured without interfering with
those for the regular fiscal period.




CHAPTER XXVIII

ADJUSTING AND CLOSING THE BOOKS


=Adjustment Entries—Kinds and Place of Record.=—In Chapter XV it was
shown that the records as they are usually kept do not reflect the true
condition of the business at any time _during_ the fiscal period. For
this reason before summarizing the book record for the current period
it is necessary to bring onto the books a number of entries the purpose
of which is to “adjust” the mixed accounts and thus make the ledger
reflect the true condition. These adjustments may be effected by entry
made directly on the face of the ledger, but it is better to run them
through the journal, thus making it possible to give ample explanation.
A further advantage of first recording the adjustment entries in the
journal is that in this way all such entries appear in one place in
the books of account. The ledger should always be kept as a book of
_secondary_ entry, with supporting data in some book of _original_
entry.

Seven types of adjustment entries are needed for the ledger of a
mercantile concern. They are:

  1. Merchandise Inventory
  2. Depreciation
  3. Bad Debts
  4. Accrued Income
  5. Deferred Expenses
  6. Accrued Expenses
  7. Deferred Income

All such items must be given consideration and entered upon the books
before the final results for the period can be correctly shown. It is
oftentimes necessary to make correcting entries for items the improper
entry or the omission of which are not detected until the close of the
fiscal period. These errors, whenever discovered, should of course be
corrected at once. Because entries of this kind are in the nature of
adjusting entries, consideration of them is included in this chapter.

It may be observed here that if a business manager has an intelligent
insight into the development of his enterprise, and carefully watches
the volume of sales, purchases, and expenses, he may be able to
forecast with some degree of accuracy the approximate results for a
given period; but only by making the actual count of stock now on hand
and by carefully estimating the classes of items just mentioned, can
accurate and dependable results be assured.

All these types of adjustment entries are not always found in every
such business, however. Each type will be discussed in turn.

=Inventory of Stock-in-Trade.=—One of the most important adjustment
entries is that by which the inventory of stock-in-trade is set up
separately on the books. By reference to Chapter XIII it will be
seen that none of the accounts connected with merchandise, viz.,
purchases, sales, returns, etc., contain any definite and up-to-date
information as to the value of merchandise on hand. To determine the
gross profit on sales this value must be known, and until the gross
profit is determined the net profit cannot be ascertained. The balance
sheet, the statement of profit and loss, and the Profit and Loss
account, call for this information. Therefore, before these statements
are made, and before the books can be closed, the value of goods on
hand must be determined. The process by which this is done is called
“inventory-taking.”

Without discussing the detail of a system of inventory-taking, three
fundamental principles can be stated relative thereto:

  1. Make sure that all goods belonging to the firm on
      the date of the inventory are included.

  2. Make equally sure that there is no duplication of
      count, i.e., that no goods are counted twice.

  3. See that the condition of the goods, viewed from
      the standpoint of salability, is indicated.

Two factors of importance enter into the determination of the
inventory, viz., the quantity of the goods on hand and their value per
unit. Inaccuracy in either factor may lead to a gross error in the
final amount. By falsifying the count of the goods the inventory can,
of course, be inflated. A usual and more elusive method, often resorted
to, consists in raising the price per unit, since the addition of
even a fraction of a cent per unit may have the effect of converting
an actual loss into an apparent profit. Without further indication of
the reason for such valuation, it is now generally required that the
inventory be valued on the basis of cost, or market if market is lower
than cost. The term “cost” should include all costs, incurred up to the
point of placing the goods in condition ready for sale, not only the
purchase price, but also duties, freight, drayage, insurance during
transit, etc.

After the amount of the inventory has been determined, it is placed
on the books. However, before this is done it is necessary that the
Merchandise Inventory account be cleared of the goods on hand at the
_beginning_ of the period by transferring the amount to Purchases. The
following journal entry effects the transfer:

  Purchases
        Merchandise Inventory
          To transfer the opening inventory
          to Purchases.

The posting of this entry automatically clears the Inventory account
and, by its addition to Purchases, causes that account to show the
“total goods to be accounted for.” Purchases, as it now stands,
contains both the cost of goods which have been sold during the current
period and those which are still on hand as shown by the inventory just
taken. Accordingly, to separate the two items, the following journal
entry is necessary:

  Merchandise Inventory
        Purchases
          To set up the inventory of
          goods now on hand.

This entry when posted shows in the Merchandise Inventory account the
asset element, and leaves in the Purchases account the cost of the
merchandise sold. The effect of these two entries, then, is to adjust
the books to true conditions so far as the merchandise is concerned.

=Depreciation, and Loss on Doubtful Accounts.=—As indicated in Chapter
XV, the amount of depreciation of particular assets and the losses due
to bad and doubtful accounts are carefully estimated at the close of
the fiscal period. The individual depreciation items are all summarized
in a _single_ depreciation account—an _expense_ account—whose total
debit is closed out to Profit and Loss. The _depreciation reserves_,
however, which are credit items, are handled under separate account
titles, and constitute the valuation account of the corresponding
assets. The journal entry covering depreciation reads as follows:

  Depreciation
        Depreciation Reserve Buildings
        Depreciation Reserve Furniture and Fixtures
        Depreciation Reserve Delivery Equipment
        Depreciation Reserve Machinery

The Reserve for Doubtful Accounts is the valuation account of Accounts
and Notes Receivable. Assume, for instance, that the debit balances of
the latter two accounts are $15,900, and the credit balance of their
valuation account is $600. The difference between these two accounts,
viz., $15,300, represents the present estimated value of Accounts and
Notes Receivable. The journal entry made _periodically_ to record the
estimated loss from uncollectible items is:

  Bad Debts
        Reserve for Doubtful Accounts

When the two entries above, for estimated depreciation and bad debts,
are posted, the present appraised values of those particular assets
are brought on the ledger; i.e., from the values, as shown by the
respective asset accounts, are taken the portions estimated to have
been used up, lost through depreciation, or uncollectible. These lost
portions are set up as expense items, leaving in the adjusted asset
accounts true asset values as existing at the close of the period.

=Accrued Income.=—As to the asset portion of items of this kind, it is
indicated in the account in a manner similar to deferred expenses, as
explained on page 242. Take the case of interest income earned but not
due. The entry for adjusting it is:

  Interest Income (Accrued)
        Interest Income

The credit part is posted immediately, thereby showing an addition
to the income already recorded as earned during the current period.
The debit part is posted after the current account is adjusted and
allowance made for the closing transfer entry to Profit and Loss. The
debit part of the adjusting entry is then entered on the debit side of
the _new_ portion of the account. Assume this debit item to be $50,
and the interest received during the next period to be $170. The new
account will indicate a _credit balance_ of $120, which is the amount
actually earned during that period, since the previous period took
credit for the $50 accrued or earned during _that_ period.

=Deferred Expenses.=—When a part of the expense paid during the current
period applies to the next period, the prepaid portion must be taken
out of the current expenses and held over—deferred—as a charge to
the expenses of the next period. Taking insurance as an example, the
following journal entry effects the required adjustment:

  Insurance (Deferred)
        Insurance

In posting this entry, the credit part is posted first in order to take
out of the excessive cost shown chargeable to this period the portion
equitably belonging to the next period. When this is done, the _debit
balance_ of the Insurance account indicates the amount to be charged
to the current period and is the correct charge against the Profit and
Loss for the period. After making allowance for the space needed for
closing the account, the debit side of the above entry is posted, this
debit becoming the first charge in the account for the next period.
Note that the use of the bracketed “Deferred” is as a guide in posting.
It indicates that that portion of the entry is not to be posted until
provision has been made for closing the account. After posting is
completed, the Insurance account appears as follows:

               INSURANCE
      ====================================
      Jan. 2    125.00 | Dec.  31   200.00
      Apr. 10   250.00 |
      Aug. 15   300.00 |
                ------ |
                675.00 |
                ====== |
      Jan. 1    200.00 |

There remains, of course, the transfer to Profit and Loss of the
current balance before the account is _closed_. This closing work is
treated later in the chapter.

=Accrued Expense Items.=—These items cover expenses which the business
has incurred but has not yet paid, and which are properly chargeable to
this period but have not yet been charged on the books. For instance,
salaries earned up to the close of the period but not paid at its close
constitute an additional charge to the period’s operations which must
be entered on the books before they will show true conditions. This
amount also constitutes a liability of the business. Accordingly, the
journal entry is:

  Salaries
        Salaries (Accrued)

thus charging the Salaries account with the amount due but not paid,
and bringing this amount down as a credit balance to the new account
for the next period. Assuming this unpaid amount to be $72, the account
after closing will show this $72 as a liability on the _closing date_.
Its effect, however, during the next period will be to _reduce_ the
amount charged to salaries during that period, because this $72,
although paid during that period, has already been charged to the
previous period.

The credit to Salaries, therefore, serves two purposes, viz., that of
showing the outstanding liability at the _close_ of the current period,
and that of effecting a reduction of what would be, without this
credit, an overcharge to _next_ period’s salaries. For example, if the
total salary paid during the next period is $600, the _balance_ of $528
is the amount applicable to that period, although the amount actually
paid is $600.

=Deferred Income.=—Income received by the business during the present
period which, however, belongs to the subsequent period is called
“deferred income,” as for instance, rent received in advance from
a tenant. As to the liability portion of items of this kind, it is
indicated in a manner similar to the accrued expense items. In this
case the journal entry is:

  Rent Income
        Rent Income (Deferred)

the effect being to decrease the amount of rent income for the current
period and to show the portion belonging to the next period deferred to
that period’s account.

=Corrections.=—When an error has been made in any entry on the books,
it should not be erased or scratched out, because by so doing suspicion
may be raised as to what was expunged. The wrong item should be ruled
out and the correct item written above it or wherever it belongs. This
applies particularly to books of original entry whose use as evidence
has often been destroyed because many erasures appeared in them.

Another way of making a correction, when an amount has been posted to a
wrong account, is first to cancel the wrong posting through a similar
entry on the _other side_ of the same account, and then to post it to
the correct account. Cross-reference to the two accounts must be made.

When an amount has been posted to the _wrong side_ of _the correct
account_, e.g., $100 to the credit side of John Doe’s account, when
it should have been posted to the debit side, the incorrect credit
may be canceled by a debit of $100, and after this the original $100
should be entered on the debit side; or the cancellation and correction
may be combined by entering $200 on the debit side. Better still,
the incorrect posting may be ruled out and a correct posting made of
the _original entry_ whose wrong posting caused the error. Adequate
cross-reference should be given so as to make the tracing of the items
easy and to indicate exactly what was done.

As these entries are of a somewhat unusual nature, their exact purpose
should be plainly indicated in the explanation columns. According to
the methods mentioned above, the various correcting entries are made
directly on the face of the ledger. It is often preferable, however,
first to make the required correction entries in the journal with full
explanation, and then to post them to the ledger.

=Adjusting Entries Illustrated.=—In order to indicate clearly the
routine and method to be followed in summarizing the books at the
close of the fiscal period, the formal adjusting and closing journal
entries needed for the books of U. R. Smart will now be set up, the
illustrative data being the same as were used for the work sheet in
Chapter XXVII to which reference should be made. In connection with the
work sheet it was stated that the adjustment columns of the work sheet
are used as a guide to making the adjusting entries. As to sequence in
the journal, these follow immediately, without break, the last current
entry for the month. The adjusting entries for U. R. Smart are:

  Purchases                                      30,000.00
  Merchandise Inventory                                     30,000.00
  Merchandise Inventory                          26,500.00
  Purchases                                                 26,500.00
  Depreciation                                    3,630.00
        Depreciation Reserve Office Furniture
          and Fixtures                                         280.00
        Depreciation Reserve Store Furniture
          and Fixtures                                       1,200.00
        Depreciation Reserve Delivery Equipment                750.00
        Depreciation Reserve Buildings                       1,400.00
  Bad Debts                                         482.88
        Reserve for Doubtful Accounts                          482.88
  Interest Income (Accrued)                         150.00
        Interest Income                                        150.00
  Insurance (Deferred)                              250.00
        Insurance                                              250.00
  Advertising (Deferred)                            300.00
        Advertising                                            300.00
  Printing and Stationery (Deferred)                150.00
        Printing and Stationery                                150.00
  Selling Supplies and Expense (Deferred)           200.00
        Selling Supplies and Expense                           200.00
  Taxes                                             340.00
        Taxes (Accrued)                                        340.00
  Salesmen’s Salaries                               175.00
        Salesmen’s Salaries (Accrued)                          175.00
  Interest Cost                                      50.00
        Interest Cost (Accrued)                                 50.00
  Special Police on Strike Duty                     150.00
        Special Police on Strike Duty (Accrued)                150.00
  Office Salaries                                   100.00
        Office Salaries (Accrued)                              100.00
  Sub-Rentals Income                                 50.00
        Sub-Rentals Income (Deferred)                           50.00

=Purpose of Summarizing.=—After the adjusting entries are posted,
the ledger reflects the true financial condition as of the date of
these entries. However, at this stage the information contained in the
ledger is usually scattered over a large number of accounts. To obtain
a concise view of the results of the business, it is necessary to
summarize this information. The Profit and Loss _account_ is the means
by which the temporary proprietorship accounts are summarized and the
net results as to profits or losses are indicated.

In this connection it will be remembered that the adjusting entries
have already effected a separation of the elements of the mixed
accounts, so that the temporary proprietorship items—expenses and
income—applicable to the current period are now separately shown. The
transfer of these _temporary_ proprietorship items to the _vested_
proprietorship accounts constitutes the work of closing. The use of the
Profit and Loss account as a place of summary—a clearing house—through
which the _net_ result can be passed on or transferred to the vested
proprietorship accounts, constitutes a part of the method or technique
of closing.

=The Closing Entries.=—The student is already familiar with the
principles of debit and credit involved in making the closing entries.
As indicated above, these are transfer entries and merely effect a
transfer of all temporary proprietorship items to the Profit and Loss
account for summary there and for the transfer of the net result to
some vested proprietorship account or accounts. Like all other entries,
these are made first in the journal and are posted from there to the
ledger. The current sections of the various expense and income accounts
are then ruled off and the ledger is said to be “closed.”

=Method of Closing the Books.=—As explained on page 129, the Profit
and Loss account in the ledger is used for summarizing the temporary
proprietorship accounts before transferring them, i.e., their net
result, to the vested proprietorship accounts. The use of Purchases and
Sales accounts for a partial summarization of the various merchandise
accounts has also been explained. After this partial summarization
has been made, the debit balance of the Purchases account, showing
cost of goods sold, is transferred to the Profit and Loss account; and
similarly, the credit balance of the Sales account, representing net
sales, is transferred to the Profit and Loss account. Profit and Loss
then shows on the credit side net sales and on the debit cost of goods
sold, the difference being the income portion, i.e., the gross profit
of the merchandising activities for the period. If it is desired to
show on the face of the account the actual figure of gross profit, the
Profit and Loss account may be balanced at this stage, though this is
not usually done. The rest of the work of summarization is accomplished
directly through the Profit and Loss account.

=Closing Entries Illustrated.=—The formal journal entries necessary to
effect this summarization in the ledger are given below, being based
on the illustration used for the work sheet and being made up directly
from the various sections of the formal profit and loss statement shown
on page 234. The way in which this is done should be carefully noted.
As to their sequence in the journal, these closing entries will, of
course, immediately follow the formal adjusting entries illustrated
above.

  Purchases                                     1,350.00
      In-Freight and Cartage                                1,350.00
  Purchase Returns and Allowance                5,400.00
      Purchases                                             5,400.00
  Profit and Loss                             134,450.00
      Purchases                                           134,450.00
  Sales                                         1,850.00
      Sales Returns and Allowances                          1,850.00
  Sales                                       193,150.00
      Profit and Loss                                     193,150.00
  Profit and Loss                              25,225.00
      Salesmen’s Salaries                                  13,675.00
      Selling Supplies and Expense                          1,400.00
      Advertising                                           4,500.00
      Out-Freight                                             400.00
      Delivery Expense                                      3,300.00
      Depreciation                                          1,950.00
        Store Furniture and Fixtures  1,200.00
        Delivery Equipment              750.00
                                      --------

  Profit and Loss                              18,560.00
        Office Salaries                                     5,100.00
        Office Expense                                      4,500.00
        General Expense                                     2,000.00
        Printing and Stationery                               600.00
        Taxes                                               3,180.00
        Insurance                                           1,500.00
        Depreciation                                        1,680.00
          Office Furniture and Fixtures    280.00
          Building                       1,400.00
                                         --------
  Profit and Loss                               2,367.88
        Interest Cost                                         950.00
        Sales Discount                                        850.00
        Bad Debts                                             482.88
        Collection and Exchange                                85.00
  Interest Income                               1,650.00
  Purchase Discount                             1,300.00
        Profit and Loss                                     2,950.00
  Profit and Loss                               1,350.00
        Special Police on Strike Duty                       1,350.00
  Sub-Rentals Income                              600.00
        Profit and Loss                                       600.00
  Profit and Loss                              14,747.12
        U. R. Smart, Personal                              14,747.12
  U. R. Smart, Personal                         4,247.12
        U. R. Smart, Capital                                4,247.12

It will be noted that after the net sales and cost of goods sold are
transferred to the Profit and Loss account, all expenses directly
connected with sales, such as Salesmen’s Salaries, Advertising,
Delivery Expense, Depreciation of Delivery Equipment, of Store
Furniture and Fixtures, and similar items, are closed into the Profit
and Loss account.

The groups of accounts closed next are those covering General
Administrative Expenses, Financial Management Expenses, Financial
Management Income, Non-Operating Expense, and Non-Operating Income. It
will be noticed that the _order_ of closing follows the order in which
the same items appear in the profit and loss statement.

The Profit and Loss account now shows on the credit side the items
of income and on the debit side the costs and expenses applicable to
the current period. Its balance then gives the net profit (or loss)
covering the period’s transactions.

Throughout the period, as the profit accrues, the proprietor may have
drawn against it for personal use, as shown in his Personal account.
To show the amount of profit remaining in the business, the balance of
the Profit and Loss account is transferred to the Personal account, the
balance of which then gives the amount of undrawn or overdrawn profit.
The balance of the Personal account is closed into the Capital account,
the credit balance of which then represents the net worth of the
business at the end of this period and at the commencement of the next.


=The Profit and Loss Account.=--In posting the closing journal entries
to the Profit and Loss account in the ledger, usually only the group
totals as indicated by the entry will appear. In small concerns where
expenses and income are not classified in much detail, the individual
items composing the group total are often shown. These items are, of
course, the same as appear in the part of the journal entry which is
contra to the group total charged or credited to Profit and Loss. The
ledger Profit and Loss account for the illustration will appear as
follows when completely posted:

[Illustration: Form 28. Profit and Loss Account in Ledger]

=Profit and Loss Not an Account for Current Entry.=--It should
be kept clearly in mind that the process of closing the books is
merely a method or device by which the transactions for the year are
_summarized_ and the net result determined. This net result, whether
a profit or a loss, belongs to the proprietor and must ultimately be
shown in his account. It is, therefore, manifest that the Profit and
Loss account is _only_ a summary account and should never be used for
current entry. It is the means by which the _temporary_ proprietorship
accounts are summarized and the medium through which the net result is
cleared into some vested proprietorship account or accounts.

=Effect of Closing the Ledger.=--The transfer of net profit to a
vested proprietorship account completes the work of closing the ledger,
all temporary proprietorship accounts for the _current_ period being
closed out. All open balances now shown on the ledger constitute either
assets, liabilities, or vested proprietorship. A post-closing trial
balance contains only the accounts shown on the corresponding balance
sheet. The income and expense accounts, having been cleared of their
current record, are prepared to receive the record of the next period.
The business cycle for this particular business has been completed and
its correct history recorded.




CHAPTER XXIX

TYPES OF ACCOUNTING RECORDS AND THEIR DEVELOPMENT


=Evolution of Analytical Journals.=--Though the only books absolutely
necessary for an accounting record under the double-entry method
are the journal and the ledger, even the small business finds some
subdivision of the journals advantageous, and so makes use of sales,
purchases, and cash receipts and cash disbursements journals. As a
business grows and its transactions increase in volume and complexity,
further subdivision is needed. When the scope of its organization
becomes too great for a personal oversight, a method or system must
be devised for keeping the proprietor or manager in close touch with
the various departments and lines of business endeavor. This is
accomplished by means of reports from the accounting department, which
exists largely for the purpose of furnishing this kind of information.

=Principle to be Followed in Securing Analysis.=--In an earlier chapter
it was laid down as a fundamental principle that the information
desired by the management should be furnished from analytical records
made at the time of original entry, rather than by analyzing a
composite record at the time the information is wanted. Such analytical
records make possible a quicker and more up-to-date report to the
management, and they save labor in securing the information by making
the analysis at the time of record when all the facts related to it are
readily available.

=Types of Sales Journals and Methods of Handling.=--The first step in
the analysis of business transactions is the subdivision of the general
journal into separate journals, and this analysis is carried still
further by the use of columnar journal records. Reference has already
been made, in Chapter XVIII, to the use of additional columns in the
sales and purchase journals. Here a brief sketch will be given of the
methods of recording sales in various kinds of sales journals.

1. The earliest type of sales journal, not often used today, consisted
of a letter impression book containing the press copy of invoices
sent to customers, with columns for the extension of the amounts and
sometimes with additional columns for purposes of analysis. Such a
journal has the advantage that the original entry is an exact copy of
the invoice. Oftentimes, however, the impression is poor and nearly
or quite illegible; it takes much room; the detail shown is not often
used; and it increases the work of making and handling the record.

2. Another method makes use of a perforated invoice book with a
columnized interleaf solid-bound between the perforated invoice sheets.
The sales invoice is written on one of the perforated sheets and a
carbon underneath gives a duplicate on the interleaf, the latter
constituting the formal sales record. The advantages and objections are
practically the same as for the impression book method.

3. Another method is to make a separate carbon copy of each invoice
and use the duplicate as the source of entry in the sales journal.
The journal entry gives only the file number of the duplicate invoice
so that in case of need the duplicate can easily be referred to. Such
a sales journal may, of course, contain analytical columns with any
desired heads.

4. Still another method uses the duplicate invoice for posting to the
customer’s account, after which it is filed in binders. The latter
are usually provided with recapitulation sheets which show the totals
and analysis for each day, week, or month as the case may be. Just as
above, the invoice file provides the detail in support of the ledger
account and the recapitulation sheets constitute the journal from which
credits to the various sales accounts are made. Either one of these
last two methods eliminates most of the objections and embraces most of
the advantages of the other methods mentioned above.

Where several sales ledgers are used, the sales journal is sometimes
subdivided on the same basis as an aid in posting and for the purpose
of securing controlling figures as explained in following chapters.

=The Sales Returns and Allowances Journal.=--The use of any special
form of sales journal, particularly if it provides for an analysis of
the sales, requires a similar record of sales returns and allowances.
Either a separate book, similar in form to the sales journal, may be
employed for recording these items or the pages in the back of the
sales journal may be used instead.

=Development of the Purchase Journal.=--The development of the purchase
records from the old-time scrapbook for invoices to the modern analytic
voucher record resembles the development of the sales journal. The
old-fashioned invoice book was usually a big, loose-bound, coarse paper
volume in which were pasted the invoices for goods bought. An extension
column was provided for the amount of the invoice, and the total of
this gave the purchases for a given period. The use of columns for
various classes of purchases provided the required analysis, but, as
it was a cumbersome, nondescript record, it was bound to give place to
something better--the formal purchase journal or register of today.

The purchase journal or register consists of a bound or a loose-leaf
book ruled to suit individual needs and purposes. Where sales are
analyzed by classes, an exactly similar analysis of purchases must be
made in order to secure a gross profit figure for each class. Therefore
its form follows very closely that of the sales journal. Entries are
made in the purchase journal of the name of the creditor, the amount of
his invoice, and the number of the file where the invoice can be found
in case of need.

Where a separate purchasing department is maintained, the duplicate
purchase orders, corrected if necessary to correspond with the purchase
invoice received, may be used as the basis of the purchase journal. In
this case recapitulation sheets are inserted just as with the sales
journal. The handling of purchases is simplified by the fact that as
a rule they are much smaller in number than sales. The same general
considerations apply to the handling of returned purchases as to
returned sales.

=Handling Expenses through the Purchase Journal.=--It is the practice
of some concerns to treat expenses such as labor, rent, salaries,
supplies, etc., as purchase transactions. Under this method, instead
of postponing the entry until the item is paid, it is made at the time
of securing the service or supplies. The basis for the entry may be
either: (1) the bill or purchase invoice; (2) a formal purchase memo or
voucher made out for each transaction; or (3) the fact that the expense
has been incurred may suffice for the entry on the books with no formal
paper to vouch for it. The use of such formal papers as the basis for
entry is known as the voucher record system. The details of this system
are fully explained in the second volume. Discussion is here limited to
a brief outline of the method and of the advantages of its use.

When expense invoices are entered and analyzed in the voucher record
form of purchase journal, their posting requires debits to the various
expense accounts and credits to the individual creditors’ accounts
in the ledger. If the ledger contains only a controlling account,
this account must be credited with the total of the expense and other
purchases, while the individual accounts in the creditors subsidiary
ledger must be credited with the details which make up the total. When
the bill is paid, entry in the cash book will not be, as usual, to the
debit of the expense account in the general ledger, but to the debit of
the creditor’s account in the subsidiary ledger. The reason for this
procedure will be made clear in the discussion of controlling accounts
to follow.

The entry of expense invoices in the above manner secures an immediate
record of all liabilities as incurred and therefore makes the books
show at all times the true state of affairs as regards liabilities. The
method, however, necessitates a little more work in making the record,
and for this reason many concerns do not enter expenses until paid,
making the debit to them through the cash book. In this latter case all
unpaid expense bills should be kept in an expense file for reference
when information as to the unrecorded liabilities is desired.

=Note Journals.=--As explained previously, note journals are
sometimes used instead of the general journal for the record of note
transactions, where these are sufficiently numerous. Provision is
sometimes made for securing a proper analysis in order to distinguish
between notes from customers and notes from other sources. It will be
seen later that such an analysis is necessary when controlling accounts
are operated.

=Analysis in the Cash Book.=--The cash journals may be ruled to furnish
any desired analysis, showing on the debit side (i.e., the cash
receipts journal) the sources of receipts, and on the credit side the
objects of expenditure. As the sources of cash receipts are usually
more limited than the objects of expenditures, they do not require so
much analysis. The analysis may be very detailed, the only limit to the
number of columns being the width of the page. A minute analysis of
expenditures, however, is usually made, not in the cash journal, but in
the purchase or voucher record, which thus relieves the cash book of a
mass of detail.

The chief advantage of using additional columns in books of original
entry lies in the fact that time and labor are saved in posting. The
column total is posted in one item, whereas each of the numerous items
composing it would have to be posted separately to the account named
in the column heading if no analytical column were provided. Hence it
would be a waste of space to provide separate columns for items which
recur so infrequently as to make their summarization unnecessary. Care
should be taken to avoid needless columnization.

It is customary to have the following columns on the debit side of the
cash book: General or Sundry, Accounts Receivable, Sales Discount,
and Net Cash or Bank; on the credit side: General or Sundry, Accounts
Payable, Purchases Discount, and Net Cash or Bank. (See page 282 for
illustration.) The proof of the distribution is secured by checking the
sum of the net cash and discount columns against the sum of the totals
of the other columns. In both receipts and disbursements journals every
item must appear in the respective Net Cash columns, and from these
distribution is made to the other columns. For example, in the cash
receipts journal, receipts from customers are distributed into the
Accounts Receivable column for the gross amount of each item, and into
Sales Discount for the discount, if any is taken. All other items are
carried into the General or Sundry column. Where several sales ledgers
are kept, additional columns may be provided so that instead of having
one accounts receivable column, there are columns for each ledger.
Similar treatment is given to the disbursements.

=Analysis in the General Journal.=--Where the general journal is used
for returned goods, allowances, and other adjustments with customers
and creditors, use is made of analytic columns with these captions for
both the debit and credit: Accounts Receivable, Accounts Payable, and
General. Here, however, there is no column in which to enter all items
for distribution to the other columns. If a customer’s or a creditor’s
account is affected, entry is made in that column in the first place.
All _other_ entries are in the General column. (See page 281 for
illustration.)

With regard to analysis columns in the general journal, some
accountants maintain, with good reason, that if the number of
transactions of a particular kind is sufficiently large to justify
their segregation in a separate column, this in itself would be ample
justification for the use of a separate journal to record these items.
Whenever the analysis of recurring transactions in the general journal
is facilitated by the use of separate columns, the advisability of
opening a new journal for the record of such items as appear in the
general journal most frequently should be considered.

=Subdivision of the Ledgers.=--The next step in the subdivision of the
records is made in the ledgers. The general or impersonal accounts
of the business are of a more permanent character than the accounts
with persons--customers and creditors. Consequently, when once it
is determined under what account titles information is desired and
those accounts are set up, there is usually little need to change
their titles. Personal accounts, however, are constantly changing
as some customers are lost and new ones are added, and also because
creditors change with purchases in new markets. Hence, when a business
outgrows its small beginnings, it is customary to keep these changing
accounts in separate books. The basis for the first subdivision of the
ledgers, therefore, is the separation of the accounts into personal
and impersonal. The accounts with customers are carried in a separate
ledger called variously the sales, customers, or accounts receivable
ledger, and those with creditors in a ledger called purchase,
creditors, or accounts payable ledger. All other accounts are kept in
the main ledger known as the general ledger. One advantage of this
subdivision is that several bookkeepers can work on the various ledgers
at the same time.

A further subdivision of the customers ledger is frequently made
into “city” and “country,” the former containing the accounts with
customers located within the city where the business is situated, and
the latter the out-of-the-city accounts. Other subdivisions may be made
on an alphabetical basis, i.e., customers ledger No. 1, containing all
accounts from A to G; customers ledger No. 2, H to M, etc. Sometimes
the concern’s sales territory is divided into arbitrary districts and
the ledgers are subdivided to correspond with such districts.

[Illustration: Form 29. Standard Ledger--Divided Column]

[Illustration: Form 30. Standard Ledger--Center Column]

[Illustration: Form 31. Balance Ledger Rulings]

[Illustration: Form 32. Balance Ledger Rulings]

=Kinds of Ledgers.=--There are several kinds of ledgers, which may be
classified (1) as to their rulings, and (2) as to their bindings.

1. RULINGS. As to their rulings, ledgers are either standard, balance,
or progressive. The standard ruling has two duplicate parts, a debit
and a credit, and is usually divided in the center of the page, one
money column appearing at the extreme right of each part, although
sometimes the arrangement is symmetrical with both debit and credit
money columns at the center, and the date columns at either side of the
page. (See Forms 29 and 30.)

The balance ruling is a three or four-column ledger with the money
columns either at the center or at the right-hand margin, or at both
the center and the right-hand margin. The extra columns are for the
account balances. If the balance is usually either a debit or a credit,
only one balance column would be necessary; where it is apt to be a
debit at one time and a credit at another, a debit balance column
and a credit balance column are advantageous. The balance ruling is
used particularly with personal accounts where there is need for an
up-to-date balance. Where this kind of ledger is used, entry of new
debits or credits should always be on the next blank line as shown in
the balance column, so as to allow the extension of the new balance
opposite the last entry even though this should leave blank several of
the preceding lines on the debit and credit sides. Typical forms of
some of these are shown in Forms 31 and 32.

The Boston, progressive, or tabular ledger, as it is variously called,
makes provision for a _horizontal_ progress of the account as to
sequence of time; the title of the account is written at the left-hand
margin, and one or more lines are allowed to each account according to
the degree of its activity. The account title is written once at the
left margin of the master or main sheet, and is sometimes repeated at
the right margin if the sheet is very wide. The page is divided into
columns for each day of the period. To effect this, short-margin insert
sheets must be bound in to give the desired room for accommodating a
whole period’s record. This style of ruling was formerly much used in
banks where a daily balance for each depositor’s account was necessary.
It is capable of adaptation to other uses, however. One form is shown,
Form 33.

[Illustration: Form 33. Boston Ledger Sometimes Used for Depositors]

2. BINDINGS. Ledgers may be classified also as solid-bound,
loose-leaf, and card, the titles being self-explanatory. One of
the great advantages of the loose-leaf and card ledgers over the
solid-bound ledger is their flexibility. They lend themselves easily to
any desired grouping of the accounts; they may be numerically arranged
where accounts are numbered instead of named; they may be arranged
as to classes and each class made self-indexing; or a geographical
grouping may be made. Another great advantage of this form of ledger
is the ability to discard or file away in other binders all “dead”
accounts, thus making for ease and facility in the use of the “live”
ledger. Also it is possible for several clerks to work simultaneously,
since the leaves or cards are removable and may be distributed among
any number of clerks. There is always the danger, however, of failure
to return a leaf or card, or of placing it out of regular order when
returning it, or of destroying it, if it were desired fraudulently
to do away with any particular account. The use of loose-leaf and
card ledgers for personal accounts is pretty thoroughly established,
notwithstanding the disadvantages just mentioned.




CHAPTER XXX

CONTROLLING ACCOUNTS


=Introductory.=--Reference to controlling accounts has been made
several times in preceding chapters. It is purposed now to define them
and explain their use. The separation of the various journals on the
basis of an analysis of transactions frees the general journal of a
vast mass of detail it formerly carried. This separation, however, in
no way affects the underlying debit and credit scheme of the whole
system. Each journal is an integral part of the whole; every entry
therein has its equal debit and credit which are in due course posted
to its proper account, thus maintaining the equilibrium of the ledger.
The separation of the ledger into three or more special ledgers in the
interest of economy of effort and ease of use has also been mentioned.
Still, each of these special ledgers is an integral part of the whole
ledger and the accounts in the special ledgers must be entered in the
trial balance to secure proof of equilibrium.

The customers ledger is usually the most active of the various ledgers,
i.e., more postings are made in it because the majority of business
transactions involve dealings of various sorts with customers, and
more accounts are required to keep the records with customers. It
is usually, therefore, the largest part of the whole ledger, but
its accounts are all of the same kind, viz., accounts receivable.
When taking a trial balance, the total of the balances of the
customers ledger accounts is usually set up under the title “Accounts
Receivable,” leaving the details to a supplementary list or schedule.

=Advantage of a Controlling Account.=--The advantage of thus
condensing the trial balance is apparent and suggests the desirability
of obtaining the “accounts receivable” balance independently of
the customers ledger. If this is done the bookkeeper in charge of
the general ledger can not only draw up his trial balance without
reference to the customers ledger, but has also the correct figure for
the total of the account balances in the customers ledger. In other
words, he has a figure which controls the customers ledger and which
therefore furnishes him with a check on the accuracy of the ledger
clerk or bookkeeper who keeps that ledger. The most convenient method
of recording the accounts receivable figure is evidently by means of a
formal account on the general ledger. When such an account is kept, the
effect is to make it a summary account whose detail is carried in the
customers ledger.

=Controlling Account Necessitates Changed Idea of Ledger
Equilibrium.=--By having a customers controlling account (or “Accounts
Receivable” as it is commonly called, though other terms are also used)
in the general ledger, the customers ledger is no longer used as an
integral part of the whole ledger and becomes a “subsidiary” ledger;
that is, its function is reduced to that of a supporting schedule or
list of detail for the summary controlling account. The equilibrium
of the general ledger is now maintained by summary posting to the
controlling accounts. Though the customers ledger has ceased to be a
“ledger” in the proper sense of the term, it is still a vital part of
the system, carrying as it does the detail of the summary controlling
account. Moreover, it is linked up to the system by being provable
against its summary account. Yet it should be borne in mind that its
scheme of debit and credit is now an independent one and is not linked
up to the debit and credit equilibrium of the general ledger; that is,
the postings in the subsidiary ledger are merely memorandum entries
of the detail posted in summary form to the general ledger. Thus the
mathematical basis of the controlling account is simply that the whole
is exactly equal to all its parts, the balance of the summary account
being equal to the total of the balances of all the customers’ accounts
of which it is the summary. To illustrate, if we have customers’
accounts whose balances are $1,000, $2,000, $3,000, $4,000, and $5,000
respectively, then the summary account must have a balance of $15,000.

=Debits to the Controlling Account.=--The principle and the purpose of
the controlling account having now been explained, the next problem to
consider is how best to gather the summary figures for its debits and
credits. If every debit to a customer’s account must be posted also to
the controlling account and every credit to a customer’s account must
be shown as a credit in the controlling account the work involved would
be almost doubled and little would be gained by thus duplicating the
postings in another ledger. Therefore it is important to secure the
figures for entry in the controlling accounts with the least effort,
i.e., in the form of debit and credit summaries. Hence, to determine
the sources of these debits and credits of the controlling account,
analysis must be made of the sources of the debits and credits to the
customers’ accounts.

Most of the debits to customers’ accounts are from the sales journal.
Additional debits may be from the cash disbursements journal when cash
payments are made as a rebate or a refund for overpayment or some
other similar transactions; still others from the general journal for
adjustments of various kinds. The debits to customers, however, for
cash paid them are very few in number, because such adjustments usually
are not made by means of cash payments. The sales journal, as usually
operated, carries a column for credit sales, whose total represents in
one amount the total of all detailed debits to customers’ accounts. The
total of the credit sales column, therefore, controls the total debits
to all customers on account of charge sales to them. In summarizing
the sales journal the summary entry should show that this total is to
be posted not only to the credit side of the Sales account but also to
the debit of the controlling account in the ledger. This is so because
the customers ledger has ceased to be an integral part of the general
ledger, the controlling account having taken its place. Accordingly,
the general ledger contains no record of either the debits or credits
of the entire group of sales transactions until the end of the month,
when this group must therefore be brought into the general ledger in
summary form, both debit and credit.

Where the total sales in the sales journal include an analysis of sales
into cash sales and credit sales, the following summary entry should be
made:

  Accounts Receivable
  Cash
        Sales

The cash debit is set up only to show the equilibrium of the summary
entry and is not posted, because it is entered also in the cash book
and is posted from there. This debit posting to “Accounts Receivable”
in the general ledger secures in one posting a debit amount equal to
all individual debit postings to the customers ledger from this source.
The controlling account in the general ledger is variously termed
“Sales Ledger,” “Accounts Receivable,” “Trade Debtors,” “Customers,”
etc.

The two other sources of debit posting to customers’ accounts are
the general journal and the cash book. The debit side of the journal
is provided with an Accounts Receivable analysis column in which,
as explained in the previous chapter, debits to customers’ accounts
are entered. At posting time the total of this Accounts Receivable
column will therefore give in one figure a debit posting item to the
general ledger Accounts Receivable account equal to all individual
debit postings from the general journal to customers’ accounts in the
customers ledger.

Usually it is not necessary to provide an Accounts Receivable column
on the credit side of the cash book, since debit postings from
there to customers’ accounts are very infrequent. Hence no total or
controlling figure for entry in the Accounts Receivable account can be
obtained. Every item which is posted from this source to the debit of a
customer’s account must be also posted--item by item--to the debit of
Accounts Receivable in the general ledger. This is of course a double
debit posting, but one of these debits is to a subsidiary ledger which
is no longer a part of the equilibrium scheme and therefore does not
throw the general ledger out of balance. Great care must be exercised
to make sure that each of these items is posted both to a customer’s
account and also to the Accounts Receivable account.

=Credits to the Controlling Account.=--An analysis of the credits to
customers’ accounts shows four main sources:

  1. The cash receipts journal for payments made by
      customers.

  2. The sales returns journal, if one is kept, for
      goods returned by customers.

  3. The note journal for notes received in payment.

  4. The general journal for various adjustments and
      also for the purpose of recording notes and
      returned sales where special journals are not kept
      for these transactions.

Accordingly, analytic columns for accounts receivable are provided
in the cash receipts journal and the general journal. The totals of
their columns are posted to the credit of Accounts Receivable, and the
detailed amounts to the credit of the various customers’ accounts. The
credit postings from these sources to the customers ledger accounts
and to the general ledger Accounts Receivable account are therefore
the same so far as totals are concerned. The sales returns journal is
summarized at posting time by means of an entry similar to that in the
sales journal, as follows:

  Sales Returns
        Accounts Receivable

In this case the credit posting to the Accounts Receivable account is
equal to the detailed credits to customers’ accounts.

Similarly, a summary entry for the notes receivable journal secures
a controlling figure for Accounts Receivable. If the notes are all
received from customers to apply on their accounts, the summary entry
is:

  Notes Receivable
        Accounts Receivable

the amount being the total of that journal.

In this way the total of all debits and of all credits to the
individual customers’ accounts is represented by the summary items
entered in the general ledger controlling account, Accounts Receivable.
Consequently, the balance of this single account is equal to the
balance of the customers ledger. For the trial balance, therefore, one
account takes the place of hundreds or even thousands of customers’
individual accounts. As a result of this, much time is saved and the
possibility of error on the general ledger is greatly reduced.

=Proving the Customers Ledger.=--The use of a controlling account
in the general ledger, however, does not eliminate the necessity
of proving the accuracy of the customers ledger. It merely makes
it possible to take a trial balance without bringing the numerous
customers’ accounts into it. It is just as much a part of the proof
of the work to make a list of customers’ accounts balances and check
it against the balance of the Accounts Receivable general ledger
account, as it is to prove the general ledger by means of a trial
balance. If there is a discrepancy between the subsidiary ledger and
its controlling account on the general ledger that discrepancy does not
necessarily prevent a trial balance of the general ledger, but it does
show error in the work which must be searched out and corrected.

=Accounts Payable Account.=--A similar arrangement will make possible
a controlling account on the general ledger for the creditors or
purchases ledger. This account is variously termed Accounts Payable,
Purchase Ledger, Creditors, or Trade Creditors account. Its mechanism
is the same as for Accounts Receivable. Analysis of credit postings to
creditors’ accounts shows the purchase journal as their main source.
Other credits come through the general journal and a very few through
the cash receipts journal. The summary entry for the purchase journal
is:

  Purchases
        Accounts Payable
        Cash

This shows a debit to the Purchases account for the total amount of the
purchases, a credit to Accounts Payable for the liability to creditors,
and to Cash for the amount paid on cash purchases. The cash item is not
posted. The Accounts Payable column total on the credit side of the
journal, and the separate items from the cash receipts journal, furnish
the other credits to the Accounts Payable account in the general ledger.

The debits come from the Accounts Payable columns in the cash
disbursements journal and in the general journal, and the summaries for
the notes payable and purchases returns journals.

=Basic Principle as to Postings to Controlling Accounts.=--In the
handling of controlling accounts, the one fundamental requirement is
to make sure that every entry in books of original entry which affects
any account in the subsidiary ledger is reflected in the postings to
the controlling account in the general ledger. This principle resolves
itself into the mathematical axiom stated above that a whole is equal
to all--not just some--of its parts. Only thus can a true control be
established.

=Making the Subsidiary Ledger Self-Balancing.=--Through the use of
the two controlling accounts explained above, the trial balance is
relieved of a large number of accounts, and the general ledger is
made independent of the subsidiary ledgers. On the other hand, the
subsidiary ledgers are dependent for their proof on the controlling
account balances in the general ledger. In an effort to make every
ledger “self-balancing,” a further refinement of the controlling
account idea is frequently incorporated in each subsidiary ledger. It
is accomplished in the following manner: An exact duplicate of the
controlling account on the general ledger is set up in the subsidiary
ledger, _with this difference_, that the sides of the account are
reversed so that the subsidiary ledger account has for its debits the
credits of the general ledger account, and for its credits the debits
of the general ledger account.

Take the Accounts Receivable controlling account for illustration.
On the general ledger its balance is of course a debit balance
representing the total outstanding accounts due from customers.
Similarly, the schedule or list of customers’ accounts taken from the
sales ledger will represent debit balances whose total is the same as
the controlling account balance. If, then, the controlling account
itself is placed on the customers ledger as an additional account,
the sides being reversed, the balance of this one account will be a
credit equal to the total debit balance of all the other accounts in
the customers ledger. Therefore, if the customers ledger is correct,
its own balance will be offset exactly by the credit balance of the one
additional account, and the ledger then is said to be self-balancing.
There is no theory or principle of debit and credit involved in this;
the device is simply introduced in order that the ledger may provide
an internal proof of its correctness. The title of the balancing
account on the subsidiary ledger is “Adjustment” or “Balance” and has
no significance other than that mentioned. In a similar manner any
subsidiary ledger may be made self-balancing.




CHAPTER XXXI

HANDLING CONTROLLING ACCOUNTS


Chapter XXX concerned itself with the statement and explanation of
the principles on which the controlling account rests, the manner of
its construction, its advantages, and with the changed application of
the fundamental scheme of debit and credit under a system of records
operating controlling accounts. The present chapter will be devoted to
a consideration of the problems met with in the practical operation of
these accounts.

=Introduction of the Controlling Account.=--Upon the installation of
a new system or set of books, the controlling account feature may
be incorporated from the start. The new system must provide for the
separation from the general ledger, of the ledgers over which control
is to be established. The method of securing controlling totals for
posting to the general ledger controlling accounts was indicated in the
preceding chapter.

Where it is desired to introduce controlling accounts into a system
which has not formerly used them, certain adjustments must be made,
i.e., the accounts to be controlled must be segregated and controlling
account columns must be provided for in the books of original entry.
With the transfer of these accounts to a separate ledger, together with
the introduction of the controlling accounts into the general ledger,
the equilibrium of that ledger is maintained. The opening entry in
the newly established controlling account is of course the sum of the
balances of the transferred accounts.

If it is desired to establish the new controlling account by journal
entry, that entry would appear somewhat as shown on page 279, Form 34,
with suitable explanation added. All these items should be posted to
the general ledger as shown by the entry, and in addition the detailed
items should be posted as debits to the accounts in the customers
ledger. The effect of these postings would be, first, to close the
individual customers’ accounts formerly carried in the general ledger
and open up in their stead the controlling account; and second, to set
up on the subsidiary ledger the detail of the customers’ accounts.

=Recording Withdrawals of Stock-in-Trade.=--The original basis for
separating the main journal into its subsidiary parts was the analysis
of transactions by kinds, such as sales, purchases, cash, etc. The
sales journal was presumed to contain only sales of stock-in-trade.
Departure from this principle was advisable in the case of goods
drawn at cost, for use in the business or by the proprietor or for
other purposes. This is done because withdrawals of stock-in-trade,
at whatever price and for whatever purpose, can be recorded more
conveniently in the sales journal than elsewhere.

It is theoretically incorrect, however, to enter such items in the
Sales account because withdrawals at cost do not represent actual
sales, and for this reason they should be regarded as deductions from
purchases or from inventory. The only proper place for their record,
under this view, is the general journal, entry in which would have
to be by detailed debit and credit for each item. However, because
this requires much more work than entry in the sales journal, this
last method is more commonly employed. Usually the volume of such
transactions is not large and would not seriously vitiate the use of
the Sales account as the basis for estimating percentages of cost of
goods sold, gross profit, selling expenses, etc. Moreover, as the total
amount of these withdrawals is often fairly constant as between periods
their record in the sales journal is countenanced.

=The Problem of the Sales Journal Summary.=--When withdrawals
from stock at cost price are recorded in the sales journal, a new
problem arises in summarizing the sales journal when operating under
a controlling account system. The customers or sales ledger is
usually limited absolutely to customers’ accounts. Accounts with the
proprietors, and with all other titles under which withdrawals for
other purposes may be recorded, are almost invariably carried in the
general ledger. Therefore, while most of the items entered in the sales
journal are posted to the customers ledger, these withdrawal items must
be posted in detail to the general ledger. Thus the total of the sales
journal does not represent the correct debit to accounts receivable in
the general ledger. Evidently an analysis of the content of the sales
journal must be made in order to obtain the correct controlling figure.

Such analysis may be made in several ways. Where possible, three
columns in addition to the departmental columns should be used. The
column titles would be “Sales Ledger,” “Cash,” and “Sundry.” The sum
of these three would give the total to check against the total of the
other distributive columns, but only the “Sales Ledger” total would be
posted to Accounts Receivable, and the individual items in that column
would be posted to the customers’ accounts in the sales ledger. The
items in Sundry column would be posted to their named accounts in the
general ledger. This method secures an automatic separation of the
controlling account total from other items, and should be used where
possible.

If the number of these extraneous items is too small to warrant the
use of a separate column, they may be recorded in the Sales Ledger
column and indicated by means of an “❌” or some other mark. At summary
time, the sales journal must be looked over and these items picked out.
Subtraction of their sum from the Sales Ledger column total would give
the correct controlling account posting.

Still another method requires a correcting general journal entry at
the time the sales journal entry is made. Under this method these
special items are included in the Sales Ledger column, thereby causing
an overcharge to Accounts Receivable. The correcting general journal
entry must therefore credit Accounts Receivable by the amount of the
overcharge for each item. For instance, if stock has been drawn by the
proprietor, the general journal entry at the time the sales journal
entry is made would be:

  Proprietor, Personal
        Accounts Receivable

the debit to proprietor being checked here and posted from the sales
journal, or vice versa. This method, however, results in a duplication
of work. It would be preferable not to enter these items in the sales
journal and to make the record only in the general journal, and so
leave the Sales Ledger column total in the sales journal the correct
controlling figure.

In a complicated controlling account system, where for current entry
a simple bookkeeping routine must be established and all items
of whatever kind be handled in the same way, the withdrawals by
proprietors are recorded in accounts opened with them in the sales
ledger just as with customers. At the end of the period, before closing
the books, these proprietors’ accounts are transferred by general
journal entry to the general ledger, requiring one entry--like the one
last shown above--for the drawings of the period.

Cash sales may also be handled without the use of a separate column in
the sales journal. Two methods are used for this. Under the one, cash
sales are included in the Accounts Receivable debit total of the sales
journal, although the individual items are not posted to the subsidiary
ledger, and they are also included in the Accounts Receivable credit
total of the cash receipts journal. The inflated debit in the general
ledger controlling account is thus offset by an equally inflated
credit, the balance therefore being the correct amount to control the
sales ledger.

Under the other method the postings to the general ledger controlling
account are the same as in the first method. The two methods differ,
however, in that under the second method an account is opened in the
subsidiary ledger entitled “Cash Customers” or “Cash Sales,” to the
debit of which are posted in detail the cash sales items from the sales
journal and to the credit of which are posted in detail the cash sales
items from the cash receipts journal. The account is thus only a “wash”
or clearing account. This method, however, prevents the inflated debits
and credits in the controlling account.

The methods last described for handling proprietors’ withdrawals and
cash sales are the ones most frequently used in large businesses where
simplicity of routine for current entry must be secured.

=The Problem of the Purchase Journal Summary.=--The practice of
recording extraneous transactions in the purchase journal brings about
at summary time a situation similar to that of the sales journal, when
a controlling Accounts Payable account is maintained. The purchase
journal is, and should be, the place of record for purchases made for
the business. If the proprietor (or other person), for his personal
account and use, purchases through the business merchandise which never
goes into stock, accurate accounting requires such transactions to be
charged direct to the proprietor and not to the Purchases account of
the business. Inasmuch as the liability is assumed by the business
and the creditor’s account will appear in the purchase ledger, the
use of the purchase journal total for credit to the Accounts Payable
controlling account gives the correct figure. The trouble comes in
because this same figure cannot be used as the debit to Purchases.
Subtraction of these extraneous items must be made to determine the
proper amount chargeable to the Purchases account, thus necessitating
an analysis at summary time.

=Accounts Both Receivable and Payable.=--It frequently happens that
purchases from, and sales to, the same party are made, i.e., goods are
sometimes bought from and sold to a customer. If the account of this
debtor-creditor is normally a purchase account, it is set up in the
purchase ledger. If a sale is made to this debtor-creditor and charged
to his purchase ledger account, such transaction should not be included
in the Accounts Receivable controlling figure from the sales journal
unless an adjusting entry is made through the general journal. Such
entry would affect only the controlling accounts and would be:

  Accounts Payable
        Accounts Receivable

Or the item might be omitted from the sales journal controlling figure
and stated separately in the summary entry for the sales journal.

A more satisfactory method is to set up two accounts with such
parties--one as a creditor, the other as a customer. Then no adjustment
need be made at the time of summarizing the journals, because the
two accounts are treated as entirely independent of each other. The
settlement of these two accounts may be handled separately or by a
payment of the balance between the two. If settled by balance, an
adjusting journal entry should be made to show on the books the two
separate elements involved. This would of course affect both the
controlling accounts and the two individual accounts.

=The Problem of the Note Journals Summaries.=--Of notes receivable the
large majority are usually received from customers. The summary entry
for such is:

  Notes Receivable
        Accounts Receivable

Where notes are received from other sources, as from officers,
partners, or from outside parties to whom loans have been made, it
is evident that these must not be included in the credit to Accounts
Receivable, and it may be advisable also to eliminate them from Notes
Receivable unless they are short-term, current items, as only such
should be carried under Notes Receivable. These special notes may be
carried in a “Notes Receivable Special” account.

If, as sometimes happens, interest is included in the face of a note,
this must be adjusted by the summary entry, as follows:

  Notes Receivable
        Accounts Receivable
        Interest Income

The considerations stated above as applicable to the notes receivable
journal, are of equal importance in handling the notes payable journal.
A very careful analysis of the note journals should be made at a
summary time, which analysis should be shown by the summary entry.

=Summary Entries for Columnar Books.=--Illustration will now be given
of some standard forms for summarizing the columnar journals. Sometimes
the summary entries for the various subsidiary journals are made in
the general journal. This seems to accomplish no good purpose and
is not usually recommended. Theoretically it is desirable to show a
formal debit and credit summary for each journal footing posted to the
ledger. If, however, the number of columns is small and it is readily
seen that the debits and credits are equal, the formal summary is often
dispensed with. So also, if there are many distributive columns of
the same effect, i.e., debit or credit, as in the large departmental
sales journal or the voucher register referred to on page 144, formal
summary is not shown, the posting being made from the column totals as
illustrated for Petty Cash on page 369.

=The Sales Journal Summary.=--An illustration of the sales journal
summary is given in Form 35. The Sundry items should be posted in
detail from their column and their total checked in the summary entry.
Where a Sundry column is not used and the Sundry items are included
in the Sales Ledger column, they must be separated before the summary
entry can be made.

[Illustration: Form 34. General Journal]

[Illustration: Form 35. Sales Journal Summary]

Where, also, a Cash column is not carried, as is so often the case,
there being just one column for Sales Ledger, Cash, and Sundry items,
from which distribution is made, the separation of the Cash items need
not be shown in the summary entry, provided those items are entered
also in the Sales Ledger column of the cash book. Where, due to the
large number of distributive columns, the sales journal can ill afford
the room for a Cash column, the above method offers the best solution
of the problem.

The purchase journal summary is similar to that of the sales journal,
and therefore no separate illustration need be given here.

=The General Journal Summary.=--As shown by the illustration in Form
36, in summarizing the general journal the Accounts Receivable and
Accounts Payable columns are formally totaled, ruled off, and their
totals brought into the General columns on both debit and credit
sides and these columns are totaled and ruled off, thus showing the
equilibrium of the journal. This summary entry is posted to the proper
accounts in the general ledger. There is no particular advantage,
however, in this formal summary entry because the postings could easily
be made directly from the column totals.

=The Cash Book Summaries.=--As illustrated in Forms 37 and 38, the
formal summary for each side of the cash book shows the equality of
the Bank and Discount columns total against the General and Accounts
Receivable and Payable columns. To show the correct debit to the bank
for the present month, the balance brought forward from last month and
entered in both the General and Bank columns on December 1, must now be
subtracted from both.

On the disbursements side no explanation of the summary entry is
necessary. It will be noted that, to show the balance of the bank
account, a restatement of the Bank column total is necessary.

[Illustration: Form 36. General Journal Summary]

[Illustration: Form 37. Cash Summary Book--Receipts Side]

[Illustration: Form 38. Cash Summary Book--Disbursements Side]

=Other Controlling Accounts.=--It is frequently desirable to keep some
accounts of the business private, such as those showing partners’
investments, drawings, ratios of sharing profits, the adjusting and
closing entries, the profit and loss, etc. This can be accomplished
through the use of a private ledger supported by a private journal
and sometimes a private cash book. For their operation a controlling
account of the private ledger is set up in the general ledger, and
similarly a controlling account of the general ledger appears in the
private ledger. The use of private books is explained in Volume II of
this work.

Sometimes subsidiary expense ledgers are used to carry a minute
division of each expense group, with corresponding controlling
accounts, such as Selling Expense, Office Expense, General Expense,
Factory Expense. Similarly, if the consignment sales of a business are
large enough to justify a separate record in a consignments ledger, a
controlling account is set up in the general ledger. In a manufacturing
business, Raw Materials, Goods in Process, and Finished Goods accounts
are often controlling accounts for the stores, jobs, and finished stock
ledgers. In a corporation the Capital Stock account (or accounts) is a
controlling account over the stock ledger.

=Principle Governing Content of Subsidiary Ledgers.=--Before closing
this chapter, it should be stated as a fundamental principle that no
accounts should be carried in a subsidiary ledger except such as are
of the same general kind and can without misrepresentation be carried
under the group title of the controlling account.




CHAPTER XXXII

PARTNERSHIP FROM THE BUSINESS VIEWPOINT


=Partnership Defined.=--In Chapter II, reference was made to some
of the features of a partnership--the purpose of its formation,
advantages, disadvantages, etc. The laws of the state of New York
define a partnership as follows: “A partnership, as between the members
thereof, is the association, not incorporated, of two or more persons
who have agreed to combine their labor, property and skill or some of
them for the purpose of engaging in any lawful trade or business, and
sharing the profits and losses as such between them.”

This definition brings out in a general way the reasons for the
formation of the partnership and its essential features. Under this
type of organization, where several persons combine their capitals,
it is possible to secure a larger fund of capital than under the sole
proprietorship. This opens to the partnership avenues of business
usually closed to the sole proprietor. The bringing together of the
man with a special aptitude or skill, or of a man with a following in
the community on account of social standing and acquaintanceship, with
another who has money or a plant for the operation of a business, often
makes successful an otherwise unpromising undertaking.

=Operating Feature and Working Organization.=--Mutual agency is the
essential operating feature of the partnership. By this is meant that
any one of the partners can act for the others, and in the eyes of the
law all are equally responsible for the management of the business.
Except in the case of a limited partnership, to be explained later,
each partner has an equal voice in the management and control of
affairs. Unlike the corporation where for management purposes the
owners’ powers are delegated to a controlling board, the essential
character of the partnership is that each partner has, regardless of
the amount of his investment, an equal right in the direction of its
business. As between themselves, for purposes of division of duties
and specialization of effort, definite power to exercise control
over certain features of the business may be delegated to individual
partners. But such delegation means nothing more than a method of
dividing the work and is simply the working organization of the firm
which may be changed at any time the majority of the partners see fit.
Thus, while a partner may be limited in his actions for the firm by
agreement among the partners, so that he is not a general agent for
the firm, still as to outsiders who know nothing of this internal
arrangement, he has power to bind the partnership by his acts, because
an outsider has a right to expect that any partner has power to act as
an agent for the firm. This is so because such power is of the essence
of the partnership form.

=Essential Characteristics of the Partnership.=--Limited life is an
essential characteristic of the partnership. The partnership relation
is a very personal one. It can be terminated in a number of ways, but
the death or retirement of any member automatically works a dissolution
of the firm, even though another man takes his place. The legal theory
is that the old partnership is dead and a new one, even though bearing
the same firm name, has come into existence. Thus a partnership cannot
be perpetual. The relationship between the partners is so intimate that
the success of the undertaking depends fundamentally on the good faith
and honor exercised by each partner towards the others, and therefore
any addition to the personnel of a partnership can be made only with
the consent of all members of the existing firm.

The partnership being the outgrowth of the sole proprietorship,
certain of the aspects of its earlier form still cling to it. For
suit at law it is looked upon as a collection of single owners, and
action on contract must usually be taken against the individual members
of the firm. Suit by or against the partnership cannot as a rule be
brought in the firm name. Some states, however, allow this under recent
enactments. Title to personalty can be held and transferred under the
firm name, but realty must be in the name of the individual members or
in the name of one member acting as trustee for the firm. Thus, while
in the view of the business community the copartnership is a business
entity under a firm name, in the sight of the law it is not an entity
but merely a collection of single owners. This legal view accounts
also for the full debt liability of every partner--except in a limited
partnership. In case the firm assets are insufficient to meet the
claims of creditors, any or all the partners’ private resources may be
levied upon.

Co-ownership of the profits of a business is another feature essential
to the copartnership. No sharing in the profits on any other basis than
that of co-ownership will constitute a partnership. When the question
comes before the courts, the intention of the parties governs, and
evidence showing that each acted as principal for himself and as agent
for the others, and has shared profits as profits, would be sufficient
to constitute the relationship.

=The Partnership Contract.=--A partnership being a contract
relationship, all the requirements governing legality of contracts,
such as agreement, consideration, lawful object, competency of
contracting parties, etc., apply to the copartnership. The contract
may be oral or in writing. In case of dispute an oral contract, on
account of the difficulty of proof, is of little force in regulating
the relations of the partners, and the general law of partnership
would usually govern. Inasmuch as there is so great an opportunity for
disputes in a relationship of this sort, it is imperative, if efficient
working relations are to be maintained, that very carefully drawn
articles of copartnership be agreed upon before active business is
begun. These articles should contain, at least, the following:

  1. The name of the firm and of the partners.
  2. The kind and place of business.
  3. The duration of the partnership.
  4. The method of terminating it.
  5. A detailed statement of the relations between the
      partners, such as duties and powers, capital
      contributions, withdrawals of capital, salaries,
      division of profits and losses, interest on
      capital, and the time of closing the books to
      secure a definite determination of the partners’
      interests.

Even when the utmost care is exercised in drafting the articles
of partnership, it almost always happens that some portion is
not understood alike by all or that some contingency arises not
specifically provided for. Nevertheless, it is the only way in which a
comparative avoidance of misunderstanding and dispute can be obtained.

=Partnerships Classified.=--As to the scope of their business
operations, partnerships are usually classified into general and
special. The general class embraces those for the conduct of some
general or ordinary lines of business. The special class comprises
those formed to undertake a definite task or some particular line of
business. Joint ventures would come under this latter class.

As to the liability of their members, partnerships may be classified
as general and limited. The general partner has the full liability,
referred to above; the limited partner’s liability never exceeds the
amount of his investment. In a limited partnership one or more, but not
all, members may limit their liability. This class of partnership can
be formed only under direct authority of statute law. A limited partner
is not active in the management of the business, being more in the
nature of a lender of money to the firm, who gets his return in profits
instead of interest. Should he become active in the firm’s management,
he will constitute himself an ordinary partner with full liability. The
New York statute governing the formation of the limited partnership is
as follows:

  Two or more persons may form a limited partnership which
  shall consist of one or more persons of full age, called _general_
  partners, and also of one or more persons of full age who contribute
  in actual cash payments, a special sum as capital, to the common
  stock--or fund--called _special_ partners, for the transaction
  within this state of any lawful business, except banking and insurance
  by making, severally signing and acknowledging and
  causing to be filed and recorded in the clerk’s office in the county
  where the principal place of business of such partnership is located,
  a certificate in which is stated:

  1. The name or firm under which such partnership is to
      be conducted and the county wherein the principal
      place of business is to be located.

  2. The general nature of the business intended to be
      transacted.

  3. The names, and whether of full age, of all general
      and special partners therein, distinguishing which
      are general and which are special partners, and
      their places of residence.

  4. The amount of capital which each special partner
      has contributed to the common stock--or fund.

  5. The time at which the partnership is to begin and end.

Affidavit of the payment of capital must be made and a notice of
the formation of the partnership published in a paper of general
circulation. The limited partnership is thus hedged about with
safeguards for creditors, bankers, and other interested parties,
particularly by the rule that a limited partnership cannot exist unless
there are one or more general partners with full liability.

=The Joint-Stock Company.=--The joint-stock company is a partnership
or association in which ownership, voice in the management, and
profit-sharing ratio are evidenced by transferable shares of stock.
Control and management are exercised through a board of directors
chosen by the stockholders. If the company becomes bankrupt and the
firm assets are insufficient to satisfy creditors, the members are
personally liable to the full extent of their private property in the
same way as in a general partnership.

The mining partnership is a form of joint-stock company which operates
in mining communities. Usually the mining property itself is beyond the
scope of such a partnership, only the development of this property by
means of a lease being contemplated. Unlike the ordinary partnership,
the members of a mining partnership may assign their shares of
ownership. Upon their death or bankruptcy, their interests pass to
others who take their place in the partnership without the consent of
the remaining partners. Thus, the confidential relationship based on
the right of selection of its members, characteristic of the ordinary
partnership, is largely lacking in the mining partnership.

=Partners Classified.=--Finally, brief mention may be made of the
following terms applied to partners to indicate varying degrees of
activity within the ordinary partnership:

  1. Ostensible partners--those who hold themselves out
      and are known to be partners.

  2. Nominal--those who are known as partners but who
      have no real interest in the firm.

  3. Dormant or silent--those who are not known to
      outsiders as partners and who take no active
      part in the management of the firm’s affairs.

  4. Secret partners--those who are not known as
      partners to outsiders but who have an interest and
      take active part in managing the firm.

For more detailed information as to a partner’s rights, duties, and
responsibilities to his copartners and to outsiders, a standard legal
text on partnerships or business law should be consulted. The student
should also read Chapter II in connection with this chapter and the
next.




CHAPTER XXXIII

PARTNERSHIP FROM THE ACCOUNTING VIEWPOINT


From the fact that the law looks upon the partnership as a combination
or collection of sole owners, some of the accounting problems arising
out of the partnership form of organization are unique, and a partial
or full treatment of some of these problems will be given in this
chapter.

=Profit-Sharing in the Partnership.=--Of these problems perhaps the one
occurring most frequently is that concerning the division of profits.
Attention was called in Chapter XXXII to the need of explicit statement
on this point in the articles of copartnership under the head of the
intrapartnership relations. Since men combine their capitals for the
purpose of realizing profits, it would naturally be supposed that
all partnership agreements would be specific on that point. Yet it
very often happens that many contingencies relating to the matter of
profit-sharing have not been foreseen and as a result disputes arise.

The fundamental principles governing profit distribution may be stated
as follows:

1. Where the agreement is silent, the law provides that profits shall
be divided equally among the partners regardless of the amounts of
their respective investments of capital. Some partners may have made no
investments of money or property, setting up their particular skill and
aptitude or standing in the community as their share and contribution
to the profit-earning capacity of the organization. Unless it is
specifically agreed otherwise, these will share equally in any profits.

2. Where profits are to be shared in the same ratio as capital, the
agreement should specify whether the basis of division is to be the
original investments or the capitals as shown at the beginning of
each period, which would be the original investments plus profits
left in the business. This latter interpretation would usually result
in a changing ratio for succeeding periods, whereas under the former
interpretation the ratio of profit-sharing would be always the same.

3. Provision should be made, either in the original articles or at a
subsequent time, for a change in the profit-sharing ratio in the event
of a partner’s withdrawing some portion of his original investment if
such withdrawal is allowed. It may be stated here that an agreement
between the partners as to any ratio for division of profits can
be made at any time and will govern such ratio, but must be on a
determinable basis.

4. Where the articles are silent as to the division of losses, the
profit-sharing ratio governs. Where a different ratio is desired,
specific statement of it must be made. Of course, upon the inception
of an undertaking losses are not contemplated, but the experience of
others should cause provision to be made for apportionment of losses in
order to avoid possible difficulties or disputes.

5. Unless the articles--or subsequent agreements--provide for the
payment of salaries to any or all of the partners, none are allowed.

6. The conditions governing the partners’ drawings should be explicit
as to the amount to be drawn during a given period. It should be stated
explicitly whether excess drawings shall be regarded as a charge
against capital, or as the basis for an interest charge, or simply as
an excess drawing standing in the partner’s current account without
penalty other than a disallowance of future drawings until lapse of
time brings the total amount drawn within the agreed limitations.

7. The manner of handling undrawn profits should be made definite. Are
they to be transferred to the capital account and so be made a part
of capital, resulting in changing capital ratios; or are they to be
carried as open balances in the drawing accounts and thus take on the
nature of temporary loans subject to withdrawal at any time?

=Average Investment as a Basis for Profit-Sharing.=--Attention should
be called to a basis for profit-sharing sometimes employed for special
partnerships, entered into for the performance of a specific contract
or for doing any special work. In these cases the capital needed may
not be known at the start, or if known may not all be required then but
is to be furnished by whichever partner may have available funds at the
time of need. In such cases the basis of profit-sharing may be made the
amount of capital furnished by each partner and the length of time of
its use in the enterprise. Two methods of determining the ratio may be
employed.

FIRST METHOD. Each investment may be multiplied by the number of days
occurring between the date on which the investment was made and the
date of profit determination, giving a result which may be called
“day-dollars” of investment in a sense similar to the term foot-pound
in physics. From the total day-dollars of investment must be subtracted
the day-dollars of withdrawals, arrived at similarly, thus showing net
investment in terms of day-dollars. The sum of all the investments
in day-dollars becomes the basis on which to prorate profits, each
partner’s share being the part which his individual net investments
bear to this total net investment.

SECOND METHOD. The original investment of each partner may be
multiplied by the time it remains unchanged, i.e., until it is added
to or some portion is withdrawn. Similarly, this changed capital is
multiplied by the time it remains fixed, and so for every change. The
total of these items constitutes each partner’s net investment, from
which the profit-sharing ratio is determinable as above. In the problem
given below, for purposes of illustration the dates are so taken that
the calculation can be made on a month-dollar instead of a day-dollar
basis, thus shortening the operation. The capital accounts of the
partners, showing investments and withdrawals, are as follows:

                 A. B. CARD
  =========================================
  19—                 | 19—
  Jan. 15   2,500.00  | Jan.  1   10,000.00
  Apr.  1   4,500.00  | Mar. 15    7,500.00
  June 15   1,500.00  | June  1    5,000.00

                D. E. FOLWELL
  =========================================
  19—                 | 19—
  Feb.  1   3,000.00  | Jan.  1    5,000.00
  May  15   2,000.00  |      15    5,000.00
                      | Apr.  1    5,000.00
                      | June 15    2,500.00

Profits as on July 1, 19—, were $5,000. Determine each share.

                   SOLUTION
           (Using the second method)

   Amount          Months   Month-Dollars
  A. B. CARD:
  $10,000       ×    ½         $ 5,000
    7,500       ×  2            15,000
   15,000       ×    ½           7,500
   10,500       ×  2            21,000
   15,500       ×    ½           7,750
   14,000       ×    ½           7,000
   ------          -----       -------
                   6                       $63,250

  D. E. FOLWELL:
  $ 5,000       ×    ½         $ 2,500
   10,000       ×    ½           5,000
    7,000       ×  2            14,000
   12,000       ×  1½           18,000
   10,000       ×  1            10,000
   12,500       ×    ½           6,250
                   -----       -------
                   6                        55,750
                                          --------
  Total investment in month-dollars       $119,000
                                          --------
                                63,250
  Card’s share of the profit:  -------- of $5,000 = $2,657.56
                                119,000
                   55,750
  Folwell’s share: ------- of $5,000 = $2,342.44
                   119,000

The first method will, of course, give identical results. The second
method has the slight advantage that the Investment Months column will
always total the same as the length of the fiscal period, provided each
partner makes his initial investment at the first of the period—which
is not always the case—and acts as a check on the accuracy of that part
of the calculation.

=Interest on Partners’ Investments.=—A second problem of importance in
connection with partnership accounting is the interest on partners’
investments. The purpose of allowing such interest is twofold: First,
it may serve as an indication of the excess of the profits in this
enterprise over the return on the investment of a like amount in the
money market, thus dividing the partnership profits into two parts,
interest and management earnings; and second, it may serve as a method
of distributing profits up to a certain amount on the basis of capital
investments, where the agreed-on ratio is different from the capital
ratio, thus distributing the period’s profits on two different bases or
ratios.

This is done sometimes to equalize somewhat the comparatively
smaller-ratio profits of the partners who have made the larger
investments. This problem, however, will be treated more fully in a
later chapter where the methods of booking the interest, its treatment
in case of a loss instead of a profit, and the computation of
interest on drawings as well as on investments will be discussed and
illustrated. Suffice it to say here that disputes frequently occur in
connection with these problems and that detailed provision as to their
handling should be made in the partnership agreement.

=Valuation and Correct Booking of Original Investments.=—A third
matter of importance is the valuation and correct booking of the
original investments other than cash. In the case of the sole
proprietor this is of comparatively little importance because he will
always reap the entire gain and therefore suffer no harm ultimately
from present undervaluation of his property investments. In the
partnership, however, where separate investment and personal accounts
must be kept with each member, the correct valuation of the assets is
of importance, inasmuch as the property of the partnership is the joint
property of all partners and all will share ultimately in the effect of
any under-or over-valuation at the time of investment. The partners’
accounts are set up for the purpose of showing their respective
interests in the enterprise, and after investments are once brought
onto the books these accounts govern the equities of the various
partners.

=Distinction between Buying Out an Interest and Making an Investment to
Secure an Interest.=—The taking in of a partner by a sole proprietor
or his admission as a new member to an existing partnership raises
a point about which there must be a very definite understanding. A
distinction must be made between purchasing from the owners an interest
in the business as it stands at any given time and making an investment
in a business to secure such an interest. The first transaction is
of a personal nature between the owners and a third party who is
a purchaser; in the other transaction the third party, who is an
investor, puts in money to acquire an interest and his investment
becomes the common property of all the owners of whom he is now one. In
the one case the capital of the business is not increased, in the other
case it is increased by the amount of the new investment. For example,
if a balance sheet shows:

  Cash          $ 5,000.00      Liabilities          $ 6,000.00
  Other Assets   15,000.00      A. Jackson, Capital   14,000.00

and Jackson sells a half-interest to B. Killian for a given
consideration, the new balance sheet becomes:

  Cash          $ 5,000.00      Liabilities          $ 6,000.00
  Other Assets   15,000.00      A. Jackson, Capital    7,000.00
                                B. Killian, Capital    7,000.00

In this case no new capital has come into the business because the
purchase price does not go to the business as such but to A. Jackson as
a private individual.

If, however, Killian is admitted as a half-interest partner by making a
cash investment equal to the amount of Jackson’s interest on the basis
of book values, the balance sheet of Jackson and Killian will read:

  Cash          $19,000.00      Liabilities          $ 6,000.00
  Other Assets   15,000.00      A. Jackson, Capital   14,000.00
                                B. Killian, Capital   14,000.00

showing an investment of double the capital in the original Jackson
business.

The question of good-will which frequently comes up when an interest in
a going business is secured will be treated in Chapter XXXV, where also
the manner of closing the books of the old business and opening those
of the new firm will be shown.

=Final Considerations.=—From the foregoing discussion it is evident
that the partnership relation gives rise to some of the most vexing
questions which confront the accountant and the lawyer. It is a
truism, therefore, that in drawing up the partnership agreement, all
eventualities should be foreseen as nearly as possible and that they
should be carefully provided for. As a final safeguard it is well to
provide for the submission to arbitrators of disputes subsequently
arising, the decision to be binding upon all the partners. This will
avoid endless, expensive, and usually unsatisfactory actions at law
and will more nearly secure justice to all. As a step in the same
direction, it is suggested that provision be made for the drawing up of
correct balance sheets and profit and loss statements, that sufficient
time be allowed each partner to examine them as to their correctness
and, if satisfied, that each be compelled to subscribe to them. This
will localize any dissatisfaction within a limited time period and
secure its adjustment while all salient points are still fresh in the
minds of the interested parties.




CHAPTER XXXIV

CAPITALIZATION OF THE PARTNERSHIP


=Sources of Capital.=—From an accounting viewpoint, the capital of any
business enterprise is the excess of its assets over its liabilities.
Usually, the main fund of capital is secured by original contribution.
In a partnership, the partners’ investments provide the common
partnership fund. Thereafter, additions to the capital may be secured
in several ways:

  1. Profits may be left in the business instead of
      being withdrawn.

  2. Specific contributions may be made by the partners,
      which are either to be considered as additions to
      their capital investment, or are to be treated as
      more or less temporary loans to the business.

  3. A new partner may be taken in, his contribution
      increasing the partnership capital.

The present chapter deals with original investments and with the
first two types of additional capital mentioned above, while the next
chapter discusses the admission of new members and the consolidation of
partnerships.

=Original Contributions.=—It sometimes happens that the partnership
agreement does not state specifically how much each partner shall
invest in the business. For example, the agreement may state that
partner A is to contribute certain properties, i.e., place of business
and equipment; that B is to contribute a stock of goods, and that the
investments of the remaining partners are to consist of cash, the exact
amount of which is not stated because it depends upon the valuation to
be placed upon the property and merchandise invested by A and B.

After such a valuation has been made and the amounts of the cash
contributions have been determined, it may be found that the total
investment is more than the business requires; or it may develop that
some of the partners do not have sufficient funds available to pay
their shares, while others may be able to contribute more than their
respective shares. It thus happens that the partnership agreement is
not always rigidly enforced, some partners contributing more, and
others less, than the agreed amounts. At the time this is looked
upon as a temporary arrangement, but it often results in a permanent
condition. The partnership agreement should contain provision for such
a contingency. If it does not, a later agreement should be made to
regulate the relations between the partners.

=Adjustment of Capital Contributions.=—Whenever a partner contributes
more than his agreed share, it is customary to allow him interest on
the excess amount, and other partners whose investment may be less than
the agreed amount are usually charged with interest. This is obviously
an equitable method of meeting the situation.

As a rule, these interest adjustments are handled through the Profit
and Loss account, i.e., the partners who invest less than the agreed
share are considered to owe interest to the partnership, and those who
invest more have an interest claim against the business—not against
the other partners individually. The debit or credit balance in the
Profit and Loss account resulting from these adjustments is in turn
distributed among _all_ the partners in the profit-or-loss-sharing
ratios. It should be clearly understood, however, that although these
adjustments are made through the Profit and Loss account, there is no
element of business profit or expense involved. For this reason, these
interest entries should be made direct in the appropriation section of
the Profit and Loss, and should never be booked in the regular Interest
accounts.

The following illustrations will bring out the different methods of
adjustment:

  PROBLEM. A, B, and C are equal partners under
  an agreement to contribute each $15,000. Provision
  is made that excess contributions are to be credited
  with interest at 6% and that deficits are to be
  charged at the same rate. The records show that actual
  contributions were: A, $18,000; B, $13,000; and C,
  $11,000.

  Three methods of adjustment will be shown.

   FIRST METHOD
      A’s excess  is $3,000, interest on which is $180.
      B’s deficit is $2,000, interest on which is $120.
      C’s deficit is $4,000, interest on which is $240.

  These three interest amounts are brought upon the books
  by the following journal entries:

      Profit and Loss         180.00
             A                        180.00
      B                       120.00
      C                       240.00
             Profit and Loss          360.00

  The Profit and Loss account then shows a credit balance
  of $180, which is distributed as follows:

      Profit and Loss   180.00
             A                  60.00
             B                  60.00
             C                  60.00

  The net effect of these adjustments is a credit to
  A of $240, and debits to B and C of $60 and $180
  respectively.

  Note that A is credited with $180 for his excess of
  $3,000, and Profit and Loss is debited with the same
  amount, because it is the business that owes him this
  interest. If this Profit and Loss debit is distributed
  separately, A’s share of it is $60, so that his real
  credit on his $3,000 excess is not $180 but $120. On
  the other hand, the combined debits to B and C result
  in a credit to Profit and Loss of $360, and if this
  item is distributed as such, A’s share of it is $120,
  thus making his total credit on the complete adjustment
  $240. A similar explanation applies to the adjustments
  for B and C.

  SECOND METHOD. The first method was based on
  a consideration of the respective excesses or deficits
  on capital investments, but the same result may be
  obtained by comparing all contributions with the amount
  of the smallest investment, viz., $11,000 by C. This
  would show A’s excess over C as $7,000, and B’s excess
  over C as $2,000, and these two amounts may be treated
  as loans to the business. The result is that A is
  credited with 6% on $7,000, and B with 6% on $2,000, as
  follows:

      Profit and  Loss   540.00
          A                      420.00
          B                      120.00

  The debit to Profit and Loss is charged in equal shares
  to the three partners as follows:

      A                  180.00
      B                  180.00
      C                  180.00
          Profit and Loss        540.00

  The final result shows a net credit to A of $240, a net
  debit of $60 to B, and a net debit of $180 to C, the
  same as by the first method.

  THIRD METHOD. The total capital contributed
  is $42,000. To be equal partners under the agreement,
  each should have contributed one-third of the common
  fund, or $14,000. Actually, A’s investment is $4,000
  in excess of this, while B’s is $1,000 less, and C’s
  $3,000 less. The excess contribution of A, $4,000, may
  be looked upon as a loan to B and C as individuals,
  bringing their shares up to the $14,000; viz., $1,000
  to B and $3,000 to C. Instead of making the adjustment
  through the Profit and Loss account as in the first
  two methods, the interest is now adjusted between
  the three partners as private persons, the entries
  affecting only the partners’ personal accounts. This
  adjustment results in a credit to A and a debit to B
  for $60, A having loaned B $1,000; and in a credit to
  A and a debit to C for $180, A having loaned C $3,000.
  A’s total credit is $240, and B’s and C’s debits are
  respectively $60 and $180, the same as by the other two
  methods.

Thus it is seen that any of the three methods employed leads to the
same results. It will be observed, however, that in the example given
the contemplated investments are to be equal for the three partners
($15,000), and the profit and loss is to be shared on the same basis.
The three different methods of adjusting interest lead to the same
result only when the profit-sharing ratio is identical with the ratio
between the contemplated investments.

=Averaging Investments.=—In temporary partnerships, organized for
carrying out a particular undertaking, the amount of capital needed is
often not known and may vary at different stages of the undertaking.
Here the partners usually contribute as need arises, and withdraw when
funds not needed in the business become free. Under such conditions,
the partnership agreement should always state the manner in which
the partners’ interests are to be adjusted. A common method, as
explained and illustrated in Chapter XXXIII, is to compute the average
investment of each partner and to use these amounts as the basis for
profit-sharing. In this way the problem of interest adjustment as such
is completely eliminated.

=Accretions of Capital through Profits.=—At the close of the fiscal
period, when results are summarized, the net profits are transferred
to the partners’ accounts. As the amount of profit left in the
business usually differs for different partners, it is evident that
the partners’ capital accounts at the end of the period will show a
different ratio from that existing at the beginning. Assume that a
given partnership consists of two members, A investing $2,000 and B
$1,000, and that profits are to be shared in the same ratio as these
original investments, i.e., 2:1; assume further that A withdraws the
greater part of his profits while B allows his share to accumulate, and
that at the end of a number of years the capital ratios have completely
changed, the capitals being, say, $8,000 for A and $24,000 for B.
Obviously, under such circumstances it would not be just for A still
to receive twice as much profit as B on the basis of the _original_
investment ratio of 2:1.

Whenever it is intended that profits are to be shared on the basis of
investments, the profit-sharing ratio should be changed from time to
time in order to correspond with actual investments, and this should be
plainly stated in the partnership agreement; or increments to capital
through the accretion of profits should be treated as temporary loans
subject to withdrawals and bearing interest until withdrawn. It should
be the policy of the firm to offer an incentive to its members to
leave their surplus profits in the business and so prevent the need of
borrowing from outside.

Finally, it may be said that in the event of dissolution, accretions
through profits constitute claims against the firm ranking before the
partners’ capitals. Such accretions partake of the nature of loans
and for this reason they are sometimes carried in _partners’ loan
accounts_, to keep them separate from the original capital investments,
or are left in the “Personal” accounts which are not then closed into
the “Capital” accounts.

=Additional Contributions and Loans.=—When contributions are made
by partners there should be a specific understanding as to whether
such funds are to be considered as additional capital or as loans to
the partnership. In the first case the items should be shown in the
capital accounts of the partners, thus requiring a reconsideration of
the profit-sharing ratio—although a change is not always made; in the
second case they should be entered in the partner’s loan accounts with
corresponding interest adjustments, as has been explained.

Loans by partners may be evidenced by firm notes signed by all the
partners. However, these notes should not be carried in the regular
Notes Payable account because that account represents the firm’s
liability to outsiders, which must ordinarily be met promptly according
to the terms of the instrument. At common law a partner may not bring
suit against the firm of which he is a member; hence there is an
essential difference between these two kinds of notes. For this reason
a new account is opened entitled “Partners’ Notes Payable,” which is
credited whenever the firm issues a promissory note to any of its
members. Where the loan is not evidenced by a formal note, record
should be in the partner’s loan account. As stated on page 324, any
loans made by partners to the business rank before regular capital
claims, and this priority is not changed when such loans are evidenced
by promissory notes.

=Partners’ Loans in Relation to Firm Credit.=—Loans made by partners to
the business may be viewed in two very different ways, depending upon
the credit rating of the firm. If there is distrust as to the partners’
standing and financial condition, the fact that they themselves, who
know the real condition better than any outsider, are willing to put
additional capital into the business, is the best evidence that the
firm is not so badly off. Consequently, loans made by partners under
such conditions help to increase the firm’s credit.

On the other hand, if the integrity of any member of the firm is
questionable, his loans to the business do not necessarily increase
the credit of the firm; for in case of financial trouble he may
attempt secretly to withdraw part of the assets from the business and
to conceal the true condition of affairs from the creditors. Being on
the inside, he is in a position to do this before outsiders can even
scent trouble. Normally, however, the loan of a partner makes a better
impression than a loan from an outsider, since in case of insolvency
and dissolution the partner’s loan ranks _after_ the claims of outside
creditors.

It sometimes happens that in a partnership one or more of its members
lends the firm comparatively large amounts of money and accepts demand
notes as evidence of such loans. If the partner holding such a note is
unscrupulous, he may present it for payment at an unfavorable time and,
if the business is unable to pay, may demand an “accounting.” He may
even go so far as to cause its dissolution, repurchase the business at
much less than its true value and so “freeze out” his partners.

=Borrowed Capital.=—It may happen that a firm is obliged to borrow
funds from outside in order to increase its working capital. For
instance, the partners may have no available private funds for
further investment and yet may not desire to admit new capital on a
profit-and-loss-sharing basis. Such loans usually are on a long-time
basis, and should not be included in the Notes Payable account.
A special account should be opened, e.g., Notes Payable Special,
Mortgage, or some other title plainly indicating the nature of the
loan. Sharp distinction should be made between funds borrowed for the
purpose of increasing the permanent capital, and money borrowed for
current needs. The need for additional current funds usually results
from seasonal fluctuations in business, slow collection of customers’
accounts, or slow movement of stock, and is met by current borrowing at
a bank; while the need for increased capital is caused by the original
capital investment being insufficient to meet present conditions.




CHAPTER XXXV

OTHER PARTNERSHIP PROBLEMS


=Admission of a New Partner.=—In Chapter XXXIII a distinction was made
between buying out an interest in a business and making an investment
in a business. In the former case no new capital is acquired, while in
the latter the capital of the firm is increased by the amount of the
new partner’s contribution.

When a new partner is admitted he usually acquires not merely the right
to share in the profits, but he also obtains a share in the net worth
(often called “net assets”) of the enterprise. For this reason it is
necessary that all the partners, including the new member, agree on the
value of the net assets, and in this connection any of the following
possibilities may arise:

  1. Upon admission of the new partner the book accounts
      may be considered to represent the true status of
      the business. A balance sheet is drawn up and the
      new partner is admitted on the basis of the net
      worth it shows.

  2. It may be agreed that the assets are not worth the
      amount at which they are carried on the books and
      that a new valuation be placed upon them.

  3. The business may be considered to be worth more
      than the amount shown by the balance sheet.

=First Case.=—In the first case little difficulty is met in making the
opening entry admitting the new partner. For instance, if the balance
sheet shows a net worth of $30,000, and the new partner wishes to make
an investment in order to secure a one-fourth interest in the firm, the
amount to be contributed is manifestly $10,000. Assuming that he makes
a cash investment of $10,000, the following entry meets all accounting
requirements:

  Cash              10,000.00
        A, Capital             10,000.00

As a result of this cash investment of $10,000, the net worth of the
new firm is increased to $40,000 and the one-fourth interest belonging
to A is evidenced by his capital account at $10,000. The new firm may
now continue the old records and no further adjustments need be made.

=Second Case.=—In the second case it is necessary to place a new
valuation upon the assets of the old firm and the accounts of the old
partners must be adjusted accordingly. For instance, suppose A and B
are equal partners and the financial status of the firm is shown by the
following balance sheet:

                  BALANCE SHEET OF A & B

  Cash                    $ 1,000.00    Notes Payable     $ 3,000.00
  Accounts Receivable      10,000.00    Accounts Payable    5,000.00
  Merchandise               6,000.00    Mortgage on Bldg    4,000.00
  Building and Equipment   16,000.00    A, Capital         10,500.00
                                        B, Capital         10,500.00
                          ----------                      ----------
                          $33,000.00                      $33,000.00
                          ==========                      ==========

More capital is needed and C is invited to make an investment.
Upon investigation he finds that there are included under Accounts
Receivable many old items, of which it is estimated $1,000 will be
uncollectible; that the merchandise is overvalued to the amount of
$500; and that the building and equipment are worth $1,500 less than
is shown on the books. He offers to make an investment to secure a
one-fourth interest and his offer is accepted.

As a result of the new valuations placed upon the assets, the net
worth of the firm is now $18,000, against the old showing of $21,000.
Consequently, the capital accounts of A and B are reduced from $10,500
to $9,000 each. The new partner is to invest a certain sum sufficient
to acquire a one-fourth interest in the new business. Hence the
combined capital of A and B, amounting to $18,000, will represent
three-fourths of the new capital, and consequently the amount to be
invested by C is $6,000. Thus the new capital of the firm will amount
to $24,000, one-fourth of which, or $6,000, is credited to C’s capital
account.

The balance sheet of the new firm will show:

                BALANCE SHEET OF A, B & C

  Cash                    $ 7,000.00    Notes Payable     $ 3,000.00
  Accounts Rec.  $10,000                Accounts Payable    5,000.00
  Less—Reserve     1,000    9,000.00    Mortgage on Bldg    4,000.00
                 -------                A, Capital          9,000.00
  Merchandise               5,500.00    B, Capital          9,000.00
  Building and Equipment   14,500.00    C, Capital          6,000.00
                          ----------                      ----------
                          $36,000.00                      $36,000.00
                          ==========                      ==========

The firm has thus secured $6,000 additional capital, on a basis
somewhat unfavorable for the present, but inasmuch as the books now
show conservative values, no real injustice results.

=Third Case.=—The third case shows the firm in a position to demand
something more than book values as the basis for admission of the new
partner. The presumption is that the old firm is favorably known, has
an established trade and patronage, built by fair dealing and judicious
advertising, by its favorable location, and the numerous other ways
in which a substantial business may be developed. Its standing in the
community is a factor of value to the firm because it brings trade to
its doors. Other conditions being equal, a firm which enjoys a good
reputation is worth more than a new venture. Such a reputation is
known as “good-will” and constitutes an exceedingly valuable though an
intangible asset. The essence of good-will is the ability to produce
more than normal profits, i.e., profits above the average in that line.
Consequently, whenever the members of a firm consider the admission
of a new partner, good-will is regarded as one of the _assets_ of the
existing enterprise, thereby increasing its net worth.

The valuation of good-will, however, is a difficult matter and it is
a well-established principle that good accounting will not allow the
asset good-will to be set up on the books of a concern unless it has
come into possession of it by purchase or unless a part of its own
good-will is sold to a new partner. In this case the price received for
the portion sold represents an outsider’s valuation and may therefore
become the basis for valuing the whole of it.

The following case will serve as an illustration:

  PROBLEM. Assume that X has a one-half interest
  in a firm, and Y and Z a one-fourth interest each, the
  balance sheet showing the following summarized facts:

            BALANCE SHEET OF X, Y & Z

  Cash          $ 2,000.00    Liabilities   $10,000.00
  Other Assets   48,000.00    X,  Capital    20,000.00
                              Y,  Capital    10,000.00
                              Z,  Capital    10,000.00
                ----------                  ----------
                $50,000.00                  $50,000.00
                ==========                  ==========

  An outsider, R, is now to be admitted to a one-fifth
  interest by making an investment in the business. The
  relative shares of the others are to remain as before.
  Hence, after R’s admission, X will have two-fifths,
  and Y, Z, and R one-fifth interest each. It is further
  assumed that no revaluation of the tangible assets is
  necessary.

  The net worth of the old firm, according to the books,
  is $40,000, and if this were taken as the basis
  for admitting R, an investment of $10,000 would be
  sufficient to acquire a one-fifth interest in the new
  firm. However the business is considered to be worth
  $10,000 more than the $40,000 shown in the balance
  sheet, and for this reason, instead of paying $10,000,
  R is required to invest $12,500. The excess of $2,500
  is paid by R as an offset to the shares of the others
  in the good-will of the firm.

There are three ways of treating this good-will element, viz.:

 FIRST METHOD. Debit the Good-Will account for the amount actually
paid for it by R, viz., $2,500, and credit the capital accounts of the
old partners in proportion to their shares in the profits:

  Good-Will         2,500.00
       X,  Capital            1,250.00
       Y,  Capital              625.00
       Z,  Capital              625.00

  As a result of this entry, the capital account of X is
  $21,250, and those of Y and Z $10,625 each. The capital
  account of R, however, shows a credit of $12,500. In
  other words, R’s interest in the net assets—although
  not in the profits—of the business as shown by his
  account is _larger_ than that of Y and Z, while
  as a matter of fact he is to have an equal share. For
  this reason, this method of treating good-will is not
  satisfactory.

  SECOND METHOD. This method regards the matter
  from a different standpoint. Taking book values as a
  basis, the share bought by R is worth only $10,000.
  However, on account of good-will, the real value of
  this share is considered to be higher and R is required
  to pay $12,500 for it. Hence, in order that the books
  may show actual values, the good-will item must be
  added to the assets of the old firm, at the same time
  increasing the capital accounts of X, Y, and Z in
  proportion to their shares in the profits. The entry is:

  Good-Will         10,000.00
       X,  Capital             5,000.00
       Y,  Capital             2,500.00
       Z,  Capital             2,500.00

  As a result of this adjustment the capital of the
  old firm is shown as $50,000. R now invests $12,500,
  and the capital is thereby increased to $62,500. The
  capital accounts of the four partners now show $25,000,
  or two-fifths for X, and $12,500 or one-fifth each for
  Y, Z, and R.

  THIRD METHOD. Under this method of handling
  good-will, the extra $2,500 invested by R is treated as
  a bonus for distribution among the members of the old
  firm, their capital interests in the new firm remaining
  the same as in the old and R’s appearing at $10,000.
  There is no objection to this method if R is satisfied.

Of the three methods, the second usually proves the most satisfactory.

A similar problem involving the handling of good-will is encountered
when a member of an existing firm sells out his interest, including
a share of the good-will, to one who takes his place in the firm.
Here the transaction may be looked upon as a private deal between
buyer and seller, in which case the buyer merely succeeds to the
seller’s interest in the firm, his capital appearing on the books at
the same amount as the seller’s former capital figure even though the
new partner pays more for it; or the good-will may be brought onto
the books and the capitals of all the partners be shown at increased
figures, as under the second method discussed above.

=Consolidation of Partnerships.=—There are various reasons why the
consolidation of partnerships may be of mutual advantage to the
individual firms concerned. When two or more firms consolidate, the
competition which formerly existed between them is eliminated and
co-operation takes its place. Also by uniting their businesses, many
of the operations which were formerly performed separately are now
amalgamated with resulting savings. Many other advantages may result
from such consolidations.

From the standpoint of the accountant, the consolidation of
partnerships is essentially the same as the admission of new partners,
the same principles applying to both. Before actual consolidation
takes place, it is necessary for each of the partnerships to place a
new valuation upon its assets and for all concerned to agree upon the
new figures. In almost all cases good-will is an important factor. The
valuation of good-will requires an investigation of the profits and
profit-earning capacity of the member firms. Conditions affecting the
profits of the various firms must be equalized as nearly as possible
so that the earning capacity of each can be compared on an equitable
basis. Such questions as the way in which partners’ salaries, interest
on capitals, withdrawals, and loans have been handled; the relation of
outside sources of income, if any, to the profit of any of the member
firms; and whether the consolidation contemplates taking over such
source of profits—these and similar questions must be considered and
treated equitably for all concerned.

The following illustration is given to indicate the bookkeeping
problems incident to consolidations:

  PROBLEM. A and B, equal partners in an
  established business, consolidate with C and D, equal
  owners of an allied business. A and B are each to have
  a one-third, and C and D each a one-sixth interest in
  the new firm. The following balance sheets show their
  financial positions:

                  BALANCE SHEET OF A & B
  Cash                    $ 2,500.00    Notes Payable     $ 5,000.00
  Notes Receivable          1,000.00    Accounts Payable    8,000.00
  Accounts Receivable      22,000.00    Mortgage on Real
  Merchandise              10,000.00      Estate            4,000.00
  Furniture and Fixtures    2,500.00    A, Capital         16,000.00
  Delivery Equipment        1,500.00    B, Capital         16,000.00
  Real Estate               9,500.00
                          ----------                      ----------
                          $49,000.00                      $49,000.00
                          ==========                      ==========

                  BALANCE SHEET OF C & D
  Cash                    $ 5,000.00    Notes  Payable    $ 5,000.00
  Accounts Receivable      15,000.00    Accounts Payable    7,750.00
  Merchandise               8,000.00    C, Capital          9,000.00
  Furniture & Fixtures      2,000.00    D, Capital          9,000.00
  Horse & Wagon               750.00
                          ----------                      ----------
                          $30,750.00                      $30,750.00
                          ==========                      ==========

  A careful valuation of the various properties shows
  the figures of the balance sheet of C & D to be
  conservatively estimated. In regard to A & B’s
  figures, however, it is decided to allow $2,000 for
  possible bad debts, and to value their merchandise at
  $9,000, delivery equipment at $1,000, and real estate
  at $9,000. Furthermore, it is agreed that C & D’s
  good-will is to be valued at $5,000, and A & B’s at $10,000.

  After the adjustments the new balance sheets appear as follows:

                     BALANCE SHEET OF A & B
  Cash                       $2,500.00    Notes Payable     $5,000.00
  Notes Receivable            1,000.00    Accounts Payable   8,000.00
  Accounts  ”       $22,000               Mortgage on Real
    _Less_—Reserve    2,000  20,000.00      Estate           4,000.00
  Merchandise                 9,000.00    A, Capital        19,000.00
  Furniture and Fixtures      2,500.00    B, Capital        19,000.00
  Delivery Equipment          1,000.00
  Real Estate                 9,000.00
  Good-Will                  10,000.00
                            $55,000.00                     $55,000.00
                            ==========                     ==========

                     BALANCE SHEET OF C & D
  Cash                    $ 5,000.00    Notes Payable      $ 5,000.00
  Accounts Receivable      15,000.00    Accounts Payable     7,750.00
  Merchandise               8,000.00    C, Capital          11,500.00
  Furniture and Fixtures    2,000.00    D, Capital          11,500.00
  Horse and Wagon             750.00
  Good-Will                 5,000.00
                          ----------                       ----------
                          $35,750.00                       $35,750.00
                          ==========                       ==========

  It is agreed that C and D’s capitals are each to be
  taken as representing one-sixth of the capitalization
  of the new firm, and A and B are each to contribute
  $4,000 in cash to bring their capitals up to the
  required amounts.

  The opening balance sheet of the consolidated firm will
  then read as follows:

                         BALANCE SHEET OF A, B, C & D
  Cash                       $15,500.00   Notes Payable    $10,000.00
  Notes Receivable             1,000.00   Accounts Payable  15,750.00
  Accounts                                Mortgage on Real
  Receivable        $37,000                 Estate           4,000.00
    _Less_—Reserve    2,000   35,000.00   A, Capital        23,000.00
  Merchandise       -------   17,000.00   B, Capital        23,000.00
  Furniture and Fixtures       4,500.00   C, Capital        11,500.00
  Delivery Equipment           1,750.00   D, Capital        11,500.00
  Real Estate                  9,000.00
  Good-Will                   15,000.00
                             ----------                    ----------
                             $98,750.00                    $98,750.00
                             ==========                    ==========




CHAPTER XXXVI

PARTNERSHIP PROFITS


=Ambiguity of Definition of Profits.=—The term “profits” as applied
to business is perhaps used with as little uniformity as any term met
with. When a concern speaks of its profits, it is difficult to know
exactly what is intended, because the meaning of the term depends very
largely on the methods of accounting of that particular concern. The
reported profits of different firms are not, therefore, a true basis
for judging their relative worths. For instance, although the net
profits of a single proprietorship and of a partnership are usually
determined in the same manner, there is nevertheless variation in the
treatment of some items such as salaries, drawings, interest on capital
invested, etc. The partnership form, like the single proprietorship,
contemplates an investment on the part of the owners not only of
capital but also of time and effort. This is one of the differences
in working organization between these forms of business and the
corporation. Investment in the corporation is of capital only. If
services are employed by the corporation, they are paid for and charged
as services, salaries, etc.

=Compensation for Time and Services.=—In the partnership form of
organization, the active and direct management of the business is
usually vested in the owners. Where this is not the situation, as in
a limited partnership, or whenever one or more of the partners does
not take an active part in the management of the business, his share
of the profit is usually curtailed by the allowance of salaries to the
managing partners before any distribution of profits in the agreed
ratio is made to the partners. Thus, partnership profits include not
only the salaries of the owners but, in general, a recompense for the
time and ability of the proprietors. The man who makes an investment in
a partnership does so usually because he desires to invest his time as
well as his capital. He expects, therefore, to receive not only a fair
rate of interest on his money but also pay for the services he renders.

=Interest on Investment.=—The rate paid for the use of money is
dependent both on the money market and on the element of risk involved
in the particular investment. In mining ventures, for instance, where
there is frequently considerable uncertainty as to the return of the
principal, the interest rate is sufficiently high to offset, during
the life of the loan, the possible loss of the principal at the end.
So an investor in a partnership, because of the greater element of
risk in comparison with other and safer investments, requires a higher
rate of return in interest than he would ordinarily secure through the
investment of his capital in sound securities.

=Partnership Profits Defined.=—Partnership profits, therefore, contain
these two elements—interest and recompense for services. If profits are
extraordinary or above normal, such excess may be and usually is the
measure of the more-than-average ability of the partners, unless it
results from the monopolistic character of the business.

In speaking of profits the term is used in a technical accounting sense
and has reference to the manner of their showing in the Profit and Loss
account and its content. That account or the Profit and Loss statement
usually develops a so-called “net profit” which is distributed to the
partners. Such profits are more easily defined by stating what should
not be considered in their determination, than by attempting to give an
itemized list of the income and expense items entering therein.

In accordance with the theory of the law of partnership, the net
profit of a partnership is the balance of the Profit and Loss account
before interest on owners’ capital investments and the recompense to
the partners on account of time and services are taken into account.
In the accounting for an ordinary partnership, such items as interest
on capital investments, salaries to partners, etc., are not to be
considered as expense items to be deducted from profits before the
net earnings are determined, but as a part of the net profits to be
distributed to the several owners of the business. The payment of
salaries and interest on capital is made simply for the purpose of
distributing net profits according to certain methods agreed upon by
the members of the firm.

=Profit and Loss for Comparative Purposes.=—For the purpose of
comparing results between different periods, the Profit and Loss
account should have a fairly uniform content from year to year. It
should set forth the amount of the net operating profit, in the
calculation of which account should be taken of all ordinary income and
expenses incurred in the operation of the business. This will provide
the basis for comparison, as between periods, of the ordinary normal
activities of the business.

In the “Non-Operating” or “Other Income” sections any
“outside-the-business” income and expense should be shown, such as
income from outside investments, and expenses in connection therewith.
Items of extraordinary income and expense, however, such as the profits
arising through the sale of good-will, the sale of real estate,
extraordinary losses from fire, etc., usually are taken directly into
the partners’ accounts so as not to destroy the value (for purposes of
comparison) of the results shown by the Profit and Loss account from
year to year.

In this way, while the purpose of the Profit and Loss account is to
summarize the temporary proprietorship accounts, some proprietorship
items may be omitted for the sake of making the summary of greater
value to the proprietors. Such a method of handling does not conflict
with principles previously laid down, but rests upon the general
principle that accounting methods and forms must be flexible in order
to conform to the requirements of particular cases; else they fail in
fulfilling their full purpose.

=Allowance of Salaries.=—The allowance of salaries to partners is not
so much for the purpose of measuring the excess of the profits of
the partnership over what the individual owners might have earned by
working for others, as it is for the purpose of equalizing or adjusting
their interests on an equitable basis. When, on the one hand, men
invest their abilities and services in addition to their capitals, and
on the other hand, the profit and loss-sharing ratio is determined on
the basis of capitals invested, the greater ability of a given partner
may be recognized and compensated by a salary. Thus a partner of
exceptional ability secures a larger share in the profits by receiving
a fixed amount under the head of salary, the remaining part of the
net profits being divided among all the partners in the profit and
loss-sharing ratio.

=Allowance of Interest.=—As explained in Chapter XXXIII, it is not
unusual in partnerships where the profit and loss ratio differs from
the capital ratio, to allow interest on capital. The effect of such
a provision is to secure a distribution of profits on a dual basis,
viz., a part as interest on the capitals in the capital ratio and the
remainder in the profit and loss ratio. Thus, two partners, A and B,
whose capitals are $10,000 and $15,000 respectively, with a 6% interest
allowance on capital and a subsequent half-and-half distribution of
profits, share the profits in effect on two different bases. Suppose
the profits are $6,000. The interest requirement will give A $600 and B
$900, after which $4,500 will be divided equally. Interest on partners’
capitals is thus in no sense an operating expense and should be handled
always in the appropriation section of the Profit and Loss.

If the partnership agreement makes specific provision (but not
otherwise), interest may be charged on partners’ drawings. This is
merely an additional device for adjusting the partners’ interests, and
causes a slight difference in the net shares of profits. Where interest
is allowed on capitals and also charged on drawings, the partners’
accounts, Personal and Capital, when considered together, comprise
virtually an account current, and the interest computations may be made
as will be explained in Chapter L in connection with accounts current.

Another method of profit-sharing sometimes introduced in the
partnership agreement is the device of an interest allowance for a
contribution in excess of the agreed amount and an interest charge on
partners’ deficiency of capital. This method of equalizing unequal
investments, as illustrated in Chapter XXXIV, is a fair arrangement to
all concerned.

=Interest on Partners’ Loans.=—Careful differentiation must be made
between interest on partners’ capitals and on partners’ loans. If a
loan is secured from outside parties, its interest cost is a business
expense, to be taken into account before determining net profits.
A loan from a partner does not in the least change the manner of
showing its cost. Interest on partners’ loans is not, therefore, to be
handled in the appropriation section of the Profit and Loss account,
but should be charged to the regular Interest Cost account, which is
cleared in the regular way through Profit and Loss. The credit is
to Cash if actually paid, or to the partners’ personal accounts if
unpaid, although the amount is sometimes credited to the partners’ loan
accounts in order to secure a compounding of the interest.

=Reserved Profits.=—In rare cases, before the partners’ shares in the
net profit are determined, a portion of it may be reserved for some
specific purpose. The portion so reserved is transferred from Profit
and Loss to some specified reserve account, to indicate the retention
of the profits in the business. If the profits were transferred to
the partners’ accounts, they would be subject to withdrawal from the
business. Even when shown in the reserve account, however, they belong
to the proprietors and are just as much a part of the net worth of the
business as if credited to the proprietors’ accounts. Such reservation
of profits may be for the purpose of providing for the replacement of
some fixed asset when it wears out, as buildings, machinery, etc.,
or for meeting a liability when it comes due, or for some similar
purposes. Such reservations, however, are seldom made in partnership
accounting and a complete treatment of the subject is reserved for the
work of the second year in connection with corporation accounting.

It should be noted that reserves created from profits are not to be
confused with valuation accounts, such as reserves for depreciation
and doubtful accounts. Valuation accounts in no sense represent a
reservation of net profits. They represent the credit side of certain
asset accounts. The contra debits—to depreciation or bad debts—of these
credit reserves are expenses of the business which must be taken into
account before the amount of net profit can be determined.

=Closing Profits to Partners’ Accounts.=—The disposition of profits
under a partnership does not differ materially from that under the
single proprietorship form. When the net profits are determined,
they belong to the proprietors and are usually transferred to their
accounts. The method of transfer may be either by way of the partners’
personal accounts or direct to the capital accounts. The principle
involved in either treatment was discussed at the time of closing the
books for the single proprietorship and will not be repeated here.
Where the partners do not desire to have any change shown in their
original capital accounts, the profits may be transferred to the loan
accounts of the partners or stand as open balances in their personal
accounts.

=The Appropriation Section—Distributing a Deficit.=—The appropriation
section of the Profit and Loss account shows the distribution of net
profits to the partners’ accounts. A thorough understanding of the
partnership agreement is necessary before the proper distribution
can be made. If the agreement provides for salaries and interest on
capitals and drawings, these requirements must first be met, even
though the net profits are insufficient to satisfy them. Their purpose,
as explained above, is to equalize conditions and interests among the
partners preliminary to their sharing in the profit and loss ratio.
If this equalization results in a deficit, such deficit will be
distributed in the agreed ratio and to that extent nullify some portion
of the profits distributed as salaries and interest. If specific
provision in the articles of copartnership requires a different
handling of the salaries and interest items, that provision of course
governs. Otherwise these items should be treated as above.

If any of the partners leave profits in the business, this usually
results in a changing ratio of the capital account balances. Where the
distribution of profits is based upon the original contributions, it is
advisable to transfer the profits left in the business to separate loan
accounts for the partners. The partners’ capital accounts then always
show their original contributions.

=Partners’ Withdrawals.=—Partners’ withdrawals and salaries are usually
handled in a very unsystematic way. The amount of the drawings allowed
each partner during a given period—week or month—should be definitely
determined by agreement, and regular checks should be issued for these
amounts. The payment of partners’ personal bills and the handling of
any other personal items should, as a matter of standard practice, be
made out of personal funds.

If the partnership agreement provides for salaries these should be
credited, when due, to the partners’ drawing accounts which will then
be charged with all actual drawings, whether for salary or otherwise.
The offsetting charge at the time the salary credit is made should be
to a “Partners’ Salaries” account, which at the close of the fiscal
period is closed into the appropriation section of the Profit and Loss
account, thereby showing in it the proper distribution of profits as
salary.

=Profits Determination upon Admitting a New Partner.=—Particular
care should be taken to determine as nearly as possible the correct
net profit at the time of any change in the partners’ relations. Upon
the admission of a new partner, failure to make entry in the old
partners’ accounts of any profit rightfully belonging to them leads to
its being shared with the new partner and consequently results in a
loss to the old partners. In like manner the deferring of an expense
charge—rightfully belonging to the period before the admission of the
new partner—to the period after the admission, results in a wrongful
charge to the new partner. Similarly, when a partner is admitted on a
changing profit ratio basis (as when, for example, he is to receive a
one-fourth share for three years, at the end of which time he is to
have a one-third share), an incorrect determination of profits at the
end of the three-year period may mean a loss either to him or to the
old partners. So long as the same partnership and the same profit and
loss-sharing ratios continue, no injustice results through failure to
include some such items in their proper periods, as they are cumulative
and their effect will be recorded in later periods. However, this is no
excuse for the inaccurate determination of profits at any time.




CHAPTER XXXVII

PARTNERSHIP DISSOLUTION


=Temporary Nature of Partnership.=—Because of its personal character, a
partnership has necessarily a limited duration. It must look forward to
the time when its business will have to be closed up. The chief causes
leading to a dissolution are briefly reviewed here.

=Causes of Dissolution=

1. The withdrawal of any partner. Under ordinary circumstances a
partner cannot be held to a specific performance of his contract. If
he becomes dissatisfied, suspicious, or desires for other reasons to
withdraw from his contract before its expiration, he has that power.
Such withdrawal cannot be looked upon as a right but only as a power
to be exercised under unusual circumstances. If his withdrawal before
the agreement terminates results in damage to his copartners, they
have a lawful claim against him for the amount of the damage. Under
extraordinary conditions, specific performance of the contract might be
decreed, i.e., the partner would not be allowed to withdraw.

Withdrawal does not relieve a partner from liability for partnership
debts incurred while he was a member of the firm. Any creditors not
paid by the firm may hold the withdrawing partner liable for the
debts. To be relieved from the liability on debts arising _after_ his
withdrawal, personal notice of withdrawal must be given to all the
firms with which the partnership has been dealing; a published notice
being considered sufficient for the parties not dealing with the firm
until after withdrawal.

2. Sale of a partner’s interest or admission of a new partner. When a
partner, with the consent of his copartners, sells his interest in the
firm to another, or when a new member is admitted to the partnership,
in the eyes of the law the old partnership has ceased to exist and a
new one has taken its place.

3. Limitations in the partnership agreement. The agreement may specify
the period for which the partnership is to exist. If it is a special
partnership, the object it is to accomplish may be stated and the law
considers the firm automatically dissolved as soon as that object is
attained.

4. Mutual consent of the partners. Whether or not the partnership
period is limited by the agreement, the partners may at any time
rescind their contract by mutual consent.

5. Misconduct, insanity, death, assignment, or bankruptcy of a partner.
The happening of any of these contingencies effects a dissolution.
By misconduct may be understood a member’s failure to pay the agreed
contribution of capital, failure to perform his duties, his acting in
bad faith towards his copartners, etc.

6. Illegal object. A partnership entered into for the pursuit of an
object which later becomes illegal is automatically dissolved.

7. War between nations of which partners are citizens. This dissolves
the partnership, though such dissolution may be more in the nature of a
suspension, inasmuch as the relation may be resumed upon cessation of
hostilities.

8. Bankruptcy of the firm. This results in the firm’s assets being sold
to satisfy the claims of its creditors and the firm as such ceases to
exist.

9. Sale or transfer. A firm may sell out to another firm or change its
form of organization to that of a corporation. The old firm, therefore,
no longer exists.

=Problems Incident to Dissolution.=—It is purposed to consider some of
the problems involved in winding up the affairs of a partnership. From
the schedule of causes of dissolution given above it will be seen that
a firm may be either solvent or insolvent at dissolution. The three
statements sometimes set up in the case of insolvency—the Statement of
Affairs, the Deficiency Account, and the Realization and Liquidation
Statement—will not be explained here but results obtained through them
will be taken into account. These statements are seldom met in practice
and are not standardized either as to form or content. Their treatment
is deferred to the work of the second year.

=Partnership Provisions Covering Liquidation.=—Because of the certainty
of final dissolution, it is not unusual for the partnership agreement
to make definite regulations concerning the method of liquidation. The
appointment of one of the members as liquidating partner, the manner
of distributing the proceeds from liquidation whether by instalments
or otherwise, the manner of paying the liquidator for his services—all
these contingencies should be provided for.

Where dissolution is forced by the death of one of the partners, to
determine the interest of his heirs it is necessary to take inventory
and make appraisal of the firm’s assets. To avoid this inconvenience
to the business, provision is sometimes made in the agreement that the
remaining partners shall continue the business until the end of the
regular fiscal period. The deceased partner’s share in the profits
for the current period up to the date of his death is determined by
prorating the year’s profit over the period in which the deceased had
an interest. The method of calculating the firm’s good-will is usually
provided for in the partnership agreement so that the estate of the
deceased partner will share in it also. Usually interest is allowed the
estate of the deceased partner from the date of his death until the
settlement of his share.

=Partners’ Rights and Procedure During Liquidation.=—When dissolution
is accompanied by liquidation, as happens in many instances, all the
partners have an equal right to share in the work of liquidation.
Since the work usually does not require the time of all the partners,
a customary procedure is to appoint one member—or an outsider—as
the liquidator. Notice of the dissolution, in which the name of the
liquidator is given, is published in the leading newspapers. If
liquidation is necessary because of the death of a partner, great
responsibility rests upon the liquidator. He must act in strict good
faith and endeavor to realize the best price possible for the assets of
the firm in the interest of the deceased partner’s estate. A similar
responsibility rests upon him when liquidation is carried on in the
interest of absent members.

The expenses and losses incident to liquidation must be borne by all
in the profit and loss ratio. The liquidator may be paid either by
means of a commission on the sums realized or by a salary. If the
liquidator is a partner, settlement may take place privately between
the partners but usually his commission or salary is charged to the
firm’s liquidation expenses.

Liquidation may proceed by sale of the assets in regular order and may
even permit the purchase of additional goods where necessary to fulfil
existing contracts or to complete partly manufactured goods, or where
stock on hand can be disposed of to better advantage by the addition of
side lines or specialties.

=Distribution of Proceeds.=—Upon the realization of the assets,
application of the proceeds must be made in the following order: First,
the claims of outside creditors must be met in full or by compromise
where not fully recognized. Second, the claims of the partners on
account of loans or advances made to the firm must be satisfied.
Third, the partners share in the remainder, by first taking out their
respective capital contributions and then, if there is a balance, by
sharing it in their profit and loss ratios. If there is a loss, this
must be shared in the profit and loss ratio before withdrawal of any
capital contributions. The remainder, if any, is divided among the
partners in the ratio of their capitals as diminished by the loss.
Whether the net assets are either more or less than the total amount
of the capitals, the difference is shared in the profit and loss
ratio, and what remains is shared in the capital ratio. If a careful
accounting is made of the profit or loss at the time of the sale of
each piece of property and these profits and losses together with the
dissolution expenses are summarized and distributed to the partners’
capital accounts, those accounts will of course show the claims of the
various partners on the net assets of the business after all assets
have been converted into cash and all liabilities paid.

Instead of a complete liquidation of the firm’s assets, certain of the
assets may, by mutual consent, be taken over by each partner at agreed
values and applied toward the satisfaction of his capital and loan
interests. Such use of assets is spoken of as a _conversion_ to that
particular purpose. It must be distinctly understood that this is not a
right which any partner can demand, but only a privilege granted by the
mutual agreement of the partners. Any partner can demand that all the
assets be sold and that the proceeds be applied in satisfaction of the
interests concerned.

=Sharing Losses.=—In the case of insolvency, the partners are compelled
to share the losses in the profit and loss ratio, not in capital ratio,
and these losses are chargeable against their capital accounts. If the
capital account of any of the partners is not large enough to satisfy
his share in the losses, a deficit in that partner’s interest results,
which is represented by the debit balance in his capital account.
This shows the amount which he must contribute to the firm in order
that all claims may be satisfied. The rule that profits and losses in
liquidation cannot be shared in the same ratio as capitals, unless this
ratio is also the profit and loss ratio, is responsible for the fact
that upon dissolution one or more partners may have to make additional
contributions, while others may not be obliged to do so. This duty
of contributing to make up a deficit is inherent in the partnership
relation and can be enforced by the copartners.

A few illustrations will set forth the main problems in connection
with the liquidation of partners’ capitals:

=1. Sharing Losses Equally=

               BALANCE SHEET OF A, B & C
  Cash          $10,000.00    Liabilities  $10,000.00
  Other Assets   60,000.00    A,  Capital   15,000.00
                              B,  Capital   20,000.00
                              C,  Capital   25,000.00
                ----------                 ----------
                $70,000.00                 $70,000.00
                ==========                 ==========

A, B, and C share profits and losses equally.

The above balance sheet shows, in summary form, the condition of the
firm previous to liquidation, and also indicates the shares of the
partners in the net assets as on that date, i.e., the partners share
in the net assets in the ratio 15:20:25 or 3:4:5. Dissolution becomes
necessary and in the course of liquidation the expenses and losses
incurred amount to $15,000. After the net loss of $15,000 is divided
equally among the partners, the capitals will amount to, A $10,000,
B $15,000, and C $20,000. The result is that the capital ratio has
changed from 3:4:5 to 10:15:20, or 2:3:4, and the net assets of $45,000
are to be shared in this new ratio.


=2. Capital Deficit=

                   BALANCE SHEET OF JONES & SMITH
  Cash                   $10,000.00    Jones, Capital  $20,000.00
  Losses in Liquidation   15,000.00    Smith, Capital    5,000.00
                         ----------                    ----------
                         $25,000.00                    $25,000.00
                         ==========                    ==========

Jones and Smith share profits and losses equally.

The above balance sheet shows the condition of the firm after
liquidation. It is necessary, first, to distribute the liquidation
losses among the partners, after which they share in the net assets
according to capital ratios. Accordingly, each capital account is
debited with an equal share in the loss of $15,000, after which Jones’
capital is $12,500 and Smith’s account shows a debit balance of $2,500.
This means that Jones not only gets the entire cash of $10,000, but
Smith must contribute $2,500 to the firm and this also goes to Jones.


=3. Personal Insolvency of One Partner=

               BALANCE SHEET OF SMITH, JONES & GREEN
  Cash            $16,000.00    Smith, Capital  $15,000.00
  Jones, Capital    9,000.00    Green, Capital   10,000.00
                  ----------                    ----------
                  $25,000.00                    $25,000.00
                  ==========                    ==========

Smith and Jones each have a ⅖ share and Green a ⅕ share in profits and
losses.

The above balance sheet shows the financial condition of the firm after
taking into consideration the losses incident to liquidation. From
this it is seen that Jones owes the business $9,000. Assume that he
is personally insolvent and cannot contribute the share due from him.
The net assets available for distribution consist of $16,000 in cash.
Inasmuch as Jones’ interest is entirely wiped out and a contribution
is due from him which he cannot pay, the amount of that contribution
is an additional loss to be borne by the two remaining partners. Their
respective shares in this loss are determined by their original profit
and loss ratios ⅖ and ⅕, so that as between themselves Smith must bear
⅔ of the loss or $6,000, and Green ⅓ or $3,000; after which Smith’s
capital and share in the net assets is $9,000, and Green’s $7,000.

Where a partner, in his private capacity, and the firm of which he is
a member are both bankrupt, his personal creditors have first claim on
his personal estate and the firm’s creditors on the assets of the firm.

=Distribution by Instalments.=—Where the liquidation is of long
duration, the partners may desire to receive what is due them by
instalments rather than wait to receive their respective shares in
one amount. Where the capital ratio differs from the profit and loss
ratio, it is difficult to determine the proper ratio in which the
instalments should be paid, due to the fact that expenses and losses
have not yet been determined. Consequently it is impossible to tell
what the ultimate ratios will be in which the partners are to share
the net assets. As the payment of instalments on an arbitrary basis
might result ultimately in an overpayment of some partners and an
underpayment of others, the only safe method of handling the situation
is to pay the first instalments to those partners whose capital ratios
are in excess of their profit and loss ratios until their capitals are
reduced to the point where the capital ratios of all the partners are
the same as their profit and loss ratios. As soon as this point is
reached, the proceeds of the assets may be distributed to the partners
on the basis of their profit and loss ratios, because these are now
identical with their capital ratios. A more complete treatment of this
problem will be found on pages 650 to 654 of the author’s second volume.

=Treatment of Good-Will upon Liquidation by Sale.=—When dissolution is
brought about by the sale of the entire business, it may happen that
the amount realized on the assets is smaller than their book value,
and the difference must be treated as a loss in accordance with the
principles previously stated. Similarly, where the assets are sold
and the price realized is larger than their book value, the excess
constitutes a profit and must be distributed among the partners in
profit and loss ratio. Usually such an excess is treated as a receipt
on account of good-will, and two standard methods of booking it are
employed. When good-will is mentioned in the sale contract and its
value has been determined, it is brought on the books as an asset and
transferred immediately to the partners’ accounts. Thus, if the value
is $15,000 and the profit and loss ratio is ⅖ to A, ⅖ to B, and ⅕ to C,
the entry is:

  Good-Will          15,000.00
        A,  Capital             6,000.00
        B,  Capital             6,000.00
        C,  Capital             3,000.00

Good-will is now shown as an asset, and the entry closing it off is the
same as for the sale of the other assets, viz., a debit to Cash and a
credit to Good-Will.

On the other hand, when good-will is not specified as such in the sale
contract, but the amount realized on the sale of the assets is larger
than their book values, this excess may be credited to Good-Will, which
is then treated not as an asset account (as in the case given above)
but as a profit and loss account. The balance of this account is closed
out to the partners’ accounts in profit-sharing ratios in the same way
as above. The ultimate result is the same in either case; the first
method is a little more complete since it shows the value of the asset
good-will previous to its sale.

The formal entries by which the sale of any business is recorded on
its books, whether single proprietorship, partnership, or corporation,
are treated in Chapter XXXIX under corporations.




CHAPTER XXXVIII

THE CORPORATION


=Definition.=—The definition of a corporation, given by former Chief
Justice Marshall as “an artificial being, invisible, intangible,
and existing only in contemplation of the law,” sets forth its
fundamental characteristics, viz., artificial personality and creation
by the law. Blackstone says, “A corporation is an artificial person
created for preserving in perpetual succession certain rights which
being conferred on natural persons only would fail in the process
of time.” Blackstone’s definition lays particular emphasis on a
characteristic not specifically mentioned by Marshall, that of
perpetuity of succession. It is apparent that the corporation within
the limits prescribed by statute has most of the attributes and
powers of a person—it can sue and be sued, can hold and pass title to
property, real and personal, can carry on business in its own name, is
responsible to the extent of its entire property for the payment of its
debts, etc.

=Growth of the Corporate Form of Organization.=—The corporate form
of organization is being increasingly utilized for the conduct of
business of almost every kind. It offers a much more attractive field
to the investor who desires to place his surplus funds in productive
enterprises and share in their profits without having the burdens
of active management or the risk of losing his private fortune to
satisfy the claims of business creditors should the undertaking prove
unsuccessful. Just as the partnership is an advance over the sole
proprietorship in point of business organization, efficiency, and
ability to cope with larger undertakings, so the corporation in some of
its forms represents an advance over the partnership form of business
organization. Its advantages and disadvantages in comparison with the
partnership will be reviewed briefly.

=Advantages.=—Some of its advantages are:

  1. Limited liability. Only corporation property can be
      levied on to satisfy the claims of creditors; the
      private fortunes of the individual stockholders
      cannot be touched.
  2. Continued existence. The death, withdrawal, or
      bankruptcy of any of its members does not interfere
      with its existence. Its life may be terminated by
      voluntary dissolution, insolvency, expiration of
      charter life, forfeiture of charter to the state
      for misuse, non-use, or abuse of its privileges.
  3. Transferability of its shares, and their use as
      collateral for private loans without injury to the
      credit of the corporation.
  4. Larger capital. A partnership becomes unwieldy and
      inefficient if the number of partners becomes too
      large. The number of stockholders in a corporation
      is not limited and varies from one to many
      thousands in the larger corporations. Accordingly
      much more extensive fields of endeavor are open to
      the corporation because it can bring together and
      use advantageously the combined capitals of many persons.
  5. Centralized control. Its method of internal organization
      is such that one man can be made the responsible head
      instead of the many heads of the partnership.

=Disadvantages.=—The chief disadvantages of the corporation may be
summarized thus:

  1. Comparative absence of personal interest of the
      managing officer. This is largely a theoretical
      drawback, inasmuch as it is usually required that
      the managing officer be a stockholder.

  2. As a creature of the state, the corporation is
      subject to state legislative control. It is taxable
      by the state and is required to make periodic reports.

  3. Its credit is dependent on the amount of its net assets
      and not on the fortunes of its individual owners.

  4. Corporations are sometimes restricted as to the
      character of their business. In some states certain
      lines of business cannot be carried on by corporations.

  5. In some states it is illegal for corporations to
      hold stock in other corporations.

In spite of these and other disadvantages, most of which are not
serious, the advantages of the corporate form of organization far
surpass those of the sole proprietorship or partnership.

=The Formation of a Corporation.=—Formerly a corporation could be
brought into existence only by a special act of the legislature.
As this method proved cumbersome and was subject to much abuse, it
gave place in all states to general corporation statutes or enabling
acts whereby an application in due form and according to statutory
provisions is all that is necessary for organizing a corporation.
Though the statutes differ for each state, they are uniform in the main
points. The method of formation under the New York statute will be
explained.

=Certificate of Incorporation—New York State.=—The form of
application for a charter to do business as a corporation is known
as a “certificate of incorporation.” This document must be prepared
by at least three natural persons, two-thirds of which number
must be citizens of the United States and at least one of whom
must be a citizen of New York State. These persons are called the
“incorporators.” Their certificate must be made out in the English
language, signed by each incorporator, acknowledged before a notary
public, and must contain:

  1. The name of the corporation, in the English
      language. This must be different from the name of
      any other domestic or foreign corporation doing
      business in the state and must not contain in its
      title the words, “bank, trust, insurance, etc.”

  2. The purpose or purposes for which it is created.
      There is practically no limitation as to the
      lines of endeavor the corporation may declare
      itself desirous of following, with the exception
      that banks, trust, transportation, and insurance
      companies, etc., come under special laws.

  3. The amount of capital stock of the corporation,
      common and preferred if both are to be issued.
      Preferred stock of various classes may be
      authorized after incorporation. The minimum amount
      of capital required by the New York law is $500.
      One-half of the capital must be paid in within one
      year from the date of incorporation. The
      certificate must state also the amount of capital
      to be paid in before the corporation can commence
      business and this must not be less than $500. No
      debts can be contracted before that amount is paid in.

  4. The number of shares into which the authorized
      capital is divided and the par value of each.
      This must not be less than $5 nor more than $100,
      although more recently capital stock has been
      authorized with no named par value.

  5. The place in which the principal office is to be
      located, which must be within the state.

  6. The contemplated duration of its life. This may be
      made perpetual.

  7. The number of directors, which must not be less
      than three.

  8. The names and post-office addresses of the
      directors for the first year. Directors usually
      are stockholders and at least one-fourth of the
      directors are subject to election annually.

  9. The names and post-office addresses of the
      subscribers to the certificate of incorporation,
      and the number of shares in the corporation
      subscribed by each.

=Filing the Certificate—New York State.=—The certificate of
incorporation is usually made out in triplicate. The original must
be filed and recorded in the office of the Secretary of State; the
duplicate certified by the Secretary must be filed with the clerk of
the county in which the principal business office is to be located;
and the certified triplicate is retained by the corporation in its own
files. The fees for filing the certificate with the Secretary of State
are $10, and for recording 15 cents per folio. The county clerk’s fees
are 6 cents per folio for filing.

=Organization Tax—New York State.=—Before the filing of the
certificate, an organization tax of 1/20th of 1% of the authorized
capital stock must be paid to the State Treasurer. Record of this
payment is forwarded to the Secretary’s office.

=Initial Acts of Corporation.=—When the corporation is ready to
commence business, its first act is usually to call a meeting of
the incorporators and directors for the purpose of adopting a set
of by-laws—although this matter may be delegated to the board of
directors. This meeting also authorizes the issue of stock at or above
par in exchange for cash, labor, or property.

=State Control.=—The outside control of the corporation is vested
in the state. The state constitution, the general corporation law,
the statutes relating to business organizations in general, and the
specific contract between the corporation and state embodied in its
charter or certificate of incorporation—these form the basis for state
control and the limits within which the corporation may act as an
authorized person. If the corporation does an interstate business,
it is subject also to the regulations of the Interstate Commerce
Commission.

=Working Organization and Management.=—The corporation’s owners, that
is, the stockholders, are the source of all authority and control.
Unlike the partnership where control and voice in the management are
equally shared by the partners regardless of any inequality in their
investments, the corporation ownership is evidenced by shares of stock
and each share is given one vote. Thus each owner’s authority and
voting power are dependent upon the amount of his ownership of stock.
He has, however, the right to delegate this power to another person by
“power of attorney,” and in this way it frequently happens that one
stockholder exercises a power far beyond the amount of shares owned
by him. Delegation of voting power frequently occurs when the stock
is widely distributed geographically and is owned in small lots. In
theory the agent or attorney entrusted with the voting power of others
is simply carrying out the will of his principal, the real owner of the
stock.

=Annual Election of Directors.=—Because of the number of stockholders
and because many of them are engaged in other pursuits, one of the
characteristics of the corporate form of management is that the owners
frequently do not have direct control of their enterprise. Accordingly,
at regular times, usually annually, the stockholders elect directors to
whom are delegated the general oversight and control of the business.
The board of directors thus elected stands in the place of the
stockholders during the period between the annual meetings at which it
renders account of its management.

=Officers.=—The board of directors elects officers of the
company—usually a president, vice-president, treasurer, and
secretary—to undertake the active management of the business; or the
directors may appoint a general manager or superintendent on whom rests
the active management and who is the executive head of the corporation.
Thus the chief characteristic of the working organization of the
corporation is the delegation of authority to a responsible head. The
accountability of the officers to the board of directors, and of the
directors to the stockholders, has so far proved the most efficient
method of conducting modern business.

=The Showing of Proprietorship.=—The chief difference, from an
accounting viewpoint, between the corporate form and other forms of
business organization is in the showing of proprietorship. Vested
proprietorship in a sole owner or partnership business is carried under
the title of the different owners’ capital accounts, and credit is
extended by the public to such owners, not on the basis of what the
particular business is worth, but on the reputation of the owners and
what they are known to be worth outside the business as well as in
the business. On the other hand, the law has relieved the owners of a
corporation of individual liability for the debts of the corporation.
Only the corporate property can be held liable for the satisfaction
of creditors’ claims. For their protection, the corporation is not
allowed to impair its capital stock by the payment of any portion of
it in dividends to the owners or to change the amount of its capital
stock without special authority. The outstanding capital stock, in
theory, represents to the prospective creditor the minimum value of the
corporation assets which are supposed to be sufficient to meet in full
the claims of creditors. Accordingly, the portion of the capital of a
corporation represented by its capital stock is a fixed amount, and
the increments or decrements of proprietorship are usually shown in a
separate account called Surplus. This account must always be read with
the Capital Stock account to ascertain the current or present capital
as distinguished from the original.

The Surplus account is sometimes divided and shown under such titles
as Profits, Reserves, Undivided Profits, Working Capital, etc. To
ascertain full proprietorship or net worth, all such accounts must be
included.

RECORDS PECULIAR TO A CORPORATION

=The Subscription Book and Subscription Ledger.=—Upon the proper filing
and acceptance of the certificate of incorporation, authority is
given the incorporators to secure subscriptions to the capital stock.
Subscription books or blanks may then be opened, which usually contain
a form of agreement somewhat as follows:

  We, the undersigned, do hereby subscribe for and agree
  to take the number of shares of the capital stock of
  the Blank Company, par value ........ set opposite our
  names and pay for the same, ........ per centum down,
  the remainder subject to the call of the board of
  directors.

Where the number of subscribers is large and especially if record must
be made of the payment of calls, a Subscription Ledger or Instalment
Book is used. This ledger has no set form but usually carries columns
showing when the calls are to be made, when actually made, when paid,
and the balance still due. A controlling account called “Subscribers”
or “Subscription” is carried on the general ledger, with a special
column in the cash book to gather the totals for posting.

=The Stock Certificate Book and Stock Ledger.=—A subscriber is,
as such, a stockholder in the corporation even though his stock
certificate may not yet have been issued to him. The stock certificate
is merely evidence of ownership. It is usually issued from a book with
perforated leaves similar to a check book, with stub to carry the
essential data of the certificate. Directly from this stub, or through
the medium of a stock journal, postings are made to the individual
accounts in the stock ledger. This ledger which, in turn, is controlled
by the Capital Stock account or accounts on the general ledger, carries
the detailed information as to the number of shares issued, shares
canceled, and balances held by each owner.

=The Stock Transfer Book.=—In the state of New York a stock transfer
book must be kept, showing all the data in connection with transfers
of shares, such as old and new stock certificate numbers, names of the
parties, etc.

=The Minute Book.=—To preserve a record of the meetings of the
directors and stockholders, and the business transacted thereat,
use is made of a minute book kept by the secretary. This book, as
the source of authority for all the important acts and policies of
the corporation, is a most important record. The record should be a
complete history of the corporation from its organization through the
entire period of its existence.

=Other Records.=—When the stock is sold on the instalment plan, formal
receipt of the payment of each instalment is sometimes made by means of
an “Instalment Scrip Book,” whose certificates or receipts are issued
upon payment of each instalment. When full payment has been made, the
instalment certificates are exchanged for the regular certificates
of stock. A dividend book for recording the payment of dividends is
sometimes kept, though the need for such a record has been largely
eliminated through the use of dividend checks.




CHAPTER XXXIX

OPENING THE CORPORATION BOOKS


=Corporation Accounting Records.=—The method of recording the ordinary
business transactions of a corporation is essentially the same as in
the types of business organization previously discussed. The opening
and closing of corporation accounts, however, as also the method of
making the periodic summarization, call for the special treatment given
in this chapter and the next.

=Proprietorship and Capital Stock.=—As stated before, the members of
a stock corporation have their ownership evidenced by certificates
of stock. The proprietorship or net worth of a corporation, as of
the single proprietorship and partnership, is the excess of its
assets over its liabilities. This excess is shown in the books by two
accounts or two groups of accounts, viz., the Capital Stock account—or
accounts—which represents the amount of outstanding shares; and
the Surplus account—subdivided and carried under other titles, if
desirable—which represents the excess of the proprietorship over the
amount of capital stock. Each stockholder’s share in the corporation is
determined by the number of shares he possesses.

=Common and Preferred Stock.=—There may be various classes of stock.
If only one kind is authorized at the beginning, the subsequent
creation of other kinds requires an amendment of the charter. The usual
classes of stock are common and preferred. As its name indicates,
preferred stock has some kind of preference over the common or ordinary
stock. This preference may be only in regard to dividends, or it
may include preference as to ownership in the net assets in case of
dissolution. Preferred stock usually carries a fixed dividend, payable
before any dividend can be paid to the common stockholders.

Preferred stock is classified as cumulative and non-cumulative. The
terms apply to the dividend liability of the corporation in the event
that the continuity of dividend declarations is broken. The dividend
on cumulative preferred stock accumulates and becomes a preferred
claim for the amount accumulated since the time of the last dividend
declaration. That is, the common shareholders are not entitled to
receive any dividend until the preferred shareholders have received the
amount of the accumulated total. Preferred stock that is non-cumulative
does not possess this feature. A dividend once passed on such stock is
not a preferred claim to profits as compared with the dividend rights
of common stockholders, but lapses completely. Preferred stock is
cumulative unless specified to the contrary.

The issue of No-par-value stock is authorized by thirteen different
states. Very often in a corporation whose stock carries a stated par
value, there is little real relationship between the actual value of
the stock as indicated by the net assets of the corporation and its
stated par value. The law requires that par-value stock be carried on
the books at its stated par. If such stock has been sold or exchanged
for assets of a lesser value, there is always the temptation to inflate
the value of the assets in order to maintain it at the par of the
stock issued for them. This tendency is not met in the use of stock
carrying no par value. Such stock appears on the books at exactly the
amount of the assets received in exchange for it. A purchaser of such
stock, because of the fact that it carries no stated par value, is at
once put on notice to investigate the values back of it. No-par-value
stock may be either preferred or common. In the former instance, if the
preference relates to the assets at the time of dissolution, each such
share must state the amount of assets applicable to each share in case
of liquidation of the corporation. This constitutes a preference claim,
not over the creditors of the corporation, but only over the common
stockholders.

Thus it is seen that there may be different classes of ownership of a
corporation, the owners of one class having some advantages over the
owners of the other classes. It should be understood, of course, that
within each class the rights and duties of the owners are the same.

=Opening the Books of a Corporation.=—The opening entries of a
corporation have to do with a correct treatment of capital stock,
subscriptions, calls and instalments, payments by cash and by property,
etc.

The charter to do business, granted a corporation by the state, gives
it the right to sell shares of stock. These shares have no value in
themselves and are worth only what the corporation can exchange them
for, either in cash or other assets. There is, therefore, no reason
for making a record on the books of account as distinguished from
the corporation’s minute book, of the corporation’s right to issue
stock and of the amount of the stock which it has a right to issue.
Until the stock has been paid or subscribed for, no formal entry
need be made on the books of account. Of course, full record of all
deliberations and resolutions as to procedure and policy up to the time
of the actual sale of the stock is carried in the minute book, and a
concise narrative statement of the organization of the corporation, its
purposes, the authorized capital stock issue, the number of shares,
the par value of each share, if par value stock, and so forth, should
always precede the formal opening entries in the journal. This record
and that in the minute book should give all the information of this
sort needed. There is a too prevalent tendency among bookkeepers
to make all sorts of memorandum entries on the books of account. A
memorandum entry is an entry which has no financial significance and is
made merely as a reminder that transactions of financial significance
may arise from that source.

Before a corporation can secure its charter it is necessary to
make certain expenditures. These usually consist of fees paid to
a lawyer for his services in assisting in drawing up the charter;
fees for filing the certificate; the organization tax; the cost of
the certificates of stock and stock records; and so forth. These
expenditures must be met by the incorporators from their private funds
but they are reimbursed from the funds received upon sale of the stock.
It is, accordingly, customary in opening the books of a corporation to
show first the sale of the stock before showing the expenditures for
organization.

A number of different methods of opening the books are employed. The
first of these does not make use of the memorandum entries referred
to above, whereas the other two do use memorandum entries. The three
methods will be illustrated by means of the problem given below. The
entries are shown in journal form. It will be understood, of course,
that those entries which involve cash will appear in the cash book
only. All the other entries appear in the general journal.

  PROBLEM 1. The Smith-Brown Company is
  incorporated with an authorized capital stock of
  $250,000, of which $150,000 is subscribed and paid for
  at par; the balance remains unissued for the present.
  The organization expenses are $1,000.

  FIRST METHOD

            THE SMITH-BROWN COMPANY
  A corporation organized under the State of New York,
  with an authorized capital stock of Two Hundred and
  Fifty Thousand dollars ($250,000), divided into Two
  Thousand, Five Hundred (2,500) shares of the par value
  of One Hundred dollars ($100) each, with all powers
  necessary to carry on the business of manufacturing,
  selling, and distributing motors of all kinds.

  Case 1. Where the subscription and payment are not
  simultaneous:

  (a) Subscribers                              150,000.00
         Capital Stock Subscriptions                      150,000.00
         To record subscriptions to the capital
           stock as follows:
         A  shares
         B   ”
         C   ”
         Etc.
  (b) Cash                                     150,000.00
         Subscribers                                      150,000.00
           To credit subscribers for the payment
           of their subscriptions.
  (c) Capital Stock Subscriptions              150,000.00
         Capital Stock                                    150,000.00
           To record the issue of stock to all
           subscribers who have paid in full.
  (d) Organization Expense                       1,000.00
         Cash                                               1,000.00
           To record the payment of the costs of
            organizing the corporation.

  Entry (a) sets up the claim under subscription
  contracts against the subscribers as an asset of the
  corporation, and is offset by the proprietorship
  account, carried under the title “Capital Stock
  Subscriptions,” until payment has been made and
  the certificates of stock actually issued to the
  stockholders.

  Entry (b) is self-explanatory.

  Entry (c) shows the issue of the certificates and
  therefore transfers the proprietorship from Capital
  Stock Subscriptions to Capital Stock.

  Case 2. Where the subscription and payment are
  simultaneous:

  (a) Cash                               150,000.00
          Capital Stock                             150,000.00
  (b) Organization Expense                 1,000.00
          Cash                                        1,000.00

  In a small corporation where a cash investment
  constitutes the entire original capital, the entries
  shown in case 1 above are sometimes abbreviated as
  here indicated. In such a case there is often no
  formal subscription contract entered into and there is
  therefore no need to set up accounts with Subscribers
  and Capital Stock Subscriptions.

  SECOND METHOD. This method makes use of the
  memorandum accounts, Unissued Capital Stock and Capital
  Stock Authorized. Omitting the narrative statement of
  organization, the explanatory matter after the various
  entries, and the organization expense entry, which are
  common to all methods, the other necessary entries are
  as follows:

  (a) Unissued Capital Stock             250,000.00
         Capital Stock Authorized                    250,000.00
  (b) Subscribers                        150,000.00
         Capital Stock Subscriptions                 150,000.00
  (c) Cash                               150,000.00
         Subscribers                                 150,000.00
  (d) Capital Stock Subscriptions        150,000.00
         Capital Stock                               150,000.00
  (e) Capital Stock Authorized           150,000.00
         Unissued Capital Stock                      150,000.00

  Entry (a) is a memorandum entry recording the amount of
  capital stock authorized by the corporation’s charter.
  This entry has little or no financial significance. Not
  until stock is sold does the corporation have any real
  assets.

  Entry (b) shows that of the stock which was unissued
  under entry (a), $150,000, has been subscribed for,
  thus giving the corporation a legally enforcible
  claim—an asset—for that amount.

  Entry (c) is self-explanatory.

  Entry (d) shows the issue of the stock when the
  subscriptions are paid.

  Entry (e) adjusts the memorandum entry (a), to show
  the present amount of authorized stock still unissued,
  viz., $100,000. Both accounts under (a) continue as
  memoranda only, and as they exactly offset each other,
  they will not appear on the balance sheet.

  THIRD METHOD. This method also makes use of
  memorandum accounts before the sale of the stock. The
  difference between this and the second method should be
  noted. It will be seen that the credit of entry (a) is
  here Capital Stock instead of Capital Stock Authorized.
  This is theoretically incorrect because as yet the
  corporation has no proprietorship. The best that can be
  said for it is that the debit represents a contingent
  asset and the credit a contingent proprietorship item.
  The other entries are self-explanatory.

  (a) Unissued Capital Stock             250,000.00
         Capital Stock                               250,000.00
  (b) Subscribers                        150,000.00
         Subscriptions                               150,000.00
  (c) Cash                               150,000.00
         Subscribers                                 150,000.00
  (d) Subscriptions                      150,000.00
         Unissued Capital Stock                      150,000.00

=Premium or Discount on Stock.=—The law requires that when stock
of par value is issued, the Capital Stock account must be carried
always at par. When stock is sold at a premium or at a discount, it
necessitates, therefore, the use of supplementary proprietorship
accounts to make the proper record. In the state of New York, a
corporation cannot sell its stock at a discount, but in states where
this is allowed the amount of such discounts should be charged to a
“Discount on Stock” or some similar account. Sometimes the charge
is made to “Organization Expense.” The use of Organization Expense
account for this purpose is contrary to the principle that the account
title should show the exact nature of the items recorded under it. It
is misleading and sometimes reprehensible. A full discussion of this
matter is given in Volume II. When stock is sold above par, the amount
of the premium is recorded in the account “Premium on Stock,” which
as usually handled constitutes a part of the permanent capital of the
corporation. Premiums on stock sales should not be credited to Surplus
account. The following illustration will show the kind of entries
required:

  PROBLEM 2. Of the $100,000 unissued stock
  of Problem 1, we will assume that $50,000 is later
  subscribed for at 98, and $50,000 at 102.

  Entries to make the record according to the first
  method, Problem 1, are as follows:

  (a)  Covering stock subscribed for at a discount:
         Subscribers                                  49,000.00
  Discount on Capital Stock                 1,000.00
           Capital Stock Subscriptions                50,000.00
  (b)  For stock subscribed for at 102:
         Subscribers                                  51,000.00
           Premium on Capital Stock         1,000.00
           Capital Stock Subscriptions                50,000.00

  Entries for payment of the subscription and issue of
  the stock follow the method of entry already shown on
  page 342. It will be observed that the Capital Stock
  Subscription and the Capital Stock accounts are always
  shown at par value.

=Capital Stock on the Balance Sheet.=—The net worth section of the
balance sheet of a corporation will usually appear somewhat as follows
for the capital stock items. Often, however, more detail is shown in
connection with the surplus item. The student should note how full
information is given concerning the capital stock.

  (1)               _Net Worth_

  Represented by:
    Capital Stock:
      Authorized             $250,000.00
      Unissued                100,000.00
                             -----------
      Issued and Outstanding              $150,000.00
    Premium on Capital Stock                 5,000.00
    Surplus                                 60,000.00
                                          -----------
           Total Net Worth                             $215,000.00
                                                       ===========

Where the discount on stock has not been charged off against Surplus
either because sufficient profits have not been reserved, or because,
although sufficient profits have been reserved, it is deemed desirable
to build up a larger balance of Surplus before charging off the
discount, the net worth section will appear as follows:

  (2)             _Net Worth_

  Represented by:
    Capital Stock:
      Authorized              $250,000.00
      Unissued                 100,000.00
                              -----------
      Issued and Outstanding               $150,000.00
    Surplus                                  10,000.00
                                           -----------
                                           $160,000.00
    Discount on Capital Stock                15,000.00
                                           -----------
        Total Net Worth                                 $145,000.00
                                                        ===========

Discount on capital stock should usually be shown as above, although
one sometimes finds it listed among the assets on a balance sheet. This
is not wholly objectionable unless it is set up under a title which
does not indicate its true nature.

=Instalments.=—The subscription contract sometimes provides for
payment by instalments. The corporation usually issues to all such
subscribers a “call,” i.e., a notice that an instalment payment will
come due at a given time. The subscriber is not considered delinquent
until the call has been made and he has not responded. The accounts
must therefore reflect the difference in status brought about by a
“call.” This is accomplished by transferring the claim against the
subscriber carried in Subscribers account to a new claim against him
carried under Call account. The illustrations below show the accounts
required and their handling.

  PROBLEM 3. Assume that the $50,000 of stock
  subscribed for at 102 is to be paid for one-half in
  cash and the remainder in two equal instalments at the
  end of successive three-month periods.

  For the one-half cash payment the entry is as follows:

  Cash                          25,500.00
       Subscribers                        25,500.00

  At the end of the first three months, the record is:

  Call No. 1                    12,750.00
      Subscribers                         12,750.00
        To show the call issued.
  Cash                          12,750.00
      Call No. 1                          12,750.00
        To record payment of the first call.

  Similar entries at the end of the second three months are:

  Call No. 2.                   12,750.00
      Subscribers                         12,750.00
  Cash                          12,750.00
      Call No. 2                          12,750.00

  If the call is not paid in full at balance sheet time,
  the debit balance in the “Call” accounts constitutes an
  asset, i.e., the amount of unpaid instalments due from
  subscribers. Upon full payment of all subscriptions,
  certificates of stock are issued and recorded as shown
  on pages 341, 342.

=Entries for Common and Preferred Stock.=—Where more than one
kind of stock is issued, such as common and one or more kinds of
preferred, separate capital stock accounts—and usually other related
accounts—should be kept for each class, as illustrated below:

  PROBLEM 4. Assume that the stock of a
  corporation is $200,000 common and $50,000 preferred,
  and that $100,000 common and $50,000 preferred have
  been subscribed for. The entries necessary to record
  the subscription in accordance with the first method
  explained above, are:

  Subscribers—Capital Stock Common           100,000.00
      Capital Stock Common, Subscriptions               100,000.00
  Subscribers—Capital Stock Preferred         50,000.00
      Capital Stock Preferred, Subscriptions             50,000.00

  The other entries for payment of subscriptions and
  issue of stock are essentially the same as explained
  above, but the record of the transactions affecting
  common and preferred stock should always be kept
  distinct and separate.

=Entries for No-Par Stock.=—When a corporation issues no-par stock,
the amount of proprietorship resulting from its sale is exactly what
the stock brings and is so recorded; there is neither discount nor
premium. Booking it is, therefore, simple. The amount of capital so
secured, i.e., secured from its sale, should, however, never be mixed
with the accretions to capital from reserved profits or other sources.
Such items constitute the Surplus just as in the case of stock of par
value, and the legal requirement that these amounts be kept separate
from the capital stock are just as strict. This is necessary so that
the records will clearly show that dividends have not encroached
upon the capital. Since the value at which no-par stock is carried
on the books bears no relation to the number of shares issued, it is
customary to carry on the balance sheet information as to the number
of shares outstanding. The net worth section of the balance sheet of a
corporation issuing no-par stock should appear as follows:

                          _Net Worth_

  Represented by:
    Capital Stock—No Par:
        Authorized                10,000  shares
        Unissued                   3,000    ”
                                  ------
        Issued and Outstanding     7,000    ”     $369,465.00
    Surplus                                        125,479.00
                                                  -----------
          Total Net Worth                         $494,944.00
                                                  ===========

=Payment of Subscriptions by Property.=—When payment of subscriptions
is by property instead of by cash, the value at which such property
shall be brought onto the books is entirely at the discretion of
the corporation’s directors, and unless fraud can be shown, their
valuations are final. No difficulties are involved in recording such
a payment; the paid properties are debited under suitable account
titles, and the Subscribers account is credited. The following problem
illustrates the change from a partnership to a corporation, at the
same time showing how the payment of subscriptions by property must be
treated.

=Change from Partnership to Corporation=

  PROBLEM 5. A and B, partners, incorporate
  as the American Baking Company. The authorized
  capitalization is $250,000. Each partner subscribes
  for an amount of stock equal to his interest in the
  partnership, and C, an outsider, subscribes for
  the remainder of the stock at par. The corporation
  purchases the assets and assumes the liabilities of the
  partnership, paying therefor with stock as above. C
  pays his subscription in cash. The balance sheet of the
  partnership on that date was as follows:

                     BALANCE SHEET OF A & B
  Cash                 $ 20,000.00    Accounts Payable  $ 45,000.00
  Accounts Receivable   150,000.00    Mortgage Payable    80,000.00
  Merchandise            50,000.00    A, Capital         125,000.00
  Plant                 130,000.00    B, Capital         100,000.00
                       -----------                      -----------
                       $350,000.00                      $350,000.00

  Make the opening entries for the new corporation and
  also close the books of the partnership.

  1. The entries to open the corporation’s books:

  (a) Subscribers                            250,000.00
            Capital Stock Subscriptions                  250,000.00
              To record subscriptions to
              the capital stock as follows:
              A                       125,000
              B                       100,000
              C                        25,000

  (b) Cash                                    20,000.00
       Accounts Receivable                   150,000.00
       Merchandise                            50,000.00
       Plant                                 130,000.00
            A & B, Vendors                               350,000.00
              To record the purchase from
              A & B of their partnership assets.
  (c) A & B, Vendors                         125,000.00
            Accounts Payable                              45,000.00
            Mortgage Payable                              80,000.00
              To record partial payment to A & B for
              their assets by the assumption of their
              liabilities.
  (d) A & B, Vendors                         225,000.00
            Subscribers                                  225,000.00
              To record full payment to A & B for the
              balance due them, by the cancellation
              of their subscription indebtedness.
  (e) Cash                                    25,000.00
            Subscribers                                   25,000.00
              To record payment by C of his
              subscription contract.
  (f) Capital Stock Subscriptions            250,000.00
            Capital Stock                                250,000.00
              To record the issue of stock to
              all subscribers, who have paid in full.

  Entries (b), (c), and (d) are sometimes combined in the
  following compound entry:

  Cash                                        20,000.00
  Accounts Receivable                        150,000.00
  Merchandise                                 50,000.00
  Plant                                      130,000.00
        Accounts Payable                                  45,000.00
        Mortgage Payable                                  80,000.00
        Subscribers                                      225,000.00

  Although this accomplishes the same result so far as
  the ultimate showing is concerned, it does not present
  the various steps of the transactions so clearly as
  the separate entries. The “A & B, Vendors” account in
  entry (b) indicates the liability of the corporation to
  A & B, arising from the purchase of their partnership
  properties. Entries (c) and (d) show the manner
  in which A and B are paid for this purchase, with
  consequent cancellation of that liability.

  2. The entries to close the books of the partnership of A & B are:

  (a) American Baking Company                350,000.00
            Cash                                          20,000.00
            Accounts Receivable                          150,000.00
            Merchandise                                   50,000.00
            Plant                                        130,000.00
              To charge the American Baking Company
              with the assets purchased under
              contract of (date).
  (b) Accounts Payable                        45,000.00
      Mortgage Payable                        80,000.00
              American Baking Company                    125,000.00
                To credit the American Baking Company
                under their purchase contract for
                the taking over of the firm’s
                liabilities.
  (c) American Baking Company Stock          225,000.00
              American Baking Company                    225,000.00
                To credit the American Baking Company
                for the payment of the balance due
                by the issue of its stock at par
                to the firm.
  (d) A, Capital                             125,000.00
      B, Capital                             100,000.00
            American Baking Company Stock                225,000.00
              To show the distribution of
              the stock.

  Where the stock is issued to each partner directly
  (instead of to the firm and then distributed to the
  vendors), sometimes the issue is not shown on the
  partnership books, entry (c) above carrying debits to
  the partner’s capital accounts in place of the debit
  to American Baking Company Stock. Whether the actual
  transaction follows one course or the other, entries as
  shown above seem to meet either requirement.

  The student should make sure that the effect of the
  entries under (a) and (b) is thoroughly understood.
  It may be further noted that if good-will or shrinkage
  of values enters into the sale of a partnership, the
  necessary adjustments should be made in the partners’
  accounts before the sale takes place, after which the
  closing entries are as shown above.




CHAPTER XL

CURRENT AND CLOSING ENTRIES FOR THE CORPORATION


=Relation between the Corporation and Its Owners.=—It should be noted
that the owners of a corporation are on a somewhat different basis in
their relationships and activities to the business than are the owners
of a partnership or single proprietorship business. The legal theory
that the corporation is an entity, a person, separate and apart from
its owners, necessitates a change in the status of accounts with owners
as compared with similar accounts in the other types of organization.
A charge against a stockholder as a customer of the corporation is on
the same basis as a charge against any other customer. A stockholder
may become a creditor of the corporation in exactly the same way as any
other person. In a partnership, on the other hand, charges against a
partner and credits to his account are looked upon as charges against
and credits to his proprietary interest in the event of liquidation of
the firm. This is not true in the case of a corporation, stockholders
in such dealings being considered “outside” parties.

=Current Record on Corporation Books.=—After the corporation has
been organized and the opening entries made on its books, the record
of current transactions proceeds on practically the same basis as
in all other types of business organization. Sales, purchases, cash
receipts and disbursements, notes receivable and payable, and all the
transactions arising out of them, are recorded currently in the same
types of books and in the same manner as the similar transactions of a
single proprietorship or a partnership.

While the record of current transactions is practically the same for
all types of business organizations, there are some kinds of current
transactions of a corporation which differ somewhat from those of the
other types. They arise out of the nature of the corporation and are
recorded under account titles peculiar to the corporate form. Some
of these transactions and other accounting records will be discussed
briefly.

=Treasury Stock.=—In some classes of enterprise and also under some
methods of organizing and financing the corporation, no provision is
made for the securing of a fund of working capital, all of the original
capital being tied up in fixed assets—as a mine or some other plant.
A similar condition is sometimes encountered even after a corporation
has been operating for a number of years. Lack of business judgment
and financial foresight sometimes brings about a condition in which
the company has allowed an undue proportion of its current assets, and
therefore its working capital, to become tied up in plant extensions.

In both such cases a frequent method of raising working capital is
for the stockholders to donate to the corporation a pro rata portion
of their holdings of stock to enable it to secure the needed working
capital by selling the stock. When such stock comes back into the
company’s treasury, it is termed “treasury stock.” Having once been
issued and presumably fully paid for, it has this characteristic which
does not attach to the original shares before their issue, viz., that
it can be sold at a discount without the purchasers being liable to
creditors, in case of bankruptcy, for the amount of the discount.
Par-value stock which is originally sold at a discount or which is
being sold on the instalment plan and has not therefore been paid
for in full is subject to levy for the unpaid amount in the event of
bankruptcy of the corporation. Thus, the man who buys a $100 share of
original stock for $90, is subject to a $10 levy in the event that the
assets of the corporation are not sufficient to pay its debts.

Accordingly, in financing highly speculative ventures such as mining,
oil, and other similar companies, it is customary to issue the entire
capital stock of the company to the owner or owners of the mining
or oil property taken over by the corporation as the basis for its
operations. Inasmuch as the value of the properties taken over is not
determinable, it is usually impossible to show that the stock issued
for them does not represent their true value. Accordingly, such stock
is legally fully paid stock and not subject to the liability for
additional assessment which attaches to stock sold at a discount.
Working capital is provided through the donation of a portion of the
capital stock to the treasury of the corporation, which is then in a
position to sell to others the stock now fully paid and non-assessable.
It is easier to find purchasers for this stock because it can be sold
at whatever discount is necessary to dispose of it and carries with it
no liability for future assessment.

Treasury stock may arise also through repurchase by the company. It
may sometimes be desirable for a company to buy back some of its own
stock. This is not allowed in all states but where allowed such stock
repurchased becomes treasury stock.

The student should distinguish carefully between treasury stock and
unissued stock.

=Accounting for Treasury Stock.=—The record of treasury stock
transactions is not complicated. They are discussed under three heads
as follows:

1. RECORD AT TIME OF ACQUISITION. Only the acquisition through donation
will be explained here. Acquisition through purchase usually involves
an adjustment of purchase price to par value and the vexed problem of
valuation. This problem will be found discussed on page 18, Volume II.

Assume that a company has issued all its capital stock, $1,000,000
in amount, for the acquisition of a mining property, and that the
shareholders donate to the treasury $400,000 of the stock to provide
working capital. This stock donation will be recorded on the books as
follows:

  Treasury Stock                400,000.00
        Donated Surplus                     400,000.00

Like any other gift, this gift of stock in theory creates additional
capital and must therefore be recorded in a proprietorship account.
The title “Donated Surplus” is used to indicate the source of this
additional capital. Capital arising from this source should never
be recorded in the general Surplus account, largely because of its
problematical value but also because of the information which it gives
concerning the financing of the company by making a separate record.

2. RECORD AT TIME OF SALE. Assume that $250,000 of the treasury
stock is sold at 50. Inasmuch as the stock was brought on the books
at par, the portion sold must be taken off at the same figure. The
50% discount, instead of being recorded in a Capital Stock Discount
account, will be recorded as a charge against the Donated Surplus, thus
adjusting a portion of this donated surplus, recorded originally at par
value, to its realizable value. The following entry records the sale
and adjustment:

  Cash                          125,000.00
        Donated Surplus                     125,000.00
        Treasury Stock                      250,000.00

The student should understand that the customary procedure of opening
the subscription books, making the entries with subscribers for
treasury stock subscriptions, payment in cash or by instalments, and
finally, the issue of the stock, may be the procedure followed in the
sale of treasury stock just as in the sale of other stock. The net
result will, however, be as shown by the above entry.

3. RECORD OF TREASURY STOCK ON THE BALANCE SHEET. On the balance sheet
treasury stock is treated in the same way as unissued stock, namely, as
a deduction item in the net worth section of the balance sheet. Using
the above figures for illustration, the net worth section will appear
as follows:

                       _Net Worth_
  Represented by:
    Capital Stock:
      Authorized              $1,000,000.00
      Treasury Stock             150,000.00
                              -------------
      Issued and Outstanding                $850,000.00
    Donated Surplus                          275,000.00
                                            -----------
          Total Net Worth                               $1,125,000.00

=Bonds Payable.=—Generally, when a corporation borrows money on
long-term notes secured by a portion of its fixed assets, chiefly its
holdings of real estate, the notes (usually of uniform amounts so as
to make them more marketable) are called “bonds.” Thus, such notes
or bonds are frequently in $100, $500, and $1,000 denominations,
making it possible for one of limited means to take advantage of the
mortgage offered as security for the loan. Bond issues are floated
in pretty much the same way as capital stock issues, being offered
for subscription at a price depending both on the interest rate which
the bonds bear and the prevailing interest rate at the time of their
offering. Thus, if the bonds bear 5% interest and the market rate for
bonds of the same general character is 6%, an investor will naturally
not be willing to pay par for them and the company will therefore have
to sell them at such a discount as will put the yield to the investor
approximately on a 6% basis. The company, by receiving for its bonds an
amount less than par value but by being required to pay interest on the
par amount, is thus paying higher than the nominal or agreed rate.

There is thus a very definite relationship between the bond discount
and the interest rate which the bonds bear.

The accounting record of bond transactions is very similar to that of
other liability transactions, and is shown under three heads as follows:

1. SALE OF BONDS PAYABLE. Assume that a $100,000 issue of bonds
bearing 5% interest, payable semiannually, and maturing in 20 years, is
sold at 90. The record will be:

  Cash                    90,000.00
  Bond Discount           10,000.00
        Bonds Payable                100,000.00

Bonds payable are always set up at par, since that represents the
liability which must be met at maturity of the issue.

2. BOND INTEREST PAYMENT. At the close of the first six months, 2½%
interest, or $2,500, will be paid to the holders of the bonds. Since
the corporation will have to redeem its bonds at par, it has been
deprived of the use of $10,000, represented by bond discount, because
the issue was brought out at 5%. The $10,000 discount is therefore in
the nature of a lump sum interest cost incurred in advance—prepaid—and
must be spread equitably over the life of the bonds. Accordingly, at
each of the 40 interest payments during the life of the issue, a pro
rata share of this prepaid interest should be taken into account as
bond interest. The distribution of bond discount over the interest
payments made during the life of a bond issue is termed “amortization”
of the discount. Scientifically, amortization is worked out on a
compound interest basis, discussion and explanation of which are
found on page 269, Volume II. Here, all we are concerned with is the
principle involved and for the sake of simplicity the amortization
is prorated evenly over the 40 interest periods, resulting in an
additional interest charge of $250 each period. The record is therefore:

  Bond Interest            2,750.00
        Bond Discount                    250.00
        Cash                           2,500.00

3. CANCELLATION OR THE BONDS AT MATURITY. When the bonds come due and
are paid, the record is the same as the cancellation of any other
liability, viz.,

  Bonds Payable          100,000.00
        Cash                         100,000.00


=Bond Premium.=—Bonds are also often sold at a premium. As with
discount, the premium is intimately related to the interest rate which
the bonds bear. At the time of the sale of bonds, the premium is
brought on the books as a credit, which together with the par value
at which the bonds are booked, offsets the cash received from their
sale. At the regular interest periods the premium is amortized over the
life of the bonds and so results in a lessening of the periodic bond
interest charge. The student should set up the entries to record the
sale of bonds at a premium and the interest payment for such bonds.

=Sinking Fund.=—The sinking fund is a fund of liquid assets created
by periodic sums, usually of equal amounts, set aside during the
life of a bond issue or other liability to provide ready funds for
the cancellation of the liability at maturity. This method is very
commonly followed in public finance and is not infrequent in private
corporations. It is not purposed here to explain the methods of
determining what periodic sum is necessary to be set aside so that
these principal sums and their interest accumulations will provide
sufficient funds for the cancellation of the liability at maturity.
Nor will the complicated problem of sinking fund investments in the
hands of a trustee, and the expense and income arising out of it, be
discussed here. These and related problems are covered fully in Chapter
XXV, Volume II. Only the creation of the fund and its final disposition
are treated here, under two heads as follows:

1. CREATION OF THE FUND. Assume that $1,000 cash is set aside at the
end of each six months to provide for the retirement of the bonds at
maturity. The entry for this, every six months, will be:

  Sinking Fund            1,000.00
        Cash                        1,000.00

2. CANCELLATION OF THE BOND LIABILITY. The student will understand
that the cash set aside periodically for the sinking fund will be
invested in securities in order to accumulate an income, which usually
accrues to the fund. The securities in the fund must be sold just
before the maturity of the bond issue, in order to provide cash. It
will be assumed that in this instance the securities in the fund have
been sold, that the cash in the sinking fund at the time of maturity
is $101,500, and that the bond issue to be retired is $100,000. The
entries will be:

  (a) Bonds Payable                       100,000.00
            Sinking Fund                              100,000.00
  (b) Cash                                  1,500.00
            Sinking Fund                                1,500.00

Entry (b) returns to the general cash the unused cash in the sinking
fund. In case of a deficiency in the sinking fund it will be necessary,
of course, to draw on the general cash for the amount of the deficiency.

=Sinking Fund Reserve.=—It is often the policy of a corporation,
which has to provide for the redemption of a bond issue, to reserve
from the yearly profits a sum equal to the periodic payment into the
sinking fund and the accumulations of the fund during that period.
Such a policy prevents the distribution by dividends of all the
current profits to stockholders, and insures that the increase in the
assets represented by these profits will be held in the business and
so provide each period an increased amount of assets for use in the
business and ultimately, by conversion of the assets into cash, for the
use of the sinking fund. The entries crediting the sinking fund reserve
and showing its disposition at the maturity of the bonds are as follows:

  (a) Surplus (or Profit and Loss)          1,000.00
            Sinking Fund Reserve                        1,000.00
  (b) Sinking Fund Reserve                100,000.00
            Capital Surplus (or Surplus)              100,000.00

The first entry shows the periodic reservation of profits. The second
entry transfers the total profits so reserved during the life of the
bonds, back to surplus—capital surplus if it is desired that these
profits be made a part of the permanent capital of the corporation,
or to general surplus in the event that these profits are to be made
available for future dividends.

=Closing the Books of the Corporation.=—The results of the period’s
operations are summarized and the books closed in very much the same
way as with the partnership. From what has been said above, it will be
understood that there are some types of transactions to be considered
at the time of closing the corporation’s books that are not found in
the partnership and single proprietorship. These concern largely the
bond interest, the sinking fund reserve, and the dividend transactions.
Bond interest is an expense. The sinking fund reserve is a reserve of
net profits. Two methods are employed in showing the appropriation of
net profits. Under the one method the total net profit is transferred
to Surplus account, which then shows not only the profit for the
current year but also the undistributed balance of previous years.
The current appropriations of profits for whatever purpose are then
booked as a charge against Surplus. Under the other method the current
appropriations of profits are shown as charges against the net balance
in the Profit and Loss account. Any unappropriated profit remaining is
then transferred to the Surplus account.

=Dividends.=—A business is being operated always for the benefit of
its owners, to whom the profits belong. In the case of a corporation,
before the owners may secure any of the profits, a formal declaration
of dividends must be made by the board of directors. During the term of
its election the board is supreme in its management of the business.
It is intimately in touch with the condition of the business. It knows
the needs of the corporation and its obligations and must provide for
them. If, after considering all the circumstances, it decides that some
or all of the profits should be divided among the shareholders rather
than be retained in the business for purposes of expansion, it meets in
regular session and passes a formal dividend resolution.

=Ultimate Control of Stockholders.=—Thus it is seen that the board of
directors is supreme during the period of its incumbency. Its actions
are, however, subject to the review of the stockholders at their
periodic meetings, which are usually held annually. If their policies
are not favored by the shareholders, a new board, presumably one which
will carry out the will of the majority of stockholders, is elected.

=Dividends Out of Profits Only.=—It is forbidden by law to pay
dividends out of the capital of the corporation. Such payments would
encroach upon the net assets of the organization and thereby weaken
the creditors’ security for the payment of their claims. Dividends
need not be paid out of the profits of the current year, provided the
undistributed profits of former periods are still available.

=Distribution of Profits.=—The appropriation of profits in a
corporation differs, therefore, from that in a partnership. The entries
recording the appropriation of profits cover in the main two kinds: (1)
reserves, and (2) dividends. These entries are not necessarily the same
for all corporations nor for all periods. No set disposition of profits
is prescribed, authority resting with the directors. Their decision,
therefore, as recorded in the minutes of their meetings is the basis
for this group of entries. Some of the usual entries are illustrated in
the following paragraphs.

=Reserves and Dividends.=—As stated above, the two methods for handling
the appropriation of profits are: (1) as a charge against Surplus after
the net profit for the current period has been transferred to that
account; and (2) as a charge against the current Profit and Loss credit
balance and a transfer of the remaining balance, if any, to the Surplus
account.

A part of the profits may be retained in the business to provide
funds for certain future needs, as for the payment of fixed debts,
the extension of fixed plant, etc. Such items are transferred to the
credit of properly named reserve accounts. Profits for distribution as
dividends are similarly transferred to a Dividends Payable account. The
dividend is always based on the amount of outstanding stock, not on the
unissued or treasury stock. It is reckoned either as a percentage of
the par value of each share, as a 6% dividend, or as a stated amount on
each share, as a dividend of $4 or 10 cents per share.

The following illustration will show the necessary entries in
accordance with the two methods.

  PROBLEM. Assume that the net profits of
  Jackson & Co. are $25,000. The directors declare an 8%
  dividend on the outstanding capital stock of $100,000,
  and order $5,000 to be transferred to a reserve for
  buildings and $7,000 to a reserve for the cancellation
  of a bond issue.

  FIRST METHOD
  Profit and Loss                               25,000.00
        Surplus                                            25,000.00
          To transfer net profits to Surplus.
  Surplus                                       20,000.00
        Dividends Payable                                   8,000.00
        Building Fund Reserve                               5,000.00
        Sinking Fund Reserve                                7,000.00

  SECOND METHOD
  Profit and Loss                               20,000.00
        Dividends Payable                                   8,000.00
        Building Fund Reserve                               5,000.00
        Sinking Fund Reserve                                7,000.00
          To appropriate profits as per resolution
          of the directors.
  Profit and Loss                                5,000.00
        Surplus                                             5,000.00
          To transfer balance to Surplus account.

=Dividend Liability.=—The student should note that the effect of a
dividend declaration is to change a portion of the proprietorship into
a liability. Surplus is decreased and liabilities are increased. The
liability so created ranks with other liabilities, i.e., the assets of
the corporation may be used to pay the liability to its stockholders
equally with the payment of liabilities to outside creditors. The
payment of such dividend is recorded by the cancellation of the
dividend liability, as follows:

  Dividends Payable         8,000.00
        Cash                          8,000.00

Where there is more than one class of stock outstanding, it is
customary to keep separate dividend accounts with each class.

=Other Methods of Adjusting and Closing the Books.=—It seems desirable
at this point, although the material is applicable to any type of
business organization, to discuss other methods of adjusting and
closing the books than those heretofore explained. In Chapter XXVIII
and previous chapters, the methods of handling deferred expense and
income, and of summarizing the merchandising transactions were shown.
The method given there of adjusting the ledger because of deferred
expenses rested upon a classification of the various expense accounts
to be adjusted as temporary proprietorship accounts. The method of
adjustment effected a transfer out of the current part of the account,
the asset portion of the expense, and carried it over into the next
period. The balance remaining in the account after this adjustment
shows the expense, that is, the amount of service or use, chargeable to
the current period.

Another method of handling such items is based on an asset
classification of the accounts recording them. Under this hypothesis
such account titles as Postage, Stationery, Wrapping Supplies, and
even Insurance (that is, unexpired insurance), are classed as asset
accounts. At the close of the period when the adjustments are made, it
is necessary to transfer from such asset accounts only the portions
used or consumed during the current period. The balances left in the
accounts represent the unused assets carried over into the next period.
The difference between the two methods is indicated by the two sets of
adjusting and closing entries given below.

  PROBLEM. Assume that $1,000 of insurance has
  been purchased during the current period and that at
  its close unexpired insurance is $250.

  FIRST METHOD. The adjustment of the Insurance
  account classified as an expense account is here made
  by the following entry:

  Insurance (Deferred)      250.00
        Insurance                   250.00

  The closing entry would be:

  Profit and Loss           750.00
        Insurance                   750.00

  The ledger account would show as follows:


                INSURANCE
  ===========================================================
  19—               | 19—
  Jan. 15    500.00 | Dec. 31 Deferred as unexpired    250.00
  June 15    500.00 |         Profit and  Loss         750.00
           -------- |                                --------
           1,000.00 |                                1,000.00
           ======== |                                ========
  19—               |
  Jan. 1     250.00 |
                    |

  SECOND METHOD. The Insurance account is here
  looked upon as an asset account. The only adjustment
  necessary, therefore, is to remove from it the portion
  used, the portion remaining unused being an asset. This
  is effected by the following entry:

  Profit and Loss           750.00
        Insurance                   750.00

  The ledger account would appear as follows:

                   INSURANCE
      =======================================================
      19—               | 19—
      Jan. 15    500.00 | Dec. 31 Profit and  Loss     750.00
      June 15    500.00 |

In favor of the first method it may be said that it brings out more
sharply the difference between asset and expense accounts and the need
for separating mixed accounts into their two elements of expense and
asset. The second method requires less work.

=The Trading or Selling Account.=—For the purpose of summarizing
the merchandising activities a separate account called Trading
or Merchandise Trading is sometimes used to effect the partial
summarization heretofore explained as being made in the Purchases and
Sales accounts respectively. Where so used the Trading account becomes
virtually the old Merchandise account with totals in place of details.
The following entries will show its content and the method of handling
it.

  Trading                                      10,000.00
        Merchandise Inventory                              10,000.00
          To transfer opening inventory.
  Merchandise Inventory                        12,000.00
        Trading                                            12,000.00
          To set up new inventory.
  Trading                                     100,000.00
        Purchases                                         100,000.00
          To transfer purchases for the period.
  Trading                                       3,000.00
        In-Freight and Cartage                              3,000.00
          To transfer in-freight and cartage
          expense.
  Purchase Returns and Allowances               5,000.00
        Trading                                             5,000.00
          To transfer.
  Sales                                       150,000.00
        Trading                                           150,000.00
          To transfer.
  Trading                                       6,000.00
        Sales Returns and Allowances                        6,000.00
  Trading                                      48,000.00
        Profit and Loss                                    48,000.00
          To transfer the gross profit on sales.

The Trading account is thus used as a means of separating the net
sales into its two elements: (1) income, or gross profits; and (2)
decrease of assets, or the cost of goods sold. This method makes
the Profit and Loss account a purely summary account of income and
expenses. Its chief disadvantage, however, is that a picture of the
entire operations for the period is not presented in one account. One
seldom finds the Trading account used in actual practice. It does
serve, however, as an efficient teaching device to bring out clearly
the way in which the merchandise accounts are adjusted and summarized
in order to effect a separation of the income and decrease in asset
elements.




CHAPTER XLI

HANDLING THE CASH


=General Considerations.=—In keeping record of the various properties
of a concern, the greatest care is usually exercised in accounting for
the asset cash. This is done because of the difficulty in tracing money
that is lost or stolen and the ease with which the thief may get rid
of it, due to its universal use as a medium of exchange, and due also
to its great value in comparison with its small bulk. Merchandise,
supplies, and the like, may be purloined or misappropriated, but not so
easily and profitably. Oftentimes, however, unless care is exercised
in safe-keeping it, large losses occur also in merchandise. Absolute
prevention of losses cannot be expected even with the employment of
all possible precautions, but experience shows that certain general
safeguards may be placed about both cash and merchandise. In the
ultimate analysis the best safeguard is the integrity of the employee;
still the employer should not tempt the employee by making the
abstraction of his cash an easy performance.

=Principle of the Double Record.=—A fundamental principle in the
handling of cash is to secure a double—not a duplicate—record of its
receipt and disbursement. The practice of depositing in a bank all cash
receipts and making disbursements only by check should be followed
invariably, because it secures this double record—the bank’s record and
the cashier’s record. Any discrepancy is detected whenever comparison
of the two records is made. When the bank’s record is compared with the
cash book record, the balances shown by each are seldom in agreement,
chiefly because of the outstanding checks which have not yet been
presented to the bank for payment. This requires a reconciliation of
the two balances before proof of correctness is secured, which is
usually accomplished by subtracting from the bank balance the amount
of the outstanding checks. Other adjustments are sometimes necessary.
These are explained and a form of reconciliation statement is shown on
page 475.

Most concerns object, however, to issuing checks for small amounts,
and set therefore a minimum below which they do not issue them. For
the purpose of paying smaller amounts, a petty cash fund is provided
from which disbursements are made in cash. This fund is established, in
the first instance, by a check on the general cash and is from time to
time replenished in the same way. In this manner the double record is
maintained.

=Handling the Petty Cash.=—There are two general methods of handling
the petty cash. Under the one, entry of the check creating the fund
is made as an immediate charge to some expense account and no further
accounting is required. This method is based on the theory that the
cash is to be used for petty expenses anyway, and might as well be so
charged now as later. Subsequent amounts for replenishment of the petty
cash are treated in the same way. The objection to this method, from
the accounting viewpoint, is that it results in an inaccurate record
of expense distribution and a misstatement of the facts in that it
charges to expense an item which at the time of the charge is still
a part of the general cash fund. The second and chief objection is
that it encourages in the petty cashier loose methods in handling and
accounting for the fund, as usually no strict reckoning is required.

The second method, known as the “imprest method,” is in more general
favor. This charges the original check creating the fund to an
account called “Petty Cash.” The petty cashier is required to secure
a receipted bill, sales ticket, or other voucher for every petty
cash item of expenditure, so that at all times the amount of cash in
his possession added to the receipted bills and vouchers must equal
the original amount in the fund. Usually the fund is a fixed amount,
its size depending upon the needs of the business for these small
expenditures. When the cash in the fund becomes low, the petty cashier
turns over his receipted bills to the general cashier, who issues a
check for their exact total to replenish the petty cash by the amount
of its depletion, thus restoring it to its original fixed amount.

The expenditures as shown by the receipted bills and vouchers are
classified and entered by either of the following two methods: (1)
as a charge to the several accounts through the general cash book,
offsetting the petty cash replenishing check; in this case no charge
appears in the “Petty Cash” account except the item covering the
original check; or (2) by an entry through the journal debiting the
various expenses and other items and crediting Petty Cash. This
latter method necessitates charging in the general cash book the
replenishing check to Petty Cash as an offset to the journal credit of
the same amount. Most accountants consider the postings to the Petty
Cash unnecessary—except the original—and so check both in cash book
and journal. If, however, posting to the Petty Cash account in the
general ledger is made whenever the fund is replenished, this will
serve to indicate the activity of the fund on the face of the ledger
account—information which could just as easily be obtained from the
petty cash book. The imprest method thus effects a careful accounting
of the petty expenditures.

=The Petty Cash Book.=—The petty cash book is usually a columnar
record with the amount columns to the right of the explanation space.
The first column is the receipts column, the second the disbursements
column, and the others show under appropriate titles the distribution
of disbursements. One form of the book is shown in Form 39, with
typical entries and balancing.

[Illustration: Form 39. Petty Cash Book]

Sometimes the classified summary which is made the basis of the general
cash book or journal entry referred to above, is shown in the petty
cash book, the account titles being written in the explanation column,
with the amounts opposite in the credit column underneath the $100
total. The items of this summary are then posted to the ledger, and
the debit of the replenishing check to Petty Cash on the general cash
book is “checked” in the ledger folio column. Or if the distributive
column titles give sufficiently analyzed account titles, their totals
may be posted without formal summarization, posting being shown by
the small-figure ledger page in each column, as in the illustration.
Where the petty cash book is used as a posting medium, of course no
summarization of it is made either in the journal or the general cash
book.

=Keeping the Bank Account.=—Several different methods of keeping the
bank account are in use. Sometimes the check stub is the only record
kept; in Chapter XXIII reference was made to the two methods of keeping
the account for the entry of deposits—either on the face or the back
of the stub. When the entry is made on the face, each check is usually
subtracted from the previous balance and the new balance is shown. When
deposits are recorded on the back of the stub—or on a special deposit
interleaf—check totals and deposit totals may be carried forward from
leaf to leaf without showing any balance.

A better method is to use the stub only as a memo from which to make
formal entry in the cash book columns—one for deposits on the debit
side and one for checks on the credit side. These bank columns may be
used, first, for the purpose of keeping the bank account, by showing
the totals of deposits—but not the items composing each deposit—and the
totals of the checks that have been drawn; and second, for the purpose
of furnishing weekly or monthly totals for posting to a ledger account
kept with the bank, thus making the ledger self-balancing without
having to bring in the cash book balance.

If, however, the principle of double record (explained earlier in the
chapter) is followed, there is no need of a _special_ bank deposits
column, since the total of the Net Cash column gives the amount of each
day’s deposits, and similarly the Net Cash column on the credit side
shows the checks drawn against the bank. Thus the policy of depositing
in the bank all receipts and disbursing only by check has an added
advantage in that it simplifies the keeping of the record of cash
as well as proving it. Under this method, the cash journals may be
summarized, just as the other journals, and posted to a Cash account
in the ledger. Detailed instructions for the handling of the entries,
balancing, and closing under this method are given in Chapter XXXI.

Another and rather unusual method of keeping the cash book is to carry
a Currency column on each side, supplemented by Bank columns for
deposits and checks on the debit and credit sides respectively. In the
debit Currency column are entered all receipts of money in regular
course. When the bank deposit is made up, its amount is entered as a
charge to the bank in the credit Currency column and also, as a memo,
in the debit Bank column. As checks are drawn they are entered in the
credit Bank column. Thus the balance of the Currency columns should
show the actual amount of cash in the cash drawer at any time, and the
difference between the Bank columns should show the balance in the
bank. Though somewhat complicated, the method has its advantages under
conditions where currency accumulates before being deposited in the
bank.

Of course, under all methods of keeping the cash record, the
requirement that all cash received be deposited and payment be made
only by check should be strictly adhered to.

=Entering Checks on the Cash Book.=—When all disbursements are
by check, every check drawn must be entered on the cash book and
accounted for. Entry should be made in numerical sequence with
suitable explanation of any spoiled checks. The amount of the spoiled
check may be left blank or entered as usual, but in the latter case
the spoiled check must also be included in the day’s deposits, and
the bank’s cancellation stamp must be secured. Neither the deposit
nor disbursement is posted, each entry being marked “contra” by way
of explanation. This effects an inflation of the total receipts and
disbursements, but inasmuch as the bank’s record also shows the
inflation, an adequate safeguard is secured. The new check replacing
the one spoiled is entered in regular order.

The method just discussed is perhaps the best way of recording the
exchange of checks for cash. Sometimes a concern is asked to exchange
its check for currency, the party making the request desiring to send
the check through the mails or for some other purpose. The entry is
best made on both the debit and the credit side of the cash book with
reference “contra” in each case, but neither entry need be posted. This
makes the cash book record check against the bank record and shows the
full history of the transaction. When a check is cashed in currency, or
when a check of larger amount is received in payment of a debt and the
difference is returned in cash, no record need be made of the check, as
only the nature—not the amount—of the deposit for the day is changed
and no disbursement is made which affects the bank account. When,
however, a check is issued for “change” in lieu of currency, record
should be made, debit and credit, as shown above.

=Branch Cash—The Working Fund.=—Frequently cash working funds must be
provided for the current expenses of branches or of a factory located
at a distance from the main office. When the branch or factory keeps
a separate set of books, it must be charged with the advances of the
working fund and a careful audit of the way the fund is handled must be
made periodically, just as would be done with an independent concern.

Such cash transfers may also be handled by the imprest method as
explained above. The original advance is charged to “Factory” or
“Branch Cash,” and is deposited in the branch’s local bank to the
credit of the head office, the branch having the privilege of using
it. The branch may draw checks against the fund, sending the canceled
checks to the head office as supporting vouchers for its disbursements.
These canceled checks become the basis for the replenishing checks and
also for the charges for branch expenditures made on the head office
books.

If the branch is a selling agency making sales for cash and on account,
a modification of the system is necessary. Daily reports should be
required from the branch. Its cash receipts should be deposited daily
and a duplicate deposit ticket should be forwarded to the head office
by the bank. The bank should be asked also to forward all canceled
checks. All collections on customers’ accounts should be made from
the head office. This does not prevent the abstraction of cash before
deposit, but it at least places control or oversight of the bank
cash account in the hands of the head office and secures a careful
accounting of it.

=Safeguarding Cash—General Principles.=—Proper safeguards for the cash
should always be provided. The method of the double record—the bank’s
and the owner’s cash book—is good so far as it goes and acts as a check
on cash transactions _after_ the record is made, but does not insure
that the cash book record will be made correctly in the first place.
There are ways in which cash received may get into the cashier’s or
salesmen’s pockets instead of the cash book. No system or method has
yet been devised to prevent this entirely. Every system must rest at
some point upon the integrity of the human agent, and will fail of
its full efficiency and intended results if the agent fails in the
trust reposed in him. Every effort should be made to prevent both
petty thievery—the abstraction of small sums at every opportunity—and
systematic robbery mapped out and planned with infinite care and
detail. Only everlasting vigilance and a system of “checks” will secure
satisfactory results, as occasionally it is the _trusted_ employee who
is not true to the trust placed in him.

=Internal Check.=—By internal check is meant the method by which
employees check each other’s records, control not resting entirely
in any one clerk. Thus a system of record-making which combines the
work of the cashier and bookkeeper under one clerk or which gives the
cashier access to the ledgers is one which invites dishonesty.

Where the cashier has entire control of the cash, and besides opens the
incoming mail, makes up his daily deposits, has his pass-books balanced
periodically, and files the canceled checks, he has every opportunity
to abstract cash and falsify his records. But where he must make
detailed daily reports of the cash to the manager, treasurer, or some
other officer; where he is denied access to the records—except his own
cash record—and where his record is subject to periodic proof; where
the mail is opened first and receipts listed by an independent clerk;
where a careful system of proving receipts from cash sales and of
allowing no unauthorized deliveries over the counter is employed; where
every member of the office force is required to take a vacation during
which his work and records are cared for by other employees—there is a
very satisfactory system of internal safeguards and checks.

All these devices and systems are applicable in full only in large
concerns where minute division of duties is possible. In smaller
concerns where many duties have to be combined under one person, the
problem of safeguarding the cash and providing other measures to
prevent fraud of various sorts is more difficult. In such a concern,
at least the cash received through the mail should be listed first by
someone other than the cashier or bookkeeper, and the daily deposit
slip should be compared with this list to see that all the cash items
are included. The cash received from cash sales should also be proved
daily against the sales tickets.

=Statement of Receipts and Disbursements.=—A periodic report of cash
is usually made by means of a statement of receipts and disbursements.
This statement is an abstract or summary of the cash book, showing the
total receipts from various sources and the causes of the disbursements
and their totals. A simple form is given below:

[Illustration: Form 40. Weekly Statement of Receipts and Disbursements]

To assist in checking past deposits, an itemized record of daily
cash receipts is often kept, analyzed as to gold, silver, currency,
notes and checks. To be of value this record should be filed with the
daily deposit tickets and should be later available for purposes of
comparison.




CHAPTER XLII

NOTES RECEIVABLE AND PAYABLE


=Conditions Precedent to the Present Use of Notes and Bills.=—During
the twelfth and thirteenth centuries there was much bad money
in circulation in Europe because of the widespread practice of
coin-shaving and the entire lack of standards of purity of the coins.
If a monarch needed funds for war or government purposes, his easiest
way of getting them was to increase the amount of base alloy in the
coins of the country or to increase the rate of seigniorage. As the
former method might be resorted to several times during the reign of
one sovereign, the weight and relative purity of metallic coins had no
relation to the denominated value of the coins, and they fell under
general suspicion. Consequently, only the money dealers, who could
determine the actual value of coins by assaying them, were willing to
trade for coins. These men gradually became the custodians of moneys
for merchants, who were given receipts showing the assay value of the
coins deposited. Because the receipt represented tested and proven
value, it was a more acceptable medium of exchange than the coins
themselves.

Medieval trade was subject to many perils, chief of which was that
from robbers. Any safeguards placed about the transportation of money
from one place to another, or any method devised for settling debts
without the transportation of coin and bullion, were more than welcome.
Out of these conditions arose the method of settling debts by means
of drafts. The draft, not countenanced by law at first, had standing,
however, under the “law merchant,” the code of rules recognized by
merchants as governing commercial relations. This code was later
incorporated by statute into the law of the country.

These two kinds of paper, the one a receipt for coin which was in the
nature of a demand promise to pay, the other a counterpart of the
modern draft, were the forerunners of our promissory notes and bills of
exchange of the present day. The law with regard to the bill or draft
became settled as the result of the practice of merchants sooner than
that relating to notes.

=The Titles “Notes” and “Bills.”=—In this way, the word “bill” became
an established term. The titles “bills receivable” and “bills payable”
still cling to both classes of items. Inasmuch as the accepted bill is
practically identical with the promissory note, and the title “bill” is
so often used interchangeably with the word “invoice,” it is advisable
to use the terms _notes receivable_ and _notes payable_ instead of
bills receivable and bills payable. Some advocate the use of the title
“acceptances” in order to distinguish accepted bills from promissory
notes. Unless these two classes of paper are large enough in volume to
justify it, little advantage is secured by this separation of their
bookkeeping record. However, in the case of trade acceptances, i.e.,
acceptances based on particular sales of goods and therefore evidencing
bona fide commercial transactions as the basis for the extension of
credit, it is advisable, because of their superior rating in the money
markets, to segregate this class of acceptances from notes and other
acceptances.

=Relation of the Note to the Open Account.=—In the preliminary
discussion of the relation of the note to the open account in Chapter
XXI, it was pointed out that both the note and account are claims
against the person liable for payment; and that the one is carried
under a class title “notes receivable,” because the number of such
notes is usually small, while each account receivable is carried under
a separate title which designates the person liable for payment. The
essential difference between the two kinds of claims is that the note
is an acknowledgment of the justice of the claim and the correctness of
the amount, whereas the claim under the open account may be disputed
and in case of dispute requires outside proof; besides, the open
account may always be offset by counterclaims and sometimes by a return
of all or a part of the goods bought.

Any defenses of value under the contract for which the note was given
are good defenses as between the original parties to a note; but not
so as between the maker and a third party who is an innocent purchaser
for value. To him the maker is liable according to the exact terms
and tenor of the note. Only so could the element of negotiability be
insured and the note pass from hand to hand as money. In no other sense
is the note a preferred claim over the open account.

In case of bankruptcy a claim against the bankrupt under an open
account and a claim under a promissory note or an acceptance made by
the bankrupt before his insolvency, rank alike, both sharing pro rata
in the net assets available for the satisfaction of the total claim of
unsecured creditors.

=Relative Liquidity of the Note and Open Account.=—Compared with the
liquidity of open accounts, promissory notes have a slight advantage in
that they can more readily be turned into cash and at a better rate.
Although an assignment of open accounts is possible by hypothecating
them with a third party, the cost of such assignment is almost
prohibitive and is resorted to only where the customary sources of
credit are not available.

The legitimacy and the low cost of discounting notes greatly increase
their liquidity. Oftentimes the question of risk, i.e., the degree of
certainty of their payment when due, enters into the determination of
the relative liquidity as between open accounts and promissory notes,
but from this standpoint there is little, if any, difference between
the two claims. Occasionally a firm, which refuses to pay its debts
on open account, will meet its notes and acceptances in an effort to
bolster its credit at the local banks. This phase of the question does
not usually enter into the discounting operation, where the credit of
the discounter is the determining factor in raising money. Of course,
this may be only a temporary expedient if the note is dishonored and
charged back to the bank. In some lines of business it is very common
practice to secure notes for overdue accounts. If the Notes Receivable
account contains many such items, its liquidity is seriously to be
doubted. However, the note is usually classed as a more liquid asset
than the open account.

=Method of Recording Notes.=—As to the accounting phase, a record is
made of each note received or given, entry being to Notes Receivable
or Payable, as the case may be. If the note transactions are few in
number, the general journal is used for their record. Ample explanation
must be given as to the essential facts of date, maker, for what
received, rate of interest, due date, etc. Notes receivable must be
watched carefully, as failure to present them when due releases all
indorsers. There is nothing unusual in the entry when made in the
general journal, its debit and credit being determined as indicated in
Chapter XI.

=The Note Journals.=—Because the general journal does not lend
itself to an easy record of the essential data pertaining to note
transactions, a separate book is oftentimes kept for this purpose. This
special book may be used merely as a memorandum record for carrying the
detailed explanation of the Journal entry; or it may become a special
journal that is used as an integral part of the accounting system, and,
when so used, posting to the ledgers is made direct therefrom. The use
of this special journal is always advisable when note transactions are
numerous. A bills or notes receivable journal may be ruled as shown on
Form 41. The notes payable journal differs but slightly from the notes
receivable journal.

[Illustration: Form 41. Notes Receivable Journal (left and right hand
pages)]

If the bill book is for memorandum use only, the “Amounts Credited”
columns may be omitted. If it is a real note _journal_, its debit and
credit equilibrium is shown through summary entry at posting time. The
total debit is to Notes Receivable for the amount of that column’s
total. If it were not for the fact that sometimes notes are received
in whose face amount is included not only the credit to the customer
but an interest item as well, there would be no need of credit columns.
The note journal would then be operated just as is any simple special
journal, with a debit to Notes Receivable and the same amount credited
to the customer; but when interest is included, the note is best
recorded in an additional column, separating the credit to Customers
from that to Interest. If notes are numerous, a distributive column
in the cash book should be used for receipts from notes, in order to
secure a total posting to the credit of Notes Receivable account.

Referring to the left-hand page of the illustrated ruling (Form
41), the face amount of the note receivable is entered in the Notes
Receivable column, and the due date in one of the narrow columns headed
“When Due,” each of these columns representing a separate month. In
this way it is easy to find the total of all the notes due in a given
month and the amount of cash to be expected from their payment. For
this purpose, however, it is best to use a note journal arranged by
_months of maturity_ on the principle of a “tickler.” In such a journal
one page is reserved for each month, and the notes are entered, not
on the page for the month when received, but on that for the month
when due. Thus a note received in January and due in March should be
entered on the March page. To secure a summary of all notes received
during each month for posting to Notes Receivable account at the end
of each month, the various month pages are totaled and “recapped” on a
special page. On this “recap” page, at the end of January, say, will
be entered the total of the January page, giving the notes received in
and maturing during January; the total of the February page, giving
the notes received in January but maturing in February; etc., for each
month during the year. The grand total is the amount to be posted to
the general ledger, representing all notes received during January.

This type of journal gives easy control over maturities, and forecasts
for a given month the amount of cash receipts from notes.

=Notes Entered at Face Value Always.=—Some notes are interest-bearing
from their date of issue; others only after their due date when not
paid. Even on non-interest-bearing notes, the law allows the charging
of interest for their overdue period. From the standpoint of strict
accuracy, a note payable at a future time is not worth its face value
at the time of entry, unless it is interest-bearing from date at
approximately as high a rate as the current discount rate. Its present
value is such an amount as when placed on interest will equal the face
at its due date. That value increases day by day until it reaches
par or face on the due date. Because of the practical difficulties
encountered in the numerous adjustments necessary under any other
method of entry, universal practice countenances the bringing of the
note onto the books at a slightly inflated value, i.e., face value,
at the time of entry. Face value is the amount of the credit to the
customer’s account; it shows the amount to be collected on account of
the note; and if interest-bearing, the amount on which the interest is
based. Accordingly, the note transaction is entered at its face value.
Where the note is interest-bearing and the face plus the interest is
paid at maturity, credit is in two items, one to Notes Receivable for
the face, and the other to Interest Income for the amount received as
interest.

Occasionally, the interest for the period the note is to run is
added to the amount of the debt, and the sum is made the face of a
non-interest-bearing note. The purpose of such procedure is to secure
a compounding of interest for the first period if the note is not paid
at maturity. The entry of the note on the books is a debit to Notes
Receivable for its face, and credits to the customer for the amount of
the debt and to Interest Income for the amount of the interest. Only a
credit to Notes Receivable is made when the note is paid. The credit to
Interest Income, before the interest is actually earned and received,
is necessitated by its pre-estimate and inclusion in the face of the
note. Were a balance sheet drawn up on that date, the entire amount of
this interest would be shown as deferred income.

=The Interest Accounts.=—As explained in Chapter XV, when interest
items are numerous two interest accounts are usually carried on the
ledger, one for Interest Income and one for Interest Cost. Sometimes,
however, only the one account, Interest and Discount, is carried, and
if it is desirable to separate the two classes of interest, it may
be done by entering the debit and credit totals of the Interest and
Discount account—instead of simply the balance—when the trial balance
is taken. Needless to say, bank discount—interest paid in advance—is
the only kind of discount recorded under this account title; it must
not be confused with discounts on sales and purchases, which receive
different accounting treatment.




CHAPTER XLIII

PROBLEMS ENCOUNTERED IN RECORDING NOTES RECEIVABLE AND PAYABLE


=Entries in the Account.=—The elementary discussion of entries to the
note accounts in Chapter XIV will be reviewed and amplified here.

Where the Notes Receivable account in the ledger shows each note
separately rather than the totals of the items, good practice
countenances the recording of the _credits_ in this account in
non-chronologic order. Thus, when a customer settles his promissory
note and the document is returned to him, the credit to Notes
Receivable should be entered directly opposite the original debit item.
This brings each complete note transaction on a single line and shows
at a glance which notes are outstanding, as evidenced by the blank
lines on the credit side of the account.

When, however, the credit items are entered in chronological order, the
same purpose may be accomplished by the use of an index figure for the
original debit and the corresponding credit item.

What has been said above applies equally to notes payable.

=The Discounted Note.=—In the booking of notes receivable discounted
and accepted drafts, a problem arises because of the legal right
accorded the holders of notes, in case of non-payment by the maker,
to look for payment to any or all of the indorsers, provided certain
formal requirements are complied with. Whenever a business house
transfers a note by any method of indorsement (except the qualified),
it incurs a _contingent liability_, which may become a _real liability_
if the maker of the note fails to meet the obligation at maturity.
Since it is the function of good accounting to present _all_ the
financial facts bearing on the business, it is evident that whenever a
contingent liability is incurred, it should be entered in the books of
account. Very frequently, however, this liability is ignored, with the
result that it is eventually lost sight of altogether.

The usual, though incorrect, method of journalizing a note discounted
transaction is as follows:

  Cash
  Interest Cost
        Notes Receivable

Usually when an asset is sold, a credit to the account of the asset
sold is correct, but not so in the case of notes sold, i.e., of notes
discounted. For the purpose of showing the complete facts, the entry at
the time of discount should be made as follows:

  Cash
  Interest Cost
        Notes Receivable Discounted

and at maturity when the note is paid by the maker:

  Notes Receivable Discounted
        Notes Receivable

The effect of the first entry is to set up a suspense account, Notes
Receivable Discounted, representing the contingent liability on the
discounted note. The effect of the second entry is, first, to cancel
the _credit_ of the Notes Receivable Discounted account, because upon
payment of the note by the maker the contingent liability ceases; and
second, to cancel the original _debit_ to the Notes Receivable account
which was made at the time the promissory note was received but which
remained _unchanged_ when the note was discounted, because it was still
needed to record the contingent asset which would become a real asset
in case the contingent liability became a real liability.

It has been argued that the above treatment of discounted notes
stretches the theory of debit and credit nearly to the breaking point.
It must be observed, however, that unless accounting records are so
kept as to give the necessary information, they are not serving the
purpose which justifies their existence. Any theory which prevents the
proper functioning of the records must be changed; there is no place
for it.

It would be incorrect, however, to regard Notes Receivable Discounted
as an independent liability account, because it only represents a
contingent liability. The two accounts, Notes Receivable and Notes
Receivable Discounted, must be considered together, the latter account
being set up merely for the purpose of keeping notes discounted under
review until their final status is determined. The purpose of the
Notes Receivable Discounted account is in a way similar to that of the
valuation accounts of depreciating assets. The asset account is held
at its original figure, and in order to determine the present value of
the asset, the valuation account must be referred to. Similarly, the
asset account, Notes Receivable, is held at its original figure, even
though some or all of the notes are discounted, and in order to know
the amount of notes receivable actually on hand, the credit of the
Notes Discounted account must be subtracted from the debit of the Notes
Receivable account. In the balance sheet, Notes Receivable Discounted
is not shown as a liability item, but appears as a deduction from Notes
Receivable, only the difference, representing the amount of notes
actually in possession, being extended among the assets. It should be
noted, however, that this contingent liability is oftentimes shown on
the liability side of the balance sheet, the corresponding asset, Notes
Receivable, then being separated into two items, “Notes on Hand,” and
“Notes under Discount per contra.” Banks uniformly follow this practice
in showing these and similar items.

At maturity of the note the final entry (Notes Receivable Discounted
debit and Notes Receivable credit) is placed upon the books as
illustrated above. Usually no formal notice is received by the
indorser that the note has been paid by the maker. In case the note is
dishonored, prompt notice would be sent, and failure to receive such
notice implies that the note has been duly paid.

What has been said above concerning notes applies equally to accepted
drafts, the legal character of which is identical with that of notes,
the status of the drawer of an accepted draft being the same as that
of the first indorser of a promissory note. The contingent liability
arising from the transfer of all negotiable instruments should usually
be shown.

In some instances, however, there may be good practical reasons for not
adhering to the above principle. When, for instance, a large number of
notes and acceptances are handled and the experience of the business
shows that few of them are ever dishonored, or if the matter is under
constant review by the financial manager, it might be considered an
unnecessary requirement to make use of a separate Notes Receivable
Discounted account. It must be left to the judgment of the accountant
to decide which method is preferable in connection with the needs
of the business. However, if no current account is kept to show the
contingent liability, at the end of the period the balance sheet must
be made to show the amount of discounted notes still outstanding as of
the closing date of the period.

=The Dishonored Note.=—A note is dishonored either when the maker
refuses payment upon its legal presentation at maturity or when
there is sufficient evidence that he intends to refuse. When a note
is dishonored, a formal protest is required in order to hold the
indorsers. The payee appears before a notary public or some other
officer with notarial powers, and makes oath that legal presentment of
the note has been made and that the payment was refused. The notary
then takes the note and personally presents it for payment to the
maker. If payment is still refused, the notary makes a certificate of
protest and mails notices of the protest to all indorsers desired to be
held. Such notice is sufficient basis for action to recover from the
party or parties thus notified.

In making the accounting record of a dishonored note, a number of
problems may arise. These problems deal with these two situations: (1)
when the note is dishonored in the hands of the named payee; and (2)
when the note has been discounted by him and is charged back on account
of dishonor. To illustrate the entries required, take the following two
cases:

  PROBLEM. Case 1. Promissory note made by P.
  Canning for $100. Payee, D. Johnson. Due December 15.
  At maturity Johnson presents the note for payment, but
  payment is refused.

  Case 2. Promissory note for $250 made by P. Canning.
  Payee, D. Johnson. Due December 15. Note was discounted
  by Johnson. Final holder is A. Andrews who presents the
  note for payment on December 15, but payment is refused.

  The questions arising in connection with these two
  cases may be stated as follows: What record should be
  made on December 15—

  (a) By D. Johnson in case 1.
  (b) By A. Andrews in case 2.
  (c) By D. Johnson in case 2.

  (a) D. Johnson, at the time he received the note from
  Canning, made the following entry:

  Notes Receivable                 100.00
        P. Canning                         100.00

  and on December 15, in order to show that the note is
  dishonored, he may make either of the following two
  entries:

  (1) P. Canning                   100.00
           Notes Receivable                100.00

  or

  (2) Notes Receivable Dishonored  100.00
           Notes Receivable                100.00

  Entry (1) takes the charge out of the note account and sets
  it up again as a claim on Canning’s open account. Entry
  (2) transfers the charge to a Notes Receivable Dishonored
  account. Entry (2) is theoretically a better entry than
  entry (1), because from the latter it might be inferred
  that the nature of the claim has changed from a note claim
  to an open account claim. Such change has not taken place,
  however; Johnson’s claim against Canning is still on the
  note. Therefore, entry (1) is not true to the facts.

  On the other hand, entry (1) has an important advantage over
  entry (2), because by posting entry (1) Canning’s personal
  account in the ledger is made to show the fact that one of
  his promissory notes was dishonored. This is a matter of
  very great importance, especially if Canning should again
  apply for an extension of credit.

  If the second method is adopted, it is clear that the
  posting of the entry will not show the dishonor of the note
  on Canning’s account. It is essential, therefore, that
  the bookkeeper should make a special memo of the fact in
  that account. If the bookkeeper could be depended upon to
  make such memorandum entry, the desired purpose of making
  Canning’s account show a complete record of all dealings
  with him would be accomplished. Any treatment consistent
  with accounting principles and securing a complete history
  in one place of all dealings with the same individual
  satisfies all requirements.

  (b) A. Andrews, who is the last indorsee of the note, should
  make the following entry at the time the note is dishonored:

  Notes Receivable Dishonored      250.00
        Notes Receivable                   250.00

  The Notes Receivable Dishonored account represents Andrews’
  claim against any or all the indorsers whom he wishes to
  hold responsible. Instead of this, an entry might be made
  corresponding to entry (1) discussed above.

  (c) In case the note should be charged back to Johnson,
  either by Andrews or by one of the other indorsers, he
  should make the following entries:

  Notes Receivable Discounted                  250.00
        Cash                                           250.00
  P. Canning (or Notes Receivable Dishonored)  250.00
        Notes Receivable                               250.00

  It will be noticed that these two entries completely reverse
  the two original entries made by Johnson, viz.:

  Notes Receivable                             250.00
        P. Canning                                     250.00

  at the time he received the promissory note from Canning, and

  Cash                                        250.00
        Notes Receivable Discounted                   250.00

  when he transferred the note by indorsement.

  It is to be understood that all expenses in connection with
  the dishonored note should be charged either to the personal
  account of the maker or to the Notes Receivable Dishonored
  account, as the case may be.

Where the Notes Receivable Dishonored account is used, it secures a
good analysis of the claims against customers from the standpoint of
probable realization and gives a relatively better basis for the bad
debts estimate than that offered by the other manner of treatment. Of
course, the use of such an account is limited to the ledger; it never
appears as such on the balance sheet, being included there in the
customers’ accounts with ample reserve for uncollectible items.

=The Classification of Notes.=—The Notes Receivable account should
carry only the short-time notes of customers, and thus be a truly
current asset. Long-time notes and those secured by mortgage should
be booked under separate account titles. For a similar reason, the
notes receivable given by officers, employees, or stockholders of the
corporation should have separate booking, as these notes are given for
the purpose of making formal record and acknowledgment of indebtedness,
usually without regard to time of payment. Such notes do not constitute
easily convertible assets, and therefore should not be recorded under
the same account with short-time customers’ notes.

=Notes Receivable Out as Collateral.=—Notes receivable are sometimes
given as collateral security for a loan. When they are so used, no
bookkeeping problem is involved—though a memorandum to show their
use as such should appear in the note account, and in case a balance
sheet is drawn up, a cross-reference or a footnote should indicate
the liability secured by the notes. However, the sale of the notes to
satisfy the loan constitutes a regular business transaction, which
should be recorded in the proper manner.

=Note Renewals and Partial Payments.=—The renewal of notes and
partial payments are other features met in the accounting for notes.
The renewal of a note is rather a question of business policy than of
accounting procedure. When a note is renewed, it is usually better to
deliver up the old note and secure a new one in its stead. The accounts
should reflect the transaction by showing cancellation of the old and
receipt of the new note. If the old note is extended, a memorandum of
that fact should be entered in the ledger account.

From the financial standpoint, if neither note is interest-bearing, the
amount of the renewal note should be larger than that of the old note,
to cover the cost of deferring payment to a future date. For example,
if the old note amounts to $1,000 and is renewed two months later, the
amount of the new note should be fixed at $1,000 plus 1% interest, or
$1,010.

In accounting for partial payments, no new accounting principle is
involved. When such payments are numerous, additional space in the
note journal and in the ledger should be provided for the purpose of
facilitating the actual work of making the book record.




CHAPTER XLIV

DISCOUNTS


=Definition and Kinds.=—A discount is a deduction from a listed or
named figure. The manufacturer or wholesaler in making up his catalogue
for the trade usually enters his products at certain prices—called
“list prices”—which are not selling prices but only nominal amounts on
which the actual sale prices are based. For reasons to be explained
later, he offers buyers a deduction from list prices which is called
“trade discount.” The usual quotation of sale prices is at so many per
cent below the list prices.

Among practically all merchants it is a very common practice to bill
goods to customers with settlement allowed on an optional basis.
The goods may be billed “net,” i.e., the full amount shown in the
invoice must be paid. Since there is a relationship between the time
allowed for payment and the amount to be paid, most concerns have
an established credit term, at the end of which they expect full
settlement of the account, but, as an inducement for earlier payment,
they offer a reduction in the amount to be paid. This is stated usually
at so much per cent below the billed price, and is generally called
“cash discount.” The practice had its origin in conditions prevailing
at the close of the Civil War when business failures were numerous and
the risk on open accounts even for short credit terms was very great.

Bankers when making loans usually deduct from the face of the loan the
interest charge for the use of the money. This deduction is called
“bank discount.”

Merchants usually allow a deduction for the prepayment of a customer’s
note, and this is called “commercial discount,” to distinguish it from
bank discount, although the two kinds of discount are essentially
identical; the only difference being that in the one case a bank buys
a merchant’s note, while in the other case it is a transaction between
two commercial houses, the one buying back its own note before it is
legally due.

Trade discounts are very seldom recorded on the books, the actual
selling price and not the list price being entered. Cash discounts are
invariably recorded. If the merchant knew at the time of the sale which
optional basis of settlement the buyer would choose, he could record
the transaction at a net figure on that basis without entering the
discount portion. This would, of course, result in a varying figure at
which sales were booked. Accordingly, the almost invariable practice
is to record sales at the gross amount and show by means of the Sales
Discount account the acceptance of any lesser sum in settlement in
accordance with the sales contract. Bank discount has to be booked in
order to show the cost of the loan which is the difference between the
asset received, cash, and the asset parted with, notes. The matter of
bank discount has been treated in some detail in Chapter XLII.

=The Method and Purpose of Trade Discount.=—Trade discounts are so
universally met with in business that an extended discussion of them
will be of value to the student. As has been stated, a trade discount
is a deduction from the list price and it serves two purposes. It is
apparent that the prices listed in the catalogue cannot be changed
until a new catalogue is printed and that it would not be practicable
to print a new catalogue to make a change in selling prices. Therefore,
instead of reprinting the catalogue whenever market prices fluctuate
and a change in the list prices must be made, sheets containing the
discounts allowed from list prices are published, the expense of which
is much less than that of a new catalogue.

The other purpose served by the trade discount is in partly concealing
the real quotation. Without the rate of discount allowed from that
list, the catalogue tells nothing of the real price. In this way a
concern in publishing its catalogue does not lay itself open to the
risk of being underbid by competitors publishing later catalogues.

Prices may be quoted at a single discount or by means of a series of
discounts, each taking as its base the net amount left after deducting
the next preceding discount. Examples will illustrate:

  1. Goods listed at $250 are quoted at 20% off.
      The sale price here is $200.
  2. Goods listed at $500 are quoted at 50% and 20% off.
      50% off $500 leaves $250.
      20%  ”  $250   ”    $200—the same real sale price as in No. 1.
  3. Goods listed at $750 are priced at 50%, 33⅓%, and 20% off.
      50%  off $750 leaves $375.
      33⅓%  ” $375    ”    $250.
      20%   ” $250    ”    $200—the same as in Nos. 1 and 2.

It is apparent that the _list_ prices without the trade discounts tell
nothing as to the _real_ prices.

=Methods of Calculation.=—Short methods for calculating trade
discounts when given in a series are often employed. For a series of
only two discounts, a single rate equivalent to the two may be found
by subtracting their product from their sum—always treating them as
decimals. Thus a series of 20 and 20 is equivalent to a single rate of
36,

  (.20 + .20 = .40; .20 × .20 = .04; .40 - .04 = .36).

Another method of calculating trade discounts, and one applicable
to a series of any number of discounts, is to treat the discount off
as equivalent to one-minus-the-discount on. Thus a discount of 15%
is equivalent to 85% of the list. An additional discount of 10% is
equivalent to 90% of the new base, or 90% of 85% of the original list,
or 76.5%. Thus a continued multiplication of the “percentages on” gives
the single sale price multiplier to be applied to the list price. If
the single discount rate is desired, it is secured by subtracting the
multiplier from 1, or 100%. Take the series 60, 20, 10, and 10 off.
This is equivalent to 40, 80, 90, and 90 on, or 25.92% on

  (.40 × .80 × .90 ×. 90 = .2592).

The single discount rate equivalent to the series is, therefore, 74.08%
(100%-25.92% = 74.08%).

The _order_ in which the discounts of a series are used is immaterial,
as the order of the factors does not affect the product.

The method just illustrated develops the reason for the first special
rule given above for a series of two discounts. Let the discounts be
“_a_”% and “_b_”%. The “percentages on” are, therefore, (1 -_a_)% and
(1-_b_)% whose product, algebraically, is 1- [(_a_ + _b_)-_ab_], which
is the single “percentage on”; from which it is readily seen that the
single rate discount is _a_ + _b_-_ab_, i.e., the sum of the two rates
minus their product. Similar rules can be developed for longer series,
but they are too complicated for easy application.

There is now available a “discolog” table, an ingenious reference
table, which is operated somewhat like a logarithmic table. It gives
quickly and easily the single discount rate equivalent to any series of
discounts.

The chief value of the single rate equivalent to the discount series
is in its use for comparative purposes, as it indicates which of two
discount series is the more favorable. When a large number of selling
prices must be computed, all having the same discount series, the
single rate method of calculation also has a great advantage over the
long method, which makes use of the series. This is true especially
when the work is done with the use of a calculating machine.

=The Nature of Cash Discount—Its Basic Elements.=—Where goods are sold
on credit with a cash discount offering, four main factors of cost, not
incurred when goods are sold for cash, must be provided for. These are:

  1. Credit investigation and collection expense.
  2. Bookkeeping and billing expense.
  3. Loss from uncollectible accounts.
  4. Interest for the use of the money—credit.

The cash discount is offered to free the vendor especially from costs
(3) and (4), which are the heaviest of the four.

There is a direct relation between the credit period and the loss from
bad debts. Thus, if a credit period of 30 days results in a given
volume of such losses an extension of the credit term to 60 days would
undoubtedly result in increased losses, assuming that all factors, such
as investigation of the risk, credit supervision, collection effort,
etc., remain the same. Inasmuch as the sale price must be sufficiently
high to provide for loss from bad debts, the credit term enters into
the determination of the price.

The other of the two main factors of cost, the interest charge on the
cash sale price, represents the cost of being deprived of the use of
the capital tied up in outstanding accounts.

Thus, when a discount is offered for early settlement, under
normal conditions the controlling factors are the risk or cost of
insurance against loss from bad debts and the interest cost. Special
circumstances, however, may make it expedient to offer more or less
favorable terms of settlement. Normally, terms of 2% off if paid within
10 days, the billed price being on a 30-day credit period (2/10, n/30),
measures two things: (1) the saving secured by receipt of the money
20 days earlier; and (2) the saving in the item of bad debts expense
brought about by shortening the term for which credit is extended from
30 to 10 days. How much of the cash discount is for interest and how
much for bad debts can be seen by comparing the current interest rate,
say 6%, with the discount rate reduced to a yearly basis. A discount of
2% which effects the collection of a debt at the end of 10 days, when
the net credit term is 30 days, secures the use of the money by the
vendor 20 days earlier than the full credit term would effect. 2% for
20 days is equivalent to 36% on a yearly basis.

=Showing Cash Discount in the Trading Section.=—Opinions differ among
accountants as to the proper treatment of cash discounts in the profit
and loss summary at the close of a period. Some maintain that the
discount is a trading or selling item, and show it, therefore, in the
trading section of the statement. Their theory is that discounts on
sales partake somewhat of the nature of trade discounts, that the real
selling price is, after all, what is received for a particular bill
of goods. According to this theory, if goods are billed at $1,000,
and $980 is accepted as full settlement, the sale should be shown
only at $980 on the books. At the time of offering an optional basis
for settlement, however, the merchant does not know which basis the
customer will accept, and he therefore enters the sale on his books at
the highest offer. Later, if the customer settles on the more favorable
option, the discount he takes is logically a deduction from sales.

On the other hand, if the discount is explained as a bait offered to
secure customers, it should be treated as a selling cost. Consequently,
on either of these two theories, cash discount would have to be shown
in the trading section of the profit and loss statement, in the one
case as a direct deduction from sales, in the other as a selling cost.

=Correct Method of Showing Cash Discount.=—Other accountants maintain
that cash discount is a financial management item; that a manager,
in order to secure ready funds with which to take advantage of the
discounts offered him on his own purchases, extends to his customers
sufficient inducement to secure the early and prompt payment of their
bills. The difference between the saving on purchases payments and
the cost of securing early payment on sales, is the measure of the
efficiency of such financial policy.

While this explanation of cash discount on sales as a cost of securing
funds may have some foundation, it does not give a fully satisfactory
explanation of the practice. If cash discount has been correctly
analyzed as being composed of the two factors, interest and bad debts
expense, there can be no question as to the place of its showing. Both
factors are financial items and they should therefore be placed in that
section of the profit and loss statement. In this work cash discounts
will be treated as a financial management item.

=Account Titles for Cash Discounts.=—In booking cash discounts, two
accounts are used—one for the discounts on sales, and the other for
the discounts on purchases. Self-descriptive titles are Sales Discount
and Purchases Discount, which seem better than Discounts Allowed and
Discounts Received and other similar titles sometimes met with.

=Methods of Booking Cash Discount.=—In booking cash discounts, any one
of four methods may be used. In Chapter XIX, “The Cash Journals,” two
of these methods were shown and the explanations will not be repeated
here. Explanations of the other two methods follow.

1. Entry is made only in the cash book through the use of a
non-cash-discount column on the receipts side. This was also fully
explained and illustrated in Chapter XIX. In the illustration given
there, this discount column was not used in finding the cash balance,
because net cash columns were employed, thus making unnecessary the use
of any other column to find the cash balance.

2. Entry is made as in method 1 above, but the discount column is used
in finding the cash balance. Where, as sometimes happens, the net cash
column is omitted, the true receipts can be found only by _subtracting_
the amount of the discount from the other column totals.

The closing summary for the columnar cash book, explained in Chapter
XIX, shows one method of handling the discount column total. While all
other summary entries for the cash receipts are _credits_, the discount
summary is a _debit_. Because of this fact, the discount total is
sometimes shown on the disbursements side of the cash book among the
summary entries of the other columns, in which case the word “contra”
is written after the words “Sales Discount,” showing that the amount
has come from the discount column on the opposite page. Similarly for
the Purchases Discount.

The only advantage of this method is to bring all summary debit
postings on one side of the cash book and all credits on the other.
Where the cash book is operated according to method 2, the closing
summaries are made as shown in Form 42, using columns on the debit
side for Customers, Sales Discount, and Sundry; and on the credit side
for Creditors, Purchases Discount, and Sundry. As there is no net cash
column, the totals for Customers and Creditors are not all cash. To
clear them of their non-cash elements, the discounts can be subtracted
from their respective Customers’ and Creditors’ totals, and only the
net brought over into the Sundry columns; or the subtraction can be
effected by adding the discounts to the opposite side. The use of a Net
Cash column simplifies the summarization of the cash book and should
always be employed. Treatment 2 is shown only because it is sometimes
met with in practice.

=Securing Information as to Neglected Discounts.=—Some accountants have
pointed out the desirability of bringing before a manager or proprietor
the cost of his failure to take advantage of discounts offered him. To
show this cost the following method of entering a purchase has been
suggested:

  Purchases                      100.00
  Purchases Discount               5.00
        Vendor                           105.00

The _net_ amount of the bill is thus charged to Purchases, the discount
offered to Purchases Discount, and the Vendor is credited with the
billed amount. When payment is made on any of the optional bases
offered, entry is made as follows:

      (1) Vendor                     105.00
                Cash                         105.00

  or

      (2) Vendor                     105.00
               Cash                          103.00
               Purchases Discount              2.00

[Illustration: Form 42. Discount Columns Used for Cash Balance (Method
No. 2)]

In the case of entry (1), the net result of the whole purchase
transaction is a loss or expense of the amount in Purchases Discount,
because of failure to take the discount. In entry (2), if the best
option is taken, viz., the entire 5%, Purchases Discount shows no
balance; any less favorable option, say 2%, results in a debit balance
in Purchases Discount of 3%, measuring the expense incurred through
failure to take the best option. Unquestionably, the information given
a manager by this Purchases Discount debit balance will claim his
notice and immediate attention.

A sales transaction handled on a similar basis results in a Sales
Discount credit balance representing the excess of the offering of
discounts over the amount taken by customers and has to be treated as
income additional to the booked sales income.

Inasmuch as the sale or purchase, under this method, must be booked
on a cash option basis, this treatment seems to result in a departure
from true cost or in the mistake of booking only _some_ of the elements
which enter into the cost of merchandise. The price at which a merchant
can sell his product must include all direct and indirect costs and
provide a margin for profit. The sales discount offered is simply one
of these indirect costs. It cannot be more accurately estimated than
can the salesman’s salary which is a part of the sale price. It is
inconsistent practice to separate the invoice price into two elements
and term one _real_ selling price and the other sales discount cost
when the _real_ selling price is still a composite item. Rather, the
sale should be booked at its full invoiced price and actual costs
recorded as they accrue, to be closed out against Sales Income at the
end of the fiscal period.

After all, the sales policy of each concern enters largely into the
determination of its normal selling price. A concern with a normal
credit term of 30 days fixes its sale price on that basis; one with
a 60-day credit term will, in determining its sale price, take into
account the risk and interest costs of the longer credit period; and
one doing a cash business will determine its sale price accordingly.
However, as a means of furnishing the information necessary for
guidance under a particular sales policy, sales should be recorded on
the basis of the normal credit term.

To secure the information sought as to neglected discounts, it is
suggested that memorandum accounts be opened for that purpose and entry
be made of the expense only when incurred. Thus failure to take a
purchase discount would be recorded under these or similar captions:

  Neglected Purchase Discounts
        Reserve for Neglected Purchase Discounts

At the time the books are closed these memorandum accounts would be
closed against each other, having served their purpose of giving the
desired information through their inclusion in the trial balance
submitted to the manager or owner.

=Trade Acceptances and Cash Discounts.=—Brief mention should perhaps
be made of some recent discussions of the probable effect of the
extended use of trade acceptances on the practice of allowing cash
discounts. Some sellers, to whom the cash discount practice is
troublesome and unsatisfactory, welcome the use of trade acceptances
as an avenue of escape from the practice. Others have gone so far as
to say that the trade acceptance will eventually do away with cash
discounts. It should be said that the use of trade acceptances, while
attractive from the seller’s standpoint, has not as yet made a strong
appeal to buyers, largely because of the fact that it offers little
that the open account method does not secure for them and it may, on
the other hand, interfere somewhat with the taking of cash discounts.




CHAPTER XLV

BALANCE SHEET VALUATION


=The Two Problems of the Balance Sheet.=—There are two major problems
connected with the balance sheet: (1) the problem of form, and (2)
the problem of content. The form of the balance sheet, which was
discussed rather fully in Chapter III, has to do with the arrangement
of the items for the purpose of intelligent reading. It deals with the
principles in accordance with which the asset, liability, and net worth
items are to be marshaled and set up in groups and arranged within the
group with a view to facilitating the comparisons between groups and
the calculations made in judging the financial condition of the concern.

The second problem of the balance sheet, that of content, which
was also mentioned in Chapter III, concerns itself mainly with the
valuation of the items in the balance sheet, assuming of course that
all the assets and liabilities are included in the statement. A balance
sheet may be correct in form but, unless its content is reliable, it
has little or no value when judged from the standpoint of its chief
purpose, namely, that of showing the financial condition of the
concern. The problem of the form of the balance sheet has to do with
the technical or mechanical side of accounting, while the problem of
its content or the valuation of its items has to do with the questions
of the concern’s financial administration, for the solution of which
the accounting department must furnish in proper form the necessary
information.

=Kinds of Value.=—It is first necessary to state the limitations
within which the principles of valuation to be laid down are applicable
to the commercial balance sheet. In business many different kinds of
value are found and used. Thus we have the terms, sale or liquidation
value, cost value, and replacement value. By the term “sale value,”
when applied to a going business, is meant the value which a willing
buyer offers to a willing seller. “Liquidation value” means the value
or price offered for a commodity or an entire business when the concern
is winding up its affairs and going out of business. Liquidation is,
therefore, forced value. There is thus a marked difference between sale
value and liquidation value. The term “cost value” is understood to
mean the price paid for a purchased article. From the discussion of the
principles of debit and credit as applied to merchandise and to fixed
assets, it has been shown that the price paid should include not alone
the invoice cost but the other expenditures needed to put the article
purchased in such a position that it can be used by the business in the
customary way. Replacement value means the cost to replace an article.
It differs from first cost mainly in that the price level may have
changed between the date of the original purchase and the present time.
Thus, because of the changes in prices, an article, costing $1,000 in
1914, might have had a replacement cost of $1,800 in 1917, and $1,400
in 1922.

Manifestly, before the principles to be followed in valuing balance
sheet items can be laid down, there must be some understanding as to
what kind of value is under discussion. The kind of value used in the
ordinary commercial balance sheet is termed “going concern value.” By
this is meant the value which is applied to a going business—a business
which expects to continue in operation, not one which expects to sell
out to other owners nor one which expects to discontinue operations.

=Source of Data as to Values.=—In a going concern the information as
to value is found chiefly in the books of account. The data in the
accounting records are, of course, supported by the original documents
evidencing the purchases and sales. It is a necessary corollary that
if the books of account are to give reliable information as to values,
a correct analysis must be made of all transactions previous to
their entry. Mention was made in an earlier chapter of the necessity
of a clear differentiation between capital and revenue charges and
the effect of failure to make such differentiation. If at the time
of an expenditure a correct classification of accounts has been
made, particularly of the broad classes of assets, liabilities, and
proprietorship, the accounts should reflect the true values as of the
various dates of record. For purposes of detailed information it is
equally necessary that a correct classification be made of the accounts
affected by an entry within any of these main groups. It has been seen
that because of practical difficulties no effort is made to have the
accounts reflect day by day the correct value of the various items. It
is considered sufficient to bring the book record into agreement with
the facts in respect to value once each fiscal period, namely, at its
close. The true financial condition and correct operating results are
then determined.

It will thus be seen that a correct analysis of every transaction
recorded in the accounts is an absolute prerequisite to the use of
the accounts for determining correct values. It is very vital that a
clear line of demarcation be maintained between capital and revenue
expenditures—that great care be exercised that no cost is charged into
the asset group of accounts unless such cost really enhances the worth
of an asset. A cost incurred for the purpose of maintaining the value
of the asset is an expense charge, and repairs and maintenance charges
must be very carefully distinguished from replacements. _Maintenance_
has to do with those costs which maintain an asset in good operating
condition; _repairs_ have to do with those costs necessary to put an
asset in operating condition after a condition of inefficiency has been
reached which the maintenance costs have not been able to prevent; a
_replacement_ cost is incurred when it becomes necessary to replace
some part or the whole of an asset, neither maintenance cost nor repair
costs having been able to maintain the asset in efficient operating
condition. Where only a part of an asset is to be replaced, it is often
spoken of as a _renewal_ of parts. When so used, the term “replacement”
is limited to the renewal or the replacement of the whole asset.

When a renewal or replacement is made, it becomes necessary to
determine whether the cost of the renewal or replacement is more than
the cost of the part or the whole replaced. For example, if an asset
costing originally $1,000 is replaced by one costing $1,200, there has
manifestly been an addition of $200 to the value of the asset. The new
asset may be an exact duplicate of the old but if prices have risen so
that the new actually costs more than the old, the books must record
the asset at its new cost value. The amount by which a new asset or
part of an asset exceeds the cost of the old asset or old part is
called a _betterment_. A betterment is always an asset.

The student will readily see that at times it must be difficult to draw
the line between repairs and replacements. In practice the line is
usually drawn only when the expenditure exceeds a certain amount. This
amount is not uniform and is determined by each individual business.
For example, when the cost of placing the asset in efficient condition
for operation is less than, say, $100, it is charged as repair cost and
therefore does not increase the book value of the asset. If the cost
exceeds $100, an analysis is made to determine what portion of it, if
any, increases the value of the asset. The amount of the betterment
is of course a charge to the asset account, while the rest of it is a
charge to some expense account.

=Treatment of Special Items.=—In the determination of the
classification of charges, some kinds of items require special
consideration:

ORGANIZATION EXPENSE. The group of expenditures explained in Chapter
XXXVIII, as incident to the organization of a corporation, is recorded
under the title “Organization Expenses” and is classified for purposes
of the balance sheet as an asset. It is a kind of asset, however, which
has no tangible value and most businesses desire to consider it more
in the nature of a deferred charge to operations. It is recognized
that frequently intangible assets add no strength to the business.
While, therefore, in strict theory organization expenses are assets, in
practice it is best to write them off against income during a period of
from three to five years.

COST-CUTTING CHANGES. Another similar class of charges is met in costs
incurred in making changes in the arrangement of building and other
facilities which will tend to bring about a more economical handling
of some phases of the business; for example, a rearrangement of a
receiving and packing room in order to facilitate the receipt and
delivery of goods. Where these costs are inconsiderable it is best
to charge them against the income of the period in which they are
incurred. Where, however, a big expenditure is necessary, it seems best
to set the costs up under a suitable descriptive title and spread them
over several periods. In other words, at the date of their incurrence
the costs are treated as an asset whose value is to be written down
at the end of successive fiscal periods until finally it has all been
charged against the operations of the business.

INTEREST DURING CONSTRUCTION PERIOD. Where a business builds its own
home, all costs incurred during the period of construction are proper
charges to the costs of the construction. Thus, if a mortgage or bond
issue is used as a means of partially financing construction of the
building, the interest paid to the mortgagee or bondholders during the
period of construction is a proper charge to the building account.
Costs of this kind follow the general principle laid down previously,
that all costs up to the point of placing the asset in condition ready
for use are proper charges to the asset.

=Basic Rules for Valuation of Balance Sheet Groups.=—We may now
consider the principles applicable to the valuation of the various
groups on the balance sheet. In the standard form of balance sheet the
assets are divided into the three groups: (1) Current, (2) Deferred
Charges, and (3) Fixed.

It has been seen that the assets of the current group are used
for purposes of settling debts, the payment of expenses, and the
purchase of merchandise. In judging the sufficiency of these assets
for this purpose, it is absolutely essential to know that the values
at which they are carried will be realized when they are converted
into cash. From the standpoint of conservative business management
an understatement of realizable value may be made, but never an
overstatement. Accordingly, the fundamental principle of valuation
applicable to this group is that these assets are to be valued at cost
or market, whichever is the lower. When so valued, the figures at which
they are carried in the balance sheet will usually represent an amount
slightly less than the amount which it is expected will be realized
from their conversion into cash.

The function of the deferred charges group of assets is to secure an
equitable distribution of expense charges between the current and
the following period. It is only because certain expenditures have
been made during the current period which will benefit the succeeding
period, that it is necessary to set up this group of assets. Here the
problem of valuation is, therefore, simply the problem of dividing the
cost of the expenditures between the current and the next period on
the basis of the benefits accruing to each. In some cases the basis of
division is one of time, as where an insurance policy is purchased for
a definite term. The portion of the policy which has expired during
the current period is the portion of its cost to be charged to the
current period, the balance being deferred to succeeding periods and
therefore carried as an asset. In other cases a physical inventory is
necessary to determine the distribution of the cost of expenditures,
as when supplies of fuel have been purchased and not entirely consumed
during the current period. The basis of the value carried over to the
next period is of course a fair portion of the original cost. Market
or replacement cost does not have any effect on the valuation of the
deferred portion.

Fixed assets are acquired as more or less permanent equipment without
which it is impossible to operate the business. The time during which
an asset continues in use is the customary basis for a classification
of its cost as between expenses and fixed assets. Thus, an asset
acquired for purposes of business operation which, however, will be
used up completely during the current period is charged immediately
to some expense account, whereas an asset which will continue in use
over several periods is charged to an asset account. Fixed asset
purchases are never for purposes of resale. It is expected that they
will continue in use until they are discarded because of failure to
perform the service for which they were acquired. Neither the sale
value nor the replacement cost value of such assets has, therefore, any
influence on their value to the business. That value is the full cost
adjusted periodically by an equitable distribution of that cost over
the operations of the periods benefited by the services rendered by the
asset. This principle of valuation is usually expressed by the formula,
cost less depreciation.

=Valuation of Assets=

CASH. Cash as carried on the balance sheet is the asset which is used,
without conversion, for payment of the liabilities of the business.
There should, therefore, ordinarily be no problem of valuation.
However, because of the practice of including checks, drafts and
notes due and in course of collection, cash balances held abroad and
therefore subject to the fluctuations of exchange, and other similar
items in the account Cash, it is oftentimes necessary to examine all
these items carefully and arrive at a figure which represents the
amount expected to be realized from them.

NOTES AND ACCOUNTS RECEIVABLE. The claims against customers, both
on note and open accounts, constitute an intermediate step in the
conversion of merchandise into cash. At the time credit is extended
to a customer it is expected that he will pay the amount due. The
experience of every business man shows, however, that during each
period there is a shrinkage in these claims due to some customers
failing to pay the amounts they owe. In valuing these claims it is
therefore necessary to take cognizance of the amount of the shrinkage.
This amount is different in different businesses, depending on the
length of the credit term, the policy as to investigation of credit
risks, and on the rigor of the collections policy. On the basis of the
experience within a given business, it is therefore necessary to make
an estimate of the loss from uncollectible accounts.

The manner of making the record of estimated bad debts has already been
explained. The reason for placing the amount by which the asset is
estimated to shrink as a credit in the Reserve for Doubtful Accounts
account rather than in the Accounts Receivable account has also been
explained. The custom of estimating the amount of loss on the basis
of the sales for the period rather than on the amount of claims
outstanding at the close of the fiscal period has been referred to.
Here it is desired to explain the manner of handling the reserve at the
time claims are definitely determined uncollectible. Until a claim is
determined uncollectible it is carried as a part of the assets, Notes
or Accounts Receivable. The amount of the estimated shrinkage in these
assets due to failure to collect claims is indicated by the Reserve for
Doubtful Accounts account. This amount cannot be applied directly to
particular notes and accounts until it is definitely known that such
notes and accounts cannot be collected. When that is learned, it is
necessary to transfer from the reserve account the amount needed to
cancel from the books the uncollectible notes and accounts receivable.
This is done by the following entry:

  Reserve for Doubtful Accounts
        Notes (and Accounts) Receivable

  PROBLEM. Assume that the accounts receivable
  amount to $75,000, of which it is estimated that $5,000
  will not be collectible. During the succeeding period
  a customer owing $500 becomes bankrupt and nothing is
  realized on his account.

  The accounts will then appear as follows:

                      ACCOUNTS RECEIVABLE
  =============================================================
  Dec. 31             75,000.00 | Feb. 28                500.00

                   RESERVE FOR DOUBTFUL ACCOUNTS
  =============================================================
  Feb. 28                500.00 | Dec. 31              5,000.00

It will thus be seen that the decrease in value of the accounts
receivable as estimated by the amount in the Reserve for Doubtful
Accounts can never be applied to the asset until it is definitely
determined what particular customer’s account included in the Accounts
Receivable account is bad and must therefore be written off the books.
Inasmuch as the Bad Debts account set up at the close of each fiscal
period to indicate the loss or expense due to uncollectible accounts,
has been charged as an expense of operating for that period, it would
manifestly be duplicating the expense charge if a debt that proved
bad were charged to the Bad Debts account rather than to the Reserve
for Doubtful Accounts. Only during the first period of operation of
a business are debts, if determined bad during that period, charged
to the Bad Debts account. Even here, if it is expected at the close
of the first period to base the estimate of uncollectible accounts
on the sales for the period rather than on the amount of outstanding
accounts at the end of the period, it would be necessary to charge the
debts becoming bad during the period against the Reserve for Doubtful
Accounts account—even though at the time of the charge it contained no
credit entries—and not to the Bad Debts account. The desirability of
establishing a standard routine for the handling of all items should be
kept in mind. Best practice, therefore, demands that all debts shall
be charged against the Reserve for Doubtful Accounts whenever they
are determined to be bad, regardless of the amount held in reserve in
that account. If such practice creates a debit balance in the Reserve
for Doubtful Accounts, it is an indication that the estimate of
uncollectible accounts made in previous periods has not, as a matter
of fact, been sufficient and a larger estimate must be made for future
periods.

MERCHANDISE. Merchandise is purchased for the purpose of resale at
a profit. Sale price is dependent, in a free market, on the force
of demand and supply and not at any given time on cost. Until the
goods are sold no profit, as a matter of fact, has been secured.
Conservatism, therefore, demands that sale price should not ordinarily
be used as the basis for the inventory valuation. Unless there has
been a decided change in prices, it is the confident expectation of
the management that at least the cost price of the merchandise will be
realized when the goods are sold. Ordinarily, therefore, merchandise
will be priced in the balance sheet at cost. When, however, there has
been a change in price levels, particularly when the indication is
that there is a generally declining market and not simply a temporary
fluctuation in prices, it is the part of conservatism to value the
merchandise at its replacement cost, or even at a lower figure, if
stocks are large and market conditions are such that customers are
withholding their purchases until price levels have dropped still
further. The basic principle for valuing all current assets requires
that they be valued as nearly as possible at the realization figure.
Therefore, the amount expected to be realized governs or influences
the valuation basis. The valuation formula or rule-of-thumb method,
in accordance with which merchandise inventory is usually valued, is
expressed as cost or market, whichever is the lower. As indicated
above, there are times when exception is taken to this basis.

INVESTMENTS. Stocks and bonds representing the investment of temporary
surpluses of cash are valued on a realization basis. Inasmuch as
the tying up of cash in these securities is only temporary and it
is expected that they will be converted again into cash as needed,
the amount which can be realized from their sale on the date of the
balance sheet is the amount to be considered when judging the financial
condition on that date. A large amount of discretion must be used
in valuing these securities, because of the violent fluctuations to
which quotations on the various stock exchanges are subject. Here also
conservatism does not usually authorize value at the market if the
market is higher than the cost. Accordingly, the valuation formula is
cost or market, whichever is the lower.

ACCRUED INCOME. The income accrued on the date of the balance sheet
is determined on the basis of a fair distribution between the periods
during which the income accrues. Thus, the income from money loaned
during the current period but not due until a succeeding period must
be distributed over two or more periods. Where the income is dependent
on time, the portion applicable to the current period is determined on
a time basis. Where the income is dependent on some other basis, such
as sales or units of work done, the portion applicable to the current
period is determined by the ratio of the whole to the amount completed
during the present period. Thus, in the case of a contract entered into
to sell goods on a commission basis, the commission income accrued
during the current period will usually be based on the amount of sales
made during that period.

DEFERRED CHARGES. The valuation principle for deferred charges has
been stated above in connection with the principles of valuation to be
applied to the various groups of accounts on the balance sheet.

FIXED ASSETS. Fixed assets may usually be divided into two classes:
(1) assets not subject to depreciation, and (2) assets subject to
depreciation. The usual example of assets not subject to depreciation
is the land on which a building stands. Land used for growing crops may
easily be subject to depreciation. Land subject to the exploitation
of the natural resources under its surface is similarly subject to
depreciation. To distinguish the decrease in value of such natural
resources because of the fact that they enter into and become a part
of the commodity dealt in, the term “depletion” is used. Thus, a
coal mine or oil well decreases in value with every unit of product
taken therefrom. It is not purposed hero to discuss the principles of
valuation applicable in such cases, the assets under discussion being
limited in meaning to those of a mercantile business. (See Volume II,
page 312, for a discussion of depletion.)

The valuation formula for assets not subject to depreciation is cost.
Increase in value due to changed market conditions is not usually to be
taken account of.

The second group of assets, those subject to depreciation, are to be
valued on the basis of original cost less the amount of depreciation
accrued to the date of the balance sheet. The valuation of such assets,
therefore, requires the determination of the amount of depreciation.

Depreciation arises from several causes, the chief of which are:

  1. Wear and tear, due to use.
  2. Decrepitude or age, due to lapse of time.
  3. Obsolescence, due to a changed demand for the
      article or to an advance in the arts which makes
      the continued use of the asset uneconomical.
  4. Inadequacy, brought about by several causes, one of
      which may be the change in the market which renders
      the asset inadequate for furnishing the product or
      service in the amount required.

Obsolescence and inadequacy, because of their very nature, are
usually difficult of determination and frequently cannot therefore
be considered in determining the amount of depreciation accrued at a
given time. Where measurable they should, of course, be taken into
account. Depreciation due to lapse of time is calculable on a time
basis. Depreciation due to wear and tear is calculable on the basis
of the use to which the asset has been subjected. It is in practice
difficult to separate these two types of depreciation. The estimate
for depreciation is in the majority of cases made on a time basis.
In manufacturing establishments, oftentimes a use or output basis
proves more satisfactory. These more difficult problems met in the
determination of depreciation are discussed in Volume II. Here only the
most usual method of depreciation estimate on a time basis, known as
the straight-line method, will be explained.

For determining the periodic amount of depreciation of any asset it is
necessary to know: (1) the original cost of the asset; (2) its scrap
value, that is, the estimated value as scrap on the day it is junked;
and (3) the estimated life of the asset in years or fiscal periods. The
following symbols will be used in working out the formula:

  _V₁_ = Original value.
  _Vₙ_ = Scrap value at the end of _n_ years, its estimated life.
  _n_ = The estimated number of years in the life of the asset.
  _D_ = The amount of depreciation during a period.
  _r_ = The rate to be applied to _V₁_ in order to determine _D_.

It is apparent that _V₁_-_Vₙ_ is the amount to be depreciated over
the life of the asset. The amount to be charged off periodically as
depreciation is, therefore:

      (_V₁_ - _Vₙ_)
       ------------
           _n_

Accordingly

            _V₁_ - _Vₙ_
      _D_ = -----------   (1)
                _n_

The amount to be written off each year is thus seen to be constant. The
percentage to be applied to the original cost in order to determine the
periodic depreciation _D_ is, therefore, found by dividing _D_ by _V₁_.
Hence the formula:

            _D_
      _r_ = ----          (2)
            _V₁_

Having determined by careful estimate the method of calculating the
periodic amount of depreciation, the problem of valuation of the asset
at any given time during its life is ordinarily simple. In the case of
renewal of any parts, the question of betterment comes in and requires
careful handling. In unusual cases it may often be necessary to revise
the rate of depreciation in order to write off the betterment during
the remaining life of the asset. Depreciation is at the best but an
estimate and unless there are major betterment items it is not usually
necessary because of them to revise the estimate of depreciation.
When a renewal takes place it is theoretically necessary to determine
the value of the replaced part at the time of its replacement. The
excess of the cost of the new part over this value is the amount of
the betterment, when only the values of the old and new parts are
considered. In such cases, however, the new part will not usually
have value apart from the asset to which it is attached. In practice,
therefore, the amount of the betterment recorded is the difference
between original—not present—value of the old part and the cost of the
new part. An example will illustrate the problems involved and the
accounting treatment.

  PROBLEM. Assume that an asset—office equipment—costing
     $1,000 has an estimated life of ten years and no scrap
     value. After six years of this life it becomes necessary
     to replace a part of the asset, estimated to have cost
     originally $100, the cost of the new part being $150. At the
     time of the replacement the depreciation reserve carries an
     amount of $600.

The first step in booking the transaction is to transfer from the
reserve account to the asset account the original cost of the part
replaced. Just as in the case of bad debts, now that a part of the
asset has been discarded and the amount of the decrease in value of
the asset is definitely known, this amount held in suspense until the
present time in the reserve account must be applied as a definite
reduction in the carrying value of the asset. The entry to effect the
transfer is:

  Depreciation Reserve, Office Appliances     100.00
        Office Appliances                             100.00

The next step is to set up the cost of the new part which replaces that
discarded. This follows the usual entry at the time of purchase of any
equipment. The entry needed is:

  Office Appliances                           150.00
        Cash                                          150.00

The student will note that the office appliances account now carries
a value of $1,050, of which the $50 represents the value of the
betterment.

It might appear that since the renewal occurs at the end of six
years there has been accumulated in the reserve by that time only $60
covering this specific part, and that therefore only $60 should be
transferred from the reserve account, the other $40 being charged to a
proprietorship account to represent the additional expense or loss not
yet provided for by the depreciation charges during the past six years.
That is not the situation, however, for if the periodic depreciation
has been correctly estimated, the entire amount, $100, has already been
charged off and is therefore included in the reserve. When the asset
was originally installed and the length of its life estimated for the
purpose of determining the periodic depreciation charge, the policy
as to repairs and renewal of parts was taken into consideration. Such
estimates cannot, of course, be absolutely accurate. However, until
such time as a definite basis is given on which to check the amount
of the over-or under-estimate, it is the standard practice to charge
against the reserve the original value of the renewed part. Always
at the time of discard of the entire asset—and sometimes sooner—such
a definite basis is given and adjustment must be made in accordance
with the facts then ascertained. A problem will illustrate the
considerations involved.

Continuing the foregoing example, assume that the office appliance, now
valued at $1,050 with a reserve of $500, is discarded after ten and a
half years’ service.

At the end of the tenth year the annual depreciation charge of $105
will have brought the reserve account to a total of $920. Six months
later, at the time of discard of the asset, there will be accrued
depreciation, not yet booked, amounting to $52.50. It is, accordingly,
necessary to book this amount by means of the following entry:

  Depreciation                                  52.50
        Depreciation Reserve Office Appliances         52.50

This entry charges the current period with its share of the consumed
value of the asset. The next step is to transfer the reserve account
to the asset account, to show in that account the amount of the
inaccuracy in the depreciation estimate—the amount by which the actual
depreciation differs from the estimate. The entry is:

  Depreciation Reserve Office Appliances       972.50
        Office Appliances                             972.50

The office appliance account now shows a debit balance of $77.50, which
indicates the value or amount of the asset which has been consumed but
which has not been charged against the income of the periods during
which the asset was used. It is manifestly inequitable to charge this
amount against the income of the six months of the current period, and
it is impossible to go back and spread it over the previous periods
because their records have been closed. The charge must therefore be
made direct to the Surplus account in the case of a corporation, or to
a final section for extraordinary profits and losses of the regular
Profit and Loss account in other cases. It may be handled by this
latter method also in the case of a corporation. The entry needed is,
therefore:

  Surplus                        77.50
        Office Appliances               77.50

In case the reserve is more than the value of the asset at the time of
discard, it means that more than the cost of the asset has been charged
as expense. Accordingly, the excess represents real profit and must be
transferred to surplus. The necessary entry is:

  Office Appliances
        Surplus

GOOD-WILL. Good-will is an intangible asset depending for its value
upon the ability of a business to make more than normal profits. It is
not usual for a business to show an asset of good-will unless it has
purchased another business and has paid for the latter’s good-will. In
other words, good-will is not brought on to the books until a purchase
determines its market value. Where good-will is purchased, it is
customary to carry it at its cost value. Depreciation is not taken into
account. Because of the intangible nature of good-will and its more
or less speculative value, some businesses prefer not to show it. In
such cases it may be written off against surplus at any time and in any
amount until it has all disappeared from the books. While, therefore,
good-will is not subject to depreciation, it is subject to this writing
off process, which usually bears little or no relationship to time.
It should not be charged against the profit of any period or several
periods, but when written off should be charged direct against surplus.

=Liabilities.=—The problem of valuation of liabilities is simple.
From the standpoint of a going concern, its liabilities decrease only
when they are paid off, and increase only because of services or
assets purchased and not paid for. The main problem in connection with
balance sheet liabilities is the determination of the fact that all
liabilities are shown on the balance sheet. This oftentimes involves
the consideration of contingent liabilities. The amount of a liability
may sometimes be in dispute, in which case a careful and conservative
estimate of the probable amount must be made and shown.

=Proprietorship.=—Since proprietorship is always the difference between
assets and liabilities, the problems of valuation of proprietorship are
solved almost automatically if the valuation of assets and liabilities
have been handled properly. There may sometimes be problems in
connection with the various items in the proprietorship group. These
concern surplus, undivided profits, and various reserves. The problems
here are largely those of determining whether a company has lived up
to its contract or other agreements in the maintenance of the proper
values in the various proprietorship accounts.

=Conclusion.=—The problems of valuation are vital to any business and
intimately concern its financial integrity. In order to maintain at
least the original capital investment in a business, it is necessary
to make provision for the decrease in asset values due to different
causes. The financial management of the business must watch this
feature closely, else capital will be dissipated and the business
rendered incapable of performing the functions for which it was
organized.




CHAPTER XLVI

BUYING AND STOCK CONTROL


=Importance of Buying.=—Buying as a major function in a mercantile
concern is intimately related to, and dependent on, the other
functions of the business. Buying must always have regard to the
sales activities. To buy without reference to the ability to sell is
suicidal. Both overbuying—buying more than can be disposed of at a
profit—and underbuying—buying less than is needed to meet the sales
demand—are conditions to be avoided. Underbuying means a loss of sales.
Unless their needs are met promptly in accordance with their orders,
customers will go elsewhere. Overbuying means the unnecessary tying
up of capital in a stock of goods which increases the possibilities
of loss resulting from changes in fashions and the level of prices.
The relation of the rate of turnover to profits in merchandising was
discussed in Chapter VII. Manifestly the ideal situation, so far as
the amount of stock carried is concerned, is one in which the least
amount of capital is used to provide an adequate stock for meeting the
requirements of customers and in which the loss from unsalable stock is
reduced to the lowest level.

Many business houses fail to realize the wastes resulting from slow
turnovers. The Chamber of Commerce of the United States has called
attention to these losses and has analyzed them under the following
heads:

  1. The unnecessary use of capital in merchandise
      that could be more profitably employed in other
      productive sources.

  2. The increased cost of borrowed capital, the
      carrying of larger stocks and their slow turnover,
      necessitating the borrowing of larger amounts of
      capital for longer periods.

  3. The marking down of the sale price due to the fact
      that the goods will not move at the higher sale price.

  4. An increase in overhead expenses due to the larger
      storage and display equipment needed for goods and
      to the costs incident to handling the larger stock,
      and re-marking the stock when it is necessary to
      lower sale prices.

  5. The loss of prestige and reputation from carrying
      unstylish and shopworn goods.

=Relation between Buying and Finance.=—From what has already been
said, it is evident that there is a very necessary relation between
the buying policy of a business and its ability to finance purchases.
Even though it may be possible to increase sales, unless the business
is in a position to finance not only the additional credits extended to
customers but also the additional purchases needed to take care of the
increased sales, it will not be feasible to pursue a policy of sales
expansion and therefore of increased buying. Hence, buying cannot be
considered as a business activity by itself, but as one dependent upon
the sales activities and the financial resources of the business.

=Organization for Buying.=—In large merchandising businesses the
duties and authority of the buying department are not uniform. In
some, this department is organized entirely distinct from the selling
department; in others (and this is particularly true of the large
department stores), the buyer is head merchandise man with control
over the selling activities of the business. It is also quite usual
for the buyer to be in charge of a given department and his success
or failure to be judged by the profits he makes in that department. A
profit quota is sometimes assigned to each department, for which the
buyer is responsible. In other words, in the management of the buying
and selling activities and therefore in the control of his merchandise
stock the buyer is supreme, subject to the general limitations placed
by the financial resources at his disposal. Under the control of the
buyer, therefore, will be stock clerks, the clerks which mark and
re-mark the merchandise, and the sales force. Above and in control of
all the departmental buyers is usually an executive or high official of
the company whose chief function is to correlate the activities of the
buyers with the concern’s general buying, selling, and financial policy.

=Characteristics of the Buyer.=—To perform his functions properly, the
buyer must be a man of broad experience, with a keen sense of values
and the marketing possibilities of merchandise. On the buying side
he must have complete information as to the available sources of the
merchandise he desires to secure, both in staple and in novelty lines.
On the selling side he must know the demands of his customers and the
possibility of creating new demands. The best index of the buying power
of his customers is the volume of sales made in previous years. Past
performance, considered in connection with general trade conditions and
plans for the further development of the business, is the only basis
for judging the sales possibilities of the future. He must know the
quality of merchandise and the reliability of the people from whom he
buys. He must be a keen judge of prices. He must know the financial
resources of his own store and strive to secure the best possible
credit and discount terms.

=Buying Procedure.=—In Chapter XXII, where the goods invoice was
discussed, a typical purchasing procedure was set forth. Here only
the chief points in that procedure will be mentioned. In a large
establishment the buying requisition should be the basis of all
purchase orders. This is particularly true when the buyer does the
buying for several departments. The requisition should be made out in
triplicate by the department head, two copies going to the buyer and
one being retained in the department. Upon the issuance of the buying
order, the second copy of the requisition is returned to the department
as evidence that the goods have been ordered.

The purchase orders are made in manifold, the original going to the
vendor, one copy to the treasurer to notify him of the future need for
funds, one to the controller or accounting department, and one being
retained by the buyer as a basis for follow-up. Upon receipt of the
invoice, which usually precedes the goods, the buyer compares it with
the order and if it is found correct, he passes it to the accounting
department, where it is held until the receiving slip, showing the
receipt of goods, is received from the receiving room. If the three
documents now in possession of the accounting department, namely,
the copy of the original order, the invoice, and the receiving slip,
agree, the invoice is passed for entry on the books and is filed for
payment in accordance with the financial policy of the business. After
payment, the invoice with its supporting documents is filed. Great care
must be exercised to make sure that an invoice is not put through more
than once for payment and that every invoice represents goods properly
ordered and actually received.

=Requirements of Successful Buying.=—Successful buying rests on a
knowledge of two things: (1) when to buy, and (2) what to buy. The
timeliness of buying has regard rather to the sales requirements
than the market possibilities. Goods are bought for the purpose of
satisfying needs of customers. A knowledge of the trend of the market
is necessary but buying wholly in accordance with market trends too
often leads to speculation in merchandise, due weight not being given
to the sales requirements. A knowledge of the specific commodities
needed to satisfy the requirements of customers is equally important.
The regular use of the “want slips” of customers calling for goods
not in stock is one source of information. The records of the paid
“shoppers” as to the commodities and prices of competitors is also some
indication.

In answering both these questions, when to buy and what to buy,
the records of the business itself should furnish the fundamental
information needed to secure a proper control of the movement
of merchandise. Some system of perpetual inventory is almost
indispensable. In a small business where the buyer, usually the owner,
is in intimate contact with all departments, a fairly satisfactory
control of merchandise can be secured without a perpetual inventory. In
a business of some size, however, the perpetual inventory is an almost
absolute essential if movement of stock is to be kept under control.

=Control of Merchandise Movement.=—The beginning of merchandise control
is the fixing of the sales quota, that is, the making of an estimate
of sales for the next period. Without a definite goal to be aimed
at control is impossible. Buying and finance are dependent on it. A
knowledge of the stock on hand at any time is needed to determine the
buying requirements. Even in a small business the inventory can at
least be estimated on the basis of past performance as to percentage of
gross profit and therefore the percentage of cost of goods sold. The
application of this figure of percentage of cost of goods sold to the
sales for the period gives the cost of goods sold, which, subtracted
from the opening inventory plus goods purchased, gives an estimate of
the goods in stock. A perpetual inventory kept by quantities rather
than by values serves the purpose in many establishments. What is
known as the “retail system,” by means of which the value of the stock
on hand can be estimated at any time, is used in many large retail
establishments. In addition to, and in conjunction with such a system,
the use of commodity control cards, as illustrated in Form 43, gives a
sure index of the condition of stock and the movement of merchandise at
any time.

=The Retail Method of Inventory.=—The retail system of inventory is
based on the carrying of all goods purchased at a retail sale price
as well as at cost price. In the financial records purchases are, of
course, always booked at cost. A stock record is kept, however, which
carries purchases at retail sale price as well as at cost price. The
principle of the perpetual inventory under this method is shown by the
fundamental formula:

  Opening Inventory + Purchases - Cost of Goods Sold = Final Inventory

It is apparent that if all the values on the left side of the equation
are retail sale values, the right side of the equation represents the
final inventory valued at the retail sale price. Thus, if the opening
inventory for use in the stock record is set up at the marked sale
price, and purchases are similarly set up, the subtraction of the sales
to date from the sum of the opening inventory and purchases gives the
amount of stock on hand valued at the sale price.

In order to reduce an inventory, valued at retail sale price, to a cost
basis, the per cent of mark-on of the cost price to give the original
sale price must be applied. This per cent is based on the sale price
and not the cost price, being determined by dividing the difference
between sale and cost price (that is, the gross profit figure) by the
sale price. Thus, a commodity, costing $60 and marked to sell at $100,
will, if sold, yield a gross profit of $40, which, given in terms of
the sale price, is a 40% gross profit. This 40% is spoken of as the
“mark-on per cent.” The cost is, therefore, the difference between 100%
and the per cent of mark-on, in this case 60%. That is, 60% of the sale
price gives the cost price.

Accordingly, to reduce the inventory value at selling price to a cost
price basis, it must be multiplied by 100% minus the per cent of
mark-on.

The use of the retail method is thus seen to require a stock record
from which the goods on hand as valued at selling price can be
determined almost instantly and from which the per cent of mark-on can
also be determined. In principle the method is simple. In practice
it must be operated very carefully, else unreliable results will be
secured. It seldom happens that merchandise will always move at the
marked sale price. Adjustments are necessary. On an upward market,
perhaps, a higher price can be secured than the marked price. On a
downward market or in order to move certain colors and styles, it is
necessary to mark down from the original sale price. The fluctuations
arising from mark-ups and mark-downs are treated in Chapter XI of
Volume III and will not be discussed here. Some applications of the
retail method will be explained, however.

=Some Buying Records and Their Use.=—The chief purpose of the main
records kept in business is the securing of control over the activities
of the business. The control over merchandise must always be based
on records. The first step in securing the necessary control is a
proper departmentization of stock. Analysis of purchases and sales by
departments is fundamental. In addition, a knowledge of what others
in the same line are doing serves as a criterion by which to judge
one’s own results. Trade associations and research bureaus are giving
invaluable information by furnishing standards for judging results.

Three major problems from the buyer’s standpoint are always met. They
are not independent problems but, as indicated above, are intimately
related to selling and financial policies. These problems are: (1) the
determination of the average stock to be carried; (2) the determination
of the buying quota for a given period; and (3) the determination of
the “open-to-buy” amount at a given time. Too often these matters are
decided in a haphazard fashion. Only by means of a careful analysis of
all the factors and the results obtained in the various departments as
compared with average or standard results can a sound basis of stock
control be secured.

=Average Stock to be Carried.=—Stock control rests, in the first
place, on estimated requirements for the future. Estimates for the
future must always be based on past performance, as modified by present
market conditions and contemplated changes in basic merchandising
policies. In estimating the amount of stock to be carried, the volume
of expected sales must be taken into account. The other factor is the
rate at which the merchandise should turn during the period. Thus, if
estimates are made for a period of six months, the estimated sales for
the period divided by the number of times the stock is expected to
turn during the six months will give the average amount of stock to
be kept on hand. Seasonal fluctuations must be taken cognizance of in
determining the changes from average stocks to be carried at particular
times during the period. Thus, if the estimated sales in a given
department are $50,000 for the next six months and the merchandise
turns twice during that time, manifestly a stock of $25,000, as priced
at retail, must be carried. If the mark-on is 40%, the cost of the
average stock will be 60% of $25,000, or $15,000, representing the
average capital to be tied up in stock for that department.


=The Buying Quota.=—The determination of a buying quota for a given
period must take cognizance of the stock on hand at the beginning of
the period, the stock which it is planned to have on hand at the end of
the period, and the estimated sales for the period. If, from the sum
of the stock planned to be on hand at the end of the period and the
sales estimate for the period is subtracted the stock on hand at the
beginning of the period, the buying quota for the period is determined.
This buying quota is, of course, at retail price and must be reduced
by use of the mark-on percentage to a cost basis. An illustration will
show the method:

  Stock planned to be on hand at
    end of period                            $25,000
  Estimated sales for period                  50,000
                                             -------
                                             $75,000
  Stock on hand at beginning of period        23,000
                                             -------
  Buying quota at retail price               $52,000
                                             -------
  Mark-on is 40%, i.e., cost is 60% of
    selling price.
    Therefore                                $31,200 = buying quota
                                                       at cost

=The “Open-to-Buy” Estimate.=—The buying quota is estimated at the
beginning of the period. At various times throughout the period, if
stock is to be properly controlled, it is necessary to know how much
of the buying quota is available. Furthermore, because estimates made
at the beginning of the period never quite coincide with the facts
of actual performance, it is necessary to take cognizance of these
data of performance in determining the amount of stock to be bought
at a given time. The difference between the estimated sales for the
period and the actual sales to date is the estimated sales to be made
during the remainder of the period. If from the stock on hand at a
given date is subtracted the estimated sales for the rest of the
period, the difference will be the estimated stock remaining on hand
at the end of the period, providing no more purchases are made. If
this amount is less than the amount of stock planned to be on hand at
the end of the period, the department is “open-to-buy” to the amount
of the difference. If the estimated amount on hand at the end of the
period is more than the planned inventory for the end of the period,
no additional stock should be purchased, except of course to replenish
certain stocks which have become depleted and which it is necessary to
have on hand to meet the needs of customers. In calculating the stock
on hand at a given time, cognizance must be taken of stock in the
warehouse, in transit, and on order. A typical open-to-buy calculation
is shown below:

  Stock on hand today                     $ 40,000.00
  Stock in warehouse                        15,000.00
  Stock in transit                          10,000.00
  Stock ordered (to be received before
    end of period)                          25,000.00
                                          -----------
        Total available stock                           $90,000.00

  Sales planned for period                $175,000.00
  Sales made to date                       105,000.00
                                          -----------
        Estimated sales for balance of
          the period                                     70,000.00
                                                        ----------
  Estimated stock at end of the period                  $20,000.00
  Planned stock at end of the period                     30,000.00
                                                        ----------
        Open-to-buy amount                              $10,000.00
                                                        ==========

This open-to-buy figure should be amended in the light of experience
with regard to the way in which actual sales are running as compared
with the estimated sales. If it is apparent that the sales are running
ahead of the estimate, the sales quota should be enlarged accordingly,
which will in turn increase the open-to-buy balance. A similar
adjustment should be made in the event that actual sales are not
keeping pace with the estimated quota.

=The Stock Control Card.=—The problem of stock control is not solved
solely by a maintenance of buying quotas and limits. The movement of
individual commodities must be watched very closely. The tying up of
funds in large stocks of slow moving commodities may soon use up the
buying quota needed for faster moving commodities. To maintain control
over the movement of individual commodities, a record called the “stock
control card,” which is similar to the stock book, is of great value in
some lines. To other lines it will not be found adaptable. It is not
the purpose of this chapter to attempt to lay down specific methods
adaptable to all situations but only to discuss basic principles and to
illustrate them by methods found applicable to certain situations. The
control card illustrated in Form 43 is one used in a retail shoe store.

On the form shown as Form 43, Style, Bought From, Description, and
Material, are self-explanatory. On the line below, cost is shown in the
first column, size in the next, and the month with days along the rest
of the line follows. Horizontally are entered on the dates shown the
quantities of stock received (Rec’d), on hand (O. H.), sold (Sold), and
on order (O. O.).

According to the form, on August 1 there were on hand 19 pairs
of shoes, size 9, and 11 pairs of size 9½. During that week, on
consecutive days, 3, 4, 3, 6, 2 pairs of size 9 shoes were sold, of
which 2 pairs (circled) were returned on the 4th and 5th; and 2, 2, 1,
3, 4 pairs of size 9½ shoes were sold, of which 1 pair was returned but
again sold on the 5th.

On the first day of the following week 24 pairs of each size which had
been ordered on the 2d of August were received. Upon their receipt the
O. O. (on order) figures were inclosed in circles. On that day also the
O. H. (on hand) figure was placed in its proper place in the size 9
group. All of size 9½ had been sold during the first week of August and
there was of course no figure to be entered there.

The record is continued by daily postings of sales and by a weekly
posting or entering of the stock on hand. Orders are entered on the day
they are placed.

[Illustration: Form 43. Stock Control Card

Taken from Bulletin issued by the United States Chamber of Commerce]

With such a stock record a perpetual inventory is maintained and
control over the movement of merchandise is secured.

=Problems Connected with the Merchandise Inventory.=—Proper accounting
for merchandise at the time of inventory-taking and the close of the
fiscal period requires a consideration of the following points:

GOODS IN TRANSIT. It may happen that certain goods have been ordered
during the period, and that the invoice has been received but that the
goods themselves are still in transit. The question whether or not such
goods shall be included in the inventory may be viewed from different
angles, as follows:

1. If the goods have been paid for in advance, they have undoubtedly
been entered on the books as a charge to Purchases. If this is the
case, the goods in transit must of course be included in the inventory
as if actually received.

2. If the goods are still in transit but have not been paid for, it
is customary not to charge them to Purchases until they arrive. If
not charged to Purchases, or other similar account, they must not
be included in the inventory. However, theoretically, this method
is incorrect. The fact that the goods have been ordered and are now
in transit makes the business liable for their purchase price, and
although not actually received, in reality they form a part of the
asset merchandise. It is true that until the goods are received,
inspected, and accepted, the purchaser has the privilege of refusing
them if they are not as ordered, but this privilege is exercised only
in exceptional cases. Generally speaking, therefore, it is better
to consider such goods as a completed purchase, include them in the
inventory and credit the vendor for the amount of his invoice. Instead
of being charged to Purchases account, such goods may be charged to
Purchase Commitments which will better indicate their status.

GOODS RECEIVED BUT NOT YET BOOKED. In concerns where a separate
shipping and receiving department is maintained, it may happen that
the goods received by this department are not immediately transferred
to stock or storage, in which case they may not have been taken up on
the books. At the end of the period it is important to see that all
such goods are properly recorded as purchased and are included in the
inventory.

GOODS IN OR OUT ON CONSIGNMENT. Still another problem in connection
with the inventory has to do with goods which do not belong to the
business because they have been consigned to it for sale on account
of their owner. Inward consigned goods must not be included in the
inventory, if taken into stock, it is very important that they be so
marked as easily to distinguish them from the regular stock.

Similarly, if goods are out on consignment to another market, they
still belong to the business and must not be overlooked at inventory
time. If the proper record is made at the time the goods are shipped,
as will be explained in Chapter XLVIII, the memorandum accounts on the
ledger will call attention to them. In some concerns all such goods
are entered as sales at the time of shipment. If at the end of the
period part of these consigned goods are still unsold and in the hands
of agents, they should be deducted from the sales for the period and
included in the inventory at full cost.

GOODS FOR FUTURE DELIVERY. Goods sold for future delivery are best
handled at inventory time in the manner suggested in Chapter XLVII,
even if they are set aside ready for delivery.

GOODS READY FOR CURRENT DELIVERY. Finally, goods sold for current
shipment but delayed in delivery on account of congestion in the
service or for some other cause are best treated as sales and excluded
from the inventory.




CHAPTER XLVII

SALES


=Importance of the Sales Department.=—Of the major departments into
which business activities are commonly classified, the selling
department ranks first in point of relative importance. Regardless
of the efficiency secured in the other branches, regardless of the
economy in buying and the excellence of administration, the life of
a business largely depends upon the results obtained by the selling
division. Since the sales department plays such an important part in
the development of the business, it is evident that the accounting
and financial problems connected with sales should be given careful
attention and should be handled by the most scientific and up-to-date
methods.

As before stated, one of the most important principles of modern
accounting is that the system by which the records are to be kept must
be planned in advance. The modern accountant must first know the kind
of information that is desired and he then can classify the accounts so
that the information may be obtained from the ledger or other records
at any time, with the least possible effort.

=Basis for Sales Classification.=—The majority of enterprises at the
present time deal in a number of commodities, the kind, quality,
and grades of which are of such variety that careful classification
is imperative. Formerly all goods sold were classed together under
a single title “Merchandise,” with the result that no detailed
information concerning the sale of particular goods, qualities, and
grades was available and the manager or proprietor was unable to study
the movement of specific classes of commodities.

Applying the principle of classification to sales, the basis for
classification depends on the character of the business and the nature
of the goods sold. Where the commodities dealt in are of such variety
that it is impracticable to have a separate account for each kind, a
more general grouping by classes may be necessary. Where the concern
manufactures some of its commodities and buys the remainder in the open
market, an analysis of sales on the basis of “own” product and “other”
product may be wanted. Sales may be classified also on the basis of
the sales contract, as cash, credit, instalment, sales to branches,
consignment sales, approval sales, etc. Accounting problems in
connection with these various types of classification will be treated
in the present chapter.

=Principles Governing Analysis in Books of Original Entry.=—It is
evident that the kind of classification shown in the ledger determines
the journal analysis. That is to say, the analysis in books of original
entry, and therefore their columnar ruling, always depends upon the way
in which the accounts are classified and grouped in the ledger.

The various types of analyses, both in journals and in ledgers, make
use of either (or both) horizontal or vertical distribution. In most
forms or records, except in banking and allied institutions, the
generally accepted practice is to reserve vertical distribution for
showing chronological sequence, and horizontal distribution for any
other kind of classification. The reason for this lies in the fact
that the time basis requires practically unlimited space and the
requirement can be met only by vertical distribution, consecutive pages
being considered as the continuation of preceding pages. Horizontal
distribution, on the other hand, is limited to the width of the page.

By reference to Chapter XLI, “Handling the Cash,” it will be noted
that for the purpose of horizontal classification the sheet contains a
number of money columns, each headed by an individual class title, and
that each item is first entered in the general column and then extended
to one of the subsidiary columns. This serves as a check against error,
since it is evident that the total of the general column must be equal
to the sum of the totals of the other columns, thus furnishing a fair
though not complete proof that the extensions have been made correctly.
All books where analytical processes are involved should provide some
kind of internal check. The student should refer to Chapters XVIII, XIX
and XX, where form of analytic journals and explanation of them were
given.

=Use of the Sales Ticket in Analysis.=—Since the sales invoice or
ticket is the basis for entry and analysis in the sales journal,
it must give on its face the information necessary for making the
analysis. In accordance with the basis of classification used, it
should show the department number, the kind of goods sold, whether
for cash or credit, etc. The use of invoices with printed department
numbers and of different colors for cash, charge, and C.O.D. sales, aid
in making the record effective.

In a business of any size, the entry on the main sales journal only
shows the total for the day’s sales. The sales tickets lend themselves
easily to grouping, and therefore a day’s sales may be analyzed by
sorting and grouping the sales tickets. Under any method of this sort,
of course, each ticket must be used for the record of only one class of
goods. Thus the totals of each of these sorted groups may be entered
in the sales journal at the end of the day. Besides furnishing the
totals for each group of sales, the individual tickets are used also
for the purpose of posting the sales to the accounts of the particular
customers.

After use in these various ways the tickets are filed away in
binders for reference. Thus, the main books are freed of a mass of
comparatively unimportant detail, to which it is necessary to refer
only in rare cases.

=Analyzing Sales Returns.=—Attention should be called to the necessity
of analyzing returned sales, allowances, and rebates, on the same basis
as sales. Provision should also be made for a separate sales returns
journal since the ordinary journal does not lend itself economically to
an analyzed record of that kind.

=Purchases and Returned Purchases.=—It has been pointed out that the
basis of classification of sales in the ledger determines the analysis
in the sales journal. The same classification should also be applied to
purchases, returned purchases, and inventories, because only in this
way is it possible to determine the profit from the different classes
of merchandise.

Similarly, all inward costs, such as duty, freight, insurance,
handling, etc., which enter into the cost of goods sold must be
analyzed on the same basis and apportioned to each group on some
equitable basis. Because of practical difficulties, however, this
analysis or apportionment usually is not made upon the first entry
of these items on the records, but a distribution on a more or less
arbitrary basis is made at the close of the period. In a large concern
where very detailed information as to results is desired, an analysis
of many other expenses and costs applicable to each sales group is
made. Such a distribution of expense, however, leads into the field of
cost accounting which is beyond the scope of the present discussion.

=The Handling of Cash Sales.=—Where an analysis by kind of commodity
is unnecessary, a simple method of booking cash sales is by entry in
a “Sales” column provided in the cash book, the total of which is
posted to the credit of “Sales” in the ledger. Under this method, cash
sales need not be entered in the sales journal. In previous chapters
where the functions of the subsidiary journals were discussed, the
practice of entering a cash sale in both cash book and sales journal
was advised, so that the summaries of each may show true totals for
those groups of business activities. However, this principle is often
departed from and the method just described for booking cash sales is
followed. Where an analysis of the sales is desired, the practical
difficulty of providing analysis columns in the cash book for the cash
sales in addition to analysis columns in the sales journal for the
sales on account gives added weight to the principle stated.

It is sometimes desirable to distinguish between cash and charge
sales, thus requiring two accounts, the “Sales on Account” and the
“Cash Sales,” to show the total sales for the period. This is easily
accomplished by the use in the sales journal of the “On Account” and
“Cash” columns whose totals furnish the amounts for posting to the two
ledger accounts. Even were it desired to have two sales accounts, the
cash and charge, for each department, the necessary information can be
secured by providing in the sales journal two columns, a cash and a
charge for each department and posting their totals to the two sales
accounts carried for each.

A more complicated problem arises when it is desired to keep an
account to show the total cash sales of _all_ departments and at the
same time to keep one sales account for each department, in which
will be recorded both cash and charge sales. The information can be
placed on the ledger, but not without destroying the usual meaning
of the Cash Sales account. The purpose is accomplished by providing
the sales journal with two total or general columns—in addition to
the departmental columns—one for charge and one for cash sales, and
by carrying a Cash Sales column in the cash book. The items in the
Cash Sales column in the sales journal are distributed to the proper
analytic columns for classification. At the end of the period the
totals of these analytic columns (which include both cash and charge
sales items) are posted to the credit of the proper departmental
accounts in the ledger. The total of the Cash Sales column in the sales
journal, however, is posted to the _debit_ of Cash Sales in the ledger,
which will be offset by a corresponding credit item from the Cash Sales
column in the cash book. These two totals should agree provided the
books are completely posted.

=Sales to Branches.=—Sales to branches are made on different bases
in different concerns. Sometimes such sales are charged to the branch
office at cost, sometimes at full selling price, and sometimes at a
fictitious figure. The first method is theoretically the best, but is
not always desirable because head offices frequently prefer to keep
their branches ignorant of cost prices. For this reason such sales are
frequently charged to the branch office at the regular selling price.
By this method, however, the books of the head office record the goods
as if actually sold, while in reality they have been merely transferred
to a branch office. Consequently, the books show a profit which is not
yet earned. In order to correct this, it is necessary at the end of
the period to make an adjustment entry covering all goods still in the
possession of the branch office unsold at that time. By billing the
goods at a fictitious figure the branch is also kept in ignorance as to
real profits, but proper adjustment should be made at the close of the
period for the reason explained just above.

Whichever method is followed, sales to branches should always be kept
separate from the regular sales accounts. Where shipments of goods
to branches are frequent and a matter of regular routine, a branch
shipments journal similar to the sales journal should be provided;
otherwise a special column in the sales journal will suffice. The
total of such sales should be credited to a Branch Shipments, Branch
Consignments, or some similar account, so as not to confuse these
transactions with regular sales. The subject of accounting for both
domestic and foreign branches is treated in Volume II.

=Consignment Sales.=—Consignment sales—which in some respects
resemble branch sales—should also be recorded separately from regular
sales. This is so because the title to goods out on consignment is
still vested in the consignor and no element of profit appears in the
transaction until an actual sale is made. However, in the case of
an _occasional_ consignee as distinguished from a factor who deals
regularly in consigned goods, it has usually been held that the title
has passed to the consignee so far as the consignee’s dealings with all
except the consignor are concerned. Only in this way can the interests
of innocent third parties be adequately protected.

The accounting for consignments is treated in Chapter XLVIII.

=Instalment Sales.=—The instalment sale should be treated in a
different manner from regular sales because of certain special features
connected with it. The chief characteristic of the instalment sale is
the probability of the goods coming back into the seller’s possession
through forfeiture because of non-payment of instalments, the profit on
the transaction of course being affected thereby.

The sale of goods with the privilege of payment in instalments is a
well-recognized custom in certain lines, particularly in the furniture,
piano, book subscription, and similar businesses. To protect the
seller, the sale contract almost invariably contains a clause to the
effect that title to the goods shall remain in the seller until final
payment has been made, that failure to pay any instalment when due
shall result in the cancellation of the contract, and that in such case
the goods shall be returned to the seller. Experience with this class
of sales shows that a large number of contracts are forfeited with
or without return of the goods. Where the goods are returned, there
is frequently a large loss through depreciation, the returned goods
having to be treated as second-hand. In some instances, to enforce
return of the goods might entail greater expense than loss of the
goods themselves. These are, of course, questions of business policy
rather than of accounting, although the results shown by the accounting
department enter into their settlement.

=Accounting for Instalment Sales.=—The accounting for sales under
the instalment plan is not different from accounting for other sales.
They are, in their first record, charged to the customer and credited
to Sales or various departmental sales accounts. If the goods are
forfeited and returned, the record is to Returned Sales for the debit
and the customer is credited for the unpaid instalment. Whatever profit
or loss there may be on the transaction will be shown in the Profit and
Loss account when the inventory is taken and the returned goods are
appraised. If the customer fails to pay his instalments but does not
return the goods, the loss is one from bad debts.

=Separation of Instalment from Regular Sales Records.=—Where both
instalment and regular sales are made, as is usually the case since
few concerns limit their activities entirely to the instalment method,
it is best to keep a separate instalment ledger with a controlling
account, called “Instalment Accounts Receivable” or “Instalment
Contracts.” The two classes of customers should be kept separate
because of the greater liability to loss in the one class than in the
other. Before profits for the period can be correctly determined, it
is necessary to estimate the probable loss on contracts closed during
the period. In the balance sheet separate showing should be made of the
reserve for this class of accounts receivable and the reserve for the
other class. The estimated loss on the instalment accounts is of course
a figure based upon experience, but a conservative policy requires that
the amount should be fairly liberal.

=Delinquency Records.=—Forfeiture of contracts is not usually enforced
upon first failure to pay an instalment, but such delinquencies should
be brought to the attention of the management and particularly of the
credit and collection department. Delinquency may even be recorded in
the books by transfer from the Instalment Accounts Receivable to a
“Delinquent Instalment” account. This makes an up-to-date analysis of
the Instalment Receivable account and so furnishes a better basis for
estimating losses from bad debts than where no separation is made.

=Chief Considerations in Handling Instalment Sales.=—From the
accounting standpoint, the chief question is that of making the
estimate for loss from uncollectible accounts. From the standpoint
of financial management, instalment sales present the problems of
passing on credits before taking the risks and afterwards of pushing
collections so as to prevent, whenever possible, forfeiture and
consequent loss. It is not purposed to treat of these phases here,
for which the student is referred to standard works on credits and
collections.

=Sales for Future Delivery.=—From a legal point of view, the receipt
of a purchase order gives rise to certain rights and obligations
enforceable at law between buyer and seller. While the seller may not
be able to enforce specific performance of the contract, yet he is
entitled to the damage incurred through nonperformance. Every merchant
knows, however, that the cost of securing the remedy is usually higher
than the resulting gain and, furthermore, an action against the
customer frequently causes the loss of his trade.

Sales for future delivery do not always materialize, since either the
buyer or the seller may wish to cancel the contract. A conservative
policy therefore demands that the sale be not booked until delivery is
made. The order, however, may be received in one fiscal period and the
sale be credited to the period in which the goods are delivered, while
the major part of the expenses in connection with the sale may have
been incurred during the period in which the order was received. The
current period then is charged with the expenses but does not receive
the credit to which it seems entitled. Therefore, the portion of the
selling expense incurred during the period in which the order was
secured should be deferred to the period which receives the credit for
the sale.

This policy should be followed even when the goods covered by the
future sale are set aside specifically for future delivery and the sale
should not be booked until delivery is made. At inventory time such
goods should be included at cost, with the deferred expense charge as
above. Occasionally an unscrupulous merchant in need of cash will bill
such goods and discount the invoice; but for the reason given above
such goods should not be charged to the customer until delivery is made.

=Department Store Sales.=—As indicated above, in a department store
sales are usually classified by departments. The two classes of sales
tickets, cash and credit, are sorted by departments and the totals are
entered daily either in the sales journal or on the loose sales sheets
which, when filed in a binder, make up the sales journal. At the end
of the month the journal is posted to the various department sales
accounts. Each day the entries on the sales journal are checked against
the cashier’s record of cash received from sales and the bookkeeper’s
record of charges posted to customers.

=C. O. D. Sales.=—For this class of sales the credit is booked in the
usual way but the debit is made to a C.O.D. account. The packages are
charged on the shipping department’s memorandum records to the various
delivery men who are credited with the collections turned in. These
collections form the basis for the credit to the C.O.D. account on
the ledger. Any balance in the C.O.D. account shows the amount of the
undelivered goods still on hand in the shipping department or on the
wagons and therefore charged against the various drivers.

=Approval Sales.=—In many lines of business approval sales are
common. Merchandising concerns frequently send goods to customers for
trial and inspection, with the privilege of return if the goods prove
unsatisfactory. Publishing houses often send out books—both single
volumes and whole sets—with a few days’ examination privilege. This
class of business is often handled in a rather unsystematic fashion.
Usually it is impossible to discriminate among prospective customers,
since offers of this kind must be made to all alike. Consequently the
privilege is often abused by the unscrupulous.

=Accounting for Approval Sales.=—This abuse creates the problem of a
correct method of handling approval sales. The difficulty is rather
one of organization and administration than of accounting procedure;
the record-keeping presents no new difficulties and under certain
conditions may be likened to the methods of recording outward consigned
goods. In no sense are such transactions to be regarded as sales and
handled in the regular sales records, thereby showing a profit not
yet earned. The correct method, both from an accounting and a legal
viewpoint, is to keep a memorandum record of approval sales similar to
that made for consignments.

Unlike consignments, however, the price shown in the invoice is the
actual selling price of the goods, and the sale if consummated is
treated as a regular sale, no effort being made to keep the profit
or loss on approval sales separate from the profit on regular sale
transactions.

In the retail trade the prevailing practice in handling approval sales
is to enter the charge to the customer’s account when the goods are
sent out and to credit the account for all returns. In this way the
books keep record of all goods out on approval and provide an adequate
check against lost or misplaced goods.

When transactions of this kind are large in number, subsidiary books
devoted exclusively to their record may be kept.

=Tickler File Method of Handling Approval Sales.=—Approval sales
transactions must usually be completed within a comparatively short
space of time, either by acceptance or by return of the goods, and in
such cases a shorter method of recording them is followed. The sales
tickets or invoices covering approval sales are made with some kind
of a distinctive mark—color of paper, title, etc.—to allow their easy
separation from the regular sales tickets. These tickets are kept in
a temporary tickler file in the order of the expiration dates of the
approval period. If the sale is consummated, the ticket bearing a stamp
to that effect is sent through for record as a regular cash or credit
sale. If the goods are returned, the ticket may be filed as a part of
that particular customer’s record; in this way a cumulative record is
secured which would in some cases give an interesting commentary on
human nature. If the customer is one who makes it his or her practice
to buy on approval to secure the free use of nice wares for an evening
or for some social function, the record would show it. A rigorous
and unrelenting collection and follow-up system, supplemented by a
full credit and information record, is the only safeguard against
unscrupulous customers and oftentimes even this proves inadequate.

At inventory time all goods out on approval as shown by the approval
sales file must be included in the inventory at inventory price, for
the goods are still owned by the firm. As stated above, they must never
be treated as sales.

=The Bill and Charge System.=—By this name is known the method of
writing up the customer’s bill and using it as the basis for the
charge to his account. The system is operated somewhat as follows: The
duplicate sales tickets go to the auditing department, where they are
first sorted by departments to secure the departmental analysis of the
sales, and then re-sorted according to customers. Thus, if a customer
has made purchases in more than one department, the tickets covering
all his purchases are brought together. Each customer’s monthly bill
or statement of account is started at the beginning of the month on a
folded billhead perforated at the fold, the duplicate or under portion
usually being somewhat wider, with loose-leaf binder punchings. On
these bill and duplicate blanks the charges for the day are entered
from the sorted sales tickets. This work is usually done on a billing
machine with carbon roll or with carbon paper insertion.

At the end of the day the total amount of the charges entered on all
monthly statements is either found by means of an adding machine or is
indicated by the “tally strip” of the billing machine. This total must
of course be equal to the aggregate amount of all sales tickets for
that day, thereby proving the work of the billing clerks.

Customers’ bills after entry each day may either be passed on to the
bookkeepers who charge each customer’s account with the day’s total
purchases as shown by the bill, or the bills are returned to the file
until used again for subsequent purchases. In such case the bookkeeper
enters the total monthly charge to the customer’s account, only once a
month.

Returned goods and allowances are also entered on these customers’
bills, but in a separate column or on another portion of the sheet.

The total charges entered on these statements must check against the
total credit sales for the month, thus proving the additions of the
bills.

At the end of the month the bill is torn from its duplicate and is
passed to the bookkeepers. They enter the previous month’s balance,
if there is one, and the current payments on account, and extend the
amount now due. After the bills or statements have been mailed to the
customers, the duplicate bills are filed away, being virtually the
detail of the ledger account, for use in case of dispute.

This method of handling credit sales provides a ready means of getting
the bills out on time, of assuring agreement between the ledger
accounts and the bills, of freeing the ledger accounts of unnecessary
detail, and of checking the total billings against the total sales
tickets.

=Salesmen’s Commissions and Efficiency Records.=—Salesmen are often
paid a commission in addition to salaries. Where the commission is
based on the amount of sales, the sales ticket is made use of as the
source of information for computing the commissions earned. To this
end the tickets are sorted according to salesmen, and a record sheet,
either separate or as an adjunct to the sales journal sheets, is filled
in with each salesman’s total sales for the day. These totals should
prove against the salesman’s record in the back of his book of sales
tickets. At the end of the month his total sales are shown by his
record sheet and his commission is determined therefrom. Of course, the
total for all salesmen as shown by these sheets must equal the total
sales for the period.

If the commission, often known as “spifs” or “P. M.’s,” is allowed
only on certain classes of sales in order to encourage the movement of
old stock, each sales ticket should indicate the amount of premium or
commission due, so that a record can be made without the necessity of
depending on the records of the individual salesmen.

Salesmen’s records besides being used for the particular purpose of
computing commission, or bonuses due them, serve a wider object in
that they contain fairly complete and reliable data in regard to the
value and efficiency of individual salesmen. For this reason such
records should be kept at all times, no matter whether a commission or
bonus system is operated or not. Whenever an increase in a salesman’s
salary is considered or when the sales force is to be decreased in
number, these efficiency records are a valuable aid in making the right
decision.




CHAPTER XLVIII

CONSIGNMENTS


=Definition.=—When goods are shipped to another party to be sold by him
for account of the shipper, the transaction is called a “consignment.”
In its original sense, to “consign” means to seal, sign, mark, or
label in a formal way. In commerce this term has come to signify goods
sent for sale through another party. Usually such goods are marked or
labeled to distinguish them from those belonging to the consignee.
The owner or sender is designated “the consignor”; the selling or
receiving party “the consignee.” Sometimes the word “shipment” is
used by the consignor to designate the goods sent away for sale,
and the word “consignment” to indicate the goods received by the
consignee. Differentiation on this basis is convenient, but the terms
“consignments-out” and “consignments-in” are more descriptive and will
be used here.

=Legal Status.=—Before treating the accounts required to record
consignment transactions, it is well to understand the legal relations
between the consignor and consignee. The general law of bailments and
of agency applies in a restricted sense to consignments. A bailment is
defined as, “A delivery of goods for the execution of a special object,
beneficial to the bailor, the bailee or both, upon a contract expressed
or implied, to carry out this object, and dispose of the property in
conformity with the purpose of the trust.” Agency is the term used
to indicate the legal relation between a principal and the agent who
represents him. A person appointing another to act for him in his
dealings with third parties is called the principal. The one appointed
to represent the principal is the agent. A bailment is therefore a
special class of agency transactions with particular rules governing
the safe-keeping of the goods of the principal in the possession of the
agent. In the case of a consignment, the consignor is the principal and
the consignee the agent. The relation of the consignee to the consignor
as regards the care to be exercised in handling the consignor’s goods
is a bailment relationship.

=The Broker.=—A broker, although he acts as agent, usually is not
a consignee. He acts “as a middleman, bringing people together to
trade, or trading for them in the private purchase or sale of any kind
of property, which property, ordinarily, is not in his possession.”
The charge for his service is usually in the form of a commission,
sometimes called brokerage. There are several classes of brokers, named
according to the kind of commodity they deal in; for instance, there is
the exchange broker, the note broker, the insurance broker, the stock
broker, the real estate broker, the merchandise broker, etc.

=The Factor.=—Other types of middlemen are the manufacturer’s agent,
who is a broker or sales agent, effecting sales usually by means of
samples; and the factor or commission merchant who actually handles and
sells the goods of his principal. The chief distinction between the
broker and the factor is that the broker sells goods in the name and
for the account of his principal, but the goods are delivered directly
to the purchaser by the principal, who also collects the account;
whereas the factor has the goods of his principal in his possession and
sells them either in his own name or in the name of his principal.

The factor may operate under a specific contract with his principal,
covering a single consignment, or under a general contract governing
all consignment transactions between the two parties. Again, there
may be no formal contract between them, in which case the law sets
up a contract relationship based on trade usage and customs in any
particular line. Where the factor operates under a specific or general
contract, certain points may arise which are not provided for in such
contract, and on these points trade custom governs.

=Duties of the Factor.=—Barring specific instructions, the factor may
conduct the consignment transactions for his principal on the same
basis and in the same general way as he would conduct them were the
goods his own. In other words, he is expected to exercise the same care
in the handling of consignment goods as he employs in handling his own
property. In selling goods consigned to him he may extend credit to the
buyer if it is the custom in that particular line to do so, and he must
exercise due care as to the rating of the customer. He must push his
collections with ordinary diligence. He may warrant the goods sold if
that is customary. He can give good title to goods sold, and this title
may even be better than the one possessed by the owner of the goods. A
bona fide purchaser who does not know the principal is protected in a
sale made by a factor even if the factor exceeded his authority.

=Factor Must Protect Goods.=—So long as any part of the principal’s
goods are unsold and in the possession of the factor, he must protect
and safeguard them. He is not liable, however, for damage from forces
or conditions over which he has no control. The degree of diligence
required of him largely depends on the nature of the goods. What would
be considered due diligence in one case, might be construed as gross
neglect in the case of more valuable or perishable goods.

=Consignments to be Kept Separate.=—It is a fundamental requirement
and of the very essence of the factor relationship, that the
principal’s goods must be kept distinct from all other goods in the
factor’s possession. This applies not only to the consigned goods as
such, but also to the assets received by the factor upon the sale of
such goods—as cash, accounts and notes receivable, etc. To satisfy
this latter requirement it is usually held that actual separation is
not necessary, but that it is sufficient to record these properties in
such a manner that they can always be separated if the need arises. The
principal’s properties are held in trust for him by the factor but are
subject to the legitimate claims of the factor.

=Expenses Charged against Consignment.=—Barring specific instructions
to the contrary, the factor may incur certain expenses necessary to
safeguard the interest of his principal and to effect the sale of his
goods. These include such items as freight, insurance, duty, handling
charges, allowances and rebates to customers for unsatisfactory goods,
etc. All these are proper charges against the consignment, i.e.,
against the principal.

=Factor’s Lien on Consigned Goods.=—For any legitimate expenses
incurred and for any payments made the principal in advance of the
settlement date, the factor has a lien on the consigned goods. It has
been held in some cases that the factor has the right to sell the
goods in satisfaction of the lien, and if the proceeds of the sale are
not sufficient to satisfy the factor’s claims against the principal,
the latter is liable for the amount of the deficiency. The factor’s
commission from the principal is also protected by this lien and, if
necessary, the factor may apply part or all the proceeds of the sale
toward the payment of his commission. A lien, of course, is binding
only so long as the goods are in the factor’s possession.

=Account Sales.=—Upon completion of his service the factor must make
a strict accounting of his transactions to the principal. In case of
dispute he can be required to open to the inspection of the principal
his records covering the consignment dealings. The usual method of
settlement is by means of an “account sales” rendered by the factor
to his principal. The account sales is a summarized statement of all
transactions connected with a particular consignment. It constitutes
the formal accounting for the consignment transaction. It must show
the amount or quantity of goods received, the sales made, and the
expenses incurred, the balance being the amount due the principal. This
amount may be either remitted or credited to the principal’s account,
according to the contract between them. The usual form of account sales
is shown in Form 44.

Goods may be billed to the factor at cost, at the current market price,
or at some fictitious figure. This billing price does not enter into
the accounting of the factor at all. It is the selling price of the
factor which is the basis of income against which expenses are charged.
The principal may indicate a selling price for his goods but this
serves merely as a guide to the factor as to the price desired. If,
however, the principal gives specific instruction as to sale price, the
agent must govern himself accordingly.

[Illustration: Form 44. Account Sales]

=Compensation of Factor.=—The factor usually receives his compensation
on a commission basis—so many per cent of the sales he makes. When the
contract makes specific provision for it, he may sell the goods at a
higher price than that fixed by the principal and retain part or all of
the excess as compensation.

=“Del Credere” Agency.=—Where a factor sells on credit, the accounts
belong to the principal and any loss through uncollectible accounts is
borne by the latter. Sometimes the factor guarantees the collection
of all accounts; in this case he is known as a “del credere” agent
and receives additional compensation for assuming this risk. Such a
guarantee really amounts to a sale of the accounts to the factor.

=Advantages of Consignments.=—While the practice of consignment trading
is not so prevalent now as it was formerly, it still prevails in some
lines and under certain conditions. Shippers to the produce market
frequently consign their goods to city brokers whom they instruct to
take advantage of the prices prevailing in the open market, and in
this way they may realize higher prices than when they sell outright
to the wholesaler. The consignment shipment has another advantage to
the shipper, in that the title to the goods remains vested in him;
hence a consignment is safer than a sale on credit to a consignee
unless his rating is satisfactory. The practice of consignment trading
is of sufficient importance to require a discussion of the accounting
principles involved. These will be given first from the viewpoint of
the consignor, and then from that of the consignee.

=The Consignor’s Entries.=—The chief interest of the consignor lies
in the net outcome of each sale in order to determine the advantage,
if any, of the consignment policy over a straight sale policy. To
accomplish this, he must keep a separate account with each consignment,
either on the general ledger or on a subsidiary ledger with a total
summary account on the general ledger. When the consignor sends the
goods, whether they be invoiced at cost, sale, or some other price,
entry should not be made direct to his Sales account, for no sale has
been made as yet. He has merely placed some of his stock in another
market, being still the owner of the goods.

=Two Methods of Entering Sales on Consignor’s Books.=—There are two
ways of recording correctly a consignment on the consignor’s books at
the time the goods are sent. According to one method, the goods are
transferred from Purchases to another merchandise account, having for
its title the word “Consignment,” followed usually by the name of the
consignee and the number of the particular consignment made to him, as
“Consignment No. 4, J. B. Arscott.” To this account are charged not
only the goods at cost price but also all expenses of the transfer, as
freight, duty, insurance, etc., the corresponding credits being to Cash
or to Purchases as the case may require. This is the only record made,
until the account sales is received from the factor. Upon the receipt
of the account sales, the Consignment account may either be credited
with the net proceeds or be charged with the expenses and credited
with the gross sales, as shown in the account sales. If the money is
remitted by the factor the Cash account is debited; otherwise the
factor’s account is debited for the net proceeds.

The Consignment account is now a true proprietorship account, showing
income on the one side and cost of that income on the other side. The
difference is either a profit or a loss according as the balance is a
credit or a debit. In order readily to distinguish complete consignment
transactions from those only partially completed, it is best to close
the completed accounts by a transfer of the balance to a “Consignments
Profit and Loss” account where it is held until the close of a fiscal
period, at which time it is carried to the general profit and loss.

The second method of recording the transaction at the time of sending
the consignment is to set up two memorandum accounts, Consignment
and Consignment-Out (or Consignment Sales), debiting and crediting
these respectively with the invoiced value of the consigned goods. In
this case there is no credit to the Purchases account as under the
first method given above. Any expenses incurred are charged to the
regular expense accounts instead of to the Consignment account. For
handling the consignment shipments no special books are required,
original entry being in the general journal. If there are many such
transactions, however, a special column in the sales journal or a
special consignments-out journal is desirable.

Upon receipt of the account sales, the regular sales account is
credited either with the net or with the gross proceeds; and the other
accounts—as cash, the consignee, and expenses—are debited according to
the manner of booking as explained in connection with the first method.

The two memorandum accounts, having served their purpose of calling
attention to the fact that some goods have been sent to other markets
for sale, should now be canceled by a reversing entry, since the goods
have been sold and the record of their sale has been made in the
regular sales account. The effect of this second method is to merge
consignment and regular sales transactions into one record, making
impossible a separate showing of the profit or loss on consignments.
The particular method to be used, therefore, will depend upon the
information desired.

=Consignor’s Inventory.=—If the consignor’s fiscal period closes
before an account sales in full settlement is received, and if
accounting treatment is by the first method, the goods shown in the
Consignment account are included in the inventory of goods on hand and
so represented in the balance sheet. If the second method is used,
the Consignment and Consignment-Out accounts are both omitted from
the balance sheet, being merely canceling memorandum entries, and the
unsold portion of the consigned goods are included in the inventory.
In determining the value of consigned goods, the expenses incurred in
sending the goods to the new market may properly be included as a part
of the cost.

=The Consignee’s Entries—First Method.=—Two methods of making entries
on the consignee’s books at the time of receipt of goods are used.
In the first method, two memorandum accounts, Consignments and
Consignments-In, are set up, Consignments being debited for the billed
value of the goods received, and Consignments-In being credited for the
same item. The purpose of these accounts is merely to set up on the
general books a reminder of the transaction.

A third account, John Doe, Principal, is used for current record.
This account is charged with the expenses incurred in connection
with the consignment and is credited with the sales made therefrom;
it is charged also with the consignee’s commission. The balance of
the account is, at the completion of the sale, the amount due the
consignor, Doe. When this is paid, the account is closed by a debit to
John Doe, Principal, and a credit to Cash or Notes Payable. So long
as the balance is unpaid, the account, John Doe, Principal, shows
the factor’s liability to his principal. This is a special kind of
liability, that of a trustee, which is indicated by the inclusion of
the word “Principal” in the account title; in case of insolvency a
portion of the assets equal to the balance of John Doe, Principal’s
account belongs to John Doe and, unless merged beyond possibility of
separation, must be so treated. When the sale has been completed, the
memorandum accounts, Consignments and Consignments-In, are canceled
against each other, having served their purpose.

=The Consignee’s Entries—Second Method.=—Under the second method,
instead of an entry on the general books, the receipt of the goods is
recorded in a blotter or memorandum book of consignments received, in
which are entered all essential data, covering the name of consignor,
quantity, price, legend or distinguishing marks, etc. Expenses incurred
are charged to John Doe, Consignment account on the general books, and
sales are credited to the same account. Settlement is made as with
John Doe, Principal, as explained above, except that when the balance
is not paid it frequently is transferred to a simple John Doe personal
account, where so far as account title is concerned it loses its
character as a trust account and is merged with all other creditors.

=Consignments Must Have Distinguishing Marks.=—In making his sales from
the various consignments, the factor must be careful to record them in
a way to distinguish the goods taken from different consignments. This
is particularly true of sales on account, for if the accounts prove
uncollectible it is important to know to which lot the loss must be
charged. This is accomplished by recording the consignment legend or
mark with the sale.

=Factor’s Books at Close of Fiscal Period.=—When the factor’s books
are closed, the commissions earned to date on consignment sales,
whether the entire consignment transaction is fully or only partially
completed, should be taken into account. Commissions earned on
completed consignments should already be on the books as debits to
the various principals’ accounts and credits to “Commissions Earned.”
The commissions on incomplete consignments are brought on the books
by entry of the accrued income in the Commissions Earned account, the
amount being based on the sales made from the incompleted consignments
during the period. The accounts with these incomplete consignments may
show either debit or credit balances. If a debit balance is shown, the
account is an asset representing the consignee’s claim against his
principal for expenses incurred in excess of sales made. If a credit
balance is shown, the account represents a trust liability as above.
At a closing time the memorandum accounts of incomplete transactions
should be adjusted to their present inventory values.

=Consignee’s Inventory.=—Just as the consignor must be careful to
include in his inventory all goods out on consignment, so the consignee
must be equally careful to exclude from his inventory all goods of his
principal’s still unsold and in his possession.

=Illustrative Entries on Consignor’s and Consignee’s Books.=—An
illustration of a simple consignment transaction from the viewpoint
of both consignor and consignee is given below. It is assumed that a
consignment transaction takes place between J. J. Querles and I. M.
Factor as follows:

  PROBLEM. Querles sends to Factor to be sold on
  his account goods amounting at cost to $1,250. He
  pays cartage $15, and insurance $25; while Factor pays
  freight, duty, and cartage amounting to $52.50. Factor
  makes sales of $1,600 and renders an account sales
  showing also allowances to customers of $27.30, a 5%
  commission charge and 1% for guaranteeing collection of
  all accounts, and the net proceeds credited.

  1. Querles’ books at the time of sending the goods to
  Factor:

  Consignment, I. M. Factor, No. 1           1,250.00
        Purchases                                      1,250.00
  Consignment, I. M. Factor, No. 1              40.00
        Cash                                              40.00
          Cartage $15, insurance $25.

  2. Factor’s books at the time of receipt of Querles’
     goods:

  Consignment                                1,250.00
        Consignments-In                                1,250.00
          To set up memo accounts of the
            receipt of Querles’ goods.
  J. J. Querles, Principal                      52.50
        Cash                                              52.50
          Freight, duty, and cartage on
          Querles’ goods.

  3. Factor’s books during the course of consignment
     transactions:

  Customers                                  1,600.00
        J. J. Querles, Principal                       1,600.00
          To credit Querles with the sales.
  J. J. Querles, Principal                     123.30
        Customers                                         27.30
        Commissions                                       80.00
        Collections Guarantee                             16.00
          To charge Querles with all expenses.

  Consignments-In                            1,250.00
        Consignment                                    1,250.00
          To reverse.

  4. Querles’ books upon receipt of the account sales:

  Consignment, I. M. Factor, No. 1             175.80
  I. M. Factor                               1,424.20
        Consignment, I. M. Factor, No. 1               1,600.00
          To credit the consignment with its
          sales and charge it with its expenses,
          including commission and to charge
          Factor with the balance due.
  Consignment, I. M. Factor, No. 1             134.20
        Consignments Profit and Loss                     134.20
          To transfer the profit on this
          consignment.

  5. When Factor finally remits the balance of $1,424.20,
     his entry is:

  J. J. Querles, Principal                   1,424.20
        Cash                                           1,424.20

  thus canceling his liability to Querles.

  6. Querles’ books will show:

  Cash                                       1,424.20
        I. M. Factor                                   1,424.20

  canceling his claim against Factor.

  If the second method (see page 455) of making the
  consignor’s record is used, the entries under No. 1
  will appear as follows:

  Consignment, I. M. Factor, No. 1           1,250.00
        Consignments-Out                               1,250.00
  Cartage                                       15.00
  Insurance                                     25.00
        Cash                                              40.00

  and No. 4 would be:

  Freight                                       52.50
  Sales Allowances                              27.30
  Commissions                                   96.00
  I. M. Factor                               1,424.20
        Sales                                          1,600.00
  Consignments-Out                           1,250.00
        Consignment, I. M. Factor, No. 1               1,250.00
          To reverse.

  In these last entries made under the second method,
  consignment sales are included in the regular Sales
  account, and the profit or loss is merged with that
  from regular sales.

Decision as to which of the two accounting methods should be used must
be made according to the information desired by the principal. Where
consignment transactions are a side line, the record is usually kept by
the first method which shows the profit or the loss on each transaction
and thus furnishes valuable information for executives. This is
sometimes called the occasional consignment theory or method. Where the
consignment transaction is the usual method of effecting sales, the
second method illustrated above is generally to be followed, because by
this method all consignment transactions are properly included in the
regular sales and expense records.




CHAPTER XLIX

ADVENTURE SALES


=Adventure Transactions.=—Before the day of easy transportation and
communication between markets, adventure or venture undertakings were
quite common. The inherent willingness of men to take a chance, and
the desire to speculate, often led to the fitting out of cargoes of
merchandise for sale in distant ports and the equipping of trading
expeditions into unknown regions. Many dangers had to be met, the
hazards and risks being great. Success attended many adventurers, and
many also met with failure. Even today this method of seeking a market
has its allurements.

=Single and Joint Ventures.=—Adventures are of two kinds, single and
joint. The single adventure is merely an outward consignment by a
single proprietor and is treated in accounting as such, i.e., it is
charged with all its costs and credited with its returns, the balance
being either a profit or a loss. The joint venture is accounted
for on the same principle, although the procedure may be much more
complicated. A joint venture account may be defined as the record of
“commercial transactions of a particular kind, usually of a temporary
nature, entered into jointly by several parties who combine together
for the purpose, contribute the capital and the services, as may
be arranged, and agree to share the losses or profits in certain
proportions.” Speculation in stocks, the chartering of a ship for
a particular purpose, a particular voyage, or a fixed period of
time—these are some lines of present-day joint venture endeavor.

=Relations between Parties.=—From the legal point of view, the
combination under a joint venture is a special partnership, i.e., one
entered into for the accomplishment of a special purpose, the several
parties to it having control, as in a partnership, and sharing profits
and losses either according to contract or, in its absence, equally.
Usually, in a joint venture one of the parties or an outside agent is
entrusted with the entire enterprise.

=Accounting for the Joint Venture.=—Accounting for the joint
transactions is comparatively easy. If the undertaking is simple, one
account for each such joint undertaking, viz., “Joint Venture,” will
suffice. This account will be carried on the records of the regular
business of each party to the venture. The account is debited with the
costs of the venture and credited with the returns from it.

If the enterprise is more complicated, it may be required to set up a
number of separate accounts, or even a separate set of records, but
the summary or clearing account for these will still exhibit costs set
over against returns. If the partners are all in the same city and have
access to the records, one set of accounts is all that is necessary.
Where the partners are in different places, each should keep a record
of all transactions as reported by the manager of the venture. Since
the manager reports all transactions to each of the parties, the “Joint
Venture” accounts as kept by the different partners will all be the
same.

The other accounts affected by the joint transactions will either be
the same or reciprocal. Upon the inception of the venture, some of
the partners having contributed cash, others merchandise, still other
facilities, services, etc., the Joint Venture account is charged with
all contributions and each partner is credited. If the venture is
managed by one of the partners, instead of a credit to his own personal
account, his cash or merchandise account will receive the credit for
his contribution. If the managing partner desires to separate his
investment in the joint venture from his investment in his regular
business, he will set up a Joint Venture Investment account to which
the amount of his contribution to the joint venture will be transferred
from his regular capital account. Expenses incurred are charged to the
joint account and credited to the partner paying them. All sales made
and collected are credited to the joint account and charged to the
partner retaining the money.

=Interest Allowances and Charges.=—Because some partners may have
made larger contributions than others, the agreement may provide that
interest be credited the partners on their contributions. On the
other hand it frequently happens that one or some of the partners
have the use of the moneys received from joint sales until date of
settlement of the venture, and the agreement may provide that interest
shall be charged to those retaining the collected funds. This can be
accomplished by charging the joint account and crediting the partners
with interest from the dates of their contributions to the date of
settlement, and by charging the partners retaining joint funds and
crediting the joint account from the date when the funds come into
their possession until the settlement date. A salary or a commission
may be allowed the managing partner or partners. This also is a charge
to the joint account and a credit to the partner.

=Distribution of Profits.=—After all transactions have been completed
and all charges and credits made, the joint account for each venture
will show by its balance the net profit or loss. This is distributed
among the partners in agreed ratio, or in equal ratio in the absence of
agreement. After this is done, only the partners’ accounts remain, some
with debit and others with credit balances. The managing partner should
collect the debit balances and remit to those with credit balances,
thus making a complete settlement of the joint undertaking.

Should the fiscal period of any of the partners close during the term
of the venture, conservatism would generally require that his own
accounts do not show a profit on the sales made to date, on the theory
that losses on the incomplete portion may wipe out any profits on the
completed portion. This is because the joint undertaking is considered
as a whole and inseparable transaction and not as composed of numerous
separate sales. The element of risk is always an important factor in
undertakings of this sort. However, there might be circumstances under
which the taking of at least a partial profit could be justified.
Assuming that no profit is taken, the joint account becomes a balance
sheet account at closing, asset or liability according as costs have
been more or less than the sales as on the date of closing.

=Joint Venture Accounts Illustrated.=—An illustration will bring out
the salient points in the above discussion:

  PROBLEM. A, B, and C enter a joint venture to
  Mexico, with C as manager. A and C contribute
  merchandise valued at $5,000 and $8,000 respectively,
  and B $11,000 cash for the purchase of additional
  merchandise. C is to receive 3% commission on sales.
  C pays freight, duty, and insurance of $890 from his
  own cash, and buys merchandise with B’s contribution.
  He makes sales, according to reports sent by him to A
  and B, aggregating $30,000, and holds the amount in his
  possession one month till settlement. The investment
  period is six months. Interest at 6% is to be credited
  to partners on their original investments and is to
  be charged to C on the $30,000 held by him for one
  month.[7] A, B, and C share profits in the ratio of
  their original contributions. Settlement is made by C
  in cash.

[7] Whatever agreement is made by the partners for interest adjustments
governs. In practice the usual procedure in a case of this kind would
be to allow C interest on the $890 cash advanced by him for expenses
from date of advance to date of settlement, and to charge him with
interest on all moneys received by him from dates of the various sales
to date of settlement. To simplify calculations, it is assumed in the
illustration that C’s use of funds received from sales during the first
five months approximately compensates him for the $890 advanced by him.

  The following entries show the record of the above
  transactions on B’s and C’s books.

  1. At the beginning of the venture the record will be:

  On B’s books:

  Joint Venture, A and C, to Mexico         24,000.00
        A                                               5,000.00
        Cash                                           11,000.00
        C                                               8,000.00
          To set up the venture transaction.

  B, Capital                                11,000.00
        Joint Venture, A and C, Investment             11,000.00
          To show capital invested in joint
          venture.
  Joint Venture, A and C, to Mexico            890.00
        C                                                 890.00
          Freight, duty, etc., paid by C.

  On C’s books:

  Joint Venture, A and B, to Mexico         24,000.00
        A                                              5,000.00
        B                                              11,000.00
        Purchases                                       8,000.00
          (As above.)
  C, Capital                                 8,000.00
        Joint Venture, A and B, Investment              8,000.00
          (As above.)
  Joint Venture, A and B, to Mexico            890.00
        Cash                                              890.00
          (As above.)
  C, Capital                                   890.00
        Joint Venture, A and B, Investment                890.00
          Freight, duty, etc., paid by C.

  2. On B’s books at the time of settlement:

  Joint Venture, A and C, to Mexico          1,620.00
        A                                                 150.00
        Interest Income, Joint Venture, A and C           330.00
        C                                               1,140.00
          6% interest on original contributions
          of each partner for six months;
          3% commission to C on sales.
     C                                      30,150.00
        Joint Venture, A and C to Mexico               30,150.00
          6% interest charged C on $30,000
          for one month; C charged with his
          collections from sales $30,000.

  On C’s books:

  Joint Venture, A and B, to Mexico          1,620.00
        A                                                   150.00
        B                                                   330.00
        Interest Income, Joint Venture,                     240.00
           A and B
        Commission Earned, Joint Venture,                   900.00
           A and B
  Cash                                      30,000.00
  Interest Cost                                150.00
        Joint Venture, A and B, to Mexico                30,150.00

  3. On the records of all the partners the Joint Venture
  account shows a credit balance, i.e., a profit of
  $3,640, the distribution of which will be as follows:

  On B’s books:

  Joint Venture, A and C, to Mexico          3,640.00
        A                                                   758.33
        Profit and Loss, on Joint Venture,                1,668.34
           A and C
        C                                                  1,213.33
          To distribute profits on the venture
          in the agreed ratio 5:11:8.

  On C’s books:

  Joint Venture, A and B, to Mexico          3,640.00
        A                                                    758.33
        B                                                  1,668.34
        Profit and Loss on Joint Venture, A and B          1,213.33

  B’s accounts now show a balance due A of $5,908.33; a
  claim against C for $18,906.67; his own share therefore
  being the difference, or $12,998.34. That this is the
  correct amount is seen by comparing it with the amount
  of B’s Joint Venture, A and C, Investment account
  showing $11,000, his Interest Income Joint Venture, A
  and C, showing $330, and his Profit and Loss on Joint
  Venture, A and C, showing $1,668.34.

  4. C now makes settlement in cash with his copartners
  for the respective amounts due them. The settlement
  transactions will appear as follows:

  On B’s books:

  Cash                                      12,998.34
        C                                                 12,998.34
          Cash from C in settlement of
          Joint Venture.
    A                                        5,908.33
        C                                                  5,908.33
          C reports settlement with A.

  On C’s books:

  A                                          5,908.33
  B                                         12,998.34
        Cash                                              18,906.67
          Settlement with A and B on Joint Venture.

  After these entries have been made on B’s books, the
  joint venture with A and C will be shown completed. His
  books show a full net profit on the venture of
  $1,998.54, reflected in the excess of cash received
  from C over cash given him for investment. At the end
  of B’s regular fiscal period, the profit on the venture
  will ordinarily be shown separately on the statement
  of profit and loss after the item, Net Profit from
  Operations. It will be set up as follows:

  Joint Venture, A and C, to Mexico                       $1,998.34
     (Schedule B-5)
    Gross Returns in cash from C,          $12,998.34
      Managing Partner
    Original Investment                     11,000.00
                                            ----------
    Net Profit, as above                   $ 1,998.34
                                             ==========

  Schedule B-5 should give a complete report of the venture,
  somewhat as follows:

  JOINT VENTURE, WITH A AND C, TO MEXICO

  Gross Returns as reported by C, Managing Partner       $30,000.00
  Costs:
    Merchandise Purchases                  $24,000.00
    Expenses                                   890.00      24,890.00
                                           ----------     ----------
  Gross Profit                                            $ 5,110.00
  Commission to C                                             900.00
                                                          ----------
                                                          $ 4,210.00

      _Add_:
  Interest paid by C for use of funds after
     completion of venture                                    150.00
                                                          ----------
  Net Profit to be distributed:                           $ 4,360.00
    A, Interest on Capital         $ 150.00
      Profit and loss share,
         ⁵/₂₄ of $3,640               758.33    $ 908.33
                                   ---------
    C, Interest on Capital         $  240.00
      Profit and loss share,
         ⁸/₂₄ of $3,640             1,213.33    1,453.33
                                   ---------
    B, Interest on Capital         $  330.00
      Profit and loss share,
        ¹¹/₂₄ of $3,640             1,668.34    1,998.34  $ 4,360.00
                                    ---------  ----------  =========

  At the close of the period the account, Joint Venture,
  A and C, Investment, having served its purpose, is
  transferred back to B’s regular capital account.

  C’s accounts show a balance due A of $5,908.33;
  due B, $12,998.34; the remainder of the joint income,
  $11,243.33 {$30,150 - ($5,908.33 + $12,998.34) = $11,243.33},
  being his own share.

  After the same manner as B, C will make, at the close
  of his regular fiscal period, a summary of the joint
  venture, showing it in his statement of profit and loss
  somewhat as follows:

  Joint Venture, A and B, to Mexico:
    Commission as Managing Partner           $   900.00
    Share of Profit (see Schedule B-5)         1,453.33  $2,353.33

    Gross Returns in cash                    $11,243.33
    Original Investment                        8,890.00
                                             ----------
    Profit, as above,                        $ 2,353.33
                                             ==========

  The student will note that the $150 interest paid by C
  for the $30,000 joint funds used by him for one month
  is not recorded as an interest cost of the venture, but
  is charged to C’s regular Interest Cost account because
  the funds must have been used for the conduct of his
  regular business.

The accounts on each partner’s books with his copartners are not
ordinary asset and liability accounts but are more of the nature
of capital accounts and might be entitled “A, Contribution,” “B,
Contribution,” etc. The records of the joint venture comprise a group
of accounts which constitute a unit within themselves, showing the
partnership relation existing among the several parties from the
inception of the partnership to its liquidation.




CHAPTER L

ACCOUNTS CURRENT


=Definition.=—An account current in its broadest sense is an account
of current transactions. In a technical sense, it is an open personal
account, one with an outstanding balance. Frequently accounts are
allowed to run on between two persons, recording transaction after
transaction with partial or full settlement at times but with no
intention of closing the account. A principal may have constant
dealings with his agent or representative, making periodical payments
on account or making remittances to be used as needed by the agent.
The agent may make purchases for the account of his principal, paying
the bill out of his own funds. He may use in his own transactions
any surplus funds of the principal in his possession. An account
showing transactions of these various kinds is an account current.
The customers’ accounts in brokerage houses and the accounts between
banks—banks and their correspondents—are other examples of accounts
current.

=Interest on Balances.=—In handling accounts current between banks and
in brokerage houses, it is the practice to charge the account with
interest on the debit balances and to credit it with interest on the
credit balances. It was formerly the practice in some lines of trade to
charge interest on all overdue customers’ accounts. Frequently today
invoices carry a statement to that effect, although the policy is not
often enforced through fear of loss of patronage.

=Joint Venture Accounts.=—In the case of joint ventures discussed in
Chapter XLIX, a condition analogous to this was mentioned where the
joint account was charged and the contributing partners’ accounts were
credited with interest, while the managing partner was charged and the
joint account credited with interest on all joint funds retained in his
possession.

=Partners’ Accounts and the Account Current.=—Occasionally, also, in
partnership adjustments at the close of a fiscal period, the agreement
may require the business, i.e., the partnership, to allow each partner
credit for interest on his investments and charge him with interest
on his withdrawals. Each partner’s account is treated very much as an
account current of the business when such adjustments are prescribed.

=Illustration of Account Current.=—Thus, while the old account
current as formerly understood and applied to the ordinary customer
and creditor relationship is now very seldom encountered, the
principle of it is met with frequently enough to demand explanation
and illustration. No special form is necessary for the stating of an
account current; the interest calculations on the various balances can
be made outside the account and only the net result be embodied in the
account. A form of account is shown in Form 45, however, which exhibits
all necessary data on its face. Take the following account on which 5%
interest is to be charged and allowed:

                         B. I. PERKINS, CURRENT ACCOUNT
  ====================================================================
    19—                                 |   19—
  July  4 Cash                 1,250.00 | June 4  Balance       600.00
  Aug. 11 Note 60 da., no int. 1,500.00 | July 4  Mdse. n/30  1,400.00
  Nov. 11 Cash                 1,000.00 | Aug. 3  Mdse. n/30  1,000.00
  Dec.  7 Cash                   400.00 | Oct. 2  Mdse.       2,100.00
       10 Rtd. Goods of                 | Dec. 4  Mdse.         800.00
            Dec.  4               50.00 |

[Illustration: Form 45. Form of Adjusted Account Current]

=Adjusting the Account Current.=—Adjustment of such accounts is usually
made periodically. Referring to the illustration shown in Form 45, the
interest calculation is made counting the exact number of days from
each “date of value” to and including December 31. Interest is figured,
for the sake of ease of calculation, on a 360-day basis. A 365-day
basis would be more accurate and this is often done on current accounts
between banks. The “date of value” is the date from which interest may
be equitably charged or allowed. For example, in the above account, the
credit for merchandise purchased on July 4, but with a credit allowance
of 30 days, may not equitably be allowed till 30 days thereafter, or
August 3. On the debit side, the note for $1,500 dated August 11, at 60
days with no interest, cannot be equitably counted until it comes due,
i.e., on October 10. Similarly, the “date of value” on December 10, for
the goods returned of the transaction of December 4, must be reckoned
as of the same date as the original transaction, for only a portion of
the full credit set up is allowed to remain.

In the above problem, the credit interest exceeds the debit by $35.80.
This amount is therefore brought as an additional credit into the
account. The account as now adjusted will be sent to B. I. Perkins
for his verification. When formally approved, or if no objection is
made to it after a reasonable length of time, the account is balanced
and it becomes now what is termed an adjusted account. This periodic
adjustment makes possible the localization of disagreements and their
settlement while the facts are still fresh in mind. Its effect,
however, is to produce a slight compounding of interest unless the
balance is immediately settled.

Another method of making the interest calculation is on the basis of
the balance of the account after each transaction and the length of
time it remains unchanged, i.e., until the next transaction changes the
balance. This method follows somewhat the method illustrated in Chapter
XXXIII for division of partners’ profits on the basis of the amount of
the investment and the length of time invested; but under this method
it is not possible to make so condensed and apparent a statement of
account as by the method illustrated in full above.

It sometimes happens that the “date of value” may fall beyond the
settlement date, as where the term of credit throws the time of
payment far enough ahead that payment cannot be demanded till after a
periodic settlement time. The effect of such a condition is to reverse
the interest charge for the period beyond the settlement date to an
interest credit, or vice versa. The method of averaging accounts
or equation of payments, as it is sometimes called, may be used to
advantage here. Explanation and illustration of this method are given
in Chapter LII.

=The Bank Account an Account Current.=—The bank’s account with a
depositor is a good example of the account current. Except by special
agreement, the allowance of interest is not customary. Periodically,
the depositor’s pass-book is balanced or a statement of his account
is rendered by the bank. When the balanced pass-book, with canceled
checks, is returned to the depositor, or when the statement of account
is rendered by the bank, the record kept by the depositor—as shown
by his check book stubs or by the bank column in his cash book—will
not usually show the same balance as that indicated by the bank’s
statement, and adjustment or reconciliation is necessary to check the
accuracy of the statement. In Chapter XLI, regarding the handling of
cash, the policy was recommended of depositing all receipts and paying
only by check. A cash book kept under that plan, making use of a net
cash column on both sides, does not need an additional column for
the bank record because everything shown in the net cash columns has
either been deposited in the bank or paid out by check. The cash book
balance, therefore, should be the same as the bank’s balance. If the
record of the bank account is kept only on the check book stubs or
interleaves, this balance should be the same as the bank’s. But however
kept, there will almost invariably be a few outstanding checks which
the depositor’s cash book or check book shows as having been issued,
but which have not been presented to the bank for payment at the time
the statement of account is rendered and which therefore are not
included in the statement. This brings about a difference which must be
reconciled.

=Reconciliation of Bank Balance.=—Two methods of reconciliation are
used. The one brings the bank’s balance into agreement with that of
the depositor; the other starts with the depositor’s balance and
brings it into agreement with that of the bank. The first step in
the reconciliation is to discover which of the checks issued by the
depositor have not been paid by the bank. This is done by arranging
the returned checks in numerical sequence and comparing these with the
depositor’s record of checks issued. Usually the total of these few
unpaid checks will be equal to the discrepancy between the two records,
and so will reconcile them.

The following problem is given to illustrate the above discussion:

      PROBLEM. On March 20, at the close of the day,
      the bank’s statement showed a balance of $1,525.14. The
      depositor’s record on the same date showed $604.19. The
      following checks were outstanding: No. 529B, $214.50;
      542B, $379.60; 557B, $119.40; 581B, $75.20; and 992A,
      $132.25.

      Reconciliation statement, as on March 20, 19—:

      Bank balance as per bank’s statement                $1,525.14
      Outstanding checks:
                No. 992A          $132.25
                    529B           214.50
                    542B           379.60
                    557B           119.40
                    581B            75.20                    920.95
                                  -------                 ---------
                True balance as per cash (or check) book  $  604.19
                                                          ---------

  Other method:

      True balance as per cash book                       $  604.19
      Outstanding checks:
                No. 992A          $132.25
                    529B           214.50
                    542B           379.60
                    557B           119.40
                    581B            75.20                    920.95
                                  -------                 ---------
                Bank balance as per bank’s statement      $1,525.14
                                                          ---------

=Other Reconciliation Factors.=—Oftentimes other items than those
shown must be taken into consideration when reconciliation is made.
Where several bank accounts are kept and a check register—in addition
to the cash book—is used to keep record of the accounts with the
various banks, it may happen that checks drawn on one bank are wrongly
charged to another; that checks drawn, or deposits made one day, are
not credited until the next; that certain drafts deposited with the
bank for collection are not credited to the depositor’s account until
collection is made, whereas the depositor debited the bank at the
time of the deposit; again it may be that the item of bank’s charges
for collection has not yet been recorded; or that interest on deposit
balances has not been credited, etc. All such items must be considered
when reconciliation is made. Where there are many of these adjustment
items to be taken account of, it may be necessary to list them in
formal schedules under such heads as:

  1. Bank charges, we do not credit.
  2. Bank credits, we do not charge.
  3. We charge, bank does not credit.
  4. We credit, bank does not charge.

Examples of transactions bringing about the above debits and credits
are:

  1. Protest fees charged against the depositor’s
      account, of which he has not been notified.

  2. Interest on bank balance credited by bank before
      the depositor is notified.

  3. Deposits made and charged to bank but not yet
      credited by bank or credited in error to some
      other depositor’s account.

  4. Checks drawn but not yet presented to the bank
     for payment.

When the first method of reconciliation is used, items (1) and (3)
must be added to the bank’s balance and items (2) and (4) must be
subtracted from it in order to arrive at the cash book balance. The
following problem will illustrate this:

  PROBLEM. In the bank’s statement of July 1, 19—,
  with a balance of $675, are included protest fees
  in connection with the collection of checks amounting
  to $7.50, and interest allowed on our average bank
  balance of $16.67. Our deposits for June 30, 19—,
  totaling $250 in the morning and $100 in the afternoon,
  have not been credited by the bank. Outstanding checks
  amount to $180. Our cash book balance on July 1, 19—
  was $835.83.

  Bank reconciliation statement as of July 1, 19—:

  Bank balance as per bank’s statement                     $  675.00
    _Add_:
  Deposit not included in above balance           $350.00
  Bank charge not included in our balance—protest
    fees                                             7.50     357.50
                                                  -------  ---------
                                                           $1,032.50
    _Deduct_:
  Outstanding checks                              $180.00
  Bank interest, not included in our balance        16.67     196.67
                                                  -------  ---------
  Balance as per cash book                                 $  835.83
                                                           =========

It will be seen that neither the cash book balance nor the bank
balance is a correct statement of the cash available for checking. The
depositor, in order to find this amount, will have to take account of
the figures given by the bank for items he has not known about. His
checking balance in the above problem is ascertained as follows:

  Cash book balance                               $835.83
    _Less_—Bank charges                              7.50
          (expenses to the depositor)             -------
                                                  $828.33
    _Plus_—Bank credits                             16.67
         (income to the depositor)                -------
  True balance available for checking             $845.00
                                                  =======

There is not usually so much difficulty in reconciling the bank
account; but where several bank accounts are maintained, it is easy to
misplace debits and credits and a formal statement of reconciliation
should always be made and kept as a part of the record. This
reconciliation should be made every time a statement is received from
the bank. The frequency of asking for a statement of account from
the bank depends somewhat upon the volume of transactions handled
through the bank, but it should be secured at least every month and
particularly whenever formal statements of profit and loss and balance
sheet of the depositor are made up.

=Reconciliation Statement a Permanent Record.=—The reconciliation
statement should be made as a permanent record. A customary place of
record is on the check stub of the same date. Where a check register
is used, it should be made a part of the record there. Occasionally it
is incorporated in the cash book. Wherever made it should be easily
available for proof at a subsequent period. When reconciliation is to
be made as of a past date, i.e., at a time subsequent to the date on
which reconciliation is desired, the bank’s cancellation date on the
returned checks must be used to determine what checks were outstanding
on that date.

=Reconciling Other Accounts.=—Occasionally the dealings between two
firms located at a distance from each other may be such that items are
in transit one or both ways at the time when statement of account is
rendered. If this is the case, the methods of reconciliation applied
above to the bank account may have to be used before agreement or
comparison of the two records can be effected.




CHAPTER LI

BALANCING METHODS


=The “Fool-Proof” Trial Balance.=—Double-entry bookkeeping is never
satisfied with anything short of absolute proof of the mathematical
accuracy of the work. Often such proof is very difficult to secure.
There has not yet been devised—and in the nature of things, never will
be—any so-called royal road to the trial balance. Yet one often sees
claims put forth that there is no longer any need for trial balance
troubles. The use of certain methods, which are disclosed only upon
payment of fees in proportion to the advantages claimed for them, makes
it possible, according to their devisers, to take a trial balance
within an incredibly short time or to do away with trial balances
altogether. As a matter of fact, satisfactory results can be obtained
only by habits of accuracy and by proving the work done wherever
possible. Some methods found useful in searching stubborn errors will
be explained in this chapter.

=Ledger Analysis.=—By ledger analysis is meant an analysis of postings
classified according to the books of original entry, i.e., on the basis
of all journals whose record is transferred to the ledger. The process
of making such an analysis is somewhat as follows: The ledger must be
gone through carefully and for each account the last debit and credit
figures which entered into the last _correct_ trial balance must be
marked distinctly so as not to be included in the analysis. If the
analysis is for an interim period, the first debit and credit items
belonging to the next period should be marked in a similar way, as
shown in the illustration (Form 46). This must be done very carefully
as the “date” is not always a safe guide. The use of subsidiary
journals with one summary posting to offset many detailed contra
postings and inaccurate dating of the summary posting, often make the
“date” an uncertain guide. Care should therefore be exercised so that
the points marked include a complete, i.e., a debit and credit, posting
of every journal.

[Illustration: Form 46. Account Marked for Analysis]

=Procedure of Analysis.=—The content of each account between the
marked points is now analyzed according to the journals from which the
postings have been made. Analysis paper, with debit and credit columns
headed for each journal, may be used for this purpose. All debits in
the account posted from the journal are entered in the debit journal
column of the analysis sheet, all cash debits in the debit cash column,
all sales journal debits in the debit sales journal column, etc.
Similarly, the credit postings in the account are entered in the proper
credit columns of the analysis sheet. Each item in the account should
be checked or otherwise marked when transferred to the analysis sheet.
Illustration of the analysis sheet is given in Form 47.

When the various accounts have thus been analyzed, there should remain
no unchecked items in the period analyzed, unless there have been
transfers between accounts made directly on the face of the ledger. If
this has been the practice, an additional heading with debit and credit
columns, entitled “Ledger Transfers,” should be set up on the analysis
sheet. _Every_ account in the ledger is analyzed in the same way.

=The Analysis Sheet.=—It will be noticed in Form 46 that only the
period between the two diagonal marks \ and / is under analysis.
Accounts which have been closed but are within the period under
analysis must, of course, be included. When all accounts have been
analyzed, the columns of the analysis sheet are footed. For each
journal the footings of the debit and credit columns should be equal.
A difference will indicate that there is an error in the postings from
that particular journal. In this way the error is localized and only
these postings need to be checked individually.

The cash book columns in the analysis sheet (Form 47) may need some
explanation. If no Cash account is kept on the ledger, the balance of
the cash book for the period will have to be entered on the analysis
sheet before equality of the cash columns will be shown. With the
exception of the items transferred to the analysis sheet from the Cash
account—where a Cash account is carried in the ledger—all items in the
cash debit column of the analysis sheet represent, in the cash book,
credits to certain accounts, and those in its credit column represent
debits to certain accounts. The entries to the cash analysis column
from the ledger Cash account, showing on its debit cash receipts and
on its credit cash disbursements, must bring about the equilibrium.
The column total, however, will not represent cash receipts and cash
disbursements respectively, but the total of each column will be the
sum of both receipts and disbursements; whereas the totals of the other
columns are equal to the totals of the corresponding journals for the
period. This is brought about by the fact that the two cash columns on
the analysis sheet really cover two independent journals, viz., the
cash receipts and the cash disbursements journals.

[Illustration: Form 47. Ledger Analysis Sheet]

Agreement between the debit and credit totals of corresponding columns
is proof of equilibrium in the postings from that book; but unless
these column totals also equal the total of the corresponding journal,
there is evidence of the omission from the ledger, both on the debit
and on the credit side, of items recorded in the journal. Thus the
ledger analysis serves also as a check against omissions; but when used
for that purpose, account must be taken of duplicate entries in the
various journals, such as cash sales entered both in the cash and sales
journals but posted only from one of them.

=Use of Ledger Analysis.=—All that is claimed for the ledger analysis
is that it localizes the error, if it is an error in posting, and
so makes the work of searching for it less haphazard and renders
unnecessary a checking of all postings in the ledger. All the means
previously explained should be exhausted before this method is used.
If the previous trial balance, i.e., the one at the beginning of the
analysis period, is correct and the ledger analysis shows no errors in
posting, then certainly the trial balance for the end of the analysis
period must balance. If not, the error is an error on the face of the
ledger and its computations must be proved.

=The Slip or Reverse Posting System.=—As indicated before, it is
better to post carefully and accurately in the first place than to hunt
for errors afterwards. A method of proving daily postings known as the
slip or reverse posting system is used with success in many places.
Formal slips of any convenient width and length are provided, one for
the debit and one for the credit of each book from which postings are
made. The debit slips may be easily distinguished from the credit slips
by the use of different colors. The debit slips are ruled only with
money columns and each slip bears the title of its journal. Reverse
posting is made on the slip from the items posted to the ledger. Thus,
when posting the debits from the general journal, the general journal
debit slip is carried conveniently on the right of the ledger and
entry of each debit posting to the ledger is made _from the ledger_ to
the slip. When all journal debit postings have been made, the reverse
posting slip is totaled and must agree with the total of the journal
debit column for the items posted. Similarly, the journal credits are
posted, reverse posted, and proved. The debit postings must equal the
credit postings and thus proof is secured of the equilibrium of the
ledger. Each journal is posted, reverse posted, and proved in a similar
way. The bookkeeper is, in this way, sure of the correctness of his
work day by day. Oftentimes monthly recapitulation of these reverse
posting slips are made and preserved as part of the business records.
It will be seen that this method is identical with the ledger analysis
method explained above but applied at the time of making the posting
instead of at the close of the period.

=Check Figures in Posting.=—The use of the check figures 9 and 11 in
the verification of the arithmetic processes of addition, subtraction,
multiplication, and division was referred to earlier. Other odd
numbers, such as 13, 17, and 19, are less frequently employed. The
number 11 gives perhaps the most satisfactory results from the
standpoints of ease of application and accuracy of results. Its use in
the verification of postings is somewhat as follows:

An additional column similar to the folio column should be provided
in all the books for the check numbers. As an amount is posted to the
ledger the bookkeeper should determine the check number from the item
as it is written in the ledger—not from the journal item—and enter it
in the check column in both ledger and journal. When postings from the
journal are complete, the journal is totaled and the check figure for
its sum found. If this agrees with the sum of the check figure column
in the journal, posting is presumably correct. If the two items do not
agree, the check number for each amount in the journal debit column
should be proved. Inasmuch as the check number used was obtained from
the ledger amount, a wrong check number for the journal amount would
indicate a wrong posting which should now be turned to and corrected.

The check numbers in the ledger accounts are used only for verifying
account totals and balances and may even be carried into the trial
balance for proving it. Practice in the use of any check number soon
develops accuracy and speed and makes the method easy of application
and commendable wherever the work must be proved day by day as
completed.

=Errors in Columnar Books and Controlling Accounts.=—These are frequent
sources of trouble unless handled with care. In the chapter on columnar
books, it was laid down as a basic principle that _all_ items appearing
in the general amount column should be entered in some analysis column,
i.e., analysis columns should be provided for distribution of _all_
items. This makes proof of distribution possible and establishes formal
equilibrium of the book so that errors in posting are not so likely to
occur.

Care must be exercised in posting the discount columns of the cash book
to the proper sides of the respective accounts.

In the use of controlling accounts, where a special column is not
provided, as for Accounts Receivable on the credit side of the cash
book, posting of the item should be made both to the individual account
and also to the controlling account.

=Trial Balance Adjustment Account.=—Where error creeps into the
ledger and seems impossible of detection at a monthly trial balance
period, the device of forcing a balance is sometimes used by setting up
an account called “Trial Balance Adjustment,” “Error in Trial Balance,”
or some other similar title. To this is charged or credited the amount
of the difference in the trial balance. It is a temporary makeshift,
a method of holding the item in suspense until the error is located.
Needless to say, the inclusion of such an account does not improve the
appearance of a trial balance, but may be countenanced as a temporary
expedient.




CHAPTER LII

SOME APPLICATIONS OF INTEREST AND PROPORTION


=The Nature of Interest.=—Interest may be defined as the charge made
for the use of money. Sprague defines it as the increase in principal
due to the lapse of time. The ethics of the practice of charging
interest was questioned by the ancient world and not fully conceded
as right until modern times. Various economic theories have been
evolved to explain the true character of interest. Whatever they may
be, interest as a commercial phenomenon is thoroughly established and
countenanced by the law, although in many states an exorbitant interest
charge is declared to be usury.

=Commercial Interest.=—Commercial interest, so-called, usually contains
an element in addition to the time-charge for the use of money. That
element may be: (1) in the nature of a premium for insurance against
the risk of losing the money loaned; or (2) where capital in some fixed
form is loaned, in the nature of an allowance or additional charge to
cover the shrinkage in the asset loaned due to wear and tear.

=Simple and Compound Interest.=—As to its method of calculation,
interest may be simple or compound. Simple or single interest is
figured on the single base known as the principal, the only other
element being the length of time. Compound interest periodically adds
the unpaid interest to the previous principal, and so secures interest
not only on the original principal but on all unpaid interest as well.

In accounting both kinds of interest are recorded under the common
title Interest. Some applications of the interest principle to certain
special accounts will be discussed.

=Equation of Payments.=—The practice of averaging accounts is
occasionally met with at the present time in American business. In
proceedings in bankruptcy, all claims against the bankrupt on open or
running account comprising several items, when filed with the trustee,
must show the average due date of the items if interest is to be
secured on the overdue amounts.

The problem involved may best be shown by an example. The following
account appears on A’s books, showing charges against B:

                                     B
  =============================================================
  Jan. 5 Mdse. 2/10, n/30.    100.00 |
  Feb. 1 Mdse. 2/10, n/60.    350.00 |
  Apr. 10 Mdse. net           200.00 |
  June 2 Mdse. 2/10, n/60.  2,000.00 |

If B does not settle the various amounts as they come due, A is
deprived of the use of his money longer than contemplated in the sale
contract. In justice to him, interest on the overdue amounts ought to
be allowed. If B should pay any of the amounts earlier than the terms
of sale require, he should be allowed a discount, i.e., a rebate equal
to the interest for the time of prepayment. Further, shortly after the
last purchase on June 2 at 60 days, amounting to $2,000, B may desire
to settle his entire account, taking his discount for prepayment on the
$2,000 and allowing A interest on the overdue amounts. If the date of
settlement is fixed, the amount necessary for an equitable settlement
may be determined by the method used for the account current in the
previous chapter.

=Average Due Date.=—But B may want to know the date on which he can
settle equitably by paying the exact amount of the account without
either paying interest on the overdue items or taking discount on the
$2,000. The problem involved is that of averaging or equating accounts.
The equated date, due date, or average date of payment are the terms
variously applied to the date of equitable settlement. If the account
has only debits or only credits, the equation is called a simple or
single equation or average; if it has both debits and credits, the
equation is called a compound or double equation.

In order to determine the equated date, an arbitrary one, called the
focal date, is taken for the purpose of computing the interest charges
and credits, and from that date the days of interest are counted
backwards or forwards according to the result arrived at through use
of the arbitrary date. Interest is calculated at an arbitrary rate,
usually 6% (100% per day is used by another method of calculation), and
in the case of compound equation the same rate must be used on both
debits and credits.

To illustrate the method of calculation for the simple equation and the
interest principle involved, the account above cited will be equated.
In order that the expired time between the focal date and each date
of value may be easily computed, the last day of the previous year is
taken as the focal date. Interest is at 6%.

                                      Int. on Total  Int. on Each
  Date of  Date of  Expired            Amount for     Amount for
   Entry    Value    Time     Amount     1 Day       Expired Time

   1/5      2/4       35 da.  $  100                    $  .58
   2/1      4/2       92  ”      350                      5.37
   4/10     4/10     100  ”      200                      3.33
   6/2      8/1      213  ”    2,000                     71.00
                              ------                   -------
                              $2,650    .44⅙           )$80.28
                              ======                    ------
                                                        182 da.

This calculation shows that theoretically, had the various
transactions been under contemplation on December 31, the focal date,
payment of the total $2,650 could equitably have been made with a
discount of $80.28. The interest (or discount) on $2,650 for 1 day is
44⅙ cents. A discount amounting to $80.28 can therefore be demanded on
$2,650 only as the result of an offer to prepay 182 days (80.28 ÷ .44⅙
= 182) before the payments are equitably due. Hence, payment of $2,650
without discount would settle the account equitably 182 days after
the focal date, or on July 1. That this is true can easily be proved
by using July 1 as the settlement date and figuring as for a current
account. It will be found that interest on the overdue items on that
date amounts to $10.42, while the discount on the item not yet due
amounts to $10.33; the difference .09 not being a large enough fraction
(9 ÷ 44⅙) to justify payment one full day earlier.

=The 100% Method.=—A short method of calculation may be used, employing
the 100% per day method. Any date may be taken as a focal date, and
very frequently the date of the first or last transaction is used. In
the illustration below, November 30 of the previous year is taken as
the focal date so that the expired time on each item is immediately
indicated by the _number_ of the month and the day in the “date of
value” column. The use of the 100% per day method makes the calculation
of interest on each item a simple matter of multiplication by time and
amount, i.e., it reduces each amount to a “day-dollars” figure, and on
that basis one day’s interest on the account total is equal to that
total, and therefore the divisor in the division made to determine the
focal date is the amount of the account. This greatly simplifies all
the operations. Sometimes the expired time is calculated by calendar
months and days, converting fractions of a month on a 30-day basis. The
method is used in the illustration below, where the problem shown above
by the accurate interest method is solved by the 100% method.

The “month-dollars” column divided by the “amount” column gives 6,
shown in the “equated date, months” column, with a remainder of 2,500.
This is reduced, by multiplication by 30, to day-dollars and carried
to that column, whose total, 80,100, is divided by 2,650, giving 30 as
shown in the “equated date, days” column. The equated date is therefore
June 30 (6/30). The one day’s difference between this and the other
method is accounted for because each calendar month is counted as 30
days.

      Time               Month-    Day-     Equated Date
  Months  Days  Amount   Dollars  Dollars  Months    Days

    2      4    $  100   $   200  $  400
    4      2       350     1,400     700
    4     10       200       800   2,000
    8      1     2,000    16,000   2,000
                 -----  --------  -------
                $2,650  )$18,400  $ 5,100    6       30
                ------    15,900
                        --------
                         $ 2,500
                              30   75,000    6       30
                         -------  -------
                                  $80,100
                                   79,500
                                  -------
                                  $   600

=Compound Equation.=—Where the account has both debits and credits, the
estimate is made similarly. Calculation of the month- and day-dollars
is made for each side separately. At this point the totals on both
sides are combined to find the balance of the account and the balance
of the discounts, and these two balances are used to find the equated
date. If the balance of the account is on the same side as the balance
of the discount, the equated date is forward from the focal date
because, if settlement were made on that date, the man who owes the
balance is entitled to the theoretical discount also. If the balance
of the account and the balance of interest are on different sides,
the count is backward from the focal date. The following account and
solution will illustrate:

                        S. L. DAVIS
  ==================================================================
  19—                         | 19—
  Mar.   8 Mdse. net 1,000.00 | Apr.  30  Note, 30 da., 6%    500.00
  June  20  ”  n/30  1,500.00 | Aug.  30  Cash              1,500.00
  Sept.  5  ”  n/60  2,000.00 | Sept. 10  Note, 60 da., no
                              |              interest       2,000.00

  _Debits_:
     Expired Time                              Interest
    Months    Days     Amount      Month-Dollars      Day-Dollars
      3         8      $1,000        $ 3,000          $ 8,000
      7        20       1,500         10,500           30,000
     11         4       2,000         22,000            8,000
                       ------        -------          -------
                Totals       $4,500         $35,500          $46,000

  _Credits_:
      4        30      $  500        $ 2,000          $15,000
      8        30       1,500         12,000           45,000
     11         9       2,000         22,000           18,000
                      -------        -------          -------
                Totals       $4,000         $36,000          $78,000
                              ------         -------         -------
  _Balances_:
    Amount                 Dr. $500
    Interest                               Cr. $500      Cr. $32,000

Dividing we get 1 month, 64 days, i.e., 3 months, 4 days. The balances
being on opposite sides, the equated date is 3 months, 4 days, backward
from November 30 (11/30), i.e., 11/30-3/4 = 8/26 or August 26.
Equitable settlement could therefore be made by interest-bearing note
for $500, dated August 26, or by cash payment of $500 plus interest on
$500 from August 26 until date of actual settlement, as would be the
case had the account been handled as an account current with adjustment
as of August 26.

=The Cash Balance.=—When an account has been equated, to determine
the cash sum which will be required for equitable settlement on a
given date subsequent to the equated date, the balance of the account
plus interest on that balance from the equated date to the date of
settlement will be the correct amount. This amount is technically
called the cash balance of the account. It is exactly the same as the
adjusted balance of an account current, and may be determined by such
adjustment of the account instead of by the method of equation of
payments just described.

=Interest on Partial Payments.=—Under the heads of accounts current
and equation of payments, the question of partial payments on open
account has been treated. There remains to be discussed a statement
of the practices governing partial payments on notes. Two methods
of calculating are in use, the legal or United States method and
the so-called merchants’ method. The merchants’ method is used for
short-time notes and on any other kind by agreement. The method is
exactly similar to that of adjustment of current accounts. Interest is
charged on the face of the note from its date of issue till its due
date, and allowed on each partial payment from its date of payment till
the due date of the note. The difference between the sum of the face of
the note plus its interest and the partial payments plus their interest
accruals is, of course, the balance due.

=United States Rule.=—The United States Supreme Court has ordered
the application of the partial payments somewhat differently. The
first partial payment must first be applied to the payment of the
accrued interest on the principal up to the date of the first payment.
Any excess shall be applied to a reduction of the principal. Each
succeeding payment is similarly applied first to cancellation of
accrued interest on each new principal and then to a reduction of the
principal. In case any payment is insufficient to meet the accrued
interest, the payment is held in reserve, the principal remaining
unchanged until a payment or payments are made which added to the
previously reserved payment or payments are sufficient to cancel
all interest accrued to that date. Any excess is used to retire the
principal.

=Interest on Daily and Savings Bank Balances.=—In the handling of
balances between banks, interest on daily balances is usually figured
in the settlement. Calculation is on a 365-day basis in the larger
banks. Banks frequently allow large depositors a low rate of interest
on daily balances maintained above a certain fixed minimum. Take the
following account:

                X. Z. & CO.
  ====================================================
  Date    Dr.   Cr.   Balance  Interest Base  Interest
  Jan. 2               1,500         500
       3  300  500     1,700         700
       4  800  100     1,000
       5  400  600     1,200         200
       6  500  400     1,100         100
       7  700  1,100   1,500         500        .11
                                   -----
                                   2,000

In the above account interest is allowed on all amounts above $1,000 at
the rate of 2%. If settlement is periodical, interest may be calculated
on the total of the “interest base” column for one day. Usually,
however, if a monthly settlement basis is used, the total minimum
balance for the month is subtracted from the total of the “balance”
column, and the remainder is the interest base. In savings banks no
interest is allowed on amounts which have been withdrawn during the
interest period, regardless of how long the sum may have been on
deposit previous to date of withdrawal. There is no uniform practice
as to when deposits shall begin to draw interest, in some banks at the
beginning of the month after deposit, unless deposit is made on the
first day of the current month; in others, not until the beginning of
the next interest period. Great care must be exercised, therefore, in
handling deposit and withdrawal dates.

=Bank and True Discount.=—Bank discount has been defined as the prepaid
or collected interest on a discounted note, calculation being on the
basis of the amount to be collected on the note at its maturity.

True discount is the difference between the face of a debt and its
present worth, meaning by present worth that sum of money which placed
at interest now will equal or be worth the face of the debt at maturity.

=Proportion, Simple and Weighted.=—Proportion is defined as an
equality of ratios. Thus, if the ratio of _a_ to _b_ is the same as the
ratio of _c_ to _d_, this relation may be expressed as follows:

  _a_   _c_
  ——— = ——— or _a_ : _b_ = _c_ : _d_
  _b_   _d_

the fractional form being preferred. In accounting it is often
required to divide amounts in certain ratios, as when profits must be
apportioned among partners, when insurance, taxes, and other expense
charges must be distributed over departments, etc. This is usually
entitled “apportioning.” It is not necessary to illustrate simple
proportion, but a problem in “weighted proportion” will be given here.

Apportion an insurance charge of $1,000 over departments A, B, and C
according to the property values in those departments, taking account
of the fact that the rate on A is double that on B and C. The property
values are: A $10,000; B $15,000; C $35,000.

The proper basis for distribution cannot be found, as in simple
proportion, by an addition of the values in the departments. Before
addition, the value in A must be weighted by 2, i.e., doubled. This
gives a basis of $70,000 ($20,000 for A + $15,000 for B + $35,000 for
C = $70,000). Of the $1,000 insurance cost, department A will have to
bear ²⁰/₇₀; B ¹⁵/₇₀; and C ³⁵/₇₀. The charges will be therefore:

  A, ²⁰/₇₀ of $1,000 or  $  285.71
  B, ¹⁵/₇₀  ”  1,000  ”     214.29
  C, ³⁵/₇₀  ”  1,000  ”     500.00
                         ---------
                         $1,000.00

=Apportioning Freight Charges.=—In-freight and cartage are treated as
additions to the cost of goods bought; consequently, at inventory time
it is necessary to add the correct amount of in-freight to the cost
of goods on hand. However, it is seldom possible to apply the freight
costs directly to each unit of product on hand and yet theoretically
this should be done. Usually the ratio of freight costs to the total
amount of purchases during a given period is taken as the basis for
adding freight to the inventory. Thus, if that ratio has been 5% for
the period, a commodity costing $100 would be valued at $105 for the
inventory. Thus the freight expense is deferred.

This usually is deemed sufficiently accurate for most purposes. Where
departmental records are kept, or where accurate factory costs are
required, a closer apportioning is sometimes necessary. The freight
classifications are such that the rates are not proportionate to the
_values_ of the goods; but other factors such as weight, kind of goods,
method of crating, etc., all enter into the freight rate. Of these, the
only factor which is easily obtainable is the weight. A distribution
of freight on the basis of _value_ and _weight_ has been suggested—a
weighted proportion method of apportionment. This, of course, requires
an involved calculation which is usually “shied” at by bookkeepers and
is not necessary except where very accurate and detailed costs are
required.




CHAPTER LIII

SINGLE OR SIMPLE ENTRY


=Different Systems of Bookkeeping.=—Except in small enterprises, the
only satisfactory system of bookkeeping is double entry. The system—or
rather lack of system—known as single entry antedates double entry and
is met today occasionally, particularly in small retail stores. It
seems necessary, therefore, to give the student an explanation of its
main features.

An early writer defines bookkeeping as “the art of recording
mercantile transactions in a regular and systematic manner.“ In
further elucidation he says: “A merchant’s books should contain every
particular which relates to the affairs of the owner. They should
exhibit the state of all the branches of his business; the connection
of the various parts; the amount and success of the whole. They should
be so full and so well arranged as to afford a ready information
in every point for which they may be consulted.“ Single entry
hardly measures up to these requirements, but there are places and
circumstances where it gives results satisfactory enough. Bookkeeping
has had a development contemporaneous with industrial life. Only simple
records are needed so long as industries are simple, but with the
increasing complexity of industrial enterprise, previous methods become
inadequate.

=Single Entry.=—Single entry may be defined as that method of keeping
records which sorts out and classifies debits and credits only as they
apply to persons, the proprietor included, and usually also to cash.
To justify the strict application of the term, a _system_ must needs
keep record of _all_ transactions. Methods—not systems—of single-entry
account-keeping are sometimes met with which do not make full record.
The point of view of single entry is personal. All features of the
business not connected with persons are looked upon as being under the
direct hand of the owner and subject to his control. But uncompleted
transactions with persons, whether customers or creditors, are not
capable of such oversight without the aid of individual, classified
records. The necessity of safeguarding the cash and keeping its flow
under review makes the classified cash record an almost universal
feature of single entry. As a usual thing, therefore, single entry
is characterized by: (1) a record of all transactions; (2) a debit
and credit analysis applied only to persons and to cash; and (3) a
classified and grouped record, i.e., ledger record, only as to persons
and cash. It does not analyze every transaction in its relation to the
business as a whole. It has a single point of view, i.e., it considers
only persons and cash and makes entries accordingly. Hence, its name.

=Books Required and Methods of Record—The Journal.=—In a single-entry
system three books of account are necessary—the journal, the cash book,
and the ledger. The cash book records all cash transactions, receipts
and payments, classified as to persons but otherwise in narrative form.
The journal records all other transactions following the same method.
The ledger makes secondary record only under the heads of customers,
creditors, and proprietor. The journal is the standard two-column
journal, the first column being used as an “items“ column, and the
second for totals. A three-column journal is advantageous, the first
column being used for items and for all unposted amounts, the second
for debit postings, and the third for credit postings. This aids in
proving the ledger postings, as will later be seen. Transactions
affecting persons are recorded under those persons’ names followed by
“Dr.” or “Cr.,” according to the analysis of the transaction. This
is necessary since position does not show it, the method of left and
right position for debit and credit not being used in the single-entry
journal. All other transactions are recorded in narrative form, merely
a memorandum being made of them.

=Cash Book.=—The cash book is the same as for double entry, receipts on
the left and disbursements on the right-hand page or column, according
as a double- or single-page cash book is used. Where the double page is
used, one of the two columns on either side is sometimes used for the
exclusive extension of the amounts to be posted to personal accounts.
This facilitates posting, since these are the only amounts which are to
be transferred to the ledger.

=Ledger.=—The single-entry ledger is the same as the double-entry and
uses the debit and credit principle of double entry. As stated above,
accounts are kept only with persons, including the proprietor. It
is seen, therefore, that single-entry books make a record of _all_
transactions but fail to analyze all those transactions in their
relations to one another and in their effects upon the business.

=Single Entry as Adapted to Modern Needs.=—Recognizing the value
of the analysis secured by double entry but overestimating the work
required to make the record, some concerns have developed single-entry
systems through use of subsidiary records and columnar books, from
which they derive very full information for management purposes. A
sales journal gives volume of sales, a purchase journal shows the
amount of goods purchased, and analytic columns in the cash book show
the main sources of receipts and their amounts, and the main classes
of expenditures and their amounts. A bill book is used for recording
notes receivable and payable, and inventory books for scheduling all
kinds of property, assets and liabilities. All of these make a system
approaching the double entry in completeness of detailed information,
but one which lacks the fundamental principle on which the double
entry rests, viz., an equality of debits and credits brought about by
a classified analysis of every transaction into its debit and credit
elements at the time of first entry on the books. It does not tie
together the whole into a mathematically provable system.

Since the advent of double entry there have always been strong
adherents to the single-entry method. An early writer, William Perry,
presented in 1777 a treatise on bookkeeping by either method. Most
small enterprises, even if they keep their records by the single-entry
method in the beginning, usually adopt the double-entry system as
their business increases, realizing that the latter furnishes better
accounting control than is obtainable under simple entry.

=Debits and Credits.=—To one who knows the double-entry method,
single-entry bookkeeping presents few difficulties. Debit and credit
as applied to personal accounts are usually of easy determination and
are exactly the same as in double entry. The debits and credits for
cash are based on the same principles in both systems. The method of
writing them in the books of original entry was sufficiently indicated
where those books were explained. Posting is done just as in double
entry. With regard to all work upon single-entry books, there is always
a temptation to do slovenly, inaccurate work because the system does
not provide internal proof as the double-entry system does. Thus, where
rebates have been allowed, only the net amount received may be shown in
the cash book with explanation that the payment is in full of account.
After this amount is posted to the customer’s account, the item does
not fully offset the original debit and it is necessary to make a note
in the ledger to the effect that the item is fully settled. The same
thing holds true for creditors’ accounts. Of course, this is not good
bookkeeping whether practiced in single or double entry.

=The Proprietor’s Account.=—The handling of the proprietor’s account
under single entry is very similar to that under double entry. The
proprietor’s capital account shows the original investment on the
credit side; his personal account, if kept separately, is debited
with his withdrawals, whether in merchandise or cash. Inasmuch as the
single-entry ledger does not show the profit or loss, the manner of
handling the proprietor’s account at closing is somewhat different.
The profit, as determined by the method shown a little later, may be
brought directly and without journal entry from the statement of profit
and loss into the proprietor’s capital account so that this account
will show the true net worth of the business as at that time. The
personal account is simply ruled off after its figures have been used
in determining profit.

=Proof of Posting.=—The only proof of work possible under single entry
is a checking of the secondary record against the original. A trial
balance of the ledger cannot be taken. A schedule or list of account
balances may be prepared and debit and credit totals of the list made.
This compared with a similar list prepared at the close of the last
period will show the changes that have taken place during the current
period. A list of the debits and credits to personal accounts in books
of original entry for this period must check against the net change
shown by the above comparison. Virtually this amounts to a second
posting of the items, and if the two postings agree, the presumption is
that the ledger is correct. The use of the “personal” posting column
for the cash book as explained above, and of similar columns in sales
and purchase journals, makes possible a much easier debit and credit
summary of the books of original entry if some proof of posting is
desired.

=Profit and Loss.=—Inasmuch as many of the factors affecting the net
worth have not been analyzed in making the original entry, no detailed
showing of profit and loss, as understood under double entry, can be
made. It is, of course, possible to go back over the books and make
such an analysis, but this would result practically in rewriting the
books on a double-entry basis. Single entry, therefore, has recourse to
another method which is characterized by a complete inventory-taking
and appraisal. It is sometimes called the “asset and liability method”
as explained in the following sections.

=Inventory and Appraisal.=—A physical inventory or count of all assets,
fixed, current, and deferred, is made. The books furnish only the
accounts receivable and the cash. All other assets are usually made
up by physical count and reappraisal. It is consequently very easy to
lose sight of some assets, particularly in the case of additions and
betterments to existing assets. For the deferred items, the inventory
of supplies on hand supplemented by the proprietor’s memory is the
customary source.

=Liabilities.=—Liabilities are more difficult of correct determination.
The accounts payable are shown on the ledger, the notes payable should
be shown in the bill book or by stubs in the bound blank book of notes.
Any unpaid bills may be found in the current file of unpaid invoices
if one is maintained. For all other liabilities, including deferred
income, the memory must serve. The haphazard manner in which this
statement must be made up is therefore apparent.

=Accrued and Deferred Items.=—There is usually little or no notice
taken of accruals and deferred items on account of the difficulty in
securing trustworthy and full information. The theory of averages,
viz., that these items at one period will offset, in the long run,
those at another, is the theory by which the failure to include
accruals and deferred data is excused. A comparison of this method with
the double-entry method for handling similar items throws into strong
relief the inaccuracies of the single-entry method.

=The Balance Sheet and the Determination of Profit.=—The balance
sheet, listing all assets and all liabilities, makes a determination
of proprietorship or net worth possible. Under the inventory and
appraisal method it must be taken periodically. A comparison of the
net worths as shown by successive statements develops the gain or loss
for the period, provided no other elements affecting net worth have
become involved. The additional element to be taken into consideration
is the relation of the proprietor to the funds of the business. He
may have withdrawn some of the assets or he may have made additional
investments, so that the condition of the assets as shown at the end
of the period is not entirely the result of business activities and
transactions.

Profits determination by this method, therefore, must take cognizance
of the two factors: (1) comparative net worths, and (2) proprietor’s
interim drawings and investments. A withdrawal of cash during the
period equal in amount to the profits for that period would result
in the same net worth at the close as at the opening of the period.
Drawings in excess of profits would cause a net worth less at the end
than at the beginning; and withdrawals less than profits would cause an
increased net worth. But under none of the three cases stated would a
comparison of the two net worths show the actual profits.

Similarly, additional investments have an opposite effect, bringing
about an increase in closing net worth in the exact amount of the
additional investment and so obscuring the true amount of profit or
loss for the period. Accordingly, the increase or decrease of net
worth as shown by the comparative statements of financial condition
must be adjusted in accordance with the proprietor’s withdrawals
and additional investments to make a correct determination of
profits. To determine the profits for the year, to the change in net
worth—treated algebraically, i.e., positive if an increase and negative
if a decrease—must be added the withdrawals, and from this sum the
additional investments must be subtracted.

=Single and Double Entry Compared.=—From the foregoing discussion and
from the illustrations in the next chapter it will be seen that single
entry can be worked through to a conclusion as to profit and loss. It
tells nothing, however, of the sources of that profit or loss, nor
does it give any control over expenses. It is true that a comparative
statement of assets and liabilities as shown in Chapter IV, presenting
increases and decreases of the various assets and liabilities, will
give additional information, but even that does not show the reasons
for the change and so affords no basis for control. For such purposes
the statistical totals of the sales and purchase records, and of
the cash book, where analytical columns are used, furnish the only
information available under single entry. Its only advantage, then,
is brevity, the saving of labor in making the record. No difficult
analysis is met with in the original record and posting is a less heavy
task than in double entry. But brevity and labor-saving are secured at
the expense of the very information which the business man needs.

The advantages of double entry may be summarized as follows:

  1. The ledger shows a classified record of every
      transaction.

  2. Expenditures for capital purposes, i.e., for new
      assets or additions and betterments to existing
      assets, are recorded as such, so that there is
      no danger of losing sight of them.

  3. A gross profit figure is obtainable and percentages
      of profits and expenses, making possible an
      _estimate_ of merchandise inventory at any time.
      This is particularly valuable in case of fire loss.

  4. The double-entry method provides a proof of the
      mathematical accuracy of the ledger.

  5. A full statement of sources of profits and causes
      of expenses can be obtained in double entry.

Where the above advantages and information are not desired nor
necessary, as in a very simple business under the immediate supervision
of the proprietor, or in simple executorship transactions, etc., single
entry may suffice.

=Change from Single to Double Entry.=—If it is desired to change
from single to double entry, all that is necessary is a complete
inventory and appraisal, to be used as the basis for an opening journal
entry, debit and credit, as for any opening entry. If the former
single-entry ledger is to be used, only the items not already posted,
i.e., the impersonal items, will be posted from this opening entry. The
proprietor’s account should first be adjusted to its correct figure
by a determination of profits by the single-entry method. If this is
done, no posting to his account is needed from the opening entry for
the double-entry books. This opening entry posted will bring the ledger
into equilibrium, which will be maintained under the double-entry
method. If a new ledger is to be used, the opening entry above referred
to will be posted completely—personal and impersonal items—which
will of course bring about the equilibrium desired. Thereafter all
transactions will be analyzed and entered according to the double-entry
system.




CHAPTER LIV

ILLUSTRATION OF SINGLE ENTRY


=Opening Entries.=—In opening a set of single-entry books, as complete
a record should be made as under double entry. If the proprietor begins
business with an investment of cash only and without any obligations,
an entry in the cash book of the amount invested as a credit to
the proprietor’s capital account is all that is necessary. If the
investment consists of a variety of properties and liabilities to
creditors, and obligations on leases, salaries, etc., are assumed, a
very careful and complete record should be made in the journal, showing
the kinds and values of the properties invested, and the kinds and
amounts of the liabilities assumed. This is best arranged in schedule
or statement form, with extension into the posting money columns only
of those personal items for which accounts are to be opened in the
ledger. Illustration will be given of a simple set of single-entry
books, the journal, cash book, sales and purchase records, and the
ledger. In order that the entries may be traced, a separate statement
or diary of the transactions will be given, covering in summarized form
a six months’ period.

  PROBLEM. June 30, 19—, A. B. Cornell purchased
  a store and business, paying $7,750.

  He took over the following assets and liabilities
  at the values shown:

  Store building and lot $3,000.
  Furniture and fixtures $500.
  Horse and wagon $250.
  Accounts receivable: B. C. Davis $50; C. D. Elliot $75;
     D. E. Foley $100; E. F. Gaynor $25; F. G. Harvey $125.
  Stock of merchandise $5,250.
  Mortgage on real estate $500.

  Accounts payable: G. H. Jackson & Co. $250; H. J.
  Kelsey $375; J. K. Landon Co. $500.

  He deposited $500 as an additional investment.

  During the six months the following transactions took
  place:

  Cash sales $10,000.
  Sales on account: Davis $300; Elliot $400; Foley $500;
     Gaynor $600; Harvey $700.
  Purchases were: Cash $3,500; Jackson & Co. $500; Kelsey
     $450; Landon $750; Morey & Co. $1,000.
  Cornell returned goods to Morey & Co. $50, and received
     an allowance from Kelsey $20.
  He made Harvey a rebate of $25.
  He received cash on account from Davis $250; Elliot
     $300; Foley $400; and notes from Gaynor $250 and
     Harvey $500.
  He paid on account cash to Morey & Co. $500; Jackson & Co.
     $600; Kelsey $675.
  He gave his note for $1,000 to Landon.
  He paid off the mortgage with interest $530.
  Expenses paid were: Clerks $750; cashier, stenographer, etc.,
     $250; N. Y. C. Ry. for freight $250; horse feed and expense
     of driver $125; newspaper and street-car advertising $300.
  Cornell drew $2,000, and made an additional investment
     of a safe valued at $250.

At the close of the year inventories and appraisals of data not on the
ledger were as follows:

  Store building and lot $2,970.
  Furniture and fixtures $725.
  Horse and wagon $235.
  Merchandise $3,000.
  Notes receivable $750, with accrued interest $2.50.
  Notes payable $1,000, with accrued interest $15.
  Accrued salaries and expenses $25.
  It was decided to value the accounts receivable at face
     value less 2%.

                           JOURNAL
   =============================================================
   19— June 30
      A. B. Cornell commenced business, purchasing the
      store and stock of the ........ Company, taking over
      all its assets and assuming all its liabilities and
      obligations. He deposited $500 as a working fund for
      the business. The following shows his investment assets
      and obligations:

               _Assets_             L.F.  Items   Dr.       Cr.
  Store Bldg. and Lot      3,000.00
  Furniture and Fixtures     500.00
  Horse and Wagon            250.00
  Merchandise              5,250.00
  Accounts Receivable:
   B.C. Davis   Dr.  50.00           5           50.00
   C.D. Elliot  Dr.  75.00           5           75.00
   D.E. Foley   Dr. 100.00           5          100.00
   E.F. Gaynor  Dr.  25.00           5           25.00
   F.G. Harvey  Dr. 125.00   375.00  5          125.00
                    ------
      Cash                   500.00
                             ------
            Total Assets                9,875.00

            _Liabilities_
  Mortgage on Real Estate    500.00
  Accounts Payable:
   G. H. Jackson
     & Co.      Cr. 250.00           5                     250.00
   H. J. Kelsey Cr. 375.00           5                     375.00
   J. K. Landon
      Co.       Cr. 500.00 1,125.00  5                     500.00
                    ------ --------
            Total Liabilities           1,625.00
                                        --------
      A. B. Cornell, Capital  Cr.    6  8,250.00         8,250.00

  Dec. 31  Morey & Co.         Dr.   5           50.00
    Returned goods as
    unsatisfactory.
   H. J. Kelsey                Dr.   5           20.00
     Allowance a/c inferior
     goods.
   F. G. Harvey                Cr.   5                      25.00
     Rebate a/c dissatisfaction.
   E. F. Gaynor                Cr.   5                     250.00
     Note at 3 mo. 6% on a/c.
   F. G. Harvey                Cr.   5                     500.00
     Note at 60 da.,
     no interest on a/c.
   J. K. Landon Co.            Dr.   5        1,000.00
     Note at 6 mo. 6% on a/c.
   A. B. Cornell, Capital      Cr.   6                     250.00
     Made additional investment
     of office safe.
                                              --------  ---------
                                              1,445.00  10,400.00
                                              ========  =========

                                 JOURNAL
    ======================================================================
     19—                             L.F.    Items       Dr.      Cr.
    Dec. 31 FINANCIAL STATEMENT
         _Assets_
    Store Bldg. and Lot     2,970.00
    Furniture and Fixtures    725.00
    Horse and Wagon           235.00
    Merchandise             3,000.00
    Accounts Receivable:
      B.C. Davis     100.00
      C.D. Elliot    175.00
      D.E. Foley     200.00
      E.F. Gaynor    375.00
      F.G. Harvey    300.00
                   --------
                   1,150.00
    _Less_—
   Bad Debts est.     23.00  1,127.00
   Notes Receivable            750.00
   Accrued Interest on above     2.50
   Cash                      1,970.00
                             --------
               Total Assets             10,779.50

                        _Liabilities_
   Notes Payable             1,000.00
   Accrued Interest on above    15.00
   Accounts Payable:
   G. H. Jackson & Co. 150.00
   H. J. Kelsey        130.00
   J. K. Landon Co.    250.00
   Morey & Co.         450.00
                       ------
                               980.00

  Accrued Salaries and Expenses 25.00
                              -------
     Total Liabilities                   2,020.00
                                         --------
     Net Worth                           8,759.50

   A.B. Cornell,
      Capital, 6/30        8,250.00
   Additional Investment     250.00
                           --------
                           8,500.00
   Drawings                2,000.00
                           --------
                           6,500.00
   Net profit this period  2,259.50      8,759.50
                           --------      ========
   A.B. Cornell, Personal       Cr.  6                    2,259.50
      To carry the net profit
      to Cornell’s Personal
      account.
   A.B. Cornell, Personal       Dr.  6           259.50
   A.B. Cornell, Capital        Cr.  6                      259.50
     To transfer the balance
     of profit left in the
     business to Cornell’s
     Capital account.
                                                 ------   --------
         Totals                                  259.50   2,519.00
                                                 ======   ========

  Dr.          CASH                                       CASH          Cr.
  ===========================================================================
   19—                                 | 19—
  June 30                              |Dec. 31
   A. B. Cornell     ✔          500.00|Purchases                    3,500.00
  Dec. 31  Sales              10,000.00|Morey & Co. on a/c 5 500.00    500.00
   B.C. Davis on a/c 5 250.00    250.00|Jackson & Co.   ”  5 600.00    600.00
   C.D. Elliot  ”    5 300.00    300.00|H.J. Kelsey Co. ”  5 675.00    675.00
   D.E. Foley   ”    5 400.00    400.00|Mortgage and
                                       |  Interest                     530.00
                                       |Clerks                         750.00
                                       |Cashier
                                       |  Stenographer,                250.00
                                       |N.Y.C. Ry. Freight             250.00
                                       |Horse Feed and
                                       |  Driver Expense               125.00
                                       |Newspaper
                                       |  Advertising                  300.00
                                       |A.B. Cornell     6 2,000.00  2,000.00
                                       |Balance                      1,970.00
                       ------ ---------|                   -------- ---------
                       950.00 11,450.00|                   3,775.00 11,450.00
                       ====== =========|                   ======== =========
   19—                                 |
  Jan. 2  Balance              1,970.00|

                      SALES JOURNAL
  ========================================================
    19—
  Dec. 31  Cash                                  10,000.00
           B. C. Davis             5     300.00
           C. D. Elliot            5     400.00
           D. E. Foley             5     500.00
           E. F. Gaynor            5     600.00
           F. G. Harvey            5     700.00
                                      ---------
             Sales on Account          2,500.00
                                                 ---------
             Sales for Cash           10,000.00  10,000.00
                                      ---------
                   Total Sales        12,500.00
  =========                        =======================

                       PURCHASE JOURNAL
  ========================================================
    19—
  Dec. 31  Cash                                   3,500.00
           G. H. Jackson & Co.     5     500.00
           H. J. Kelsey            5     450.00
           J. K. Landon Co.        5     750.00
           Morey & Co.             5   1,000.00
                                       --------
             Purchases on Account      2,700.00
                                                 ---------
             Purchases for Cash        3,500.00   3,500.00
                                       --------
                   Total Purchases     6,200.00
  =========                       ========================

                       B. C. DAVIS
  ===========================================================
    19—                        |   19—
  June  30          J2   50.00 | Dec.  31          C4  250.00
  Dec.  31          S4  300.00 |

                       C. D. ELLIOT
  ===========================================================
    19—                        |   19—
  June  30          J2   75.00 | Dec. 31           C4  300.00
  Dec.  31          S4  400.00 |

                       D. E. FOLEY
  ===========================================================
    19—                        |   19—
  June  30          J2  100.00 | Dec.  31          C4  400.00
  Dec.  31          S4  500.00 |

                       E. F. GAYNOR
  ===========================================================
    19—                        |  19—
  June 30         J2     25.00 | Dec. 31         J2    250.00
  Dec. 31         S4    600.00 |

                       F. G. HARVEY
  ===========================================================
    19—                        |  19—
  June 30         J2    125.00 | Dec. 31         J2     25.00
  Dec. 31         S4    700.00 |  ”   ”           ”    500.00

                   G. H. JACKSON & CO.
  ===========================================================
    19—                        |  19—
  Dec. 31         C4    600.00 | June 30         J2    250.00
                               | Dec. 31         P4    500.00

                       H. J. KELSEY
  ===========================================================
    19—                        |  19—
  Dec. 31         J2     20.00 | June 30         J2    375.00
   ”   ”          C4    675.00 | Dec. 31         P4    450.00

                     J. K. LANDON CO.
  ===========================================================
    19—                        |  19—
  Dec. 31         J3  1,000.00 | June 30         J3    500.00
                               | Dec. 31         P4    750.00

                       MOREY & CO.
  ===========================================================
    19—                        |  19—
  Dec. 31         J2     50.00 | Dec. 31         P4  1,000.00
   ”   ”          C4    500.00 |

                 A. B. CORNELL, PERSONAL
  ===========================================================
    19—                        |  19—
  Dec. 31         C4  2,000.00 | Dec. 31         J3  2,259.50
   ”    ”         J3    259.50 |
                      ======== |                     ========

                  A. B. CORNELL, CAPITAL
  ==============================================================
                             |   19—
  Net Worth (down)  8,759.50 | June 30              J2  8,250.00
                             | Dec. 31              J3    250.00
                             |  ”   ”               J3    259.50
                    -------- |                          --------
                    8,759.50 |                          8,759.50
                    ======== | ======                   ========
                             |   19—
                             | Jan. 1                   8,759.50

  LEDGER LIST (BEFORE CLOSING)
  B. C. Davis                             $ 100.00
  C. D. Elliot                              175.00
  D. E. Foley                               200.00
  E. F. Gaynor                              375.00
  F. G. Harvey                              300.00
  G. H. Jackson & Co.                                  $  150.00
  H. J. Kelsey                                            130.00
  J. K. Landon Co.                                        250.00
  Morey & Co.                                             450.00
  A. B. Cornell, Personal                 2,000.00
  A. B. Cornell, Capital                                8,500.00
                                         ---------     ---------
                                         $3,150.00    $ 9,480.00
                                                        3,150.00
                                                      ----------
        Excess of credits                             $ 6,330.00
                                                      ==========

                           PROOF

  Total postings from Journal            $1,445.00    $10,400.00
    ”     ”        ”  Sales Journal       2,500.00
    ”     ”        ”  Purchase Journal                  2,700.00
    ”     ”        ”  Cash Book           3,775.00        950.00
                                         ---------    ----------
                                         $7,720.00    $14,050.00
                                                        7,720.00
                                                      ----------
        Excess of credits as above                    $ 6,330.00
                                                      ==========

=Net Profits.=—Inasmuch as the change in proprietorship is determined
only by a comparison of the two financial statements, at least the
result of the comparison should be incorporated into a journal entry
and so be brought into the ledger account. Sometimes the statement
itself and the calculation of change in net worth are made on the face
of the journal, thus making permanent record of them. This is worth
while since they are an essential part of the system. A permanent
statement book will accomplish the same result. In the illustration
the statement is entered in the journal. The net profit of $2,259.50
may be set up in the proprietor’s personal account, and the balance of
that account, being the amount of profits retained in the business,
transferred to the capital account; or the net amount left in the
business may be transferred directly to the capital account and the
personal account ruled off without balancing as suggested in Chapter
LIII. The same result is accomplished, but the ability to prove
postings against the books of original entry is lost. Hence the first
method which is the one shown in the illustration is the better.




APPENDIX A

PRACTICE WORK FOR STUDENT—FIRST HALF-YEAR


Accounting principles cannot be mastered without adequate practice
work. Practice work cannot be properly done unless the principles on
which it is based have been developed and explained. Practice work
should, so far as possible, follow closely after the explanation of new
principles. This applies particularly to the introductory work of the
first half-year. Later work is cumulative in its effect and may use
all principles previously developed as well as the new principles just
developed.

The practice work for the first half-year consists largely of
disconnected problems. However, a few longer problems running through
several assignments are included. Effort has been made to keep to a
minimum the purely mechanical work of computation. While emphasis
should be placed always on the principles involved, the need for
accuracy should not be lost sight of; in its practice in business,
accountancy requires accurate and, where possible, proven results.

Of the budget of stationery provided for this work, the loose-leaf
supplies—statement, journal, and ledger paper—are for the first
half-year’s work. The three-column paper is to be used for balance
sheet and profit and loss statements, unless other directions are given
for particular assignments. The use of journal and ledger paper is
indicated where necessary. Observance of directions given and of forms
to be followed, together with careful and accurate work in drafting
solutions, will save much time in the location and correction of errors.

Sufficient practice work is furnished to accompany 30 hours of lecture
or classroom work, opportunity being provided for two review periods,
one at mid-term and one at the close of the semester. Where the lecture
period is two hours in length—the class usually meeting but once a
week—two of these assignments should be given to accompany each such
lecture period. The student should make his solutions as a part of his
home-work and these should be taken up for discussion at the next class
session and correct solutions should be presented there so that always
the student may have a criterion with which to compare his own work.
Where more practice work is desired than is provided in this appendix,
a collection of miscellaneous problems is given in Appendix C.

                                I
  1. On January 1, 19—, H. L. Lewis has the following property:

    Bank deposit $1,893.74.
    Merchandise $14,987.42.
    Office equipment: safe, desk, counters, cash register, $850.
    Delivery equipment $836.
    Securities held as investments $6,950.
    Accounts due him from customers as follows:
      John Morris $ 90.87.
      Peter Conley $135.
      Chas. Grant $742.93.
      Frank Hewitt $157.48.
      L. M. Moore $790.72.
      N. T. Taylor $48.95.
      A. S. Keene $75.

    For merchandise bought there remains unpaid:

    To Jones Bros. $1,350.45.
     ” T. J. Langdon $890.
     ” Stewart & Co. $965.
     ” T. M. Lawes & Co. $4,862.97.
          And a note for $125.

     Draw up a statement to show H. L. Lewis’ capital as of the
     above date.

  2. From the following information determine the total amount of
     the liabilities:

    Cash in bank $840.
    Goods on hand $2,500.
    Accounts receivable $1,600.
    Supplies on hand $320.
    The year’s rent $600, was paid in advance and the premises
        have now been occupied for six months.
    The capital is $2,500.

  3. From the following items in a balance sheet, which is complete
       except as to the asset cash, determine the amount of cash:

    Capital $2,500.
    Supplies $87.50.
    Real estate $2,500.
    Ford delivery truck $575.
    Accounts receivable $2,280.
    Accounts payable $1,800.
    Notes receivable $300.
    Notes payable $500.
    Salaries due but unpaid $50.
    Mortgage on real estate $1,000.

  4. The following data, complete excepting for the amount of a
       certain mortgage and interest accrued thereon, are taken
       from the records of Benjamin Goodwin for the year ending
       June 30, 19—. Determine the face amount of the mortgage
       payable, and the amount of the interest accrued thereon
       at 6% for one year.

    Cash on hand $75, and subject to check $1,200.
    Factory $6,100.
    Land $2,000.
    Office furniture $185.
    A three-year insurance premium
       was bought one year ago for $300.
    Accounts receivable $4,500.
    Goods on hand $2,800.
    Goods in process of manufacture $1,450.
    Raw materials inventory $2,250.
    Supplies $295.
    Accounts payable $9,150.
    Notes payable $4,650.
    Accrued wages $135.
    Mortgage payable and interest.
    Capital $5,000.

    5. The following was taken from the books of the treasurer
         of the Yorktown Lodge:
    Balance in Fifth National Bank, January 1, 19—, $689.22.
    The receipts during the year were:
       Proposition fees $515.
       Initiation fees $2,510.
       Lodge dues $4,904.60.
       Interest on Liberty bonds $332.14.

    Summary disbursements for the year were:

       Grand lodge dues $554.
       Printing and postage $818.25.
       Entertainment $2,199.86.
       Sundries $216.20.
       Returned proposition fees $80.
       Rent for lodge room $750.
       Salaries $387.50.
       Charity $1,211.84.
       Supplies $38.80.
       Testimonial dinner $846.48.

    There is also cash $4,498.67, on deposit in the Irving Savings Bank
       December 31, 19—, on which interest at the rate of 4% per annum
       is now due for one-quarter.
    The treasurer holds $10,000 in Liberty bonds.

    Submit statement showing the available balance of cash for
       the new year.

                            II
  1. Make up three problems, using your own data, to
     illustrate the three types of business organization.

  2. On January 2, 19—, Allen B. Dawes has in his business
     the following assets and liabilities which you are to
     classify for balance sheet purposes according to the
     definitions which have been given, changing the descriptions
     here used to standard titles:

  Alongside of a railroad spur, on a plot 100 by 75 feet,
     costing $2,500, Dawes has erected a plant for $12,000,
     for a part of which he is still indebted to the Mutual
     Savings Bank, which debt is secured by a claim for $5,000
     against the property.
  In the plant Dawes has installed stationary operating
     apparatus amounting to $19,750, and loose operating parts
     and supplementary devices amounting to $250.
  The value of the models and patterns which he uses amounts
     to $1,215.
  His stock, totaling $12,215, is in three distinct phases
        or conditions:
     Raw materials $4,305.
     Partly finished or in process goods $4,020.
     Completed stock $3,890.
  In the plant Dawes has $725 worth of furniture.
  In the bank he has a balance of $940 and $83.50 in the safe.
  Some of his customers owe him for goods bought, the total
     being $5,397.50 on open account and $875 on signed promises
     to pay.
  Dawes owes creditors on account $4,857.50.
  He has formally acknowledged and accepted drafts amounting
     to $543.50.
  He is liable for a pay-roll of $150, earned but not yet due.

  Draw up a statement showing assets, liabilities, and net worth,
     using standard titles.

  3. Dawes has reached a point where it is not only profitable
     but really necessary to expand his business if he is to
     retain the good-will of his old customers and secure new
     ones. He has therefore persuaded Edward A. Robbins, a
     capitalist, to put cash into the business equal to Dawes’
     net interest and so become a partner with him.

  The partnership uses $3,100 of this new capital to purchase
     additional raw material, and $2,500 for some partly finished
     stock (bought at a sacrifice sale). They spend $1,600 for
     new machinery, $250 for tools, and $100 for new patterns.
     With an eye toward future building facilities they acquire
     another and adjoining strip of property with a building on
     it. The latter costs them $5,470 and the land $2,500.

  To facilitate securing and delivering goods, the partners
     invest $1,800 in a small truck. They add shop furniture
     amounting to $80.

  These various deals were consummated by the early afternoon of
     January 2, 19—. The partners ask you for a new balance sheet
     to show the condition of the business and the respective
     interests of each.

  4. At the end of the year’s operation, Dawes & Robbins ask you
     to draw up a statement of assets, liabilities, and net worth,
     the following figures being submitted:

  Balance of cash in the bank $28,000.
  Accounts owing the partnership $12,000; notes $6,000.
     The inventory is again split up into:
     Raw materials $9,000.
     Partly finished goods $5,000.
     Finished stock $500.
  Still on hand unused:
     Advertising material $640.
     Oil, waste, and supplies $500.
     Packing supplies $750.
  Other assets:
     Models and patterns $500.
     Loose tools $75.
     Shop furniture is to be shown at the last
        balance sheet figure less an estimated
        depreciation in value of $161.
     Machinery in the same manner less depreciation of $2,669.
     Delivery equipment less depreciation of $360.
     Factory less depreciation of $3,498.
     Land as it was on the last balance sheet.
  Liabilities are as follows:
     Accounts owing to creditors $1,000.
     Notes $250.
     Accrued pay-roll $200.
     The mortgage had been reduced to $2,000.

  5. Robbins is anxious to withdraw from active participation
     in the partnership. To facilitate this and to secure
     additional funds with which to buy new models and other
     things needed for the growing business, it had been decided
     some time ago to incorporate and to dispose of some of the
     stock to outsiders. The necessary steps had already been
     taken. In accordance therewith the corporation takes over
     the business at the values shown in the balance sheet of
     Problem 4, with the exception of $14,252 cash which Robbins
     retains. For the good-will of the business the corporation
     gives the partners $15,000 of its capital stock. $25,000 of
     the capital stock is sold to outsiders for $25,000 cash.
     The rest of the capital stock is used in purchasing the
     partnership.

  Set up the balance sheet of the corporation.

                               III
   1. A. K. Sutton is proprietor of hardware store.
      On June 30, 19—, he has the following assets
      and liabilities:

   Bank deposits $1,980.47.
   Notes receivable $450.
   Accounts due from customers:
      L. M. Taylor $190.
      L. K. Jones $275.
      G. Sanford $18.73.
      F. Daly $87.54.
      C. Baker $103.13.

   Merchandise inventory $4,745.
   Office equipment $135.
   Delivery equipment $575.

   He owes:
      First National Bank $565.
      Chas. Goodwin $487.97.
      L. Birch $150.
      H. Tuttle $92.50.
      James Bros. $325.

   Sutton’s 60-day promissory note for $200 with interest at 6%
      is due today, but payment is deferred, with consent of
      the creditor, to tomorrow morning.

   On the above date Sutton buys out the automobile accessory
   business of his neighbor, A. M. Lawrence, and combines it
   with his own. The deal was completed on the basis of the
   balance sheet submitted below, except that Lawrence is to
   retain the cash. Sutton pays Lawrence in cash from his
   hardware business. Lawrence’s balance sheet contains the
   following items:

   Cash $347.90.
   Accounts receivable:
      Taxi Service, Inc. $49.50.
      The Market Shops $18.50.
      Whitney’s Delivery Service $80.
   Merchandise inventory $1,597.
   Delivery equipment $475.
   Office equipment $90.
   Accounts payable $850.

   Draw up a balance sheet to show Sutton’s condition after his
   purchase of Lawrence’s business.

   Why is Sutton’s net worth the same as before buying
   Lawrence’s business?

                           _Instructions_

   Show accounts receivable and accounts payable as totals, with
   a supplementary schedule listing each separately.

   2. From the following particulars prepare a balance sheet of
      the Mountel Manufacturing Company as of December 31, 19—:
         Premises $2,500.
         Machinery $11,500.
         Buildings $5,300.
         Capital stock $30,000.
         Stock-in-trade: finished goods $12,500;
            goods in process of manufacture $8,670;
            and raw materials $4,980.
         Loose tools $490.
         Models and patterns $650.
         Patents $1,000.
         Good-will $3,000.
         Trade creditors $15,540.
         Cash $50.
         Motor truck $1,580.
         Bank deposits $1,740.
         Outstanding claims against customers
            on open account $8,975.
         A 60-day note payable for $1,000 had
            been discounted at the bank at 6%
            and is due in 30 days.
         Office equipment $250.
         Supplies $500.
         Notes receivable $4,970.
         First National Bank stock and other investments $4,000.
         Unexpired insurance premium $150.
         Accrued wages $75.
         Other notes payable outstanding amount to $8,960.
         Purchase money mortgage on machinery $5,500, due in 18 months.
         Mortgage on buildings $2,000, due in six months.
         Unpaid motor truck expense $85.

   It is estimated that during the year machinery has depreciated
      10% and buildings 5% from the values shown above.
   Investigation shows that the present market value of finished
      goods is 75% of that carried on the books, goods in process
      90%, and raw materials 100%.
   It is decided to reduce the values of stock-in-trade to present
      price levels.
   A reserve of 5% is to be created for bad debts, 50% for models
      and patterns, and 20% for the delivery truck.
   Loose tools are valued at $245.

   3. The Cordovan Tanning Company has issued $3,000,000 of
      capital stock. It suffered heavy losses due to the drop
      in prices during the year. The following balance sheet
      submitted to the stockholders as of December 31, 19—,
      showed:
         Cash on hand $1,805; on deposit $378,090.
         Customers’ acceptances unmatured $249,754.
         U. S. Liberty bonds $47,500.
         General investments $82,950.
         Loans receivable $15,280.
         Income accrued on investments $3,450.
         Accounts receivable $2,948,582.
         Reserve for doubtful accounts $56,125.
         Notes receivable $82,000.
         Prepaid insurance $14,950.
         Finished goods $750,000.
         Goods in process $697,974.
         Raw materials $460,900.
         Plant and equipment, $4,980,760.
         Depreciation reserve for plant and equipment was $460,640.
         Accounts payable $1,980,760.
         Notes payable $350,000.
         Dividends payable January 15 of the next year,
            and constituting a present liability of the
            company $230,000.

   From the following information and the balance sheet as of
      December 31, 19—, prepare the balance sheet as of
      December 31 one year later.

         Cash on hand December 31 was $1,790; on deposit $162,875.
         Customers’ acceptances unmatured $449,500.
         The market value of the Liberty bonds was $46,000,
            and general investments $50,000.
         Loans receivable $16,000.
         Income accrued on investments $1,800.
         Accounts receivable $2,310,000.
         Reserve for doubtful accounts $60,000.
         Notes receivable $150,000.
         Prepaid rent $2,400.
         During the year $380,000 worth of goods was added to
            finished stock, and $420,000 at cost price was sold.
            It is decided that the balance must be marked down
            50% to conform to market replacement costs.
         Goods now in process are valued at $315,890.
         Raw materials carried on the books at $670,000 are to be
            written down 30% to market value.
         5% of the cost of plant and equipment is to be added to
            the reserve for depreciation.
         Accounts payable $3,670,980.
         Notes payable $1,475,000.
         A dividend of 5% had been declared and was payable
            January 15 of the next year.

  4. By comparing the two December 31 balance sheets of the
     Cordovan Tanning Company, what can you tell as to the
     progress of the company during the year? Did it make a
     profit or suffer a loss?

                            IV
  1. Draw up a comparative balance sheet as of December 31,
     19— of the Interurban Railway Company, from the balance
     sheets of December 31, 19— and December 31 of the
     previous year.

  Balance sheet of 19— showed:
   Cash $40,909.18.
   Accounts receivable $33,097.49.
   Securities deposited with Workmen’s Compensation
      Commission $4,893.75.
   Materials and supplies $27,112.28.
   Prepaid insurance $5,732.16.
   Work in progress $7,509.81.
   Road and equipment $696,622.49.
   Accounts payable $17,058.81.
   Notes payable $70,000.
   Accrued interest on first mortgage bonds $3,645.84.
   Accrued taxes $6,450.65.
   Depreciation reserve for road and equipment $19,995.96.
   Surplus $223,725.90.
   Capital stock $300,000.
   First mortgage 5% bonds $175,000.

  Balance sheet of the year previous showed:
   Cash $34,313.78.
   Accounts receivable $57,779.47.
   Securities deposited with Workmen’s Compensation
      Commission $4,893.75.
   Materials and supplies $29,308.56.
   Insurance prepaid $3,639.19.
   Work in progress $98.64.
   Road and equipment $694,216.73.
   Depreciation reserve for road and equipment $15,813.46.
   Capital stock $300,000.
   Accounts payable $25,973.61.
   Notes payable $100,000.
   Accrued interest on bonds $3,645.84.
   Accrued taxes $8,872.31.
   First mortgage bonds $175,000.
   Surplus $194,944.90.

  2. Can you tell definitely and in detail how the increase
     in surplus in Problem 1 was effected?

  3. The annual report of the Northeastern Power Company for
     year ending December 31, 19—, gave the following balance
     sheet as of December 31, 19—:

   Investments in subsidiary companies $4,244,855.57.
   Cash $1,927,898.84.
   Accounts receivable $1,514,605.11.
   U. S. Government Liberty Loan 4¼% bonds $915,102.
   Canadian Victory Loan 5½% bonds $497,769.88.
   Securities deposited with State Workmen’s Compensation
      Commission $8,893.75
   Other securities $241,001.
   Mortgages owned $13,500.
   Materials and supplies $364,410.81.
   Work in progress $12,931.10.
   Prepaid insurance $231,350.66.
   Prepaid taxes $624,744.28.
   Real estate, plant and transmission systems $48,230,896.04.
   Mortgage on real estate $15,000.
   Accounts payable $867,763.35.
   Accrued taxes $707,870.94.
   Interest payable $213,896.68.
   Dividends payable $201,519.50.
   First mortgage 5% bonds $10,000,000.
   6% refunding mortgage bonds $8,226,000.
   6% debentures $10,200,000.
   Depreciation reserve $2,254,476.13.
   Surplus $138,932.44.
   Capital stock outstanding $26,002,500.

  The report for the following year gives the following particulars
  as to the balance sheet of that year:

   Cash $1,677,663.43.
   Accounts receivable $1,286,731.23.
   U. S. Liberty bonds 4¼% $1,106,452.
   Canadian Victory Loan 5½% bonds $747,769.88.
   Securities deposited with State Workmen’s Compensation
      Commission $8,893.75.
   Other securities $170,501.
   Mortgages owned $15,500.
   Materials and supplies $391,645.
   Prepaid insurance $355,302.71.
   Investments in subsidiary companies $1,406,325.67.
   Prepaid taxes $607,575.33.
   Real estate, plant, and transmission systems $53,470,089.04.
   There were no changes in the various bond issues nor in the
      capital stock during the year.
   Mortgages on real estate $20,000.
   Accounts payable $875,214.37.
   Notes payable $1,650,000.
   Accrued taxes $484,806.02.
   Interest payable $215,509.58.
   Dividends payable $201,519.50.
   Reserves for depreciation $2,532,715.94.

  Draw up a comparative balance sheet and determine the profit
     for the year.

  4. Make an analytical statement showing the effect on the
     various assets and liabilities of the profits made during
     the year.

  5. Discuss these changes and so far as possible show how they
     were brought about.

                            V
  1. On December 31, 19—, James Good’s books revealed the
     following facts:

   Cash $25,000.
   Due from customers $130,000.
   Plant and equipment $100,000.
   Other assets $15,000.
   Due creditors for merchandise $55,000.
   Accrued expenses $7,980.
   Mortgage on plant $50,000.
   Other liabilities $49,500.
   Merchandise now on hand $67,800.
   Capital at beginning of year $150,000.
   Drawings during the year $10,000.
   Sales $300,000.
   Initial inventory $75,000.
   Purchases $200,000.
   Selling expenses $30,000.
   General administrative expenses $27,480.

   Draw up a balance sheet with the net worth section expanded
   to show the operations for the year.

  2. On January 2, 19—, the value of the goods on A. R. Knight’s
     shelves amounted to $85,980, and he bought $275,600 worth
     during the year. On December 31 of the same year the inventory
     was $106,720. What was the amount of gross sales, if gross
     profits were $96,000 and returned sales $17,500?

  3. Expenses for conducting Knight’s business for the year
     were as follows:

     Salesmen’s salaries $18,750.
     Advertising $2,750.
     Expenses of shipments $4,580.
     Office help $12,800.
     Rent $18,000.
     Insurance $2,500.
     Supplies $5,400.
     Depreciation on buildings $6,500.
     Interest $5,250.
     Taxes $3,920.

  What was the net profit?

  4. During the year 19—, the Morton Trading Company’s
     books showed:

     Net sales amounting to $265,000.
     Purchases were $148,000, of which $7,540 worth of goods
        were returned.
     The cost of goods sold was 60% of the net sales and the
        final inventory was $84,900.
     Sales salaries $29,760.
     Advertising $30,000.
     Shipping expenses $4,680.
     Office salaries $10,260.
     Rent $4,800.
     Insurance $1,500.
     Depreciation of plant $6,890.
     Supplies $1,230.
     Taxes $4,430.

  Prepare a statement of profit and loss for the year.

                              VI
  1. The books of Alfred Gristede show the following record
     at the close of business September 30, 19—:

     Inventory September 1, 19—, $500,000.
     Purchases $2,500,000.
     Purchases returns $50,000.
     Sales $3,250,000.
     Sales returns $100,000.

  If the gross profit is $850,000, what is the final inventory?

  2. The profit and loss records of A. C. Dye for the year 19—
     show the following figures:

     Merchandise January 1, 19—, $235,960.
     Sales $875,900.
     Sales returns $6,900.
     Purchases net $586,900.
     Advertising $16,000.
     Office salaries $22,500.
     Sales salaries $34,800.
     Insurance $6,300.
     Taxes $21,700.
     Depreciation on buildings $4,630; on motor fleet $1,875.
     Accounts written off as uncollectible $36,875.
     Interest on notes and accounts receivable $6,790.
     Interest on notes payable $3,275.

  At the end of the year the merchandise amounted to $216,735.
  Draw up the statement of profit and loss for the year.

  3. Prepare a formal profit and loss statement of the Lincoln
     Leather Company for the year ending December 31, 19—,
     from the data below taken from the company’s books:

     Sales $1,559,087.
     Sales returns $13,456.
     Merchandise on hand January 1, 19—, $487,693.

  Leather bought during the year $876,019, of which there were
  returns because of defects amounting to $8,716.

  Inventory on December 31, 19— disclosed $513,860 worth of
  goods on hand.

  Expenses of operation were:
     Advertising $247,920.
     Sales salaries $143,560.
     Sales commissions $88,723.
     Sales traveling expenses $6,423.
     Freight-out $1,976.
     Delivery expenses $38,976.
     Rent $38,500.
     Taxes $12,890.
     Insurance $7,680.
     Light $4,320.
     Heat $15,648.
     Interest paid $3,216.
     Interest received $4,872.
     Office salaries $27,875.
     Sundry expenses $9,213.

  4. The Interurban Railway Company whose comparative balance
     sheet was the basis of work in Assignment IV, Problem 1,
     had the following particulars for its statement of profit
     and loss for the year ending December 31, 19—:

     Operating revenue, i.e., income received from sale of service
        to community, $152,228.11.
     Other income $1,191.83.
     Operating expenses $100,582.96.
     Deductions from income were:
        Interest on 5% first mortgage bonds $8,750.
        Interest on notes payable $4,727.41.
        Taxes $10,578.57.

  What was the amount of the net profits for the year?

  Compare this with the surplus change as developed by
  the comparative balance sheet in Assignment IV, Problem 1.

  5. Draw up a comparative profit and loss statement of the
     Interurban Railway Company for the years ended December 31, 19—
     and December 31 of the previous year from the information
     submitted in Problem 4 and the following data for the year
     ended December 31 of the previous year:

     Operating revenues $181,016.11.
     Other income $526.52.
     Operating expenses $122,143.23.
     Deductions from income:
        Interest on the first mortgage bonds $8,750.
        Interest on notes payable $6,030.
        Taxes $13,634.59.

  VII

     1. The financial condition of the Subway Seller at the beginning
        of the year is shown by the following balance sheet:

                        THE SUBWAY SELLER
                          BALANCE SHEET
                              January 1, 19—

                           _Assets_
      CURRENT ASSETS:
        Cash                     $100,000.00
        Notes Receivable           15,000.00
        Accounts Receivable       225,000.00
        Merchandise Inventory     450,000.00
        Liberty Bonds              50,000.00  $840,000.00
                                 -----------
      DEFERRED CHARGES:
        Prepaid Insurance        $ 25,000.00
        Supplies Inventory         20,000.00    45,000.00
                                 -----------
      FIXED ASSETS:
        Furniture and Fixtures   $ 30,000.00
        Delivery Equipment         18,000.00
        Buildings                 350,000.00
        Land                      200,000.00   598,000.00  $1,483,000.00
                                ------------  -----------

                        _Liabilities_
      CURRENT LIABILITIES:
        Notes Payable            $300,000.00
        Accounts Payable           20,000.00
        Accrued Expenses:
          Salaries                 12,000.00
          Taxes                    25,000.00
          Interest on Mortgage     10,500.00  $367,500.00
                                 -----------
      Fixed Liabilities:
        Mortgage on Land and Bldg              350,000.00     717,500.00
                                              -----------  -------------

                       _Net Worth_
      Represented by:
        Capital Stock                         $500,000.00
        Surplus                                265,500.00  $  765,500.00
                                              ===========  =============

     At the end of the year the following facts are taken from
     the books of account:

     The profit and loss records show:
        Sales $2,125,000.
        Sales returns and allowances $15,000.
        Purchases for the year $1,200,000.
        In-freight $15,000.
        Purchase returns and allowances $8,000.
        Advertising $125,000.
        Sales salaries $190,000.
        Delivery expense $50,000.
        Depreciation on furniture and fixtures $3,000,
           and on delivery equipment $2,250.
        Superintendence $50,000.
        Clerical salaries $75,000.
        Repairs and maintenance $20,000.
        Supplies $30,000.
        Insurance $60,000.
        Telephone and telegraph $10,000.
        Bad debts $10,625.
        Depreciation on building $14,000.
        Taxes $30,000.
        Interest on notes payable $15,000.
        Interest on the mortgage $21,000.
        Sales discounts $15,000.
        Interest received on Liberty bonds $2,000.
        Purchase discounts $24,000.

     The balance sheet records show:
        Cash $141,000.
        Notes receivable $15,000.
        Accounts receivable $335,000.
        A reserve for doubtful accounts of $10,625.
        Merchandise inventory $350,000.
        Prepaid insurance $15,000.
        Supplies inventory $30,000.
        Furniture and fixtures $27,000.
        Delivery equipment $15,750.
        Building $336,000.
        Notes payable $300,000.
        Accounts payable $25,000.
        Accrued sales salaries $15,000.
        Accrued taxes $30,000.
        Accrued interest on mortgage $10,500.
        Mortgage on land and building $250,000.

     Other figures on the balance sheet of January 1, 19—
     have remained unchanged excepting surplus, the amount
     of which you are required to determine.

     From the above information:
      (a) Prepare a comparative balance sheet.
      (b) Prepare a statement of profit and loss.
      (c) Determine the following ratios:
            1. Current assets to current liabilities
            2. Working capital turnover
            3. Merchandise turnover
            4. Accounts receivable to sales
                 (Assume a normal credit period of 60 days)
            5. Net profit to net worth
            6. Gross profit to net sales
            7. Selling expenses to net sales
            8. Net operating expenses to net sales
            9. Net profit to net sales

     2. From the following particulars taken from the books
        of the United Steel Company, prepare a pro forma balance
        sheet, and a statement of profit and loss:

        Stocks of goods on hand from preceding year $4,964,792.
        Purchases $12,945,983.
        Sales $14,987,653.
        Sales salaries $52,500.
        Sales traveling expenses $8,613.
        Sales commissions $1,780.
        Cash $1,420,909.
        Executive salaries $32,500.
        Interest on notes payable $18,604.
        Rentals $17,000.
        Capital stock outstanding $38,669,600.
        Interest income including the accrued, $29,911.
        Real estate, plant, and equipment $34,469,867.
        Trade debtors $7,082,026.
        Notes receivable $302,638.
        Customers’ acceptances unmatured $4,446,000.
        Trade creditors $1,609,101.
        Notes payable $250,000.
        Repairs to plant $8,790.
        Investments in subsidiary companies $3,358,933.
        Advertising cost to date $35,680, exclusive of
           the amount prepaid.
        Telegraph $2,514.
        Telephone $8,716.
        Freight-out $4,978.
        Demurrage $1,972.
        Taxes expense $39,447, of which $17,017 is unpaid.
        Surplus without taking account of the current year’s
           profit is $13,678,362.
        Goods now on hand $7,004,339.
        Interest accrued on notes receivable $5,510.
        Prepaid advertising $11,892.

     Note: Show Interest Income Accrued as a current asset.
     3. The warehouse of the Eastern Distributing Company is
        destroyed by fire. The records at the main offices showed
        that there were $785,960 worth of merchandise in the
        building on January 1, 19—.

        The fire occurred on October 3, 19—, and to that date
        purchases had been made amounting to $2,486,475, of which
        $18,920 were not yet delivered. Included in the cost of
        purchases is $22,500 for freight paid.

        Sales had amounted to $2,930,760. Statistical records for
        the ten years previous to the loss, showed a gross profit
        on sales of 51.42%.

        The loss is complete except as to a small amount of goods
        salvaged, the realizable value of which is estimated at
        $125,000.

        It is necessary, according to the terms of the fire insurance
        policy, to file an immediate claim for goods destroyed.
        Prepare such a claim, having due regard to a form suitable
        for showing the loss.

   VIII
  1. Draw up from your own data the balance sheet of a corporation,
     with at least twelve assets and at least five liabilities and
     a total asset figure of over $250,000.

  2. Making your own assumptions set up a balance sheet for the
     succeeding year and a comparative balance sheet for the
     two years.

  3. Determine the ratios of fixed assets to capital stock,
     of working capital to net worth, and of current assets to
     current liabilities.

  4. Write a brief statement of about 150 words giving your
     opinion of the financial condition of the concern.

                           IX
  1. Enter in ledger “T” accounts the information for the “end
     of the year” given in Assignment VII, Problem 1, page 525.

  2. Using the account titles in the ledger of Problem 1, draw
     up a chart of accounts similar to Form 2, page 75.

  3. Show and explain how the ledger of Problem 1 is the
     proprietorship equation.

  4. Draw up a profit and loss statement to account for the
     change in proprietorship shown by Assignment VIII, Problem 2,
     making your own assumptions as to items in the various
     sections of the statement.

  5. State the probable business transactions occurring to
     bring about these changes in proprietorship (Problem 4),
     i.e., show the interaction of the profit and loss elements
     with the asset and liability elements in causing the changes
     in financial condition.

                         _Instructions_

   Problem 1. A ledger “T” account is a skeleton account ruled
   only with the horizontal “title” line and the vertical line
   separating the left section from the right, date and amount
   columns being left without formal ruling.

   Problem 3. The illustration on page 41 gives the form to
   follow in solving this problem.

   Problems 4 and 5. Make your assumptions reasonable as to the
   turnover and the ratios of expenses and profit to sales.
   Assume a merchandise turnover of 5, and a gross profit of
   40% of sales. From these determine roughly the cost of goods
   sold, the purchases, and the sales figures. Make reasonable
   provision for bad debts, depreciation, interest, etc.,
   in accordance with the balance sheet requirements. Make
   the other expense items whatever amounts are necessary to
   produce the same net profits as is shown by the comparative
   balance sheet.

   Follow closely the illustration in Chapter VII for the form
   of solution to be used for Problem 5.

                              X
  1. Using the schedule shown on page 82, write out three
     examples of each class and show their effects in each of
     the three opposite classes (27 examples).

  2. Set up ledger “T” accounts for each of the illustrations
     on pages 82-84, entering therein the proper amounts, debit
     and credit.

                              XI
  1. (a) Analyze the following transactions from the seller’s
         viewpoint and name the debit and credit elements of
         each to show:
      1. The increase or decrease of assets, liabilities, and
         proprietorship.
      2. The account titles under each of the general groups.

  The Dairymen’s League on August 1, 19— owed the Union Car
     Line Company $19,780 for transportation services rendered,
     and paid $9,780 cash on account, and gave a 60-day note
    (6%) for $5,000.

  Services to the League for the week ending August 7
  totaled $2,920.

  A claim of $720 was allowed the League on the 12th for
  goodslost in transit.

  The bill of August 7 was paid in full August 14,
  less 5% for prompt payment.

  On the 15th the note for $5,000 was discounted at
  the bank at 6%.

     (b) Set up the Dairymen’s League account on the books
         of the Union Car Line Company.

  2. (a) Analyze the following transactions of Samuel Lawson
         and name the debit and credit elements of each to show:
      1. The increase or decrease of assets, liabilities, and
         proprietorship.
      2. The account titles under each of the general groups.

  On September 5, 19—, Lawson entered a claim for $1,000
  against the Mohawk and Westchester Railroad Company for
  goods bought but lost in transit on August 12.

  September 16 one of Lawson’s trucks was destroyed by fire
  and a claim was entered against the Shippers Fire Insurance
  Company for $5,800. The truck was new and cost $7,500.

  September 20 a bill for $23,400 for services was received
  from the Union Transport Company.

  Payment of $16,900 was made September 23 to the Transport
  Company.

  September 30 the claim of September 5 was paid in cash by the
  M. and W. R. R. Company to Lawson, and he paid by check the
  balance due the Transport Company.

     (b) Set up the Union Transport Company account on the books
         of Samuel Lawson.

  3. (a) From the data of Problem 1, set up the Union Car Line
         Company account on the books of the Dairymen’s League.

     (b) From the data of Problem 2, set up the Samuel Lawson
         account on the Union Transport Company books.

  4. (a) Analyze the following transactions from the viewpoint
        of the business and name the debit and credit elements
        of each to show:
      1. The increase or decrease of assets, liabilities, and
         proprietorship.
      2. The account titles under each of the general groups.

  Balance of cash on hand July 1, 19—, $8,940.
  July 2, received from cash sales over the counter $760.
  July 3, received from customers in payment of notes $575.

  July 5, paid for salaries $175, motor repairs $85,
  advertising $325, postage $22.
  July 6, discounted $1,000 6% 30-day note at the bank.
  July 7:
      Paid for new Ford truck $925, f.o.b. Detroit, and
      freight-in on truck, $38.75; insurance $75.
      Paid creditors $4,290.
  Made a promissory note in favor of a creditor for $500 for
      three months at 6%.
  Paid note for $2,000 due on the 8th of July with interest at
      6% for three months.
  Bought a Liberty bond for $887.50 with accrued interest of
      $16.50.

  (b)  Set up the Cash account.
  (c)  Show the account properly ruled and balanced.

  5. Name the debits and credits for each of the following
     transactions and set up the Notes Payable account:

     On October 1, 19—, discounted 30-day 6% note for $2,500
        at the bank.
     Paid six months’ promissory note at 6% for $1,000 on the
        10th and gave to a trade creditor our note for $3,750
        due in 30 days without interest for balance of open
        account.
     Discounted trade customer’s three months’ 6% note for
        $5,000 at bank on the 15th, the discount period being
        60 days.
     Paid note for $2,500 at the bank on the 31st.

  6. The Willow Spring Dairy Farm purchased a new Cleveland
     Tractor April 1 for $1,850, f.o.b. Cleveland. Freight
     charges were $32.90; insurance in transit $15; hauling the
     accessories from the station to the farm $12; attachments
     cost $435; and assembling the parts cost $35. After being
     used for six months the machine with accessories was sold
     for $2,000.

  Set up the Farm Implements account and determine the profit
  or loss. Disregard depreciation.

  7. On January 15 a tract of land was purchased for $32,000,
     which amount included the cost of searching title $800, and
     unpaid taxes at time of purchase $350. The cash paid included
     all but the taxes.

       On March 1 a new road was completed through the tract at
          a cost of $1,250.
       April 1 the unpaid taxes of $350 were paid.
       August 1 assessments were levied for the state highway
          amounting to $3,280.
       Half of the land was sold, December 10, for $18,500.

   Name the debits and credits of each of these transactions and
   set up the Land account.

                         _Instructions_

   Problems 1, 2, and 4. Set up each item somewhat in the following
   manner:

   Paid $9,780 cash on account (Dairymen’s League paid to
   Union Car Line Company).

   Debit:  Increase of Assets (Cash, $9,780).
   Credit: Decrease of Assets (Accounts Receivable,
           Dairymen’s League $9,780).

                             XII
  1. (a) Analyze the following transactions and name the debit and
         credit elements of each to show:
      1. The increase or decrease of assets, liabilities,
         and proprietorship.
      2. The account titles under each of the general groups.
         [Refer to (b) for account titles to be used for this.]

  Paid, March 1, repairs on auto truck $62.50; by check, rent $100.
  March 4, $18 for office supplies; advertising circulars $128;
     postage $25; telephone $18.50.
  March 8, interest on borrowed money $12; new sign on door $22.
  March 15, received interest on Liberty bonds $21.25.
  March 18, typewriter repairs cost $8; gasoline and oil $57;
     wrapping paper and general supplies $20.
  March 25, advertising $75; electric light $17; insurance $15.
  March 31, salaries of manager $125; office force $100;
     telegrams $12.80; discount on borrowed money $5; coal $50;
     sales salaries $75; traveling expenses $14.

     (b) Prepare accounts with:
          1. Delivery Expense
          2. Advertising
          3. Interest Cost
          4. Interest Income
          5. General Office Expense
          6. Postage, Telephone, and Telegraph
          7. Selling Expense
          8. Cash

  and set up the debits and credits of the transactions therein.
  All transactionsa re for cash.

  Be careful always to maintain the debit and credit equilibrium.

  2. Prepare accounts with Delivery Expense, Delivery Supplies,
     Delivery Wages, and Cash, and set up therein the debits and
     credits of the following transactions, all of which are for
     cash:

    November 1, paid $5.40 for gasoline and $1.20 for oil.
    November 6, bought a new inner tube for $3.50, and the
       following day a new shoe for $42.50.
    November 10:
       Paid $4.50 for gasoline, and $1.20 for oil.
       Paid the driver $35 for wages and $22.50 to the helper.
       Removing carbon cost $2 and patching a tire $.50.
    November 15, the car was repaired for $75.
    November 18:
       A short-term insurance policy for $25 was taken.
       Paid the driver $35 for wages, and $22.50 to the helper.
       The driver was arrested and fined $10 for passing a
          trolley car while it was discharging passengers.
    November 19, the car was wrecked by going down a
       washed-out embankment and the helper hurt. Hospital
       expenses were $50, which the
    Casualty Insurance Company paid on the 25th. It cost $60
    to take the car to a garage and repairs cost $275.
    Suit was entered against the township for costs.

  3.  (a) Analyze the following transactions and name the debit
         and credit elements of each to show:

       1.  The increase or decrease of assets, liabilities,
           and proprietorship.
       2.  The account titles under each of the general groups.

  R. C. Rockwell goes into the wholesale grocery business and
     invests $20,000 in capital.
  Due to a need for cash to take advantage of a favorable
     purchase of securities for personal use, he withdraws $5,000
     cash.
  He sells some of his personal securities for $500 to buy
     merchandise for the store.
  He pays out of business funds household expenses of $400,
     and a personal note due on his touring car for $500.
  By selling two acres of land for $500 he returns the $500 he
     paid on the car.
  At the end of the month he transfers to his capital account
     $1,000, being the debit balance in his personal account.

     (b) Set up the proprietor’s capital account as carried
         on the books of the grocery business.

  4. (a) Analyze the following transactions and name the debit
         and credit elements of each to show:

      1.  The increase or decrease of assets, liabilities,
          and proprietorship.
      2.  The account titles under each of the general groups.

      There is a credit balance in Profit and Loss of $4,000.
         A debit balance in George B. Kelly, Personal, of $1,500.
         A credit balance in George B. Kelly, Capital, of $35,000.
         A debit balance in Cash of $5,000.
      Mr. Kelly paid bills for the business out of personal funds:
         Heat and electric light $75.60.
         Water rent $25.
         Store rent $400.
         Gas bill $26.50.
         R. G. Dun rating dues $10.
         Trade association dues $15.

     He received personally and retained the following amounts
     due the business:
        Interest on notes receivable $375.
        Cash in settlement of last month’s disputed electric
           light bill $15.
        Rent of desk room $150.
        Mr. Kelly withdrew $400 cash for personal use.
        He paid for telegrams for the business $15.
        He had his touring car repaired and took $75 store
           cash to pay for it.

     (b) Prepare accounts with:
           1.  Profit and Loss
           2.  George B. Kelly, Personal
           3.  George B. Kelly, Capital
           4.  Cash

  and set up the debits and credits therein.

  Transfer the net balance of Profit and Loss account to Kelly,
  Personal; and transfer the net balance of the latter account
  to Kelly, Capital.

  XIII

     1. Analyze the following transactions and name the debit
       and credit elements of each to show:

         1. The increase or decrease of assets, liabilities,
            and proprietorship.
         2. The account titles under each of the general groups.

         Credit sales to customers $389,650.
         Sales returns $9,480.
         Inventory at beginning of year $62,780.
         Credit purchases $206,240.
         Purchase returns $4,760.
         Cash received from customers $250,000.
         Sales discounts allowed $1,280.
         Purchase discounts taken $3,560.
         Cash paid creditors $175,000.
         Freight-in $2,670, and freight-out $3,935,
            were paid in cash.

     2. Bought a motor truck for $2,250, on which the freight
        charges were $40 in addition. Accessories cost $150 and
        of these the speedometer was later sold for $50, its cost
        price. Set up the Delivery Truck account and show it
        properly adjusted at the close of the period to take
        account of 10% depreciation.

     3. An old building cost $10,000.

           Renovation with betterments $1,200.
           Assessments for paving the street were $750.
           An extension not joined to the main building
              cost $2,000.
           The extension was sold for $2,500 cash early
              in the second year.
           Loss by fire at the end of the third year amounted
              to $3,000, which the insurance company made good
              by repairing the damage.
           Depreciation at 5% per annum is calculated on the
              balance of the Building account at the end of
              each year.

      Show the Building account and its depreciation reserve at
      the end of the fifth year.

     4. The Office Supplies account shows $450, of which $400 is
        still on hand at the end of the period. Show the account
        properly adjusted and closed.


     5. From the data of Problem 1, prepare a single Merchandise
        account. Assume a final inventory of $75,000, and show the
        account adjusted and closed.

     6. Analyze the following transactions relating to a business
        plant, and name the debit and credit elements of each to
        show:
            1.  The increase or decrease of assets, liabilities,
                and proprietorship.
            2.  The account titles under each of the general groups.

        Purchased a building for $100,000 from James Jackson & Co.
        Paid James Jackson & Co. $40,000 cash and executed a mortgage
           for the balance.
        Installed a new heating plant at a cost of $15,000 cash,
           $1,000 cash being received from sale of old plant.
        A new roof, at a cost of $5,000 cash, was put on.
           The old roof had no value as scrap.
        One year later the entire heating plant was covered with
           asbestos to conserve fuel. The cost was $500 cash.
        The roof was repainted at a cost of $100 cash.
        Glass broken by a hail storm was replaced at a cost
           of $50 cash.
        Two new skylights costing $750 cash were built.
        Gutters and down-spouts were replaced at a cost of $150.

                             XIV
  1. Allowing five lines for each account and for the necessary
     depreciation reserve accounts which should follow immediately
     their particular assets, set up the following accounts on the
     ledger in proper form and under correct titles, and take a
     trial balance as of December 31, 19—.

        C. M. Loomis, capital investment $50,000.
        Withdrawals $3,000.
        Initial inventory of merchandise $19,740.
        Purchases $63,800; returns $1,524.50.
        Sales $99,360; returns $1,480.
        Cash in bank $2,750.
        Office equipment $800.
        Delivery trucks $5,000.
        Accounts receivable $40,950.
        Notes receivable $5,000.
        Liberty bonds $5,000.
        Notes payable $1,700.
        Interest and discount $90, Dr.
        Supplies $600.
        Salesmen’s salaries $3,500.
        Advertising $1,200.
        Delivery expenses $569.50.
        Office salaries $4,655.
        Legal advice $50.
        Light and heat $150.
        Insurance $75.
        Building $22,910.
        Taxes $245.
        Land $2,500.
        Mortgage $10,000.
        Accounts payable $18,980.
        Depreciation incurred during previous years on
           buildings $2,000; on delivery equipment $500.

  2. Loomis’ final merchandise inventory is $20,680. He estimates
     depreciation on buildings at 5%, and on delivery equipment at
     10%. 5% of the outstanding accounts and notes are deemed
     uncollectible. Office equipment is to be written down $300.
     Unexpired insurance is $25; accrued mortgage interest $300;
     accrued taxes $250; accrued sales salaries $350; and supplies
     on hand $200.

   Prepare a statement of profit and loss and a balance sheet.

  XV

     1. Give three examples each of deferred expense and income,
        and accrued expense and income (12 examples). Show these
        in account form after the account has been adjusted.

     2. From the following particulars, take a trial balance of
        the ledger of the Builders’ Supply Co. on June 30, 19—.

        Warehouse                       $ 22,500.00
        Land                               7,800.00
        Capital Stock                    300,000.00
        Surplus                           50,193.00
        Stock-in-Trade                   245,680.00
        Furniture and Fixtures             2,500.00
        Good-Will                         25,000.00
        Trade Debtors                    362,400.00
        Cash                              38,490.00
        Trade Creditors                  176,700.00
        Notes Payable                     15,700.00
        Notes Receivable                  18,900.00
        Sales                            589,760.00
        Purchases                        356,420.00
        Salaries                          38,900.00
        Coal                               4,200.00
        Repairs                            2,800.00
        General Expenses                  17,900.00
        Depreciation Reserve Warehouse     5,000.00
        Mortgage Payable                  10,000.00
        Interest Expense                     475.00
        Interest Income                      662.00
        Lighting                             700.00
        Telephone                            600.00
        Insurance                          1,860.00
        Taxes                                890.00

      Draw up a balance sheet and profit and loss statement for
      the year, taking consideration of these additional data:

         The merchandise on hand is $256,920.
         Coal on hand $500.
         Accrued mortgage interest $600.
         The warehouse has depreciated 5%, and furnitures
            and fixtures 10%.
         3% of the Trade Debtors balance is deemed uncollectible.

      Note: Do not classify expenses in the profit and loss statement.
            List them under the two titles, Operating Expenses and
            Non-Operating Expenses.

      3. (a) Using the trial balance data of Problem 2, set up the
             ledger of the Builders’ Supply Co.
         (b) Close the ledger in accordance with the data given.
         (c) Take a trial balance of the ledger after it is closed.

  XVI
      1. The following transactions are to be set up, debit and
         credit, on the ledger. Use the transaction number as the
         date of the month of June. Set upon your ledger the
         following account titles, in the order given, allotting
         to each the number of lines indicated by the numeral
         following the title:

          Cash                             35
          Notes Receivable                 10
          C. H. Scovil                     10
          M. K. Dorns                      10
          A. B. Sutton                     10
          J. P. Nevin                      10
          B. T. Stanton                    10
          C. J. Moger                      10
          R. B. Karell                     10
          Reserve for Doubtful Accounts    10
          Merchandise Inventory            10
          Furniture and Fixtures           10
          Depreciation Reserve Furniture
            and Fixtures                   10
          Notes Payable                    10
          Crew Brothers & Co.              10
          Morris, Lee & Co.                10
          Bondell & Co.                    10
          R. Kennedy                       10
          C. H. Wyss, Capital              10
          C. H. Wyss, Personal             10
          Profit and Loss                  15
          Sales                            25
          Sales Returns and Allowances     10
          Purchases                        15
          Purchase Returns and Allowances  10
          Freight-In                       10
          Salaries                         10
          General Expense                  15
          Depreciation                     10
          Bad Debts                        10
          Expense Supplies                 10
          Interest Income                  10
          Interest Expense                 10
          Purchase Discount                10

        June
           1. C. H. Wyss invested $10,000 cash.
              He paid $5,000 cash for merchandise; and $200
                 for one month’s rent of a storeroom.
              Bought for cash, furniture and fixtures $1,000.
           2. Bought merchandise, $2,750 of Crew Brothers & Co.
                 on account.
              Sold merchandise for cash $675.
           3. Sold merchandise for cash $1,345.
              Paid for office supplies $35.75.
           4. Sold C. H. Scovil $500 of merchandise,
                 receiving $200 cash.
           5. Bought office safe for $150; and typewriter for $65.
           6. Bought merchandise of Morris, Lee & Co. $957.80,
                 paying $257.80 cash.
              Gave Crew Brothers & Co. our 6% 30-day note for $1,000.
              Wyss took merchandise for his own use, $50.
           8. Cash sales were $1,585.
              Advertising cost $275.
           9. Paid salesman $22; and office clerk $18; and $24 for coal.
          10. Bought merchandise for cash $480.
          11. Sold R. B. Karell merchandise for $90, and took his
                 check in payment.
          12. Paid $25 for Merchant Association dues; postage
                 and stationery $15.
          13. Sold bill of merchandise $358.90 to M. K. Dorns,
                 receiving $158.90 in cash and accepting from Dorns,
                 at its face value, R. C. Home’s note,
                 non-interest-bearing, for $50, due in 10 days.
          14. Gave Crew Brothers & Co. a 10-day 6% note for balance due.
              Dorns returned as unsatisfactory $10 worth of merchandise
                 sold to him on the 13th.

                               XVII
   1. The following transactions of C. H. Wyss are to be set up
      on the ledger in the same manner as those given in the
      practice data of Assignment XVI.

    June
      16. Cash sales were $875.55.
          Paid salesman $22; and office clerk $18.
      17. Paid freightbill of $35; and express $5.80.
      18. Wyss drew for personal use $400 cash.
          Paid electric light bill of $18.90.
      19. Bought on account 2/10, net 20, merchandise
             from Bondell & Co. for $5,600.
      20. Cash sales were $925.50.
          Sales on account to A. B. Sutton $1,275;
             J. P. Nevin, $150; C. J. Moger $99.70;
             and R. B. Karell $285.90.
      22. Returned merchandise $400 to Bondell as unsatisfactory.
      23. Paid salesman $22; and office clerk $18.
      24. Received payment of R. C. Home’s note for $50.
          Was allowed by Bondell & Co. $50 on claim.
      25. Paid Crew Brothers & Co. note in their favor,
             with interest at 6%.
          C. H. Scovil paid $100 on account.
      26. Paid freight $38.50.
          Wyss took goods for his own use $45.
          Sold B. T. Stanton $175 merchandise, receiving $50
             cash and James Harvey’s note for $100 at 6% for
             60 days, accepted at face value.
      27. Paid telephone bill $13.90; advertising $52;
             and circulars $10.
          Allowed C. J. Moger’s claim for $10 for spoiled goods.
          Paid Bondell & Co. amount due.
      29. Cash sales were $470.
          Wyss drew for private needs $200.
          Collections were: A. B. Sutton $275;
             J. P. Nevin $150; C. J. Moger $59.70;
             and R. B. Karell $185.90.
      30. Paid Morris, Lee & Co. $500 on account.
          Paid salesman $22; office clerk $18.
          Cash sales were $950.
          Purchased from R. Kennedy a desk for store use
             valued at $75, Kennedy taking merchandise to
             the value of $50 in part payment and the balance
             being credited.

                        _Instructions_

  Note that the Bondell & Co. bill was paid within the
  discount period. (2/10, net 20, means that 2% can be
  deducted from the amount due if it is paid within 10 days
  and that the face amount of the bill is due in 20 days from
  date of rendering.)

                             XVIII
    1. Take a trial balance of C. H. Wyss’ ledger completed in
       Assignment XVII and record it on a piece of journal paper.

       Draw up a balance sheet and profit and loss statement for
       the end of the month, taking account of the following
       adjustments:

       Interest accrued on notes receivable $.67.
       $49.53 worth of accounts and notes receivable will
          probably prove to be bad. Set up a reserve on the
          balance sheet.
       Inventories on hand: merchandise $7,218.20; expense
          supplies $25.75.
       Depreciation of $11.45 on furniture and fixtures for
          the month.
       Interest accrued on notes payable $4.
       Salaries accrued $5.71


    2. The following transactions are to be entered in a purchase
       journal. Make daily postings to vendor accounts and a
       summary posting at the end of the month to Purchases account.

  April
     2. Bought from Endicott-Johnson Company, 61 Hudson St., N.Y.C.:
        20 pairs men’s bluchers, black               @ $ 4.75
        36 pairs ladies’ single strap pumps,
          patent leather                             @   3.50
        10 pairs men’s white buckskin                @   2.50

    10. Bought from Lounsbury-Soule Company, 47 Duane St., N.Y.C.:
        25 pairs men’s Scotch brogues                @ $ 6.00
         8 pairs men’s kangaroo bluchers             @   4.50

    15. Bought from Lexington Shoe Company, 141 Duane St., N.Y.C.:
        20 pairs men’s sport oxfords                 @ $ 4.00
        15 pairs women’s sport oxfords               @   3.75

    20. Bought from Charles A. Eaton, 127 Duane St., N.Y.C.:
        12 pairs women’s two strap oxfords, black    @ $ 2.50
         6 pairs women’s pumps, black kid            @   1.75
         8 pairs women’s two strap sandals, white    @   2.65

    26. Bought from I. Miller, 560 Fifth Avenue, N.Y.C.:
         5 pairs Russian boots                       @ $10.00
        12 pairs riding boots                        @  12.00
        16  pairs single strap suede pumps           @   6.00

    3. Enter the following transactions in a purchase journal
       ruled for two departments—Prescription and General.
       Make daily postings to vendor accounts. Summarize and
       post at end of month.

  May
     1. Bought from Park Davis & Co., Detroit, Mich.:
          For Prescription Dept.  Invoice #10  2/20, n/60  $650.00
          For General Dept.       Invoice #11  2/20, n/60   425.00
     3. Bought from Lehn & Fink, Inc., 635 Greenwich St., N. Y. C.:
          For Prescription        Invoice #61  1/20, n/30  $150.00
          For General             Invoice #62  1/20, n/30    87.50
     7. Bought from Eastman Kodak Co., Rochester, N.Y.:
          General                 Invoice #675 1/30, n/60  $126.50
    13. Bought from Park & Tilford, New York City:
          General                 Invoice #256 1/10, n/30  $ 22.50
        From McKesson & Robbins, 91 Fulton St., N.Y.C.:
          Prescription            Invoice #27  2/20, n/60  $ 75.00
    17. Bought from Hospital Specialty Co., New York City:
          General                 Invoice #27  1/30, n/60  $ 76.00
          Prescription            Invoice #28  1/30, n/60    98.00
    23. Bought from Crescent Drug Sundry Co., Philadelphia, Pa.:
          General                 Invoice #75  1/30, n/60  $135.00
    29. Bought from Marcus & Smith, New York City:
          General                 Invoice #861 1/10, n/30  $ 65.00
        From J. M. Dalton, New York City:
          General                 Invoice #10,680    n/30  $ 16.00
    31. Bought from Denver Pharmaceutical Co., Denver, Colo.:
          Prescription            Invoice #16  1/20, n/60  $165.00
        From United Drug Exchange, New York City:
          Prescription            Invoice #205 1/30, n/60  $267.00

                          _Instructions_

    Problem 1. Do not close the accounts in the ledger. Make
    up the statements from the trial balance figures and the
    adjustment data given.

    Problem 2. Use two-column journal paper—the inner column
    for detail and the outer column for totals. Follow Form 7
    shown on page 142.
       Use plain paper with “T” accounts for the ledger.

    Problem 3. Use three-column journal paper. Rule in
    additional lines to make it conform with Form 9 on page 144.
    Follow carefully the illustration on that page in making the
    entries.
       Use plain paper with “T” accounts for the ledger.

                           XIX
    1. Close C. H. Wyss’ ledger, taking account of the
       adjustments mentioned in Assignment XVIII. Use the profit
       and loss statement already drawn up to show the order in
       which the accounts should be closed.

       Take a post-closing trial balance, recording it on a piece
       of journal paper, and compare it with the balance sheet.

    2. The following transactions are to be entered in a sales
       journal. Make daily postings to customers’ accounts and a
       summary posting at the end of the month to Sales account.


  April
     3. Sold on account to Mrs. A. K. Foster: 3 waists @ $1.50;
           1 suit $45; and 6 pairs hosiery @ $1.10.
        Cash sales were $175.
     7. Sold on account to Mrs. R. F. Burns: 1 evening dress $75;
           1 evening cloak $125; 3 pairs hosiery @ $3.30.

        To Mrs. B. J. Scott: 1 riding habit $65; 1 pair riding
           boots $20; 1 riding crop $7.50; 1 riding hat $12.
        Cash sales were $225.
    15. Sold to Miss Alice Hanna, on account: 1 pair 18-button
           gloves $7.50; 1 evening dress $45; 1 pair cut-steel
           buckles $25; 1 pair evening slippers $16.
        Cash sales $376.
    21. Sold to Mrs. W. S. Jordan, on account: 1 evening dress
           $97.50; 1 afternoon dress $72.50; 1 business suit
           $45; 1 pair sandals $8.50; 1 pair evening slippers
           $16; four pair hosiery $20.
        Cash sales $413.
    28. Sold to Mrs. Franklin Perry, on account: 1 bathing suit
           $13.50; 1 pair hose $1.50; 1 pair bathing shoes $2.50;
           1 rubber cap $1.75.
        Cash sales, $365.

    3. The following transactions are to be entered in a sales
       journal ruled for two departments—Prescription and General.
       Make daily postings to customers’ accounts. Summarize and
       post at end of month.

  May
     2. Sold to Alhambra Pharmacy, Invoice #325, 1/30, n/60:
           Prescription, $325; General $215.
        To Alpha Drug Co., Invoice #326, 1/30, n/60: General $165.
        Cash sales: Prescription $614; General $528.90.
     6. Sold to Ambassador Pharmacy, Invoice #350, 1/20, n/30:
           Prescription, $235; General $129.
        To Anglo-American Drug Co., Invoice #352, 1/10, n/30:
           Prescription $12; General $137.25.
        Cash sales: Prescription $562; General $489.
    10. Sold to Arcade Drug Store, Invoice #375, 1/20, n/30:
           Prescription $27; General $439.
        Cash sales: Prescription $281; General $314.
    18. Sold to Boston Pharmacy, Invoice #401, 1/30, n/60:
           Prescription $426; General $237.
        To Boyer-Gordon Drug Co., Invoice #402, 1/30, n/60:
           Prescription $374; General $472.
        Cash sales: Prescription $489; General $654.
    24. Sold to Bronx Pharmacy, Invoice #431, 1/30, n/60:
           Prescription $256; General $416.
        Cash sales: Prescription $617; General $529.
    28. Sold to Terminal Drug Co., Invoice #465, 1/20, n/30:
           Prescription $10; General $438.
        Cash sales: Prescription $675; General $981.

                          _Instructions_

    Problem 2. Use two-column journal paper—the inner column
    for detail and the outer column for totals. Follow Form 7
    shown on page 142.
       Use plain paper with “T” accounts for the ledger.

    Problem 3. Use three-column journal paper. Rule in
    additional lines to make it conform with Figure 9 on page
    144. Follow carefully the illustration on that page in
    making the entries.
       Use plain paper with “T” accounts for the ledger.

                             XX
    1. The following transactions are to be entered in a cash
       receipts journal and posted, where necessary, to ledger
       accounts. At the end of the week summarize and post to
       a Cash account. Follow the illustration on page 148.

  May
    1. A. K. Foster, on account $56.10; S. C. Kramer $66.25.
       Cash sales $316.
    2. Miss Alice Hanna, on account $93.50; W. S. Jordan $259.50.
       Cash sales $425.
    3. Cash sales $543.
    5. C. A. De Forest paid his note for $1,000, due today,
          with interest $15.
       Mrs. Irene Brush paid on account $235.
       Cash sales were $276.
    6. Mrs. Lena Dupont paid on account $67.25.
       E. F. Gibbs paid on account $100.
       Cash sales were $347.75.
    7. James W. Law, on account of his non-interest-bearing
          note $126.75.
       Mrs. Molly Lee, on account $257.25.
       E. D. Wynne, for commission on goods sold for him, $25.
       Cash sales $482.

    2. Enter the following transactions in a cash disbursements
       journal and post daily to “T” ledger accounts set up on
       plain paper. Follow the form of journal shown on page 149.
       Post total disbursements for the week to the ledger Cash
       account used in Problem 1.

  May
     1. Paid Acme Cloak & Suit Co., on account $235;
           American Cloak Co. $165.
        Bought postage stamps and stamped envelopes $50.
     2. Paid Green & Greenberger on account $175.
        Bought office stationery $51.75.
        Paid Ideal Cord & Trimming Co. on account $45.
     3. Paid Lakeview Garment Co. on account $127.50;
           Lang Trimming Co. on account $25.
        Paid salesmen’s salaries $225.
     5. Paid Empire Dress & Suit Co. on account $137.
        Paid telephone bill for April $30.14.
        Paid Elmer Cloak & Suit Co. $75.
        Our note #25 for $1,000 came due and was paid
           with interest $10.
     6. Paid electric light bill for April $27.50.
        Paid rent May 15 to June 15, $263.
        Paid Standard Novelty Works on account $115.
     7. Paid Magic Cloak & Suit Co. on account $67.50;
           Textile Trimming. Works on account $75.
        Paid office salaries $100.

    3. The following transactions are to be entered in a cash
       book, cash receipts and cash disbursements bound together.
       Post daily to “T” ledger accounts set up on plain paper.
       Follow Forms 10 and 11 shown on pages 148-149. Post total
       receipts and total disbursements for the week to the ledger
       Cash account used in Problem 1.

  May
     8. Balance from previous week’s transactions, $1,691.96.
        Paid Green & Greenberger on account $135;
           American Cloak Co. $45.
        Received on account from Miss Frances Clyne $102;
           and Miss Lula Fields $178.
        Cash purchases were $340.25.
     9. Paid Acme Cloak & Suit Co. $165;
           Lakeview Garment Co. $135.
        Received on account from Miss Louise Fox $215;
           and Miss Alice Gaynor $176.
        Cash sales were $189.
    10. Paid salesmen’s salaries $230; for delivery service $150.
        Received on account from Miss Katherine Kennedy $216;
           and Mrs. Johanna Lambert $75.
        Received rent from portion of store $50.
    12. Paid Empire Dress & Suit Co. on account $150;
           Elmer Cloak & Suit Co. $125.
        Paid freight on purchases $41.37.
        Received on account from Miss Pauline Marks $167.50.
        Cash sales $576.
    13. Paid telephone bill, $27; advertising bill for newspaper
           insertions $75.
        Received on account from Mrs. D. J. McCormack $167.
        Received payment of note of J. I. Ardsley $500, and
           interest $7.50.
    14. Paid Daisy Cloak & Suit Co. $150 on account.
        Paid office salaries $100.
        Received from Miss Sue Robertson $125.
        Proprietor, M. D. James, drew for personal use $50.
        Cash was short $4.87.

   4. The following data have been taken from the ledger of the
      Port Bedford Terminal Company, on December 31, 19—.

    Real Estate, Wharves, and Warehouses                     $30,932,394
    Terminal Railway                                             807,052
    Marine Equipment                                             298,994
    Machinery and Electric Plant                                 177,588
    Depreciation Reserve, Real Estate, Wharves, and Warehouses 4,187,074
    Terminal Railway Depreciation Reserve                         45,817
    Marine Equipment Depreciation Reserve                         23,942
    Machinery and Plant Depreciation Reserve                      16,894
    Cash in Bank                                                 192,806
    Accounts Receivable                                          451,406
    Materials and Supplies Purchases                             128,894
    Investments in U. S. Liberty Bonds                         1,809,000
    Capital Stock                                             15,000,000
    First Mortgage 4% Gold Bonds, due August 1, 1951          12,000,000
    Accounts Payable                                             652,644
    Notes Payable                                                247,000
    Surplus                                                    1,231,540
    Warehouse Income                                           2,681,694
    Income from Piers                                          2,140,562
    Sundry Income                                                436,353
    Maintenance of Property                                    1,160,453
    Selling and Service Costs                                  1,081,526
    General Expenses                                             462,386
    Taxes                                                        681,021
    Bond Interest                                                480,000

       (a) Set these items up in the ledger.
       (b) Take a trial balance.

                          _Instructions_

    Problem 1. Use plain paper with “T” accounts for the ledger.

    Problem 3. Use a double sheet of two-column journal
    paper for the cash book. On the receipts side enter
    the balance brought forward in the outer column. For
    current and summary entry follow carefully the forms
    shown on pages 148-149.

    At the end of the week summarize the cash book and post
    the totals to the ledger Cash account. Balance and
    rule the cash book, being careful to carry forward the
    balance to the next week.

                           XXI
   1. The following transactions should be entered in a general
   journal, debit and credit, with full explanation.

   On November 15, 19—, John Henry and James Raymond form a
      partnership to carry on a retail grocery business. Losses
      and gains are to be shared equally. Each partner is to be
      allowed a salary of $150 per month.
   Henry invests the following assets from a business of which
      he has been sole owner:
   Cash $150; notes receivable $570; accounts receivable $7,320;
      merchandise $24,360; furniture and fixtures $4,230.
   The partnership also assumes the following liabilities
      for Henry:
      Notes payable $3,000; accounts payable $8,815.
   Raymond invests these assets:
      Cash $5,500; furniture and fixtures $2,500;
      building $17,000.

  2. At various times the following transactions of the
     partnership occur. Record them in the journal with full
     explanation.

  Nov.
   20. Returned goods to Austin Nichols & Co. $215;
          to Bronx Sugar Co. $65; to Continental Food
          Products Co. $87.50.
   22. Received 30-day 6% note of J. D. Jordan for $75.
       Accepted draft of Armour & Co., 60 days from sight,
          in favor of the American Live Stock Co., $127.50.
   24. Goods sold during previous week were returned by
          Franklin K. Adams $25; Eugene Alread $35;
          Preston Freeman $16.50.
   26. The partners gave their 90-day 6% note to Swift &
          Company, payable at the store, for $725.
   28. Investigation upon a complaint from James Ortner,
          a customer, showed that a sale of $150 to George
          Ortner had been charged to the former in error.
  Dec.
    8. Made Joseph Horowitz, a customer, an allowance of $25
          on account of dissatisfaction with a recent purchase.
   10. Sold bill of goods $425.50, to Ben. B. Brady, receiving
          cash $125.50, and J. S. Gordon’s 60-day acceptance
          for the balance.
   20. Purchased a plot of ground for $4,000 from the Bond &
          Mortgage Co., paying $1,000 cash and executing a
          mortgage for the balance.

  3. The following particulars relating to Problem 4,
     Assignment XX, must be taken into account to show the
     true condition of the Port Bedford Terminal Co. as on
     December 31, 19—:

       Materials and supplies on hand $68,894.
       Depreciation for the period:
       On real estate, wharves, and warehouses $308,401.
       On terminal railway $22,581.
       On marine equipment $16,714.
       On machinery and electric plant $4,978.
       Estimate of uncollectible accounts $10,000.
       Interest accrued on Liberty bonds $21,488.
       Accrued maintenance of property $25,980.
       Accrued selling and service costs $16,460.
       Accrued rents on warehouses $50,000.
       Accrued rents on piers $30,000.
       Taxes payable $50,000.
       Warehouse rents prepaid $20,000.

      (a) Draw up a balance sheet for December 31, 19—.
      (b) Draw up a statement of profit and loss for the
          twelve months’ period ending December 31, 19—.

                         _Instructions_

   Problem 3. The net worth section of the balance sheet should be
   set up as follows:

   Capital Stock                         $........
   Surplus:
     At beginning of period   $........
     Net profit for period     ........
                               --------
     At end of period                              $
                                         ------     ======

   Classify the items of the profit and loss statement on the
   basis of:
       1. Operating income
       2. Operating expenses
       3. Non-operating income
       4. Non-operating expenses

                           XXII
   1. Albert Johnson and Harold Taylor enter into a
   copartnership agreement for the purpose of buying and
   selling Christmas novelties. Each contributes cash, no
   other resources of use to this undertaking being available.
   Taylor, because of wide acquaintance among manufacturers,
   is to handle the buying end, and Johnson is to have charge
   of the details of store management and selling. They are to
   share profits and losses equally.

   On November 15, 19—, operations begin. They keep a full
   record of all transactions, using a cash book, purchase
   journal, sales journal, general journal, and ledger. The
   following accounts are kept:

   Cash
   Notes Receivable
   M. K. Lord
   C. H. Marks
   K. P. Temple
   L. K. Lewis
   F. M. Wood
   T. C. Bailey
   Merchandise Inventory
   Furniture and Fixtures
   Notes Payable
   Imbrie & Co.
   Bonbright & Co.
   Halsey, Stewart & Co.
   B. W. Chapman & Co.
   Albert Johnson, Capital
   Albert Johnson, Personal
   Harold Taylor, Capital
   Harold Taylor, Personal
   Profit and Loss
   Sales
   Sales Returns and Allowances
   Purchases
   Purchases Returns and Allowances
   Freight-In
   Salaries
   General Expense
   Expense Supplies
   Bad Debts
   Interest Expense
   Interest Income
   Purchase Discount

   Enter the following transactions in their respective journals:

  Nov.
   15. Each partner deposits $7,500 in the firm name of Johnson
          & Taylor at the Park National Bank.
       Paid $1,000 for furniture and fixtures.
       Paid rent $250 and advertising $100.
       Bought merchandise from Imbrie & Co. $2,000, paying $500
          cash, giving a note for $1,000, due in 30 days at 6%,
          and the balance remaining on account.
       Johnson withdrew $200 in funds for personal use.
   16. Cash sales $430.80: on account to F. M. Wood $569.20;
          K. P. Temple $500.
   17. Bought for cash, paper and twine $29.50;
          miscellaneous supplies $10.
   18. Sold merchandise to M. K. Lord for $1,000, accepting his
          10-day 6% note for $500 and $300 in cash.
       Cash sales amounted to $450.
   19. Bought a cash register for $150.
       Cash sales $400.
   20. Bought merchandise from Bonbright & Co. for $500, 2/10, n/30.
       Paid Imbrie & Co. on account $450.
       Taylor took merchandise $25, for his own use.
       Cash sales were $800.
   22. Cash sales were $300.
       Sold on account to Lewis $950; and to Marks $350.
   23. Paid Bonbright & Co. the bill of the 20th.
       Paid salaries $40.
   24. Sold T. C. Bailey, on account, $450 of merchandise.
       Johnson took $100 cash for current needs.
       The firm bought $1,400 merchandise from
          Halsey, Stewart & Co.
   26. Bought of B. W. Chapman & Co., merchandise $250.
       Cash sales were $450.
   27. The firm is notified that C. H. Marks has failed.
   29. Sold bill of merchandise of $200 to T. C. Bailey,
          receiving $100 in cash, and a 6% note for the balance,
          due in 10 days.
       Cash sales were $300.
   30. Returned $50 merchandise to B. W. Chapman & Co.
       Paid freight $35; insurance $15.
       Lord paid note of $500 and interest.
       Paid $40 in wages and gave Halsey, Stewart & Co.
          a 10-day 6% note for amount due.

   2. Using the adjustment data of Assignment XXI, Problem 3,
   close the ledger of the Port Bedford Terminal Co. and take a
   trial balance after closing.

                         _Instructions_

   Problem 1. The purpose of this assignment is to give
   practice in the operation of the five journals in a going
   concern. The ledger will not be used.

      Use a double sheet of two-column journal paper for the
      cash book. A single sheet of two-column paper will be
      sufficient for each journal.

      Make full opening entry on November 15.

      Do not summarize the journals until directions are given.

      Note that the firm takes advantage of the Bonbright
      discount offer.

      Make no entry as to the Marks’ failure until further
      instructions.

   Problem 2. Transfer the balance of the ledger Profit and
   Loss account to the Surplus account.

                              XXIII
    1. Continue the following as in Problem 1, Assignment XXII.

  Dec.
    1. Johnson took $100 for personal use.
       The firm paid $50 for freight bills.
       T. C. Bailey returned merchandise $50.
    2. Bought supplies for $18.50 cash.
       Electric light bill $18, and telephone bill $12, were paid.
    3. Cash sales were $240.
       They received $400 on account from Bailey.
    4. Lewis paid $850 on account.
       Bought from Imbrie & Co. $200 of merchandise.
    6. Taylor sold for $650 cash merchandise, for which the firm
          had paid $1,000.
       Sold on account to K. P. Temple $450; and to F. M. Wood $235.
    7. Paid $40 for salaries; and $15 for supplies.
    8. Paid $72 on insurance.
       Bailey paid his note of $100 and interest.
    9. Cash sales were $275.
       The firm bought from Imbrie & Co. $675; Bonbright & Co. $800.
    10. Paid Halsey note with $2.33 interest.
    11. Received on account from Lord $100; and from cash sales $150.
    13. Temple gave a non-interest-bearing note due in 30 days
           for $500.
    14. Paid freight-in bill $32; and coal bill $17.
        Salaries of $40 were paid.
    15. Paid note to Imbrie & Co. with interest.
        The receivers of C. H. Marks paid $164, the balance of
           the claim being valueless.

    Summarize all journals (referring to Problem 1, Assignment XXII,
    and the above) and balance the cash book.

   2. The following information has been taken from the books of the
      Valhalla Company after the ledger was adjusted:

        Sales $2,896,745.
        Sales returns $22,840.
        Sales allowances $12,615.
        Inventories January 1, 19—, $3,096,720.
        Purchases were $1,216,000.
        Purchase returns $5,675; and allowances $4,200.
        Inventories on December 31, 19—, were $3,514,900.
        Rent expense $54,000.
        Bad debts $45,000.
        Depreciation $89,700.
        Advertising $50,000.
        Sales salaries $686,000.
        Traveling expenses $64,892.
        Freight-in $17,990.
        Freight-out $8,960.
        Delivery expense $22,600.
        Office supplies $13,400.
        Lighting $4,825.
        Office salaries $54,000.
        Telephone $2,190.
        Insurance $8,900.
        Taxes $22,940.
        Interest expense $7,890.
        Mortgage interest $60,000.
        Interest income $10,890.
        Income from securities $2,400.
        Sundry expenses $2,890.
        Repairs $14,890.

    Draw up the statement of profit and loss.

   3. Draft the journal entries necessary to close the ledger
      of the Valhalla Company.
   4. Draw up the Profit and Loss account as it would appear
      in the ledger of the Valhalla Company.
   5. Anthony B. Mans is the proprietor of a drug business owning
      assets and subject to liabilities as follows:

        Cash $5,150.
        Accounts receivable $795.
        Stock of merchandise $25,340.
        Store furnishings $3,420.
        Soda fountain $1,250.
        Notes payable $4,500.
        Accounts payable $9,305.

    He sells the business as above, excepting the cash which he
    retains, to James R. Hart for $20,000 cash, which includes a
    bonus of $3,000 for his good-will. Mans withdraws all cash
    and deposits it in his personal bank account.

    Make the necessary entries in Mans’ journal and cash book to
    record the sale transaction and the withdrawal of cash.

                           XXIV
   As bookkeeper for Wm. C. Baldwin, dealer in coal and coke,
   you will use a general journal, a sales journal, a purchase
   journal, a cash book, and a ledger. Four _double_ pages
   of journal paper and three _double_ pages of ledger
   paper will suffice. At the top of the first page write
   “Journal of Wm. C. Baldwin.” Allow 130-150 lines for your
   Journal. The next blank _double_ page will be used
   for a cash book, marked on the left at the top, “Dr.” and
   near the middle, “Cash.” Similarly the right page, “Cash”;
   and at the top, right-hand margin, “Cr.” Allow 80-100
   lines for each side of the cash book. The next blank page
   mark “Sales Journal,” allowing 70-90 lines. The next blank
   page mark “Purchase Journal,” allowing 1 page. The last 3
   pages, reserve for trial balances and statements. Number
   consecutively all pages in journal and ledger.

   In the cash book use the first column on either side for
   items and the second column for totals and balances.
   _Balance and rule the cash book at the end of each
   week_, extending the “items” total before balancing and
   marking it for posting purposes “Cash, Dr.” or “Cash, Cr.”
   as the case may be. Enter the balance on the “Dr.” side
   in the “Total” column, and so keep each week’s receipts
   segregated. At the bottom of the page, unless it happens to
   coincide with the end of the week, carry “totals” of each
   side forward, not the balance.

   In the sales and purchase journals mark the first column “On
   Account” and the second “Cash,” and make entries in them
   according as sale or purchase is “on account” or “cash.”
   If “cash,” entry must be made in the cash book also, in
   which case check the item in the ledger folio column in
   both journals, as total cash, sales, and purchases are to
   be posted from their respective journals. In making summary
   entries for the sales journal at the end of the month, rule
   and total each column, and bring the cash column total over
   on the next line into the “On Account” column, marking it
   “Cash Sales, Total.” Add these two and rule off, marking
   them “Sales, Cr.” The purchase journal will be handled
   similarly.

   Open the following accounts in your ledger, beginning on
   the first page in the order given and allowing the number
   of lines to each account indicated by the numeral following
   each:
        Cash                              10
        Notes Receivable                   5
        M. R. Hamilton                    10
        F. S. Kent                        10
        H. T. Avery                       10
        G. C. Furnald                     10
        C. P. Pell                        10
        S. T. Hartley                     10
        A. D. Livingston                  10
        Reserve for Doubtful Accounts      5
        Coal Inventory                     5
        Furniture and Fixtures            10
        Depreciation Reserve Furniture
          and Fixtures                     5
        Building                           5
        Depreciation Reserve Building      5
        Land                               5
        Notes Payable                     10
        M. H. Hanna & Co.                 10
        American Coke & Chemical Co.      10
        Peabody & Co.                     10
        Seabord By-Product Coke Co.       10
        Midtown Realty Co.                 8
        Wm. C. Baldwin, Capital           10
        Wm. C. Baldwin, Personal          10
        Profit and Loss                   20
        Sales                             15
        Purchases                         10
        Purchases Returns and Allowances   8
        Freight & Delivery Inward         10
        Salesmen’s Salaries               10
        Advertising                       10
        Delivery Expense                  10
        Expense Supplies                  15
        Rent                               5
        Insurance                          8
        Office Salaries                   10
        Sundry Expense                     8
        Cash Short and Over                7
        Interest Expense                   8
        Depreciation                       5
        Bad Debts                          5
        Interest Income                    8

   Before recording any transactions, study carefully the
   accounts, particularly the expense accounts, which you will
   keep. Make your classification strictly according to them.
   Keep no additional accounts.

   May 2, 19—, Wm. C. Baldwin, long interested in the coke
   business, bought out the Newark Coke Company on the basis of
   the values shown below.

   The assets taken over were:

      Stocks of coal and coke $18,902.10.
      Accounts receivable:
         M. R. Hamilton $6,950.
         F. S. Kent $7,920.
         G. C. Furnald $2,450.
         C. P. Pell $7,125.
         S. T. Hartley $9,840.
         A. D. Livingston $2,890.
      Furniture and fixtures $1,200.
      A note made by G. C. Furnald for $7,800, due May 11,
         after which it was to bear 9% interest. This note
         was taken over at its face value.

   The liabilities assumed were:

      Accounts payable:
         M. H. Hanna & Co. $8,942.50.
         American Coke & Chemical Co. $12,437.18.
         Peabody & Co. $5,647.92.
      A note dated February 20, 19—, for three months at 6%,
         in favor of the Seaboard By-Product Coke Co., for
         $5,485.50, the accrued interest assumed being $65.83.
      In addition to the above investment Baldwin opened an
         account with the National City Bank for $15,000 as
         working capital.

  May
   3. Bought for cash, account books $10; stationery $18;
         stamps $25; paid rent to June 2, $500.
      Sales were: on account, M. R. Hamilton $1,293.75;
         for cash $890.40.
   4. Bought coal and coke from M. H. Hanna & Co. on account
         $6,497.95.
      Paid freight-in $169.72.
      Bought insurance policy for one year $360.
      Sales were: on account, F. S. Kent $3,497.82; cash $614.80.
   5. Paid Peabody & Co. balance due.
      Sales on account: H. T. Avery $1,876.49;
         G. C. Furnald $5,973.80; cash $617.90.
   6. Bought from Seabord By-Product Co. on account $5,890.40.
      Allowed by M. H. Hanna & Co. $400 on account of impurities
         in coke.
      Paid freight-in $126.72.
      Sales were: on account, S. T. Hartley $3,487.60;
         M. R. Hamilton $2,947.30; F. S. Kent $2,476.30;
         cash $457.80.
   7. Received cash on account from M. R. Hamilton $1,000;
         F. S. Kent $2,750; H. T. Avery $975;
         G. C. Furnald $5,250.
      Paid bookkeeper $30; stenographer $25; clerks $40.
      Sales for cash were $1,075.
      Baldwin drew $100 in cash and $80 in coal for his home.
      Paid delivery expenses $200; and sales salaries $300.

        Balance, summarize, and post the cash book. The
        summary entry, “Cash, Dr.,” must, for this first
        week only, be set up opposite the total of the cash
        receipts journal, so as to include the cash capital
        invested. In all subsequent summary entries, the
        “Cash, Dr.” must include only the current week’s
        receipts—not the “Balance.”

   9. Paid the American Coke & Chemical Co. on account $7,500;
         cash for supplies $62.50; and advertising $1,000.
      Sales on account: H. T. Avery $2,146.70;
         G. C. Furnald $1,786.42; C. P. Pell $792.50;
         A. D. Livingston $863.47.
  10. Bought from the American Coke & Chemical Co. $5,746.80
         on account.
      Paid by check $350 for safe; and $125 for typewriter.
      Received payments from C. P. Pell $2,500;
         and S. T. Hartley $2,150.
  11. Paid M. H. Hanna & Co. $8,942.50; paid freight-in $248.50.
      Canceled $250 of order of the 10th from American Coke &
         Chemical Co.
  12. Sales on account: A. D. Livingston $2,387.50;
         H. T. Avery $1,820.
      Paid demurrage charges $290.75 by check.

                         _Instructions_

   May 2. To determine Baldwin’s net investment and to serve
   as a guide for the order of entry of the various items in
   the journal, make a rough draft of balance sheet. Enter the
   “cash” investment in the Journal as a part of the compound
   opening entry, and also in the “Total” column of the cash
   receipts journal. Check (✔) the “cash” item in the general
   journal and also check the capital investment entry in the
   cash receipts journal.

   May 12. Charge demurrage costs to the Freight and Delivery
   Inward account.

                           XXV
  May
    13. Bought from Peabody & Co. on account $4,910.
        Paid freight-in $144.70; paid to M. H. Hanna & Co.,
        the balance due.
        Sales on account were: S. T. Hartley $1,875.20.
    14. Paid bookkeeper $30; stenographer $25; clerks $40.
        Cash sales for the week were $3,679.80.
        Baldwin drew $200 in cash, and gave on his personal
           account 5 tons of coal worth $60 to the Community
           Association.
       Delivery expense was $220; and sales salaries were $300.

    Balance, summarize, and post the cash book.

    16. Bought from M. H. Hanna & Co. on account $4,895.70.
        Paid freight-in $82.93; Merchants’ Association dues $50;
           stationery $55.25.
        Received cash on account: G. C. Furnald $1,275;
           C. P. Pell $1,350.
    17. Bought a multigraph for cash $75, and paid freight on it
           of $10.22.
        Paid $96.17 for supplies.
        Returned $800 worth of coke to M. H. Hanna & Co.
        Cash was short $5.48.
        Paid on account: A. D. Livingston $1,375;
           M. R. Hamilton $3,500; F. S. Kent $4,035.
        Sold on account: H. T. Avery $1,275; G. C. Furnald $862.70;
           and C. P. Pell $1,872.60.
    18. Received a 30-day 6% note from S. T. Hartley for $5,000,
           to apply on account; and a note dated May 16 at 6%,
           due July 16, for $3,000, from A. D. Livingston.
    19. Paid $38.90 for repairs to office steps, which were
           broken by accident, not chargeable to the landlord.
        Canceled a $100 lot from Peabody & Co. on the last order.
        Bought from the American Coke & Chemical Co. on account
           $7,580.
        Paid $103.72 in-freight.
    20. Paid Seaboard By-Product Coke Co. note $5,485.50,
           and interest.
        Purchases for cash were $1,270.
    21. Baldwin discounted his own note at the bank for $1,000,
           for 30 days at 6%.
        Paid bookkeeper $30; stenographer $25; clerks $40.
        Cash sales for the week were $3,195.60.
        Baldwin withdrew $400 in cash.
        Paid sales salaries $300; delivery expense $235;
           and American Coke & Chemical Co. $5,000 on account.
        Balance, summarize, and post the cash book.
    23. Sold on account: A. D. Livingston $975.70;
           and M. R. Hamilton $1,392.65.
        Paid Patrol Protection Service $50; and $175 to repair
           heater and boiler, the latter item being allowed as
           applicable to future rent.
    24. Sold refuse for cash $15.80.
        Bought from Peabody & Co. $2,120 on account, and paid
           freight $174.37.
    25. Cash was short $1.04.
        Paid lighting bill of $31.75.
    26. Received cash on account: F. S. Kent $1,500;
           H. T. Avery $1,875; G. C. Furnald $1,000.
        Sold on account: C. P. Pell $1,587; F. S. Kent $1,623.80;
           A. D. Livingston $1,217.80.
    27. Purchased from Peabody & Co. on account, shipment of
           Pocahontas coal $900.
        Bought $50 worth of stamps.
        Cash was over $1.37.
    28. Paid bookkeeper $30; stenographer $25; and clerks $40.
        Cash sales for the week were $2,175.80.
        Baldwin withdrew $250 for personal expenses.
        Delivery expenses were $245; and sales salaries $300.
        Paid the Seaboard By-Product Coke Co. bill of May 6.
        Balance, summarize, and post the cash book.
    31. Paid Peabody & Co. $1,000 on account.
        Bought of M. H. Hanna & Co. on account $6,250.
        Telephone bill was $52.45; and cash was over $.51 (51 cents).
        Bought of Seaboard By-Product Coke Co. on account $2,890.70,
           paying $52.18 in-freight.
        Gave the American Coke & Chemical Co. a 90-day note
           at 6% for $1,250.
        A. D. Livingston paid $500 on account.
        Cash sales were $480.90.
        Received on account: M. R. Hamilton $3,000;
           F. S. Kent $2,000; C. P. Pell $2,500.
        Bought from Midtown Realty Co. the lot in which the yards
           were located for $2,000, and the buildings with equipment
           for $8,575, giving $5,575 in cash and executing a 6%
           mortgage on private properties not carried on the books
           of the business for the balance.

                          _Instructions_

    May 14. The coal given to charity is a personal expense
               of Baldwin’s.

    May 31. Record the purchase of lot and building as a credit
               for the entire amount to the vendor. Cancel the
               liability to the vendor by entry in the cash book
               for the cash portion, and in the general journal
               for the mortgage.

                           XXVI
  Balance the cash book, total, and make summary entries for
  the sales and purchase journals.

  Post completely the sales and purchase journals, then the
  general journal and cash book. Be sure to post the weekly
  totals of cash receipts and cash disbursements as well as
  the totals for the end of the month.

  Take a trial balance of account balances and record it on
  page 13 of your journals, labeling it
     “Trial Balance, May 31, 19—, Wm. C. Baldwin.”

                     _Instructions_

  Refer to pages 142, 148, 149, for the form of the various
  journal summaries and to 547-548, practice data, for the
  method of summarizing.

  Be very careful always to cross-index every posted item in
  both ledger and journals just as soon as the posting of that
  item is completed. The ledger folio columns in the journals
  are thus an indication as to how far the work of posting
  has proceeded, in case the bookkeeper is interrupted before
  completing the postings.

                          XXVII
  Draw up a balance sheet and statement of profit and loss
  for Wm. C. Baldwin, taking into account the following
  adjustments and inventories:

     Interest prepaid on note at bank $3.33.
     Interest accrued on following notes:
        G. C. Furnald     $39.00
        S. T. Hartley      10.83
        A. D. Livingston    7.50
                          ------
          Total           $57.33
     Expense supplies inventory $14.50.
     Insurance unexpired $330.
     Merchants’ Association dues prepaid $47.92.
     Delivery expenses accrued $75.
     Salesmen’s salaries accrued $100.
     Advertising accrued $50.
     Advertising prepaid $200.
     Office salaries accrued $31.67.
     Prepaid rent $207.26.
     Furniture and fixtures are to be depreciated at the rate
        of 1% per month.
     Uncollectible accounts are estimated as ½% on sales for
        the month.
     Coal inventory $19,352.30.

                     _Instructions_

  Use the method of the work sheet in doing this assignment.
  Follow closely the illustration in the text. After the work
  sheet has proved the accuracy of the work, draw up the
  formal statements.

                        XXVIII
  1. Adjust and close Wm. C. Baldwin’s ledger, taking account
        of the adjustment data given in Assignment XXVII.
  2. Take a post-closing trial balance.




APPENDIX B

PRACTICE WORK FOR STUDENT—SECOND HALF-YEAR


The practice work for the second semester is designed to give facility
in the use of accounting records, and accuracy and confidence in the
handling of a volume of transactions. Accordingly, this work consists
largely of two somewhat extended problems to be recorded in blank
books. The first is a problem in partnership, involving particularly
the adjustment of partners’ accounts at the close of the fiscal period.
Many points met in the operation of records using controlling accounts
are included. The second is concerned with a trading corporation. Here
some of the problems peculiar to the corporation are met, as well as
those connected with the operation of a departmental business.

The stationery furnished provides two sets of blank books, as indicated
above, the one for the partnership, the other for the corporation.
Specific directions for their use are given with each problem. Upon
completion of the problem these blanks are to be turned in for
inspection and may be retained by the school if deemed best. A few
miscellaneous problems are also provided. The loose-leaf supplies will
usually be found suitable for their solution.

Here, also, sufficient practice work is furnished to accompany 30 hours
of lecture or classroom work. If desired, this may be supplemented by
the use of material in Appendix C. If an adequate understanding of the
use and operation of accounting records is to be secured, disconnected
problem work should not be substituted for the practice work provided
in this Appendix B.

In handling this semester’s work, the student must not allow himself
to fall behind in the preparation of the assigned work There is quite a
volume of work to be done and the material of the various assignments
is so interrelated that unless the practice work is kept up to date,
most of its value is lost through the student’s not being ready to
carry out instructions given covering the current work. Careful work
and the proving of its accuracy will prevent much waste of time in
making corrections.

                           I

  This set comprises a general journal; a sales journal, a
  purchase journal, and the cash journals, for convenience
  bound together in one book; and a general ledger, purchase
  ledger, and sales ledger, also bound together in one book.
  Of the general journal, pages 1-15 inclusive will be used
  for transactions which cannot be recorded in the special
  journals, the rest of the blank being used as a place of
  record of the monthly trial balances. Of the special journal
  blank, pages 1-4 inclusive will be used for sales; pages 5-7
  inclusive for purchases; page 8 and following for the cash
  book. For the purpose of securing a better comprehension of
  some features of the operation of controlling accounts the
  general journal is not provided with the customary analysis
  columns. The student is thus compelled to consider the
  effect of each entry on the controlling account as well as
  on the subsidiary account.

  The sales journal provides for the analysis of sales into
  cash, credit, and partners’ withdrawals, the first column
  being the total or general column in which all items are to
  be entered; the others, “On Account,” “Cash,” and “Partners’
  Withdrawals.” The same provisions, with the exception of the
  Partners’ Withdrawals column, are to be made in the purchase
  journal.

  The cash book columns will be, on the debit side, General,
  Accounts Receivable, Sales Discount, and Net Cash; and on
  the credit, General, Accounts Payable, Purchase Discount,
  and Net Cash. All items affecting the controlling accounts,
  “Accounts Receivable” and “Accounts Payable,” are to be
  entered gross in their respective columns, the totals of
  which are posted to the controlling accounts when the cash
  book is summarized. The discount columns on both sides of
  the cash book are to be used for the recording of sales and
  purchase discounts, and all items to be posted to general
  ledger accounts other than the controlling accounts should
  be entered gross in the “General” columns. All amounts
  will be extended net into the “Net Cash” columns, and the
  difference between these two columns will represent the cash
  balance.

  The general ledger will include pages 1-27 inclusive, the
  sales ledger pages 28-34 inclusive, and the purchase ledger
  35-40 inclusive. The first four pages preceding ledger
  ruling are to be used for index purposes.

  All transactions affecting individual customers’,
  creditors’, and partners’ accounts are to be posted daily
  to those accounts. The postings to the controlling accounts
  will follow the explanations in the text or special
  instructions.

  This set affords the student facility in handling a
  partnership set of books operated under a controlling
  account system. The operation of this set will require great
  care in posting to controlling and subsidiary accounts in
  order to keep them in agreement.

  To secure the maximum of practice with a minimum of detail
  work, the transactions for each month are summarized and
  are to be dated as of the last day of the month. The dates
  of issuance or maturity of the notes, however, are given so
  that this can be recorded.

  The student should become familiar with the following
  ledger accounts to which he should strictly adhere in the
  classification of all transactions. These accounts are to
  be opened in the ledger at the places indicated. The first
  numeral following the account title indicates the page, the
  second the line on that page. “Line 1” refers to the very
  first line at the top of the page.

                 LEDGER ACCOUNTS (40 pages)

                 General ledger, pages  1-27
                 Sales ledger,     ”   28-34
                 Purchase ledger,  ”   35-40
                                                   Page  Line
  Cash                                               1     1
  Investments                                        1    12
  Notes Receivable                                   1    18
  Accounts Receivable                                1    30
  Reserve for Doubtful Accounts                      2    28
  Merchandise Inventory                              2    34
  Notes Receivable, Special                          3     1
  Deposit with  Westchester Lighting Co.             3    11
  Delivery Equipment                                 3    21
  Depreciation Reserve Delivery Equipment            3    31
  Store Furniture and Fixtures                       4     1
  Depreciation Reserve Store Furniture and Fixtures  4    11
  Office Furniture and Fixtures                      4    22
  Depreciation Reserve Office Furniture and Fixtures 4    31
  Building                                           5     1
  Depreciation Reserve Buildings                     5    11
  Notes Payable                                      5    22
  Accounts Payable                                   6     1
  Mortgage Payable                                   6    30
  C. Allen Cotten, Profits Loan Account              7     1
  Scott Wooster, Profits Loan Account                7    12
  Landsdowne Woolsey, Profits Loan Account           7    26
  C. Allen Cottenm Capital                           8     1
  C. Allen Cotten, Personal                          8    13
  Scott Wooster, Capital                             9     1
  Scott Wooster, Personal                            9    13
  Landsdowne Woolsey, Capital                       10     1
  Landsdowne Woolsey, Personal                      10    13
  Profit and Loss                                   11     1
  Sales                                             12     1
  Sales Returns and Allowances                      12    19
  Purchases                                         13     1
  Purchases Returns and Allowances                  13    19
  In-Freight and Cartage                            14     1
  Salesmen’s Salaries                               14    13
  Salesmen’s Traveling Expenses                     14    26
  Advertising                                       15     1
  Delivery Expense                                  15    13
  Shipping Supplies                                 15    26
  Out-Freight                                       16     1
  Office Salaries                                   16    13
  Office Supplies                                   16    26
  Office Expense                                    17     1
  General Expense                                   17    13
  Cash Short and Over                               17    29
  Charity Donations                                 18     1
  Association Dues                                  18     13
  Light and Heat                                    18     26
  Rent                                              19      1
  Insurance                                         19     13
  Taxes                                             19     26
  Depreciation                                      20      1
  Sales Discount                                    20     13
  Bad Debts                                         20     26
  Interest Cost                                     21      1
  Purchase Discount                                 21     13
  Interest Income                                   21     26
  Miscellaneous Sales                               22      1

  On pages 28-34 inclusive, enter the following customers’ accounts,
  four to the page:

        Arnold Sheriff & Co.
        Atlas Dry Goods Co.
        Baird Dry Goods Co.
        Bostonian Dry Goods Co.
        Burrows Dry Goods Co.
        Century Dress Goods Co.
        Childs & Son
        Daniel & Co.
        Eagle Dress Goods Co.
        Emporium Dry Goods Co.
        Falk & Taylor
        Hudson Dry Goods Co.
        Macmillian & Co.
        Marquis Dress Goods Co.
        Melrose Dry Goods Co.
        Metropolitan Dry Goods Co.
        Henry Miller
        T. H. Miller
        National Dress Co.
        New York Silk Co.
        Public Bargain Store
        Rogers & Son
        Silk & Dress Goods Exchange
        Southern Dry Goods Co.
        Thompson Hudson Co.
        Wilson Williams Co.
        Young, Smith, Field Co.

  Beginning on page 35, enter these creditors’ accounts,
  four to a page.

        American Dry Goods Co.
        Associated Dry Goods Co.
        Bentley, Gray & Co.
        Claflins, Inc.
        Carter Dry Goods Co.
        Marshall Field & Co.
        Miller & Rhoades, Inc.
        Newcomb Endicott Co.
        Wm. Taylor, Son & Co.
        U.S. Dry Goods Co.
        Wico Mills, Inc.

                         II

  C. Allen Cotten, who has long been in the wholesale
  merchandising business, anticipating a revival of commercial
  activity in the early part of 19—, decided to enlarge his
  business. Accordingly, on January 2, 19—, he enters into a
  partnership agreement with Scott Wooster, a former executive
  of the United Dry Goods Co., of Philadelphia, and Landsdowne
  Woolsey, a retired real estate and insurance broker of New York.

  According to the terms of the partnership agreement,
  Cotten’s investment was his business, based upon the
  following balance sheet which represented the book value
  of the items:

                     C. ALLEN COTTEN
             BALANCE SHEET, December 31, 19—

                           _Assets_

  CURRENT ASSETS:
    Cash                                              $ 3,065.00
    Notes Receivable (See Schedule 1)                   2,500.00
    Accounts Receivable (See Schedule 2)  $25,150.00
    _Less_—Reserve for Bad Debts              600.00   24,550.00
                                          ----------
    U. S. Liberty Bonds                                 3,000.00
    Accrued Interest                                       90.00
    Merchandise                                        21,780.00

  DEFERRED CHARGES TO OPERATION:
    Prepaid Insurance                     $   100.00
    Office Supplies                           150.00
    Garage Rent                                75.00      325.00
                                          ----------
  FIXED ASSETS:
    Delivery Trucks                       $ 5,000.00
      _Less_—Depreciation Reserve             500.00    4,500.00
                                          ----------  ----------
          Total Assets                                $59,810.00

                        _Liabilities_

  CURRENT LIABILITIES:
    Notes Payable (See Schedule 3)        $ 4,000.00
    Accounts Payable (See Schedule 4)      25,600.00
    Accrued Interest on Notes                  20.00
    Accrued Taxes                             190.00
                                          ----------
          Total Liabilities                            29,810.00
                                                      ----------
                         _Net Worth_

  Represented by:
      C. Allen Cotten, Capital                        $30,000.00

  Schedules appended to the balance sheet of C. Allen Cotten:

  Schedule 1. NOTES RECEIVABLE:
    Baird Dry Goods Co.                               $ 1,500.00
      60-day 6% note due February 1.
    Childs & Son                                        1,000.00
      Non-interest-bearing note, due February 15.
                                                      ----------
                                                      $ 2,500.00
                                                      ==========
  Schedule 2. ACCOUNTS RECEIVABLE:
    Atlas Dry Goods Co.                               $ 2,283.00
    Burrows Dry Goods Co.                               2,000.00
    Century Dress Goods Co.                             4,800.00
    Falk & Taylor                                       3,400.00
    Marquis Dress Goods Co.                             2,795.00
    T. H. Miller                                        1,425.00
    National Dress Co.                                  2,892.00
    Rogers & Son                                        3,650.00
    Wilson Williams Co.                                 1,905.00
                                                      ----------
                                                      $25,150.00
                                                      ==========
  Schedule 3. NOTES PAYABLE:
    Marshall Field & Co.                              $ 2,000.00
      90-day 6% note due March 1, 19—.
    American Dry Goods Co.                              2,000.00
      90-day 6% note, due March 15, 19—.
                                                      ----------
                                                      $ 4,000.00
                                                      ==========
  Schedule 4. Accounts Payable:
    Associated Dry Goods Co.                         $ 3,950.00
    Claflins, Inc.                                     6,290.00
    Wico Mills, Inc.                                   2,780.00
    Miller & Rhoades, Inc.                             5,672.00
    Newcomb Endicott Co.                               3,678.00
    Marshall Field & Co.                               3,230.00
                                                     ----------
                                                     $25,600.00
                                                     ==========

  Cotten guaranteed the collection of all notes and accounts
  outstanding, and the partnership agreement provided that in
  case any of the accounts should be judged uncollectible by
  agreement among the partners or otherwise, such amount is
  to be charged to Cotten’s personal account on the date such
  items are found uncollectible.

  Wooster’s investment was $20,000 cash, his services and
  experience; and Woolsey was admitted as a special partner
  investing $50,000 in cash.

  The partnership agreement further provided that Cotten was
  to be allowed an annual salary of $4,800, Wooster $6,000,
  but Woolsey was to receive no salary; and that interest at
  the rate of 6% per annum was to be charged on the drawings
  in excess of the salary allowed for the fiscal period from
  the date such drawings exceeded salary until the date of
  closing the books. The drawings of Woolsey were also to be
  charged at 6% per annum from the date of draft to the date
  of closing the books. Interest at 6% per annum was to be
  allowed on capital, and in all cases was to be figured on
  the basis of 360 days to the year, 30 days to the month.
  Profits and losses were to be shared as follows: Woolsey
  20%, Cotten 36%, and Wooster 44%. The fiscal period was to
  consist of six months, ending on June 30 and December 31,
  respectively.

  The partnership agreement also provided that the capital
  accounts of the partners were to remain intact and that any
  credit balances remaining in the partners’ personal accounts
  at the close of the fiscal period were to be transferred
  to their loan accounts which were to be treated as current
  accounts bearing 6% interest and subject to adjustment of
  interest at the close of each fiscal period.

  Make the necessary entries in general journal and cash book
  to record the respective investment transactions, and post.

                    _Instructions_

  Make a _full_ but _concise_ statement of the
  partnership agreement, following the form of opening entry
  illustrated on page 166. This opening statement is the first
  record in the general journal and should provide all of the
  information needed by the bookkeeper for the proper handling
  of the partners’ accounts at the close of the fiscal period.

  Immediately following this narrative will be the formal
  investment entries. On the line just preceding the formal
  investment entry for each of the partners, use the
  following—or similar—phraseology: “C. Allen Cotten made
  the following investment.” A separate investment entry is
  made for each partner.

  These entries are to be made complete in the general
  journal and posted immediately, except the several cash
  items, which, included in the totals of the cash book, will
  be posted at the end of the month. These cash items will
  therefore be checked both in the journal and in the cash
  book, where they must be entered in the “General Ledger” and
  “Net Cash” columns.

                         III

  Summarized transactions for the month of January were as
  follows. Enter these in their respective journals. Posting
  of these entries will comprise the next assignment.

  Purchases:
     American Dry Goods Co., 2/10, n/60, $10,817.50.
     Bentley, Gray & Co., 2/10, n/60, $5,694.
     Claflins, Inc., 2/10, 1/30, n/60, $12,639.
     Carter Dry Goods Co., 2/10, 1/30, n/60, $18,709.48.
     U. S. Dry Goods Co., 3/10, 2/15, n/60, $12,104.90.
     Miller & Rhoades, Inc., 2/10, 1/30, n/60, $2,689.40.
     Wm. Taylor, Son & Co., 3/5, 2/10, n/30, $1,897.42.
     Marshall Field & Co., 3/10, 2/15, n/60, $11,744.60.
     Cash purchases were $2,564.73.

  Sales:
     Arnold Sheriff & Co., 2/10, 1/15, n/30, $5,264.80.
     Baird Dry Goods Co., 2/10, 1/15, n/30, $4,872.35.
     Bostonian Dry Goods Co., 2/10, 1/15, n/30, $3,843.68.
     Century Dress Goods Co., 2/10, n/30, $5,492.72.
     Childs & Son, 2/10, 1/15, n/30, $4,794.12.
     Daniel & Co., 2/10, n/30, $4,683.38.
     Eagle Dress Goods Co., 2/10, n/30, $5,978.35.
     Emporium Dry Goods Co., 2/10, n/30, $2,461.93.
     Falk & Taylor, 2/10, 1/15, n/30, $5,947.60.
     Hudson Dry Goods Co., 2/10, 1/15, n/30, $3,678.90.
     Macmillian & Co., 2/10, n/30, $4,642.50.
     Marquis Dress Goods Co., 2/10, n/30, $4,267.50.
     Metropolitan Dry Goods Co., 2/10, n/30, $4,180.
     Silk & Dress Goods Exchange, 2/10, n/30, $3,780.40.
     Cash sales were $847.56.
     Cotten took woolens on January 15, $50.

  Journal:
     Goods for $500 were returned by Falk & Taylor as unsatisfactory.
     Macmillian & Co. was credited with $435 because of goods lost in
        transit, for which a claim was filed against the
        Central Hudson Railway Co.
     Damaged goods were returned to Carter Dry Goods Co., $897.80.
     Received 6% 60-day note, due March 28, from Century Dress Co.
        for January bill $5,492.72 less a special discount of 5%.

  Cash Receipts (excluding those listed above):
     Arnold Sheriff & Co., January bill $5,264.80 less 2%.
     Bostonian Dry Goods Co., January bill $3,843.68 less 1%.
     Falk & Taylor, balance of January bill $5,447.60 less 2%.
     Hudson Dry Goods Co., January bill $3,678.90 less 1%.
     Atlas Dry Goods Co., December bill $2,283 net.
     Century Dress Goods Co., December bill $4,800 net.
     Falk & Taylor, December bill $3,400 less 2%.
     Rogers & Son, December bill $3,650 less 2%.

  Cash Disbursements (excluding those listed above):
     Shelving, partitions, counters, etc., for store $3,800.
     Desks, tables, mimeograph, and typewriters for office $1,250.
     A new Pierce motor truck $5,000.
     Deposit with the Westchester Lighting Co. $50.
     Salesmen’s salaries $2,000.
     Salesmen’s traveling expenses $997.84.
     Wages of chauffeurs and shipping clerks $500.
     Garage rent $125.
     Repairs to cars $50.
     Licenses for trucks $50.
     Oil and gasoline $50.
     Boxes, crates, nails, paint, etc., for shipping $297.13.
     Advertising according to contract with
        Baten Advertising Co. $5,000
     Freight and haulage $312.49.
     Insurance on stock $250.
     Lighting and heating service cost $502.60.
     Office salaries $990.
     Stationery, pads, pencils, envelopes, etc., $193.97.
     Telephone and telegraph $422.
     Postage and special messenger service $237.84.
     Wages of cleaners, watchman, repairs to elevator $594.70.
     Check to American Red Cross $100.
     Semiannual dues to the Merchants’ Association $50.
     Rent for January $1,250.
     Cotten drew $400; Wooster $500.
     Associated Dry Goods Co., December bill $3,950 less 2%.
     Claflins, Inc., December bill $6,290 less 2%.
     Wico Mills, Inc., December bill $2,780 net.
     Newcomb Endicott Co., December bill $3,678 less 2%.
     Marshall Field & Co., December bill $3,230 less 2%;
        and January bill $11,744.60 less 2%.
     Carter Dry Goods Co., balance of January bill
        $17,811.68 less 2%.
     U. S. Dry Goods Co., January bill $12,104.90 less 3%.
     American Dry Goods Co., January bill $10,817.50 less 2%.
     Cash was short $3.16.
     Rent for February $1,250.

                     _Instructions_

  All cash transactions are to be entered in the cash book
  whether listed under “Cash” above or not. In recording a
  cash sale or cash purchase in the cash book, extend the
  amount into the “General Ledger” and “Net Cash” columns only.

  Be sure to classify and post all items correctly, inasmuch
  as a wrong classification or posting may necessitate many
  correction entries.

  The claim against the railroad company will be charged to
  Sales Returns and Allowances until a settlement is effected.
  Such items are often charged to a Freight Claims account,
  with suitable adjustment to Sales Returns and Allowances
  when settlement is made for less than the amount claimed.

  The word “balance,” as in the phrase, “Falk & Taylor,
  balance of January bill $5,447.60 less 2%,” calls attention
  to an adjustment of some sort—returns or allowance—which
  has been or is to be considered in determining the amount
  still due.

  Charge the freight and haulage to In-Freight and Cartage.

  Great care must be exercised in the general journal entries
  affecting individual customers’ and creditors’ accounts,
  since these also affect their respective controlling
  accounts. Inasmuch as the general journal does not provide
  the customary analytic columns, it will be necessary, when
  making every such entry, to indicate the controlling account
  affected and, when posting, to post the item both to the
  individual account and to the control account. The following
  illustrations should be followed in making entries of this
  kind:

  (1) Sales Returns and Allowances               12   500.00
       Falk & Taylor (Accounts Receivable)     26/1            500.00
  (2) Carter Dry Goods Co. (Accounts Payable)  33/6   897.80
       Purchases Returns and Allowances          18            897.80
  (3) Notes Receivable                            1 5,218.08
      Sales Discount                             20   274.64
       Century Dress Co. (Accounts Receivable) 25/1          5,492.72

  Note particularly the way in which the ledger folios are shown
  for both accounts.

                          IV

  Summarize the sales, purchase, and cash journals; balance
  the cash book.

  In summarizing the sales journal, first total each column
  and draw a horizontal line under these amounts. On the next
  line record the summary entry, entering the amounts to be
  debited in the first money column and those to be credited
  in the second. The total of the partners’ withdrawals should
  not be posted, for they have already been transferred to
  the general ledger accounts at the time they occurred. The
  amount will therefore be checked in the summary entry. The
  total cash sales will also be checked, inasmuch as these
  have already been recorded in the cash book. The summary
  entry for the sales journal will appear as follows:

      Accounts Receivable, Dr.         ........
      Partners’ Personal, Dr.       ✔ ........
      Cash, Dr.                     ✔ ........
            Sales, Cr.                           ........

  The purchase journal should be summarized somewhat similarly
  but the total purchases are to be debited to “Purchases,”
  the purchases on account credited to “Accounts Payable,” and
  the cash purchases are to be checked. The summary entry of
  this journal will be:

      Purchases, Dr.
            Accounts Payable, Cr.                ........
            Cash, Cr.               ✔           ........

  In summarizing the cash journals, pencil-foot all columns of both
  journals. Then formally foot the columns on both sides, using the
  same line on both sides, i.e., the totals must appear on one
  line extending across both pages of the book. This may leave
  blank lines on either side according as one has had more
  entries than the other. Underline the totals. Make summary
  entries somewhat as follows:

  In the receipts journal:
         Cash
         Sales Discount
               Accounts Receivable
               General              ✔

  In the disbursements journal:
         General                    ✔
         Accounts Payable
               Purchase Discount                 ........
               Cash                              ........

  Use the first two money columns on either side for the entry
  of the amounts. Underline these entries through the four
  money columns. When posting these summary entries, the items
  “General” on either side will be checked as the details
  composing them have already been posted.

  On the next line write in the Explanation columns on either
  side, “Net Cash as above,” and extend the total amounts
  of cash receipts and cash disbursements into the Net Cash
  columns on their respective sides. Balance the cash book
  by entering “Balance” on the disbursements journal and
  extending the amount in the Net Cash column. Show totals at
  the same level on both sides and draw double lines through
  all columns on both sides except the Explanation columns.
  Bring the cash balance down in the receipts journal.

  Post completely all books of original entry. When posting
  the general journal, be very careful to post to the
  indicated controlling accounts. See Assignment III,
  Instructions, for the method to be followed.

  Take a trial balance of your general ledger and record
  it under date of January 31, beginning on page 16 of the
  journal blank. Write “Trial Balances, 19—” at the top of
  the page and in the small space over the money columns
  “January 31.” From the general ledger, copy the names of
  all accounts, whether or not there are as yet any entries
  in them, in the order there shown. Do not include the
  individual customers’ and creditors’ accounts in the above
  list, for these are taken care of by the inclusion of their
  controlling accounts. Be careful to write the account name
  at the extreme left of the explanation space, close to the
  date column. Leave one line at the bottom of page 16 and at
  the top of page of 22 for “Totals” and “Totals Forward.”

  Since one page is not sufficient to complete the record,
  continue it on page 22, there recording the rest of the
  accounts and heading the page and columns as on page 16. The
  intervening pages will be used as shown in Assignment VI.

  Prove the controlling accounts against their subsidiary
  accounts. To make this proof, at the top of page 30 of the
  general journal, write “Balances of Accounts Receivable,
  19—” and list the names of all customers’ accounts, writing
  the account name to the extreme left of the explanation
  space, close to the “Date” column. Place the words “January
  31” in the small space over the first money column, in which
  the balances of accounts receivable for January will be
  recorded. Do not use the second money column on this page;
  this will be used for February balances.

  Beginning on page 34, make a similar list of creditors’
  accounts. The instructions covering the listing of accounts
  receivable apply here also, with the exception that the
  words “Accounts Payable” are to be substituted for “Accounts
  Receivable.”

  List the individual account balances of customers’ and
  creditors’ accounts for each month, as described above,
  and record the total of each list in their respective
  columns. These totals must agree with the balances shown
  in the corresponding controlling accounts, i.e., the total
  of customers’ accounts outstanding for January must be
  equal to the balance of the controlling account, “Accounts
  Receivable,” shown in the general ledger. A discrepancy
  between a controlling account and its subsidiary accounts
  must always be located and corrected.

                         V

   Summarized transactions for February were:

   Purchases:
      American Dry Goods Co., 2/10, 1/30, n/60, $13,487.92.
      Associated Dry Goods Co., 2/10, n/60, $13,562.70.
      Claflins, Inc., 2/10, 1/30, n/60, $10,897.80.
      U. S. Dry Goods Co., 3/10, 2/15, n/60, $12,247.80.
      Marshall Field & Co., 3/10, 2/15, n/60, $17,792.90.
      Cash purchases $2,987.50.

   Sales:

      Arnold Sheriff & Co., 2/10, 1/15, n/30, $5,287.45.
      Atlas Dry Goods Co., 2/10, n/30, $5,794.32.
      Baird Dry Goods Co., 2/10, 1/15, n/30, $4,618.73.
      Burrows Dry Goods Co., 2/10, n/30, $3,289.49.
      Bostonian Dry Goods Co., 2/10, 1/15, n/30, $6,642.
      Century Dress Goods Co., 2/10, n/30, $4,497.35.
      Eagle Dress Goods Co., 2/10, n/30, $4,127.49.
      Emporium Dry Goods Co., 2/10, n/30, $4,793.80.
      Henry Miller, 2/10, n/30, $5,008.34.
      Melrose Dry Goods Co., 2/10, 1/15, n/30, $4,278.18
      New York Silk Co., 2/10, 1/15, n/30, $3,874.70.
      Southern Dry Goods Co., 2/10, n/30, $5,087.92.
      Public Bargain Store, 2/10, n/30, $4,972.
      Cash sales $2,989.90.
      Cotten took woolens, February 28, $50.

   Journal:
      Goods were returned by Century Dress Goods Co. $340, and
         Southern Dry Goods Co. $845, as unsatisfactory.
      Made Public Bargain Store an allowance of $85.
      Analysis of the January freight bill showed that $147.60
         was paid for freight on sales.
      Returns to American Dry Goods Co. $978.

  Cash Receipts:
      Baird Dry Goods Co., January bill $4,872.35 less 2%.
      Burrows Dry Goods Co., December bill $1,000 on account.
      Childs & Son January bill $4,794.12 less 1%.
      Daniel & Co., January bill $4,683.38 net.
      Eagle Dress Goods Co., January bill $5,978.35 net.
      Emporium Dry Goods Co., $1,000 on account.
      Arnold Sheriff & Co., February bill $5,287.45 less 2%.
      Atlas Dry Goods Co., February bill $5,794.32 less 2%.
      Bostonian Dry Goods Co., February bill $6,642 less 2%.
      Century Dress Goods Co., balance February bill $4,157.35 less 2%.
      Henry Miller, February bill $5,008.34 less 2%.
      Public Bargain Store, balance February bill $4,887 net.
      Cash was over $1.21.
      The note of Baird Dry Goods Co. for $1,500 was paid February 1
         with interest, amounting to $15.
      The note of Childs & Son was paid, $1,000.
      Sold miscellaneous ends, $48.50.

   Cash Disbursements:
      Bentley, Gray & Co., January bill $5,694 less 2%.
      Claflins, Inc., January bill $12,639 less 2%.
      Miller & Rhoades, Inc., December bill $5,672 net.
      Wm. Taylor, Son & Co., January bill $1,897.42 less 2%.
      Salesmen’s salaries $2,000.
      Salesmen’s railroad fares, hotel bills, etc., $1,013.48.
      Chauffeurs’ wages $240.
      Garage rent $125.
      Shipping clerks $210.
      Gasoline and oil $75.60.
      Fine for stopping car in front of hydrant $10.
      Paper, wrapping supplies, crates, $308.30.
      Wooster withdrew $500 February 15.
      Advertising as per schedule $3,000.
      Freight and haulage bills $257.80.
      Rent for March $1,250.
      Lighting and heating bills $497.58.
      Office manager’s and clerks’ salaries $998.
      Stationery, mimeograph supplies, etc., $214.40.
      Wages of cleaners, watchman, repairs to windows and new steps
         at door, $874.50.
      Telephone and telegraph $175.80.
      Messengers $128.
      Bought five $1,000 U. S. Liberty bonds at 95½, with
         accrued interest of $59.88.
      Cotten drew $400; Wooster $500.
      U. S. Dry Goods Co., February bill $12,247.80 less 3%.

   Notice has been received that a receiver has been appointed for
   Wilson Williams Co.

                       _Instructions_

   In making general journal entries affecting customers’ or
   creditors’ accounts, be sure to indicate the posting to the
   corresponding controlling accounts.

   At the time the freight bills are paid, the total amount is
   charged to In-Freight and Cartage. They are analyzed later
   into freight paid on sales and in-freight, and the amount
   paid on sales is transferred to the proper account by means
   of a journal entry.

   Record the sale of miscellaneous ends and the like in the
   cash receipts journal and post to Miscellaneous Sales.

   Charge the $10 fine to Delivery Expense.

   Be careful to charge the accrued interest on Liberty bonds
   to the proper account.

                           VI

  Summarize the special journals. In summarizing the cash
  receipts journal for February and the following months,
  do not underline the totals of the General and Net Cash
  columns, as instructed in Assignment IV. Deduct the balance
  as of the first of the month from the totals shown in both
  columns, indicating, in the explanation column, the nature
  of this amount. (See page 282 for illustration.) Underline
  these amounts and write the summary entry for the cash
  receipts journal as previously explained, taking care that
  the Cash account is debited only with the receipts of the
  current month.

  Post completely, being particularly careful in handling
  items affecting controlling accounts, especially when
  posting the general journal.

  Take a trial balance of the general ledger as of February
  28. In making record of this and succeeding trial balances,
  to obviate the necessity of rewriting account titles, fold
  back the two money columns on page 17 so that they “face
  up” on page 18, thus providing four money columns. This
  shortened leaf may now be used for recording trial balances
  for February and March. Similarly with succeeding leaves.

  Do not fail to record the balances of customers’ and
  creditors’ accounts in the proper places, and prove the
  totals against their respective controlling accounts.

  VII

      Summarized transactions for March were:

      Purchases:
         Wm. Taylor, Son & Co., 3/5, 2/10, n/30, $8,942.50.
         Newcomb Endicott Co., 2/15, n/60, $7,414.
         U. S. Dry Goods Co., 3/10, 2/15, n/60, $7,609.40.
         Wico Mills, Inc., 2/10, 1/30, n/60, $8,337.80.
         Carter Dry Goods Co., 2/10, 1/30, n/60, $8,790.
         Bentley, Gray & Co., 2/10, n/60, $10,890.45.
         Marshall Field & Co., 3/10, 2/15, n/60, $10,219.
         Cash purchases $3,390.

      Sales:
         Young, Smith, Field Co., 2/10, n/30, $6,874.32.
         Thompson Hudson Co., 2/10, n/30, $4,732.46.
         Rogers & Son, 2/10, n/30, $3,146.34.
         Public Bargain Store, 2/10, n/30, $3,590.70.
         National Dress Co., 2/10, n/30, $4,346.90.
         New York Silk Co., 2/10, 1/15, n/30, $6,784.50.
         Melrose Dry Goods Co., 2/10, 1/15, n/30, $7,894.80.
         T. H. Miller, 2/10, n/30, $6,237.40.
         Macmillian & Co., 2/10, n/30, $2,476.50.
         Hudson Dry Goods Co., 2/10, 1/15, n/30, $4,475.
         Falk & Taylor, 2/10, 1/15, n/30, $4,790.
         Eagle Dress Goods Co., 2/10, n/30, $3,105.
         Daniel & Co., 2/10, n/30, $3,490.70.
         Childs & Son, 2/10, 1/15, n/30, $4,789.40.
         Arnold Sheriff & Co., 2/10, 1/15, n/30, $3,980.40.
         Cash sales $2,462.75.
         Wooster drew merchandise $100.

      Journal:
         Gave Marshall Field & Co. our 60-day 6% note due May 15,
           for their bill of February, $17,792.90 less 3%.
         Received merchandise returned by Melrose Dry Goods Co. $1,487.90.
         Returned goods to Associated Dry Goods Co. $416.90.
         Received a credit memo for $162.40 from Claflins, Inc.
            for spoiled goods.
         Macmillian & Co. gave us their 60-day 6% note, due May 25,
            for balance of January bill $4,207.50.
         Marquis Dress Goods Co. was allowed $485 for delay in transit.
         Out-freight for February was $139.86.
         Metropolitan Dry Goods Co. issued their 30-day 6% note,
            due April 15, for January bill $4,180.

      Cash Receipts:
         Century Dress Goods Co. paid their note due March 28
            with interest.
         Baird Dry Goods Co., February bill $4,618.73 less 2%.
         Burrows Dry Goods Co., February bill $3,289.49 net.
         Eagle Dress Goods Co., February bill $4,127.49 less 2%.
         Emporium Dry Goods Co., January bill $1,461.93 net.
         Marquis Dress Goods Co., December bill $2,795 net.
         Melrose Dry Goods Co., February bill $4,278.18 less 1%.
         T. H. Miller, December bill, $1,000 on account.
         National Dress Co., December bill, $1,000 on account.
         Southern Dry Goods Co., balance of February bill,
            $4,242.92 less 2%.
         Young, Smith, Field Co., March bill $6,874.32 less 2%.
         Thompson Hudson Co., March bill $4,732.46 less 2%.
         New York Silk Co., March bill $6,784.50 less 1%.
         Hudson Dry Goods Co., March bill $4,475 less 2%.
         Daniel & Co., March bill $3,490.70 less 2%.
         Childs & Son, March bill $4,789.40 less 2%.
         Arnold Sheriff & Co., March bill $3,980.40 less 2%.
         Rogers & Son, March bill $3,146.34 net.
         The receivers for Wilson Williams Co. declared March 15
            an initial liquidating dividend of 35%,
            which was received.

      Cash Disbursements:
         Salesmen’s salaries $2,000.
         Salesmen’s traveling expenses $1,896.42.
         Chauffeurs’ and shipping clerks’ wages $435.
         Garage rent $125.
         Gasoline, oil, and minor parts, $116.84.
         Crates, boxes, and packing materials, $412.80.
         Advertising as per schedule $3,000.
         Rent for April $1,250.
         Insurance policies, elevator, fire, plate glass, burglary, $550.
         Lighting and heating $512.90.
         Office salaries $1,872.
         Books, stationery, $226.40.
         Telephone and telegraph, postage, $896.40.
         Changing partitions $280.
         Wages of cleaners and watchman $490.
         Painting of partitions $28.
         New bell on elevator $18.75.
         Contribution to Salvation Army Drive $100.
         Cotten drew $400; Wooster $500.
         Cash was short $12.92.
         Freight bill $262.90.
         American Dry Goods Co., balance of February bill
            $12,509.92 less 2%.
         Associated Dry Goods Co., balance of February bill
            $13,145.80 less 2%.
         Claflins, Inc., balance of February bill $10,735.40 less 2%.
         Miller & Rhoades, January bill $2,689.40 net.
         Marshall Field & Co., March bill $10,219 less 2%.
         Paid Marshall Field & Co. and American Dry Goods Co.
            December notes with interest.
         Lent $5,000 to Woolsey, in return for which he issued
            to the order of the firm his six months’ 6% note
            for a similar amount.

                         _Instructions_

      Record the interest received on notes receivable in the
      General Ledger column of the cash receipts journal.

      Enter the Woolsey note in the proper account.

      A liquidating dividend represents the amounts disbursed by a
      receiver to the creditors of the bankrupt.

                        VIII

  Summarize the subsidiary journals.
  Post completely.
  Take a trial balance of the general ledger as of March 31.
  Prove the totals of the subsidiary accounts against the
     totals of their respective controlling accounts.

                        IX

  Summarized transactions for April were:

  Purchases:
     American Dry Goods Co., 2/10, n/60, $8,292.50.
     Associated Dry Goods Co., 2/10, n/60, $7,784.90.
     Claflins, Inc., 2/10, 1/30, n/60, $10,467.70.
     Miller & Rhoades, Inc., 2/10, 1/30, n/60, $6,742.80.
     U. S. Dry Goods Co., 3/10, 2/15, n/60, $8,276.40.
     Marshall Field & Co., 3/10, 2/15, n/60, $28,450.
     Wico Mills, Inc., 2/10, 1/30, n/60, $4,970.80.
     Cash purchases $1,988.75.

  Sales:
     Arnold Sheriff & Co., 2/10, 1/15, n/30, $7,145.90.
     Atlas Dry Goods Co., 2/10, n/30, $6,890.70.
     Baird Dry Goods Co., 2/10, 1/15, n/30, $7,294.60.
     Bostonian Dry Goods Co., 2/10, 1/15, n/30, $9,874.50.
     Century Dress Goods Co., 2/10, n/30, $4,927.90.
     Daniel & Co., 2/10, n/30, $7,847.40.
     Hudson Dry Goods Co., 2/10, 1/15, n/30, $8,475.90.
     Henry Miller, 2/10, n/30, $5,982.90.
     Rogers & Son, 2/10, n/30, $7,826.90.
     Southern Dry Goods Co., 2/10, n/30, $7,495.80.
     Thompson Hudson Co., 2/10, n/30, $6,475.80.
     Young, Smith, Field Co., 2/10, n/30, $5,162.70.
     Cash sales $1,920.80.

  Journal:
     Returned to Marshall Field & Co., $1,250 worth of merchandise
       of the February purchase, cash adjustment effective as of
       April 15 to be made at time of paying note.
     Returned goods to Miller & Rhoades, Inc., $650.
     Transferred a desk costing $125 from the office to the sales
        department of store.
     Received returned goods from Bostonian Dry Goods Co.,
        $1,090; and from Henry Miller $785.
     Received a 30-day 6% note from the Silk & Dress Goods Exchange
        for January bill $3,780.40, due May 23.
     Out-freight for March was $152.90.
     The failure to book a payment of $10 for repairs on an
        annunciator partly explained the cash shortage in March.

  Cash Receipts:
     Note of Metropolitan Dry Goods Co. for $4,180 was paid
        April 15, with interest.
     Burrows Dry Goods Co., balance of December bill, $1,000.
     Eagle Dress Goods Co., March bill $3,105 less 2%.
     Emporium Dry Goods Co., February bill $4,793.80 net.
     Falk & Taylor, March bill $4,790 less 2%.
     Macmillian & Co., March bill $2,476.50 less 2%.
     Marquis Dress Goods Co., balance of January bill $3,782.50 net.
     T. H. Miller, March bill $6,237.40 less 2%.
     Melrose Dry Goods Co., balance March bill $6,406.90 less 1%.
     New York Silk Co., February bill $3,874.70 net.
     National Dress Co., on account, December bill, $1,000.
     Arnold Sheriff & Co., April bill $7,145.90 less 2%.
     Baird Dry Goods Co., April bill $7,294.60 less 2%.
     Hudson Dry Goods Co., April bill, $8,475.90 less 2%.
     Southern Dry Goods Co., April bill $7,495.80 less 2%.
     Thompson Hudson Co., April bill $6,475.80 less 2%.
     Young, Smith, Field Co., April bill $5,162.70 less 2%.
     The firm discounted its 90-day 6% note, due July 15,
        at the Merchants National Bank for $5,000.
     The receivers for Wilson Williams Co. declared another
        liquidating dividend of 15%.
     Received from the railroad $25, an overcharge on demurrage.

  Cash Disbursements:
     Sales salaries $2,975.
     Salesmen’s traveling expense $2,243.60.
     Delivery expense $763.87.
     Packing supplies $513.90.
     Advertising for April $3,000, and for May $3,000,
        less $250 as discount for prepayment.
     Freight bills $297.60.
     Light and heating $212.50.
     Office salaries $2,140.
     Office supplies $365.70.
     Office expense $988.95.
     General expense $897.12.
     Rent for May $1,250.
     Bentley, Gray & Co., March bill $10,890.45 less 2%.
     Wico Mills, Inc., March bill $8,337.80 less 2%.
     U. S. Dry Goods Co., March bill $7,609.40 less 2%.
     Wm. Taylor, Son & Co., March bill $8,942.50 less 2%.
     American Dry Goods Co., April bill $8,292.50 less 2%.
     Claflins, Inc., April bill $10,467.70 less 2%.
     Newcomb Endicott Co., March bill $7,414 less 2%.
     Miller & Rhoades, Inc., balance of April bill, $6,092.80 less 2%.
     Woolsey withdrew April 30 $500; Cotten, $400; and Wooster $500.
     New adding machine and desks for office $500.
     Paid taxes $190.

                     _Instructions_

  Include the discount received on advertising with the
  purchase discounts. The charge to Advertising will,
  therefore, be gross.

  Be sure to make the purchase discount adjustment
  necessitated by the returned goods transaction with Marshall
  Field & Co. Though this and the returned goods are to be
  taken into consideration when the note is paid, do not enter
  them now in the Notes Payable account, that adjustment being
  made at time of payment of note. Enter them in the Marshall
  Field & Co. account.

  Disregard the depreciation adjustment on the desk
  transferred to the sales department.

  Record the face of the discounted note in the General
  Ledger column, the amount of discount in the Sales Discount
  column with an (X) mark, and the net amount in the Net Cash
  column. In summarizing the cash book, this discount should
  be segregated from the total to be posted to Sales Discount,
  inasmuch as the former will be posted to Interest Cost.

  Credit the overcharge on demurrage to In-Freight and Cartage.

                            X

  Summarize the journals. In summarizing the debit side of
  the cash book previous to posting, remember that included
  in the Sales Discount column is an item of bank discount
  on the firm’s $5,000 note, which must be shown separately
  and charged to Interest Cost. Be sure you show this in the
  summary entries, in addition to the Sales Discount summary.
  To accomplish this the total of the Sales Discount column is
  best shown in two portions, the Sales Discount total on the
  one line, and the Interest Cost item on the next line.

  Post completely.

  Take a trial balance of the general ledger as of April 30.

  Prove the subsidiary accounts against their respective
  controlling accounts.

                        XI

    1.  Summarized transactions for May were:

    Purchases:
       Bentley, Gray & Co., 2/10, n/60, $9,764.90.
       Carter Dry Goods Co., 2/10, 1/30, n/60, $29,417.70.
       Newcomb Endicott Co., 2/15, n/60, $10,846.40.
       Wm. Taylor, Son & Co., 3/5, 2/10, n/30, $9,497.50.
       Marshall Field & Co., 3/10, 2/15, n/60, $11,145.80.
       Cash purchases $1,872.45.
       Sales:
       Arnold Sheriff & Co., 2/10, 1/15, n/30, $9,465.80.
       Baird Dry Goods Co., 2/10, 1/15, n/30, $8,467.90.
       Century Dress Goods Co., 2/10, n/30, $9,748.80.
       Daniel & Co., 2/10, n/30, $7,492.40.
       Hudson Dry Goods Co., 2/10, 1/15, n/30, $9,948.30.
       New York Silk Co., 2/10, 1/15, n/30, $9,742.50.
       Silk & Dress Goods Exchange, 2/10, n/30, $9,865.80.
       Southern Dry Goods Co., 2/10, n/30, $10,480.
       Thompson Hudson Co., 2/10, n/30, $8,942.75.
       Young, Smith, Field Co., 3/10, n/30, $16,290.
       Cash sales $1,694.90.

    Journal:
       Young, Smith, Field Co. returned $1,985 worth of merchandise;
          and Century Dress Goods Co., $625 worth.
       Out-freight for April was $147.42.
       Received from the National Dress Co., a 60-day acceptance drawn
          on the United Textile Co. in favor of the firm, due July 15,
          for $5,000.
       Returned to Newcomb Endicott Co. $2,200 of merchandise.
       Gave Associated Dry Goods Co. our 90-day note dated May 15,
          non-interest-bearing, but with 90 days’ interest, $114.43,
          included in the face, for their bill of April $7,784.90
          less 2% cash discount.
       Marshall Field & Co. note adjusted.
       Final settlement of Wilson Williams Co. was effected May 15.
          (See “Cash Receipts.”)
       Due to temporary embarrassment of the Silk & Dress Goods
          Exchange, their note was extended one month.

    Cash Receipts:
       Arnold Sheriff & Co., May bill $9,465.80 less 2%.
       Atlas Dry Goods Co., April bill, $3,000 on account.
       Baird Dry Goods Co., May bill $8,467.90 less 2%.
       Bostonian Dry Goods Co., balance of April bill,
          $8,784.50 less 2%.
       Century Dress Goods Co., April bill, $2,500 on account.
       Daniel & Co., April bill, $5,000 on account.
       Hudson Dry Goods Co., May bill $9,948.30 less 2%.
       New York Silk Co., May bill $9,742.50 less 2%.
       Public Bargain Store, March bill, $2,500 on account.
       Southern Dry Goods Co., May bill $10,480 less 2%.
       Young, Smith, Field Co., balance May bill, $14,305 less 2%.
       Interest on Liberty bonds due May 15, $119.75.
       Cash was over $42.65.
       For use of one of the motor trucks for the week,
          $100 was received.
       Sold packing materials, $80.75.
       Macmillian & Co., paid their note with interest May 25.
       Received $275 from the Central Hudson Railway Co. on our claim
          made in January.
       The receivers for Wilson Williams Co. paid a final liquidating
          dividend of 10%.

    Cash Disbursements:
       Salesmen’s salaries $2,985.
       Salesmen’s traveling expenses $2,213.72.
       Delivery expenses $886.94.
       Shipping and packing materials and supplies $516.70.
       Advertising for June $3,000 less $250 discount for prepayment.
       Rent for June $1,250.
       Freight and haulage $467.90.
       Lighting and heating $186.40.
       Office salaries $2,040.
       Office supplies $240.60.
       Office expense $1,167.70.
       General expense $912.67.
       A contribution of $250 was made to the State University fund.
       Paid Marshall Field & Co. note May 15 with interest
          and adjustment.
       Newcomb Endicott Co. balance of May bill, $8,646.40 less 2%.
       Cotten withdrew May 15, $400; Wooster $500; and Woolsey $1,000.
       Carter Dry Goods Co., March bill $8,790 net.
       Wico Mills, Inc., April bill $4,970.80 less 1%.
       U. S. Dry Goods Co., April bill $8,276.40 less 2%.
       Wm. Taylor, Son & Co., May bill $9,497.50 less 3%.
       Marshall Field & Co., May bill $11,145.80 less 2%.

    2. The Acorn Manufacturing Company, a corporation, is
    organized with a capitalization of $250,000 of which
    $150,000 is common stock and the remainder preferred. The
    company buys the plant of Brown & Towne, whose balance sheet
    appears below, issuing therefor $75,000 of common stock and
    $25,000 of preferred stock. The partners transfer all assets
    except cash and the vendee assumes the liabilities.

                    BALANCE SHEET OF BROWN & TOWNE
                            July 1, 19—

                   _Assets                          Liabilities_
      Cash                 $ 10,000.00    Notes Payable     $  2,000.00
      Notes Receivable       30,000.00    Accounts Payable     1,000.00
      Accounts Receivable    20,000.00    Mortgage Payable     5,000.00
      Inventory              30,000.00    Brown, Capital      46,000.00
      Plant and Machinery    10,000.00    Towne, Capital      46,000.00
                           -----------                      -----------
                           $100,000.00                      $100,000.00
                           ===========                      ===========
  July
     5. The remainder of the preferred stock is subscribed for
           at 90 and paid in cash.
    12. Subscriptions to common stock for $25,000 at 110 are
           received and paid in cash.

    20. The remaining common stock is subscribed for at 90 to be
           paid for in four equal instalments at intervals of
           one month.
  Dec.
    1. All calls were met as due. Paid the organization tax and
          filing fees in cash $250.

    Prepare journal entries for the above on the books of the
    Acorn Manufacturing Company.

    3. The A B Corporation is formed with a capital stock of
    $100,000, consisting of 1,000 shares par value $100 each.
    A subscribes for 500 shares, B for 200, C for 200, and D for
    100. B, C, and D pay cash for their subscriptions. A pays
    in full for his subscription by turning over a business he
    has been conducting. The corporation acquires the assets and
    assumes the liabilities of A’s business as follows:

                            A’S BALANCE SHEET

                    _Assets                      Liabilities_

       Merchandise          $15,000.00    Accounts Payable  $ 6,000.00
       Accounts Receivable   19,000.00    A, Capital         40,000.00
       Notes Receivable      12,000.00
                            ----------                      ----------
                            $46,000.00                      $46,000.00
                            ==========                      ==========

    (a) Make the necessary entries to open the books of the
        corporation.
    (b) Make the necessary entries to close the books of A.

                       _Instructions_

    Transfer the net claim against Marshall Field & Co.,
    appearing in their account, to Notes Payable through the
    general journal. The balance of the note remaining in the
    latter account will be offset by the debit to be posted from
    the cash disbursements journal. In calculating the interest
    to be paid on the above note, take cognizance of an interest
    adjustment dating from April 15.

    Transfer a sufficient amount from the Wilson Williams Co.
    account to the Reserve for Doubtful Accounts so that the
    balance of the latter account will be wiped out. The balance
    in the Wilson Williams Co. account is to be charged in
    accordance with the partnership agreement.

    Credit the amount received for the use of the delivery truck
    to Delivery Expense.

    The payment made by the railroad company should be credited
    to Sales Returns and Allowances to offset the debit made
    previously.

    Problems 2 and 3 are, of course, separate problems not to be
    recorded in the books of Cotten, Wooster & Co.

                           XII

  1. (a) Summarize the subsidiary journals.
     (b) Post completely.
     (c) Take a trial balance of the general ledger as of May 31.
     (d) Prove the subsidiary accounts against their respective
          controlling accounts.

  2. At the end of the year net profits amount to $15,000,
  with a previous surplus balance of $50,000. Preferred
  stock amounts to $100,000, of which $20,000 is treasury
  stock; common amounts to $150,000, of which $50,000 has not
  been issued. The directors declare an 8% dividend on the
  preferred, and a 10% on the common, and appropriate $5,000
  to a sinking fund reserve. Later the above dividends are
  paid. Make the entries needed to bring the above onto the
  books.

  3. A corporation authorizes a $250,000 bond issue, of which
  $150,000 are traded for a plant, and $50,000 are sold
  on the open market at 102. The bonds bear 6% interest,
  payable semiannually. Show how you would handle the above
  transactions. Show your treatment at the time of the first
  interest payment, assuming the bonds to mature in 25 years.

                   _Instructions_

  Problem 1 refers to the Cotten, Wooster & Co. problem.

  Problems 2 and 3 do not relate to Cotten, Wooster & Co.

                        XIII

  Summarized transactions for June were:

  Purchases:
     American Dry Goods Co., 2/10, n/60, $16,145.75.
     Associated Dry Goods Co., 2/10, n/60, $15,927.80.
     Claflins, Inc., 2/10, 1/30, n/60, $17,894.60.
     Wico Mills, Inc., 2/10, 1/30, n/60, $4,792.45.
     U. S. Dry Goods Co., 3/10, 2/15, n/60, $15,867.42.
     Miller & Rhoades, Inc., 2/10, 1/30, n/60, $16,279.80.
     Newcomb Endicott Co., 2/15, n/60, $15,318.40.
     Wm. Taylor, Son & Co., 3/5, 2/10, n/30, $5,728.
     Marshall Field & Co., 3/10, 2/15, n/60, $6,716.90.
     Cash purchases $1,813.40.

  Sales:
     Arnold Sheriff & Co., 2/10, 1/15, n/30, $8,465.90.
     Baird Dry Goods Co., 2/10, 1/15, n/30, $7,964.60.
     Burrows Dry Goods Co., 2/10, n/30, $6,279.45.
     Bostonian Dry Goods Co., 2/10, 1/15, n/30, $9,763.80.
     Childs & Son, 2/10, 1/15, n/30, $7,942.45.
     Eagle Dress Goods Co., 2/10, n/30, $8,246.70.
     Emporium Dry Goods Co., 2/10, n/30, $7,847.65.
     Falk & Taylor, 2/10, 1/15, n/30, $8,972.70.
     Hudson Dry Goods Co., 2/10, 1/15, n/30, $7,432.80.
     Macmillian & Co., 2/10, n/30, $6,972.50.
     Marquis Dress Goods Co., 2/10, n/30, $8,414.
     Metropolitan Dry Goods Co., 2/10, n/30, $3,985.
     Melrose Dry Goods Co., 2/10, 1/15, n/30, $8,945.
     New York Silk Co., 2/10, 1/15, n/30, $7,987.50.
     Southern Dry Goods Co., 2/10, n/30, $9,475.65.
     Cash sales $1,472.60.

  Journal:
     Out-freight for May was $157.90.
     Returned goods received from Daniel & Co., $1,875;
        and Thompson Hudson Co., $935.
     Received from Rogers & Son, Charles L. Sutton & Co.’s 90-day
        6% note for $5,000, dated May 5, with 40 days’ interest
        accrued, in payment of their April bill, the balance of
        the payment in cash.
     Returned $967.50 of merchandise to Miller & Rhoades, Inc.;
        and $614.75 to Wico Mills, Inc.
     Cash over of May was partly accounted for by failure to book
        sale of old crates and supplies for $35.
     The note of the Silk & Dress Goods Exchange, extended to and
        due June 23, was not paid, as the firm was still in
        difficulties.
     A mortgage for $25,000 was given to complete the purchase
        of the building. (See “Cash Disbursements.”)

  Cash Receipts:
     Arnold Sheriff & Co., June bill $8,465.90 less 2%
     Atlas Dry Goods Co., balance of April bill $3,890.70.
     Century Dress Goods, balance of April bill $1,802.90.
     Daniel & Co., on account $5,000.
     Henry Miller, on account $2,500.
     National Dress Goods Co., balance March bill $238.90.
     Public Bargain Store, on account $500
     Rogers & Son, balance April bill $2,793.57.
     Thompson Hudson & Co., balance May bill $8,007.75 less 2%.
     Bostonian Dry Goods Co., June bill $9,763.80 less 2%.
     Southern Dry Goods Co., June bill $9,475.65 less 2%.
     Macmillian & Co., June bill $6,972.50 less 2%.

  Cash Disbursements:
     Salesmen’s salaries $5,340.
     Salesmen’s traveling expenses $2,917.94.
     Delivery expenses $978.42.
     Shipping supplies $523.80.
     Advertising for July $3,000, less $250 for prepayment.
     Freight and haulage $569.70.
     Rent for July $1,250.
     Insurance on auto trucks $250.
     Lighting and heating $92.70.
     Office salaries $2,465.
     Office supplies $369.74.
     Office expenses $1,254.60.
     General expenses $1,219.62.
     Cotten withdrew June 15 $400; Wooster $500.
     Bentley, Gray & Co., May bill $9,764.90 less 2%.
     Wm. Taylor, Son & Co., June bill $5,728 less 2%.
     Semiannual dues to the Merchants’ Association $50.
     Purchased a lot and building for $35,000, paying
        $10,000 in cash and the balance remaining on mortgage.

                     _Instructions_

  Charge the Silk & Dress Goods Exchange note to their account.

  Additional data on the mortgage transaction are given
  under “Cash Disbursements.” In the general journal entry
  make explanation of the entire transaction, including the
  cash portion, which will of course be entered formally
  only in the cash book. In the cash book entry, by way of
  explanation, give cross-reference to the general journal
  explanation.

                          XIV

  Summarize the subsidiary journals.
  Post completely.
  Take a trial balance of the general ledger as of June 30.
  Prove the totals of the subsidiary accounts against their
     respective controlling accounts.

                             XV

    Prepare a work sheet, as of June 30, 19—, for the
    six months, taking account of the following adjustments
    and inventories. Follow carefully the form shown in
    Chapter XXVII.

    Accrued Expenses:
       Salesmen’s salaries $485.
       Shipping clerks’ and chauffeurs’ wages $265.
       Unpaid garage bills $182.50.
       Freight bills $55.60.
       Office salaries $287.50.
       Lighting expense estimate $25.
       Watchman’s and cleaners’ wages $106.
       Taxes $300.
       Prepaid Expenses:
       Advertising $3,000.
       Rent $1,250.
       Insurance $790.
       Merchants’ Association dues $50.
       Interest on note payable to the order of the
          Associated Dry Goods Co. $57.21.
       Interest on the note due the Merchants’ National Bank $12.50.

    Accrued Income:
       Interest on Liberty bonds $47.50.
       Interest on the note of Charles L. Sutton & Co. $46.67.
       Word has been received from the attorneys that the note of
          the Silk & Dress Goods Exchange, which had been extended
          and not paid when presented, will be met in full with
          accrued interest of $42.84.
       Out-freight for June, $169.70.
       Charge depreciation as follows: 10% per annum on office and
          store furniture and fixtures; 20% per annum on delivery
          equipment.
       Create a reserve for bad debts equal to ½% of gross sales.
       Inventories were: merchandise $102,560;
          office supplies $257.80; shipping supplies $387.60.
       Charge and credit the partners with interest as per the
          partnership agreement.

                      _Instructions_

    Do not close the books of the firm nor draw up the formal
    statements.

    Be content for this assignment with the making of the work
    sheet.

    Close the work sheet as usual by the transfer of the net
    profit from the Profit and Loss columns to the credit column
    of the balance sheet.

    Immediately following and on the same page with the work
    sheet, provide for showing the distribution of profits and
    interest and salary adjustments. The following illustration
    will indicate how this may be done.

  ============+===============+=============+=============+=============
     ITEMS    | PROFIT & LOSS |  X PER 36%  |  Y PER 44%  |  Z PER 20%
  ------------+---------------+-------------+-------------+-------------
  Net Profit  |               |             |             |
     as above |        $18,364|             |             |
              |               |             |             |
  Salary      |               |             |             |
   Allowances |$ 5,400        |       $2,400|       $3,000|
              |               |             |             |
  Partners’   |               |             |             |
    Drawings  |               |$3,000       |$3,100       |$1,500
              |               |             |             |
  Interest on |               |             |             |
    Excess    |               |             |             |
    Drawings  |             36|    18       |     3       |    15
              |               |             |             |
  Interest on |  3,000        |          900|          600|       $1,500
     Capitals |               |             |             |
              |               |             |             |
  Balance     |               |             |             |
   Distributed|               |             |             |
   in Profit  |               |             |             |
   and Loss   |               |             |             |
   ratio      | 10,000        |        3,600|        4,400|        2,000
              |               |             |             |
  Balance of  |               |             |             |
    Personal  |               |             |             |
    accounts  |               |             |             |
    to Loan   |               |             |             |
    accounts  |               |3,882        | 4,897       | 1,985
    ----------+---------------+-------------+-------------+-------------
              |$18,400 $18,400|$6,900 $6,900|$8,000 $8,000|$3,500 $3,500
              +===============+=============+=============+=============

    The item “Net Profit as above” is taken from the work
    sheet. The Profit and Loss columns, in conjunction with the
    detailed distributions shown in the “Partners’ Personal”
    columns, contain all the data needed for the appropriation
    section of the profit and loss statement and also for
    distributing the net profit shown by the Profit and Loss
    account. By entering the drawings in the “Partners’
    Personal” columns, those columns are made to develop the
    amount of undrawn profits of each partner. They thus
    contain the same information which the respective personal
    accounts will contain after the ledger is closed. The work
    sheet, with this appended analysis of profits and partners’
    personal accounts, thus contains all of the information
    needed both for drawing up the formal statements and for
    adjusting and closing the books.

                           XVI

  Draw up a pro forma balance sheet and a statement of profit
  and loss for the six months for Cotten, Wooster & Company.
  In drawing up the balance sheet, head it as follows:

                                            _Exhibit A_
                COTTEN, WOOSTER & COMPANY
                      BALANCE SHEET
                       June 30, 19—

  Show the total of all customers’ accounts as “Accounts
  Receivable (See Schedule A-1).” Attach to the balance sheet
  a list or schedule of all customers’ accounts to support the
  title “Accounts Receivable (See Schedule A-1),” carried in
  the balance sheet. Give to it as a formal heading:

                                          _Schedule A-1_
              COTTEN, WOOSTER & COMPANY
             LIST OF ACCOUNTS RECEIVABLE
                    June 30, 19—

  The data for the schedule come from the customers ledger
  list or trial balance for June 30.

  Attach schedules also for the other groups of items
  appearing in the balance sheet, viz.: Deferred Charges to
  Operation under which include in addition to the other items
  listed, the office supplies and packing materials still on
  hand; Accrued Income; Accounts Payable; and Accrued Expenses.

  The use of schedules relieves the balance sheet of much
  detail and renders it more intelligible; it also makes the
  detail available if desired.

  Set up the net worth section as follows:

                   _Net Worth_
  Represented by:
    C. Allen Cotten:
      Capital                             $........
      Undrawn Profits (See Schedule A-6)   ........  $........
                                           --------
    Scott Wooster:
      Capital                             $........
      Undrawn Profits (See Schedule A-6)   ........   ........
                                           --------
    Etc.

  Supporting Schedule A-6 will appear as follows:

                                           _Schedule A-6_
             COTTEN, WOOSTER & COMPANY
            UNDRAWN PROFITS, June 30, 19—

  ============================+=========+=========+=========
   DISTRIBUTIONS OF PROFITS   | COTTEN  | WOOSTER | WOOLSEY
                              |   36%   |   44%   |   20%
  ----------------------------+---------+---------+---------
  Salary for the half-year    | $       | $       |
  Interest on capital         |         |         | $
  Share of Profit and Loss    |         |         |
                              | --------| --------| --------
        Totals                | $       | $       | $
                              | --------| --------| --------
      _Deduct_:               |         |         |
  Interest on overdrafts      | $       | $       | $
  Drawings for the half-year  |         |         |
                              | --------| --------| --------
        Totals                | $       | $       | $
                              | --------| --------| --------
  Undrawn profits transferred |         |         |
    to Loan Accounts          | $       | $       | $
                              +=========+=========+=========

  The data for this schedule are secured from the
  “Profits Distribution” section of the work sheet.

  In drawing up the profit and loss statement refer to
  the forms already shown. See Chapters XXVI and XXVII. The
  Miscellaneous Sales item should be added to the Net Sales
  short-extended and their total should be full-extended,
  from which should be deducted Cost of Goods Sold as usual.

  After the item, “Net Profit for the period,” set up the
  appropriation section, showing the shares of each of the
  partners, somewhat as follows:

   Net Profit for the period                   $........

      _Add_:
  Interest charged to partners on overdrafts:
    C. Allen Cotten                            $........
    Scott Wooster                               ........
    Landsdowne Woolsey                          ........  ........
                                                --------  --------
  Amount to be distributed as:                           $........

  Salary:
    C. Allen Cotten                $........
    Scott Wooster                   ........   $........
                                    --------
  Interest on Capitals:
    C. Allen Cotten                $........
    Scott Wooster                   ........
    Landsdowne Woolsey              ........    ........
                                    --------
  In Profit and Loss Ratio:
    C. Allen Cotten, 36%           $........
    Scott Wooster, 44%              ........
    Landsdowne Woolsey, 20%         ........             $........
                                    --------    -------   ========

  Excepting for the Accounts Receivable and Accounts Payable
  schedules, the detailed data for balance sheet and profit
  and loss statements come from the work sheet drawn up for
  Assignment XV. Set up the formal statements on letter size
  (8½ × 11) paper. Typewrite them if possible.

                         XVII

  Using the “Adjustment” columns of the work sheet as a guide,
  make the adjusting entries in the general journal.

  Using the profit and loss statement (including the
  appropriation section) as a guide, set up the closing
  entries in the general journal. Use the “Profits
  Distribution” section of the work sheet as the source of the
  transfer of the balances of the partners’ personal accounts
  to the loan accounts.

  Post the adjusting and closing entries.
  Rule the ledger accounts.
  Take a post-closing trial balance of the general ledger.

                         XVIII

   This set comprises a general journal; a sales journal, a
   sales returns and allowances journal, a purchase journal,
   a purchase returns and allowances journal, and the cash
   journals, for convenience bound together in one book; a note
   journal to be used as a posting medium for notes receivable
   and notes payable; and a general ledger, a purchase ledger,
   and a sales ledger, bound together in one book. Of the
   subsidiary journal blank, page 1 is for the sales journal,
   page 2 the sales returns, page 3 the purchase journal, page
   4 the purchase returns, and pages 6-9 the cash journals. Of
   the ledger blank, pages 1-15 comprise the general ledger,
   pages 16-19 the sales ledger, and pages 20-22 the purchase
   ledger. The general journal will be used as previously,
   i.e., for the record of all items not otherwise specially
   provided for. The sales journal provides for analysis of the
   sales, the first column being the total or general column;
   the others, Dept. A, Dept. B, and Out-Freight, respectively.
   The sales returns and allowances journal makes provision
   for the same analysis as the sales journal except that
   there is no Out-Freight column, that not being used; the
   purchase journal columns are respectively, Total, Dept. A,
   Dept. B, and In-Freight, with the same column headings for
   the purchase returns and allowances journal, except as to
   In-Freight. The cash book columns will be, on the debit,
   General, Accounts Receivable, Sales Discount, and Harding
   National Bank; and on the credit, General, Accounts Payable,
   Purchase Discount, and Harding National Bank. The note
   journal will be analyzed, summarized, and posted just as the
   other subsidiary journals.

   The deposit account carried with the Coolidge National Bank
   is an inactive one. For this reason no extra column is
   provided for it in the cash book.

   Daily posting of items affecting customers’ and creditors’
   accounts should be made, carefully observing the terms of
   credit.

   The general journal is provided with six money columns,
   three of which are to be devoted to charges and the other
   three to credits. The debit columns are to be headed,
   Accounts Payable, Accounts Receivable, and General,
   respectively. The credit columns will be headed similarly
   but in the reverse order, having the General column close
   to the ledger folio column. All amounts to be posted to
   accounts in the general ledger should be recorded in the
   General column, and those affecting a controlling account in
   its respective column. The latter amounts should be posted
   to the subsidiary account immediately, but will not be
   posted to the controlling account until the general journal
   is summarized at the end of the month. Record will be made
   of transactions for the last month of the fiscal year, the
   previous eleven months being summarized in the trial balance
   given to start with.

   The Business Equipment Corporation was organized and
   incorporated under the laws of the state of New York. Its
   fiscal year closes on December 31. A trial balance from the
   general ledger on November 30, 19—, shows as follows:

    1 Harding National Bank                 $  6,521.25
    1 Coolidge State Bank                      5,000.00
    1 Consignment Accounts Receivable
    1 Petty Cash                                 200.00
    1 Notes Receivable                         8,419.80
    2 Accounts Receivable                    146,838.05
    2 Reserve for Doubtful Accounts                       $  2,574.85
    2 Investments                             12,750.00
    2 Notes Receivable Special
    3 Department A, Inventory                 78,769.40
    3 Department B,  Inventory                52,918.25
    3 Delivery Equipment                      13,000.00
    3 Depreciation Reserve Delivery Equipment                8,000.00
    4 Store and Warehouse Furniture and
        Fixtures                               4,500.00
    4 Depreciation Reserve Store and Warehouse
        Furniture and Fixtures                               2,000.00
    4 Office Furniture and Fixtures            1,250.00
    4 Depreciation Reserve Office Furniture
        and Fixtures                                           500.00
    5 Buildings                               60,000.00
    5 Depreciation Reserve Buildings                        15,000.00
    5 Land                                    10,800.00
    5 Mortgage on Real Estate                               35,000.00
    6 Notes Payable                                          6,472.50
    6 Accounts Payable                                      94,969.17
    6 Dividends Payable Common
    6 Dividends Payable Preferred
    7 Capital Stock Common                                 100,000.00
    7 Capital Stock Preferred                              100,000.00
    7 Surplus                                               34,792.80
    8 Profit and Loss
    9 Department A, Purchases                478,860.00
    9 Department A, Purchases Returns and
        Allowances                                          15,678.90
    9 Department B, Purchases                397,725.00
    9 Department B, Purchases Returns and
        Allowances                                          12,796.40
   10 In-Freight and Cartage                   9,642.57
   10 Department A, Sales                                  567,819.60
   10 Department A, Sales Returns and
        Allowances                            10,649.30
   10 Department B, Sales                                  471,932.40
   11 Department B, Sales Returns and
        Allowances                             7,427.80
   11 Salesmen’s Salaries and Commissions     29,942.70
   11 Salesmen’s Traveling Expenses           17,897.60
   11 Advertising                             22,000.00
   12 Sales General Expense                   23,649.30
   12 Out-Freight                                472.73
   12 Insurance                                7,562.40
   12 Office Expense                           2,890.78
   13 Office Supplies                          3,697.40
   13 General Expense                         12,897.48
   13 General Salaries                        32,894.72
   13 Interest and Bank Expense                2,344.52        586.13
   14 Sales Discount                          15,849.50
   14 Bad Debts
   14 Depreciation
   14 Purchase Discount                                     10,297.80
   15 Taxes
   15 Mortgage Interest                        1,050.00
   15 Consignment
   15 Consignment-Out
                                          -------------  ------------
                                          $1,478,420.55 $1,478,420.55
                                          ============= =============

                     _Instructions_

   Open all the above accounts in your general ledger, at the
   places indicated, and enter under date of December 1 the
   balances given in the trial balance. The number in front of
   the account title indicates the page on which to enter the
   accounts. Give each one-fourth of a page, except on page
   2, where give Accounts Receivable two additional lines by
   shortening the space for Investments.

   In the sales ledger (which is controlled by the Accounts
   Receivable account on the general ledger), beginning on page
   16, open the following accounts, four to a page, and enter
   the balances as of December 1:

   Alexander, Hill & Co.                           $ 10,187.60
   Automatic Pencil Sharpener Co.                     1,279.00
   Browne Morse Co.                                   4,279.85
   Clark & Smith                                      6,798.94
   General Fireproofing Co.
   Hall, Walter & Co.                                 2,967.09
   Franklin Moffit Co.                               22,897.42
   Peerless Motor Co.
   John B. Scrivener
   Standard Truck Co.                                   217.90
   Second Third National Bank                           650.00
   Willis, Dickson, Inc.                             14,679.80
   Yonkers Carpet Works
   Sundry Customers                                  82,880.45
                                                   -----------
                                                   $146,838.05
                                                   ===========

   In the purchase ledger (which is controlled by the Accounts
   Payable account on the general ledger), beginning with page 20,
   open the following accounts, four to a page, and enter the
   balances as of December 1:

   American Banking Machine Co.                    $  7,894.20
   American Duplicator Co.                            2,985.75
   American Kardex Co.                                6,732.84
   Automatic Pencil Sharpener Co.                       480.00
   Apex Office Supply Co.                             2,797.90
   Dictation Devices Co.                              5,724.75
   Filing Systems & Cabinet Co.                       6,894.80
   Library Bureau                                     7,894.90
   Protectograph Co.                                  2,147.35
   Yawman & Erbe Mfg. Co.                            10,897.50
   Sundry Creditors                                  40,519.18
                                                   -----------
                                                   $ 94,969.17
                                                   ===========
   The two accounts, “Sundry Customers” and “Sundry Creditors,”
   are used to secure volume of transactions without involving
   too great detail. They should be treated in all respects as
   personal accounts.

   In the notes receivable journal, enter the following notes:

     No. 84, made by Clark & Smith in our favor, for merchandise,
     dated September 18, 19—, for three months at 6%, amount
     $1,987.50.

     No. 87, made by Hall, Walter & Co., in our favor, for goods
     purchased, dated October 5, at 6% for two months, amount
     $2,500.

     No. 88, draft drawn by the company on Willis, Dickson, Inc.,
     dated October 28, at 60 days, amount $2,750.

     No. 91, made by Franklin Moffit Co., in our favor, for
     merchandise, dated November 15, at 6% for 30 days, amount
     $1,182.30.

  Total the “Amount” column and rule it off as this amount is
  already in your general ledger “Notes Receivable” account.

  In the notes payable journal, enter the following notes:

     No. 32, made by the company in favor of the Yawman & Erbe
     Mfg. Co., dated October 15, for two months for $1,472.50
     at 6%.

     No. 31, made by the company in favor of the Harding National
     Bank for discount, dated October 20, at 6% for 60 days,
     amount $5,000.

  Enter these in the notes payable journal and treat as with notes
  receivable above.

  Your books, general and subsidiary, will now show the condition
  as at the beginning of business December 1.

                           XIX

  Make record in the various books of original entry of the
  following transactions for December, figures at left margin
  indicating day of month. Where needed, directions appear at the
  close of each assignment.

    Dec.
      1. Sold Browne Morse Co., 1/10, n/30, $1,538.40 (A),
           and $408.75 (B) on which the company prepaid freight
           and charged to them $58.85.
         Received on account from Willis, Dickson, Inc. $2,000.
         Paid cash on account to American Banking Machine Co., $2,000.
      2. Bought of the Yawman & Erbe Mfg. Co., 2/5, n/20, $2,989.80 (A),
         and $3,347.65 (B).
         Sold Clark & Smith, 2/10, n/60, $3,276.40 (A), and $1,562.32 (B).
         Received cash on account from Alexander, Hill & Co., $3,500.
         Paid cash on account to Filing Systems & Cabinet Co. $2,000.
      3. Sold General Fireproofing Co., 1/5, n/30, $2,190, (A).
         Received cash from Sundry Customers $5,547.80.
         Paid American Kardex Co. $3,500 on account.
      5. Sold Hall, Walter & Co., 3/10, n/30, $1,279.60 (A),
            and $390.45 (B).
         Received payment on Hall, Walter & Co. note No. 84,
            with interest.
         Browne Morse Co. paid their bill of December 1, less 1%.
         Paid American Duplicator Co., November balance less 1%.
         Received $2,497.80 from Sundry Customers.
      6. Bought of the Automatic Pencil Sharpener Co., 4/10, n/30,
            $679 (B).
         Bought from Apex Office Supply Co., 1/10, n/30, $1,497.80 (A),
            and $896.45 (B).
         Sold Peerless Motor Co., 1/10, n/60, $2,679.40 (A),
            and $1,243.70 (B), with prepaid freight charged them $22.90.
         Received $2,500 on account from Willis, Dickson, Inc.
         Gave our 30-day note No. 33, at 6%, in favor of Library Bureau,
            to apply on account, $3,000.
         Paid Sundry Creditors $8,191.75.
      7. Sold Second Third National Bank, 1/5, n/60, $425 (B).
         Paid Yawman & Erbe bill of December 2, less 2%.
         Received from Sundry Customers $2,976.80 on account.
         Sold Browne Morse Co., 1/10, n/30, $1,215.60 (A),
            and $671.15 (B).
         Clark & Smith returned goods, invoice of December 2,
            $127.50 (A), and $16.18 (B).
         General Fireproofing Co. paid their invoice
            of December 3 less 1%.
         Second Third National Bank paid their November balance
            less 1%.
      9. Bought of Dictation Devices Co., 1/10, n/30, $3,784.90 (A),
           and $1,781.19 (B).
         Paid cash for insurance $275.
         In making a deposit at the bank, a $20 note was found
            to be counterfeit.
     10. A note receivable for $2,500 was received from the president,
            due in six months at 6% in return for a loan made to him
            by the company.
         Sold Automatic Pencil Sharpener Co. $896.40 (B), 1/5, n/30.
         Received cash on account from Franklin Moffit Co. $7,500.
         Browne Morse Co. paid $2,000 on account.
         Paid Apex Office Supply Co., $2,500 on account.
     12. Bought of the Protectograph Co., n/60, $2,976.80 (B).
         Sold Alexander Hill & Co., 2/5, n/30, $1,569.70 (A),
            and $972.80 (B).
         Hall, Walter & Co. returned goods, invoice of December 5,
            $92.78 (A), and $121.47 (B).
         Received balance from Clark & Smith, invoice of December 2,
         less 2%.
         Paid Yawman & Erbe Mfg. Co. $5,000 on account;
            and Dictation Devices Co. $2,500.
         The Second Third National Bank paid their invoice of
            December 7, less 1%.
     13. John B. Scrivener, the secretary, withdrew for his home use
            $125.80 (A), and $48.90 (B).
         Sold Browne Morse, 1/10, n/30, $894.65 (A) and $1,292.45 (B).
         Returned to Automatic Pencil Sharpener Co. $207 (B) of the
            invoice of December 6.
         Paid $890 for changing the partitions in the warehouse.
         Took from stock a new sofa, $275 (A) for use in salesrooms.
     14. Purchased from American Banking Machine Co., 3/10, n/30,
            $1,472.85 (A), and $4,561.40 (B).
         Sold Standard Truck Co., 1/10, n/30, $684.90 (A),
            and $516.75 (B), with prepaid freight charged them $62.81.
         Received $2,500 on account from Franklin Moffit Co.
         Paid Protectograph Co. $2,000 on account.
     15. Sent a consignment of Department A goods, $1,200 to
           G. A. Roberts, to be sold on a 5% commission basis.
         Drew a 30-day sight draft on Alexander Hill & Co. to apply
            on account, $2,500, which was accepted.
         Hall, Walter & Co. gave a 30-day 6% note for balance of their
            bill of December 5, less 3%.
         The Franklin Moffit Co. note was paid with interest.
         Received from Automatic Pencil Sharpener Co. in full
            settlement, the net balance due as shown by their
            two accounts, advantage being taken of the discounts
            both ways.
         Paid Yawman & Erbe note due today with interest.

                        _Instructions_

      December 5. Record the interest received from Notes
      Receivable in the Interest and Bank Expense account.

      December 10. Be sure to enter the note received from the
      president to the correct account.

      December 13. For stock withdrawn for use of business, make
      entry in the general journal.

      December 15. Transfer through the general journal the claim
      of the Automatic Pencil Sharpener Co. to their account
      in the sales ledger, taking into consideration the sales
      discount to be allowed and the purchase discount to be
      taken. Remember to record these amounts in the proper
      columns. The balance of the latter account will be offset
      by the credit from the cash receipts journal.

                                 XX
  Dec.

    16. Bought from American Kardex Co., 3/10, n/30, $629.50 (A),
           and $350.40 (B).
        Bought on account of the Yonkers Carpet Works, n/90,
           carpets and floor materials for showrooms. They charged
           $890 for the carpets, etc., and $125 for labor in laying
           them, with freight prepaid by them and charged to the
           company of $22.80.
        Returned to the Protectograph Co. $258 (B).
        Gave Apex Office Supply Co. 30-day note at 6%,
           for bill of December 6, less 1%.
        The Peerless Motor Co. paid their bill of December 6,
           less 1%.
    17. Sold Franklin Moffit Co., 1/10, n/30, $987.40 (A),
           and $1,642.70 (B), with prepaid freight charged
           them $62.15.
        Paid in-freight and cartage bills to date $569.47.
    19. Bought of American Duplicator Co. $4,897 (A), n/60,
           with prepaid freight $297.69.
        Sold Willis, Dickson, Inc., n/10, $892.50 (A),
           and $274.90 (B).
        The Clark & Smith note was paid with interest.
        Browne Morse Co. gave the company a 30-day 6% note
           for the bill of December 7, less 1%.
        Drew from stock for completing showrooms, furnishings
           $2,790 (A), and $650 (B).
        Hall, Walter & Co. paid the company $100 for the use
           of one of the motor trucks for the week.
        Alexander, Hill & Co. paid their bill of December 12,
           less 2%.
        Gave Dictation Devices Co. $2,500, 30-day note at 6%
           and the balance in cash, in settlement of invoice
           of December 9, less 1%.
        Paid note due at bank today.
    20. Sold Sundry Customers to date receiving full cash payments
           $2,447.50 (A), and $1,679.35 (B).
        Sold Yonkers Carpet Works Co., 1/10, n/30, $889.70 (A),
           and $632.40 (B).
        Paid American Banking Machine Co. $5,000 on account.
    21. Returned to American Banking Machine Co. $289.50 (A),
           and $186.70 (B), of invoice of December 14.
        The company accepted the draft, to apply on account,
           drawn by the American Kardex Co., at 60 days from
           December 18, for $2,500.
        Paid Filing Systems & Cabinet Co. $2,500 on account.
    22. Bought from Filing Systems & Cabinet Co., 3/10, n/30,
           $3,695 (A), and $4,272 (B), with prepaid freight
           charges of $116.74.
        Sold Clark & Smith, 2/10, n/60, $1,462.80 (A),
           and $1,937.60 (B).
        Hall, Walter & Co. paid $1,000 on account.
        Browne Morse Co. returned goods $197.60 (A),
           and $59.70 (B).
    23. Word was received that one of our Sundry Customers has
           gone into the hands of a receiver, owing $490, and
           settlement with creditors was made on the basis of 40%
           of all claims, cash being received for that amount.
        Bought of Library Bureau, 1/10, n/30, $2,897 (B).
        Sold Alexander, Hill & Co., 1/10, n/30, $1,785.90 (A),
           and $2,476.80 (B).
        Paid Library Bureau $3,000 on account.
        Browne Morse Co. paid balance of their bill of December 13,
           less 1%.
    24. The company discounted its note at the Harding National Bank
           for 60 days at 6%, $5,000.
        Paid balance on American Banking Machine Co. bill of
           December 14, less 3%.
        Bought of Yawman & Erbe Mfg. Co., 2/5, n/20, $4,567.90 (A),
           and $976.50 (B).
        Received on cash sales $458.60 (A), and $1,124.70 (B).
        Received a check from Willis, Dickson, Inc., for $5,000.
        Paid Yawman & Erbe Mfg. Co. $5,000.
        Standard Truck Co. gave a 30-day note at 6% for bill of
           December 14, less 1%.
    27. We called to the attention of Willis, Dickson, Inc.
           an undercharge of $100 in the bill of December 19
           in the Department B sale.
        Returned merchandise to Sundry Creditors $1,910 (A),
           and $897.50 (B).
        Sundry Customers returned goods $619 (A), and $1,490 (B).
        Paid advertising $2,000.
        Paid cash for purchases $4,209 (A), and $2,010.70 (B).
        Franklin Moffit Co. paid $5,000 on account.
        The Willis, Dickson, Inc. draft was given to the bank
           for collection.
    28. The Willis, Dickson, Inc., draft was sent back because
           of insufficient funds. Protest fees paid by the bank
           and charged to the company were $2.50.
        Sold Sundry Customers, n/30, $5,196.40 (A),
           and $8,927.30 (B).
        Paid the American Kardex Co. bill of December 16, less 3%.
        Received payment from Clark & Smith for bill of December 22
           less 2%.
        Paid the Filing System & Cabinet Co.’s bill of December 22,
           less 3%.

                       _Instructions_

    December 16. Record the purchase made from the Yonkers
    Carpet Works in the proper column of the general journal.
    Charge Sales General Expense.

    December 19. Credit the income received for the use of the
    motor truck to Sales General Expense.

    December 23. Refer to page 411 of the text as to the
    handling of the balance of the firm’s claim against the
    bankrupt customer.

    December 24. Cash sales will be recorded in the sales
    journal and included in the debit to Accounts Receivable
    account at time of summary. To offset this inflated debit,
    at the time cash sales are recorded also in the cash book
    the amount will be entered there in the Accounts Receivable
    column—not the General Ledger—and will thus be included in
    the credit to the Accounts Receivable account.

    December 27. Record the Willis, Dickson, Inc. undercharge in
    the sales journal.

    The entry of cash purchases is similar to that of cash sales.

                             XXI
  Dec.
    29. Upon presentation at the office of Willis, Dickson, Inc.,
           the draft due December 27 was paid with the protest
           charge.
        Bought from Library Bureau, 1/10, n/30, $3,297 (B),
           with in-freight $269.87.
        Made partial payment to Yonkers Carpet Works $300.
    30. Bought of Sundry Creditors, n/30, $11,816.80 (A),
           and $16,519.70 (B).
        Sold Sundry Customers, n/30, $32,279.90 (A),
           and $26,819.40 (B).
        Yonkers Carpet Works paid their invoice of
           December 20 less 1%.
        Received cash from sale of old showroom fixtures
           $1,450. The fixtures cost $2,500 five years ago
           and have been depreciated at the rate of 10%
           per annum since that time.
        Received a check for $317.90 from Standard Truck Co.;
           and checks and cash from Sundry Customers $53,606.97,
           less $897.48; to one of whom we issued check for $25
           due to inability to make change.
    31. Reimbursed petty cash for cash vouchers $116.80, and
           distributed same: $62.40 to Sales General Expense;
           $23.10 to Office Expense; and the balance to
           General Expense.
        Paid Sundry Creditors, invoices of $29,467.45,
           less $842.90 discount.
        Paid sales salaries $4,200; salesmen’s traveling expense
           $3,872.80; sales general expense $748.45; general
           salaries $3,764.90; advertising for January $2,000;
           general expense $1,714.92; office expense $482.70;
           interest and bank expense $86.80; office supplies $287.95.

    The statement from the bank as of December 31 showed the following:

    Items not entered on the Business Equipment Corporation books:

    Interest credited, $24.79
    Collection charges,  2.36

    Checks outstanding:
           #1296, $1,347.60
           #1314,     75.80
           #1315,     16.82
           #1318,    192.47
           #1329,    181.64
           #1331,    296.70
           #1342,    897.60

    A check from a sundry customer for $100, deposited on
    December 30, was returned by the bank as uncollectible.
    The company had not yet been informed of this.

    Balance by bank was $14,848.73.

    Reconcile the bank statement with the cash book balance
    shown previous to the entry in the cash book of any items
    from the bank statement, and determine the true cash balance.

    Summarize all books of original entry. Posting of these
    summary entries and any other unposted items will be
    deferred to the next assignment.

                     _Instructions_

    December 30. Refer to pages 416-418 of the text as to the
    proper record to be made of the sale of the old showroom
    fixtures. Credit the gain on this sale to the Sales General
    Expense.

    December 31. The amount of check for $25 is included in the
    amount received from sundry customers.

    In summarizing the general journal, first foot all the
    columns and underline the totals. On the following lines
    write the summary entry which will appear as follows:

    General                                 General
    ......   General Ledger            ✔
    ......   Accounts Receivable
    ......   Accounts Payable
                 General Ledger             ........
                 Accounts Receivable        ........
                 Accounts Payable           ........

    Since the items making up the “General Ledger” totals have
    already been posted, these totals will be checked and will
    not be posted.

    In summarizing the sales journal, the cash sales need not
    be segregated from the credit sales in the summary entry,
    inasmuch as the inclusion of such receipts in the total to
    be posted to Accounts Receivable from the cash receipts
    journal will eliminate the inflation of the claims against
    customers shown by the controlling account.

    The purchase journal will be summarized in the same way as
    the sales journal.

    The items shown on the bank statement but not yet entered in
    the cash book are to be entered there before summarizing the
    cash book. See page 562 for instructions as to its summary.

    For summarizing the other journals follow the explanations
    given in Chapter XXXI.

                            XXII
  Post completely.

  Take a trial balance of the general ledger, recording it on
  a double sheet of journal paper. When posting customers’
  and creditors’ accounts, make sure that the corresponding
  controlling accounts will receive, either in totals or in
  items, the same amounts.

  Prove your sales and purchase ledgers and record the proof
  with the general ledger trial balance, i.e., make a list
  or schedule of the accounts and show the list totals as
  agreeing with their respective controlling account balances
  in the general ledger trial balance.

                             XXIII

    Prepare a work sheet for the year ending December 31, 19—,
    taking the following adjustments into consideration:

  Accrued Expenses:
        Salesmen’s salaries $385.
        General Salaries $416.90.
        Amount due on repairs to building $500.
    Mortgage interest $1,050.
    Interest on notes: Library Bureau note $12.50; Apex Office
       Supply Co. note $5.92; Dictation Devices Co. note $5.
    Accrued freight bills $824.34.
    Accrued taxes $378.
    Chauffeurs’ wages $160.60.
    Garage bills $216 ($100 for gasoline and balance for repairs).
    Automobile tire $90.

  Prepaid Expenses:
    Interest on note discounted at the Harding National Bank $44.17.
    Advertising $2,000. Insurance $2,867.90.
    Prepaid dues to Merchants’ Association $50.

  Accrued Income:
    Interest on following notes: notes receivable special $8.75;
       Hall, Walter & Co. $3.77; Browne Morse Co. $3.73;
       Standard Truck Co. $1.46.
    Bank interest on inactive deposit with Coolidge State Bank
       $24.36.
    Upon analysis, $387.86 of the freight bills was found to be
       out-freight.
    Take into account depreciation at the yearly rates of: 3%
       on buildings; 20% on delivery equipment; 10% on office
       furniture and fixtures.
    No depreciation is to be charged on the store and warehouse
       furniture and fixtures just installed.
    Create a reserve for doubtful accounts equal to 1/2% of net
       sales.
    Inventories showed the following on hand:
       Department A $79,897.80;
       Department B $51,764.32;
       office supplies $296.45.
    In-freight was apportioned between the departments on the
       basis of net purchases.
    Charge 90% of insurance expense to selling expenses.

    In answer to our request, G. A. Roberts submitted the following
    information regarding his consignment:

    Sales to customers                       $800.00
    Expenses paid by him:
        Freight and drayage          $58.22
        Insurance                     12.54

    A formal account sales will not be rendered till completion
    of sales of entire consignment. The quantities of unsold
    articles reported showed, upon pricing, a valuation of $600.
    Word was also received that a check for the amount due on
    sales as above would follow immediately after certification
    by the bank. It was decided to defer one-half of the above
    expenses reported by the consignee as applicable to the
    remainder of the consignment.

    The Board of Directors declared the regular semiannual
    dividend of 4% on the preferred stock, payable January 25,
    and a 4% dividend on the common stock, also payable January 25.

    Analysis, based on vouchers and invoices, showed the
    following content of the Sales General Expense account
    before adjustment:

        Garage rent                                 $1,800.00
        Chauffeurs’ wages                            8,969.34
        Shipping clerks’ wages                       2,775.13
        Gasoline and oil                             2,491.68
        Licenses, Trucks                                96.00
        Repairs                                        895.46
        Stationery, supplies, and  postage           1,237.29
        Tires and tubes                                714.78
        Crates, boxes, and shipping supplies         1,374.30
        Light and heat                               3,775.37
        Carpets and labor for showroom               1,037.80
        Sundries                                       330.80
        Profit on sale of old storage and warehouse
          furniture and fixtures                       200.00
        Renting of truck                               100.00

    Likewise, a similar analysis of the General Expense account
    before adjustment showed the following distribution:

        Cleaners’ and watchman’s wages              $4,369.75
        Repairs to buildings                         2,174.65
        Changes in partitions                        1,215.79
        Auditor’s fees                               1,500.00
        Legal fees                                   2,500.00
        Contributions                                1,000.00
        Light and heat                               1,869.43
        Merchants’ Association dues                    100.00
        Sundries                                       824.08

                        _Instructions_

    Refer to Chapter XLVIII of the text as to consignments. In
    this case make use of the Consignment Accounts Receivable
    account for recording the claim against the consignee, and
    be careful to charge the proper amount of expenses against
    the income to be taken into the earnings for this period.
    Handle the deferred expense items on the consignments in the
    Out-Freight account. Do not forget to adjust the memorandum
    accounts so that they will show the value of goods still
    out on consignment, and take the latter amount into
    consideration when setting up the final inventories on the
    books.

                            XXIV

   Using the work sheet as a guide, draw up pro forma balance
   sheet and statement of profit and loss for the year ending
   December 31, 19—. Show the gross profit on the sales of
   each department. Support both the balance sheet and the
   profit and loss statement with properly set-up schedule.

                      _Instructions_

   Balance Sheet. Where the number of accrued and deferred
   items is small, they may be shown on the face of the balance
   sheet or in attached schedules as preferred. See page 577
   for form of schedules.

   Profit and Loss Statement. Where the record of the period’s
   business has been made by departments, it is desirable
   that the summary for the period show departmental results,
   at least so far as the gross profit stage. To get rid of
   the detail on the face of the statement, schedules may be
   appended showing such items as Cost of Goods Sold, the group
   of Selling Expenses, the group of General Administrative
   Expenses, etc. Such a statement of profit and loss,
   supported by schedules, is called a condensed profit and
   loss statement. Such a statement for a departmental business
   is shown by the following illustration. Only Schedule B-1
   is given; the other schedules are merely lists with their
   totals shown.

                                                  _Exhibit B_
                 JACKSON EDWARDS COMPANY
               STATEMENT OF PROFIT AND LOSS
               For the Year Ending December 31, 19—

                                  Department  Department      Total
                                       A            B
  Sales                           $100,000.00  $150,000.00  $250,000.00
   _Less_—Returns and Allowances     5,000.00     6,000.00    11,000.00
                                  -----------  -----------  -----------
  Net Sales                       $ 95,000.00  $144,000.00  $239,000.00
  Cost of Goods Sold (Schedule
    B-1)                            60,000.00    90,000.00   150,000.00
                                  -----------  -----------  -----------
  Gross Profit                    $ 35,000.00  $ 54,000.00  $ 89,000.00
                                  ===========  ===========
  Selling Expenses (Schedule B-2) $ 35,000.00
  General Administrative Expenses
    (Schedule B-3)                  20,000.00
  Financial Management Expenses
    (Schedule B-4)                   5,000.00    60,000.00
                                  -----------
  Financial Management Income
    (Schedule B-5)                                2,000.00    58,000.00
                                               -----------  -----------
  Net Profit                                                $ 31,000.00
                                                            ===========

                                                    _Schedule B-1_
                  JACKSON EDWARDS COMPANY
                     COST OF GOODS SOLD
            For the Year Ending December 31, 19—

                                 Department   Department      Total
                                      A            B
   Inventory, January 1,  19—    $12,000.00  $ 18,000.00  $ 30,000.00
   Purchases                       60,000.00    87,500.00   147,500.00
   In-Freight                       3,500.00     5,000.00     8,500.00
                                 -----------  -----------  -----------
                                  $75,500.00  $110,500.00  $186,000.00
                                 -----------  -----------  -----------
       _Deduct_:
   Purchase Returns               $ 2,000.00  $  3,000.00  $  5,000.00
   Inventory, December 31, 19—    13,500.00    17,500.00    31,000.00
                                 -----------  -----------  -----------
                                  $15,500.00  $ 20,500.00  $ 36,000.00
                                 -----------  -----------  -----------
   Cost of Goods Sold             $60,000.00  $ 90,000.00  $150,000.00
                                 ===========  ===========  ===========

   In preparing the schedules of expenses, refer to the
   previous assignment for the analysis of the Sales General
   Expenses and General Expense accounts.

   Analyze the Interest and Bank Expense account into expense
   and income, and show these items separately in the
   statements.

                           XXV

  Adjust and close the ledger through the general journal in
  accordance with the data given in Assignment XXIII.

                           XXVI

  1. The sales of the Radcliffe Company last year January to
  June, amounted to $752,465. It is estimated that the price
  level for the current year will be 10% lower than a year
  ago. Due to plans for increased publicity and sales effort,
  it is expected that the _volume_ of sales for the
  corresponding period this year will be 15% larger than last
  year’s. The average rate of turnover is 3½ and the mark-on
  is 35%.

  What will be the average amount of capital required to
  finance the merchandise stock?

  2. In establishing a buying quota for a three-month period,
  the Gotham Novelty Company has available from its records
  the following data: present inventory at retail $79,800;
  sales corresponding period last year $316,000; estimated
  sales volume this year same as last but 15% less in value.
  It is thought that the rate of turnover can be increased. It
  is therefore decided to reduce the stock carried so that at
  the close of the period there will be on hand a stock 20%
  less in volume.

  Assuming that the price level is 15% less at the end of the
  period and that the mark-on is 40%, determine the company’s
  buying quota for the period.

  3. The sales representative of the Natty Uniform Company
  is making his regular call on the Salem Dry Goods Co.,
  whose buyer has just secured the following data from the
  accounting department:

      Salesroom stock on hand at beginning of period $32,000.
      Additions to salesroom stock to date $45,000.
      Sales to date $52,000.
      Stocks in transit and on present order $15,000
      There is no stock in the warehouse.
      Planned sales for the period are $75,000 but a revised
         estimate calls for a 10% increase.
      Stock planned to be on hand at the end of the period
         is $25,000.

  Is the buyer open to buy and, if so, how much?

  4. Your Notes Receivable account shows $25,000 of customers’
  notes on hand. Being in need of cash you discount $10,000 of
  these at the bank, receiving therefor a credit of $9,750 in
  your bank account. Fifteen days later the bank notifies you
  that $4,000 of these notes have been paid by their makers at
  maturity, but that a note for $1,000 signed by J. B. Grant
  has been charged back on account of non-payment.

  Make all the entries, in journal form, to record the above.

  5. On April 1, 19—, Jones of Trenton, N. J., ships an
  invoice of goods to Smith in New York. The goods are valued
  at $2,000, and the consignor pays freight amounting to $40,
  and insurance $30. The consignee pays cartage amounting to
  $50, and storage $40. On April 2, Jones draws a 30-day draft
  against Smith for $500, which is duly accepted on April 5.
  The goods are sold for $2,700. Smith’s commission is 5%.

  Set up the necessary accounts both on the books of the
  consignor and on those of the consignee properly to reflect
  the above transactions.

  6. Prepare the closing entries for the following consignment
  sale. The consignment was received July 8, account of
  William Nevins & Co., showing an invoice value of $3,750.
  You paid freight and cartage $87.50, and insurance $18.75.
  Sales were made July 16, $1,000, and July 25, $1,525, on a
  5% commission basis. On July 31, upon closing your books,
  you inventory the unsold balance of the consigned goods as
  $2,500.

  7. From the following data, relating only to customers
  and creditors, prepare as of December 31, 19—, Accounts
  Receivable and Accounts Payable accounts. Indicate in folio
  column the book of original entry from which each item is
  obtained.

   1. Accounts receivable, balance January 1, 19—          $1,200.00
   2. Accounts payable, balance January 1, 19—              1,350.00
   3. Sales                                                 4,000.00
   4. Purchases                                             2,500.00
   5. Return sales                                            200.00
   6. Return purchases                                        100.00
   7. Cash received from customers                          3,200.00
   8. Discount allowed customers                              100.00
   9. Cash paid creditors                                   1,800.00
  10. Discount allowed us                                      50.00
  11. Customers’ notes indorsed to creditors                  500.00
  12. Notes received from customers                           600.00
  13. Freight paid by us for customers                         40.00
  14. Cash received from creditor for overpayment              20.00
  15. Customer’s check deposited returned by bank             300.00
  16. Customer’s note indorsed to creditor (see item 11)
        dishonored and returned                               250.00
  17. Protest fees on above                                     5.00
  18. Allowance for damages on goods purchased                 30.00
  19. Cash returned to customer for overpayment                10.00
  20. In item 3 (Sales) included in total sales was one
        to creditor                                           100.00

                              XXVII

    1. An investment company purchased for investment $100,000
    of 6% 10-year municipal debentures at 96, and $200,000 of 5%
    industrial bonds, 15 years to run, at 104.

    How would you treat the discount and the premium in the
    accounts? Give the journal entries.

    2. The authorized capital stock of a corporation is
    $500,000, divided into 5,000 shares, par value $100. Of this
    amount $400,000 has been subscribed and paid for in full.
    The corporation purchases ten shares of a dissatisfied
    stockholder for $75 a share, and five other stockholders
    each donate five shares to the company. Five shares of the
    purchased stock and all of the donated stock are sold for
    $50 a share.

    (a) Draft proper entries and show the ledger accounts and
         balances.
    (b) How would the balances of the accounts in (a) appear in
         a balance sheet?
    (c) Give the entries and show the ledger accounts and
         balances if the capital stock were of no specified par
         value, but 5,000 shares had been issued at $80 and the
         other conditions remain as stated in the first paragraph.
    (d) How would the balances of the accounts in (c) appear in
         a balance sheet?

    3. J. B. Brown and L. C. Smith are partners, and in order
    to raise more capital and to preserve the organization they
    decide to incorporate. A company was duly incorporated under
    the name of The Eclipse Company, with an authorized capital
    of $800,000 divided into 8,000 shares of the par value of
    $100 each.

    The partners agreed to sell for the sum of $800,000, payable
    in capital stock of the corporation at par, all rights to
    and title in the net assets of the partnership, exclusive
    of the cash, which was divided between the partners in
    proportion to their several interests at the time of the
    sale of the property.

    According to the articles of partnership, Brown and Smith
    were equally interested in the assets, but the profits and
    losses were on a basis of 60% and 40% respectively.

    The partnership balance sheet at the time of the sale was:

                 _Assets_                          _Liabilities_
    Land and Buildings       $200,000.00  Notes Payable     $100,000.00
    Cash                       10,000.00  Accounts Payable    40,000.00
    Inventories               100,000.00  Brown’s Capital    210,000.00
    Accounts Receivable       150,000.00  Smith’s Capital    210,000.00
    Machinery and Equipment   100,000.00
                             -----------                    -----------
                             $560,000.00                    $560,000.00
                             ===========                    ===========

    For the purpose of providing working capital, the
    partnership donated $300,000 of the capital stock to the
    corporation, which was sold at $50 per share.

    You are required to:

    (a) Close the partnership books, showing ledger accounts of
         partners only.
    (b) Open the corporation books.
    (c) Prepare a balance sheet of the corporation before sale
         of donated stock.
    (d) Prepare a balance sheet after sale of donated stock.

    4. Before making the charges referred to below, the Profit
    and Loss account of a corporation for the year shows a
    credit balance of $60,000. The accounts receivable are
    $40,700, and the plant and machinery account is $55,000.
    The 6% preferred stock is $50,000, and the common stock
    $150,000. It is decided:

    1. To provide out of the above-named profit and loss
        balance 7½% depreciation on plant and machinery.
    2. To write off as uncollectible $1,500 of the accounts
        receivable, and to make a reserve of 2% of the remainder
        of the accounts receivable to provide for possible
        losses thereon.
    3. To provide for the preferred stock dividend for the year.
    4. To provide for a bonus of $7,500 to the employees.
    5. To provide for a dividend on the common stock of 15% for
        the year.
    6. To carry the balance then remaining on the Profit and
        Loss account to an Undivided Profits account.

  Draft entries to comply with the above provisions.

    5. A has $5,000 invested in a business. He sells B a
    half-interest for $3,000 and keeps the money. Make the entry.

    6. Jones and Johnson form a copartnership, January 1, 19—,
    each investing $10,000. April 1, Jones pays in an additional
    $2,500, and Johnson draws out $1,500. August 1, Johnson pays
    in $3,000, and Jones withdraws $1,000. The profits for the
    year ending December 31, 19— are $5,000.

    Prepare statements showing each partner’s investment and
    portion of profits, the profits being divided in proportion
    to capital invested and the time it is employed.

    7. A, B, and C agree to start in business with a capital
    of $200,000, of which A is to furnish $100,000, and B and
    C $50,000 each. A is to have one half-interest in the
    business, and B and C each one-quarter. Interest at 5% is to
    be credited on excess, or charged on deficiency of capital.
    A contributes $100,000; B $45,000; and C $40,000.

    How would the capital accounts stand on the books after
    adjusting the interest at the end of the year?

    8. A and B are partners sharing losses and gains equally.
    A invested $3,000, and B invested $4,000. They are ready to
    wind up the business. The firm owes $5,000, of which $1,000
    is due A and $500 is due B. They have $7,000 in cash.

  Prepare the accounts showing the closing.

                           XXVIII

    1. The cash book of the Chicago Grocery Company on December
    31, 19—, shows a balance of $10,280.72 on deposit with the
    National City Bank of New York. The bank statement received
    by the firm as of the same date shows a credit balance of
    $9,707.15.

    The firm finds that the following checks had not cleared:

        Check 1264  $    4.00
              1329      52.80
              1499   1,080.70
              1510     108.07
              1511   2,500.00
              1512   3,281.70
              1513   2,223.77
              1514     100.80
              1515     150.17

    The bank statement also shows the following items not
       entered in the company’s cash book:

    _Charges_:
      Telegram                                $ 1.80
      Collection charges (5 items)              1.17
      Check of Central Wholesale Grocery Co.   80.79

    _Credits_:
      Interest on daily balance for December    8.18

    The company had mailed to the bank a note, due December 31,
    payable to the National City Bank of New York and had taken
    credit for it in the sum of $10,000. The bank had not yet
    credited the item.

  Prepare a reconciliation statement.

    2. John Doe commenced business with a cash capital of
    $15,000. At the close of the first fiscal period the ledger
    accounts (except Cash and Capital) were: Accounts Receivable
    $4,312.50; Merchandise, debit balance $5,062.50; Accounts
    Payable $5,375; Expense $900. Doe’s net loss for the period
    was $2,775, and his sales were $50,000.

  Prepare a statement of assets and liabilities and the profit
    or loss.

    3. From the books of Messrs. Deas & Alexander, which are
    kept by single entry, the following balance sheet as at June
    30, 19— was taken:

                 _Assets                     Liabilities_
   Cash in Bank and                Accounts Payable          $10,300.00
     on Hand           $10,800.00  Capital Accounts:
   Accounts Receivable  16,032.00    Deas           $ 3,263
   Inventories          29,980.00    Alexander       51,249   54,512.00
   Buildings and                                    -------
        Equipment        8,000.00
                       ----------                            ----------
                       $64,812.00                            $64,812.00
                       ==========                            ==========

    It was agreed that the partnership would be dissolved as
    at October 31 of the same year, but that Alexander would
    continue the business. It was further agreed that Deas would
    be paid the balance to his credit at June 30, 19—, together
    with a sum of $5,000 to cover his interest in the good-will
    of the business and his profit up to October 31, which
    latter was estimated at $1,200. From this amount, however,
    his drawings, amounting to $800, were to be deducted.

    The following balances were shown on the books at June 30
    of the next year: Cash in Bank and on Hand $8,310; Accounts
    Receivable $12,203; Inventories $29,143; Buildings and
    Equipment $8,103; Accounts Payable $8,706.

    You ascertain that on April 30 of this year, merchandise
    valued in the books at $500 was destroyed by fire. As this
    loss was not covered by insurance, Mr. Alexander reduced the
    book value of his inventory to take care of the loss.

    The additions to the buildings and equipment during the year
    cost $503, but the book value of these assets was reduced by
    the sum of $400 to take care of depreciation.

    Alexanders personal drawings during the year amounted to
    $2,500.

    You are instructed to prepare a balance sheet for Alexander
    as at June 30, 19—, a year after the balance sheet first
    given, together with statement showing profit or loss for
    the year and the distribution of same. You are also required
    to write up Alexander’s capital account for the year to June
    30, 19—.

    No value is to be placed on the good-will.

    4. A machine costing $12,000 was estimated to have a life of
    twelve years with a residual value of $1,500. At the close
    of each year a charge of $875 was made to depreciation,
    and a like amount credited to “reserve” for depreciation.
    Just prior to closing the books at the end of the twelfth
    year the machine was discarded and sold for $2,000 (cash)
    and a similar machine was bought, costing $16,000. Show the
    journal entries you would frame to make the proper record.

    5. What is the equated time for the payment of the balance
    of the following account (30 days to the month and 6% per
    annum)?

                                     HENRY M. DOREMUS
    ========================================+=======================
    19—                                     | 19—
    Mar. 16  Merchandise, 4 months  $444.57 | July  1  Cash  $400.00
         30  Merchandise, 60 days    376.82 |      20  Cash   375.00
    Apr. 20  Merchandise, 30 days    712.19 | Aug. 16  Cash   700.00
    May  17  Merchandise, 4 months   628.75 |      30  Cash   600.00
         28  Merchandise, 4 months   419.31 |

    Henry M. Doremus desires to settle the above account on
    September 13, 19—. What amount of money shall he pay?




APPENDIX C

MISCELLANEOUS PROBLEMS FOR SUPPLEMENTARY WORK

CONTROLLING ACCOUNTS


    1. From the following data prepare controlling accounts.
    Indicate beside each entry its source book. Balance and
    close the accounts.

        Sales $10,000.
        Purchases returns and allowances $200.
        Credit given customers for cash received $5,000.
        Purchases $16,000.
        Sales discount $180.
        Notes payable issued to creditors $8,000.
        Customers’ notes dishonored $100.
        Credit received for cash paid to creditors $4,000.
        Notes received from customers $1,000.
        Purchase discount $80.
        Bad accounts charged off $100.
        Freight prepaid on sales $60.

    2. Journalize the following transactions:

    (a) In our accounts receivable ledger there appears a debit
        balance in the account of John Smith amounting to $200,
        and in our accounts payable ledger there is a credit
        balance to him of $500. We send him a check for the
        balance due him, taking into consideration the cash
        discount allowed by us of 2%, and that granted by him of
        3%. (The general ledger contains controlling accounts
        for these two ledgers.)

    (b) Henry White owes us on open account $1,000, which is
        subject to 5% cash discount. He settles his account
        by giving us a note, which has included in its face
        interest for six months at 6%.

    3. Draw up rough forms of a general journal, sales journal,
    sales returns and allowances journal, purchase journal,
    purchase returns and allowances journal, cash book, and note
    journals, as used in a controlling account system, and make
    entries of the following transactions therein:

    (a) John Norman dishonors a note for $700 which you left at
        the bank for collection. The bank charges $1.50 protest
        fees.

    (b) Amos Clark returns $50 worth of goods and asks for an
        allowance of $30 on goods retained. You accept the
        returned goods and grant the allowance.

    (c) C. Cohen is both a customer and a creditor but you
        desire to carry his account in the creditors ledger
        only. You sell him a bill of goods, $350.

    (d) An error was made last month in crediting customers’
        remittances. James Jones was credited for $40 that
        should have been credited to John Jones. Correct the
        error.

    (e) Settled your account of $800 with D. Flynn, a creditor,
        by returning goods $60, an allowance for defective goods
        $30, transferring a note you received from D. Morgan
        $570, and your check for the balance.

                  PARTNERSHIP—FORMATION

    4. A has $5,000 invested in a business. He sells B a
    half-interest for $2,000, and places the money in the
    business. Make the entry.

    5. X and Y bought merchandise to the amount of $12,000.
    X contributed $7,500; Y $4,500. They afterwards sold Z a
    one-third interest for $6,000. How much of this amount
    should X and Y receive respectively in order to make X, Y,
    and Z equal partners, assuming:

        (a) Money paid into the business with no good-will.
        (b) Money paid into the business with good-will.
        (c) Money not paid into the business.

    6. A and B carried on business in partnership and divided
    profits and losses in proportion to their capital,
    three-fifths and two-fifths, respectively. On January 1,
    19—, A’s capital was $52,500, and B’s $35,000, as shown by
    a balance sheet of that date. They agreed to admit C as a
    partner from the same date on the following terms:

        1. Assets and liabilities and capital to be taken as
              shown in the balance sheet.
        2. $12,500 to be added to the assets for good-will.
        3. The amount of good-will to be added to A’s and B’s
              capital in the proportion in which they divide profits.
        4. C to pay to the partnership such a sum as will give
              him a one-fifth share in the business.

      (a) State what amount of capital C has to
             bring in.
      (b) Set out the capital accounts of each
             partner in the new partnership.
      (c) State in what proportions the profits
             will be divided in the future, A and B,
             as between themselves, sharing in the
             same proportion as before.

    7. New, Knott, and Moore are partners, sharing profits in
    the proportion of their investments. On December 31, 1920,
    the balance sheet of the partnership is as follows:

                 _Assets                Liabilities and Capital_
    Cash                  $18,000.00  Accounts Payable  $ 1,000.00
    Other Current Assets   23,000.00  Moore, Capital     24,000.00
    Fixed Assets           20,000.00  New, Capital       24,000.00
                                      Knott, Capital     12,000.00
                          ----------                    ----------
                          $61,000.00                    $61,000.00
                          ==========                    ==========

    Moore decides to retire from active business and agrees to
    sell his interest to the other two partners for $26,400,
    taking $14,400 in cash and the balance in three equal
    instalments payable July 2, 1921, January 2, 1922, and July
    2, 1922, evidenced by notes payable.

    The business is very prosperous, but it becomes increasingly
    evident that more capital is required, especially in view
    of the approaching maturity of the first note given to
    Moore. New and Knott decide to admit John Less as partner
    as of date July 1, 1921, at which time the current assets
    have increased by $16,000, accounts payable by $10,000, and
    the partners’ capital accounts by $6,000. They value the
    good-will at $12,000.

    Less buys a one-third interest, but stipulates that all he
    pays must remain in the business and that the good-will
    shall not appear upon the books.

    How much must he pay for the one-third interest? Present the
    balance sheet of the firm of New, Knott & Less as of July 1,
    1921. (Ignore accrued interest on Moore notes.)

                 PARTNERSHIP—OPERATION

    8. A, B, and C are partners. A is to receive a salary of
    $2,000 per annum, B $2,500, and C $3,000. The balance of
    profits, after payment of salaries, is to be divided as to
    the first $20,000, 2/3 to A, and 1/6 each to B and C; and
    profits above $20,000 are to be divided equally among the
    three. A retires from active business, and gives up his
    right to salary for 19—. The profits for the year, before
    charging salaries, amount to $35,000. To what extent are A,
    B, and C, respectively, affected by A’s concession?

    9. A and B, partners, finding themselves in want of further
    capital in their business, and both being possessed of real
    property, A deposited deed with the bankers of the firm
    as security for a loan of $2,000 to the firm. B arranged
    on some of his own property a mortgage for $1,500 with a
    private friend and paid the proceeds into the firm’s bank
    account. The bankers were eventually obliged to realize the
    security held by them which produced, after payment of all
    expenses, the sum of $2,850.

  Prepare entries recording these transactions in the firm’s
    books.

    10. In making an audit of the books of the partnership of A
    and B, you find that the agreed division of profits was to
    be on the basis of the capitals and of the time that they
    were left in the business.

    The books show as follows: A’s account paid in January 1,
    $6,000; March 1, $2,000; June 1, $4,000; November 1, $1,000;
    withdrew April 1, $3,000; October 1, $2,000.

    B’s account, paid in January 1, $4,000; February 1, $1,000;
    August 1, $3,000; withdrew May 1, $2,000; December 1, $1,000.

  Prepare a statement showing method of arriving at correct
    profit distribution.

    11. Bull and Bear entered into partnership, Bull
    contributing $100,000, and Bear $75,000. Profits and losses
    were to be divided, Bull 60% and Bear 40%, and interest was
    to be allowed on capital at the rate of 6% per annum. The
    profits for the first two years (after charging interest on
    capital) were $19,600 for the first year, $22,400 for the
    second; and the drawings of the partners in excess of their
    salaries were, Bull $1,800 first year, $2,000 second year;
    Bear $2,000 first year, $2,400 second year.

    At the end of the second year, Peak was admitted to
    partnership, and put into the business capital equal to
    Bull’s capital at the time, on the same conditions as to
    interest. Profits were to be divided on the basis of capital.

    The profits for the third year were $30,000, and the
    partners’ drawings in excess of salaries were: Bull $2,000,
    Bear $2,500, and Peak $1,500.

    Set up the capital accounts of the partners for each of
    these years, showing balance of each at the end of the third
    year.

                PARTNERSHIP—DISSOLUTION

    12. A, B, and C are in partnership. A invested $11,000;
    B invested $5,000 and C invested $1,200. Their agreement
    provides that profits or losses shall be divided as follows:
    A, ⁴/₉; B, ³/₉; and C, ²/₉.

    The partnership has become insolvent and has therefore
    decided to dissolve. The cash value of assets is $10,000.
    The deficit is, therefore, $7,200. How should the assets be
    divided and how much money will each partner receive?

    13. A, B, and C engage in business. A contributes $10,000
    capital; B contributes $5,000; while C in lieu of any
    capital contribution agrees to undertake the active
    management at a salary of $3,000 a year, to be paid monthly.

    After allowing 5% interest on capital, they are to
    divide the net result in the proportions of 5, 3, and 2
    respectively.

    At the end of eighteen months they ascertain the position
    to be unfavorable and decide to wind up. The assets realize
    $12,500; there are no liabilities except for capital and
    interest thereon and one month’s salary, due to C.

    Make up the partners’ accounts showing the amount to be
    received by each.

    14. Thompson and Murray are partners, sharing profits and
    losses equally. The partnership is dissolved December
    31, 19—, at which time Thompson’s capital investment is
    $20,000, and Murray’s $7,000. Total liabilities are $55,000,
    included in which is $5,000 due Wilson on open account, and
    $7,000 due Murray on account. The whole of the assets had
    been disposed of for $60,000 cash by July 1 of the next
    year. Close the partnership books.

                   CORPORATION BOOKS

    15. On June 1, 19—, the Home Manufacturing Company is
    incorporated under the laws of the state of New York to
    acquire and conduct the business of the firm of R. O.
    Browning and H. E. Johnson. The authorized capital stock
    of the company is $250,000, par value $100 per share. The
    company has agreed to take over the net assets of the
    partnership at the following valuation, and to issue in
    payment 1,000 shares of stock to each of the two partners:
    real estate $120,000; tools and equipment $60,000; raw
    materials $20,000. A bill of sale is executed and the stock
    duly issued. E. O. Kitchell and R. K. Taylor subscribe
    for 100 shares each. On June 10 the stock subscribed for
    by Kitchell and Taylor is paid for and issued. On June 14
    Browning and Johnson each donate 100 shares of stock to the
    company to be sold for the purpose of securing additional
    working capital.

  From the foregoing data, make: (a) the entries on the books
    of the partnership for the sale of the assets; (b) the
    opening entry of the new corporation.

    16. A corporation is organized with an authorized
    capitalization of 5,000 shares at a par value of $100 each.
    One-half of the stock is subscribed for at 90 and paid for
    in two instalments. R. K. Reymer, in return for 1,000 shares
    of stock, transfers to the corporation his shipyard valued
    at $80,000. A. R. Paine receives 100 shares of stock for his
    services in organizing the corporation.

  Make the necessary opening entries on the books of the
    corporation for the above.

    17. F. H. Cole and R. D. Harris have patented an improved
    electric meter and have borrowed $1,500 on their note with
    which to complete the invention. They organize a corporation
    with a capital of $50,000, shares $100 each. Cole and Harris
    each receive $20,000 worth of stock in return for the patent
    rights transferred to the corporation. The corporation
    also assumes the payment of the $1,500 note. A. G. Emery,
    an attorney, is given five shares to pay for services in
    fulfilling the incorporation requirements. Cole and Harris
    each donate to the company $10,000 worth of stock to be
    sold in order to provide working capital; 160 shares of the
    donated stock are sold for cash at 50% of the par value.

  Make the entries on the corporation books for the
    transactions given above.

    18. The Bristol Manufacturing Company issued and sold on the
    1st of January, 19—, to A and B (50 to each at the same
    price), first mortgage bonds of $500 each, bearing interest
    at 4% per annum, and received $48,000 in cash.

  What records of the transactions should be made and in what
    books?

    19. A corporation has an authorized capital stock of
    $100,000, of which $75,000 is outstanding.

    This year’s profit and loss shows a profit of $4,125. The
    previous surplus balance is $20,150. They declare and pay an
    8% dividend.

  Show in journal form the entries covering the above.

    20. A corporation’s profits for the year ended December 31,
    19—, amount to $451,000. The by-laws require a reserve
    equal to 10% of any dividend paid to common stockholders,
    and any surplus remaining after such dividend has been paid
    is also to be applied to the reserve, until such reserve
    account amounts to $250,000. The reserve at December 31,
    one year before, was $156,020. The capital is $2,000,000,
    one-half cumulative preferred 6%, and one-half common, all
    fully paid. On December 31, 19—, the date first mentioned,
    the preferred dividend is two and one-half years in arrears.
    On December 31, one year before, the Profit and Loss account
    was in debt $202,000.

  Set out your treatment of the profit for the year between
    these dates.

    21. On April 1, 19—, the Healey Manufacturing Company
    is incorporated with an authorized capital of $100,000
    common stock, and $50,000 preferred stock. The preferred
    stock is subscribed for and paid in full. One-half of the
    common stock is subscribed for, less 10% discount, the
    subscribers paying one-half in cash, the balance to be paid
    in two months. On June 1, the balance on the common stock
    subscribed for on April 1 is paid, and the remainder of the
    authorized common stock is sold for cash at 10% premium.

  Make the entries required for the above transactions.

    22. In auditing the accounts of a corporation for the
    current year, it was found that for the previous year the
    inventory had been undervalued $2,000; accrued wages $3,150,
    and rent receivable earned but not yet due $750, had not
    been taken into consideration. The surplus at that time,
    $25,000, is increased during the current period to $40,000.
    During the current year a piece of real estate owned by the
    corporation was sold at a profit of $5,000; a fire resulted
    in a loss of $10,000; accounts receivable that had been
    charged off as worthless were collected to the amount of
    $1,000. Dividends amounting to $15,000 were declared.

  Bring the above transactions onto the books.

                  CASH AND PETTY CASH

    23. On June 7, 19—, when balancing cash you found that you
    were over $153.75. Part of it was due to the following,
    which you corrected:

    Duplicated an entry on the credit side for $12 paid for
    postage; an error of $10 in addition on the debit side,
    decreasing the total.

    Not being able to locate any more errors, you make necessary
    entry to balance the cash book.

    On June 15 you recalled a cash sale of merchandise $14.50
    made on June 7 but not recorded.

    On July 7 A. B. Potter returned your statement, saying he
    paid $75 on account June 7 which you had failed to credit
    him with.

  Make the necessary adjusting entries.

    24. (a) Show by journal entry the proper booking of the
    following transactions, indicating any items not to be
    posted:

    1. Creation of a petty cash fund of $100.

    2. Petty cash disbursements summarized:
        Office stationery and printing $35.
        Stamps and postage $30.
        Delivery expense $10.
        General expense $5.
        Repairs to furniture $15.

    3. The petty cash fund is replenished.

        (b) Set up the petty cash account in the ledger and show
            all postings to it.

    25.  The following balances are found on the books of a trading
    concern at the end of its first fiscal year:

        Inventory Merchandise                    $ 4,312.09
        Salaries                                   4,622.89
        Capital Stock                             10,000.00
        Real Estate, Buildings, and Fixtures      17,500.00
        Sales                                      8,469.10
        Notes Payable (Merchandise Creditors)      5,000.00
        Mortgage Bonds Issued                     15,000.00
        Customers’ Accounts                        5,423.23
        Accounts Payable (Merchandise Creditors)   2,436.28
        Notes Payable, Bank                        5,000.00

    Total merchandise purchases as per invoices on file, less
    inventory, show the cost of merchandise sold to be 97% of
    sales. The cash at bank and in hand amounted to $1,302.14.

  From the foregoing construct Cash account.

                    NOTES AND DRAFTS

    26. Lang is in need of funds. Connelly, an associate of
    Lang, induces Moore to accommodate Lang. Accordingly,
    Connelly introduces Lang to Moore, for which Lang pays $500.
    Moore discounts for Lang a note for $15,000 due in three
    months and turns over to him $14,500.

  Frame journal entries covering their interest.

    27. X, a branch, buys from Y. Y draws on X for $2,000 at
    60 days. The draft is accepted and is later discounted 40
    days from maturity at 6% per annum. In addition to the above
    acceptances, Y holds a total of $15,000 acceptances from
    other customers; $12,000 of these are used as collateral for
    a loan of $10,000 at the bank.

  State all necessary entries.

    28. A corporation had discounted $25,000 of notes receivable
    that are not due until December 31, 19—. How should this
    be dealt with in preparing a balance sheet at November 30,
    19—? One of the above notes for $5,000 was not paid at
    maturity but was protested, the protest fee amounting to
    $15. The company drew its check for the amount to take up
    the note.

  State the entries required to be made on the books to record
    the transactions.

    29. Previous to examining the accounts of a corporation
    at the end of its first fiscal year, you find that notes
    receivable stand in the financial statement prepared for the
    banker at $5,500.

    Upon investigation it is disclosed that $20,000 of notes
    from customers were received during the period, and that
    $10,000 of these notes were duly paid in full by the
    customers to the company at maturity, and $5,000 of the
    notes were discounted at the bank. Of the notes discounted,
    a note for $500 given by Brown & Company was not paid when
    due, and has been charged back to the Notes Receivable
    account. Notes to the amount of $1,500 are not yet due at
    the bank.

    Partial payments have been made to the company to the extent
    of $500 on notes still due, and these payments have been
    credited to an account called “Partial Payments on Notes
    Receivable.” This item is listed in the financial statement
    as a liability.

    A customer’s note of $1,000 is found to have been given
    as collateral for the payment of a note of the company
    discounted at the bank.

    A 30-day note given by an officer of the company for $200 is
    treated as a cash item. The note is 60 days past due.

  You are asked to give the journal entry or entries for
    obtaining the proper account or accounts to record the
    above facts.

                      DEPRECIATION

    30. An engine installed in a factory December 31, 19—, at
    a cost of $1,000, is replaced four years later by one of
    larger capacity costing (second-hand) $2,800. The discarded
    machine was sold for $900. The cost of making the change
    was $200. It has been the practice of the company to charge
    off 10% depreciation annually (on the diminishing basis),
    carrying the credit to a Depreciation Reserve account.

  Make the necessary journal entries.

    31. A manufacturing concern has annually for the past six
    years made provision at the rate of 10% per annum for
    depreciation of its plant and machinery, crediting the
    amount of such depreciation to a suitable Reserve account.
    During the year an engine which cost originally $5,000, was
    replaced by an improved engine costing $6,800. The cost of
    the new engine was charged to Machinery account at time of
    purchase. $300 was realized from the salvage of the old
    engine, this amount being credited to “Scrap Sales,” when
    received, and later closed to Profit and Loss.

  Draft the adjustment entries which you consider necessary and
    explain the principle upon which these entries are based.

                MERCHANDISE INVENTORIES

    32. The average gross profits on sales of the Blank
    Corporation for the past five years have been 50%. During
    19— the sales were $60,000. Purchases during the period
    were $50,000. In-freight and cartage was $3,000; returned
    purchases amounted to $2,500. At the beginning of the year
    the inventory was $20,000. It is estimated that current
    market prices are 10% above those at time of purchase.

  What will be the cost of replacing the amount of stock on
    hand at the end of the year?

    33. In examining a business for the two years ending
    December 31, 19—, it is found that an item amounting to
    $750 had been omitted from the initial inventory of the
    first year; that an error had been made in the footing
    of the final inventory of that same year, by which that
    inventory was overstated to the amount of $1,250; and that
    in pricing the final inventory of the second year, an error
    was made by which that inventory was understated to the
    amount of $1,500.

  State fully the effect of these errors on the profit of each
    of the two years.

    34. A certain trading corporation desires to prepare its
    financial statement as of September 30, 19—, but takes
    no inventory at that date. It has no perpetual inventory
    records, but the management states that the ratio of gross
    profit to net sales has remained substantially the same for
    many years, namely, 25%, and that the rate will remain the
    same for 19—.

    The following information is given and you are asked to
    prepare a statement showing estimated inventory on hand
    September 30, 19—:

        Inventory January 1, 19—, $6,100.
        Purchases $28,450.
        Freight-in $985.
        Freight-out $1,200.
        Allowances on sales $2,360.
        Sales $44,500.
        Discounts on purchases $960.
        Buying expenses $2,500.
        Sales salaries $3,000.
        General office expenses $4,000.

    35. The ledger accounts of Henry James on December 31,
    19—, showed: Accounts Payable $16,125; Accounts Receivable
    $13,188; Expense $2,450; Debit Balance Merchandise account
    $15,187. He started in business January 1, 19—, investing
    $45,000 cash. His total loss for the year was $8,074.50.

  Prepare a statement of assets and liabilities and the profit
    and loss.

           CONSIGNMENTS AND JOINT VENTURE

    36. Indicate by journal entries how the following
    transactions should be recorded upon (a) the books of the
    consignor, and (b) the books of the consignee:

    1. Shipment of goods costing $12,000 which are expected to
       be sold for $16,000.
    2. Sale of three-fourths of such goods to sundry customers
       for a total of $15,000, only $5,000 of which is received
       in cash.
    3. Return by customers of $55 of goods sold as defective
       in quality.
    4. Advance of $4,000 to consignor by consignee, and payment
       of $100 freight, and $150 warehouse expense by the latter.
    5. Settlement of all customers’ accounts except items
       totaling $200, which are written off as uncollectible.
    6. Remittance to cover balance due consignor after consignee
       has deducted commission at the rate of 3% on the selling
       price of goods sold. (Account sales is rendered only when
       consignment is sold.)

    37. On April 30, 1921, St. John & Company and Carpel
    Brothers enter into a joint venture agreement. They each
    contribute $4,000, with which they pay for goods that are
    shipped on May 1 to John Doe of San Francisco. St. John
    & Company advance $400 to defray freight and incidental
    expenses. John Doe, the consignee, is allowed 10% on the
    cost of the goods and is to sell them at whatever price he
    can obtain for them.

    On June 1, 1922, on the strength of a report sent by wire,
    Carpel Brothers draw at sight on John Doe for $4,000 to the
    order of Carl Peter of New York. On July 1, 1922, St. John
    & Company receive from the consignee a check for $11,200,
    all the goods being sold; on the same day St. John & Company
    settle with Carpel Brothers. Interest at 6% is allowed on
    all transactions affecting the partners in the venture.

  Prepare all the ledger accounts brought about by the above
    on the books of St. John & Company, including a joint
    venture account. (Construct your ledger accounts in such a
    manner that they will explain fully what took place and make
    a cross-reference possible.)

                    SINGLE ENTRY

    38. The books of the Butter, Egg & Cheese Company, with an
    authorized and outstanding capital stock issue of $25,000,
    are kept by single entry.

    It annually inventories all its assets and liabilities and
    from such inventory prepares a financial statement. At
    December 31, 19—, this inventory is as follows:

        Office, Cash                       $ 1,584
        Balance, Bank A                     10,824
        Accounts Receivable                 29,521
        10 shares in competing company       1,000
        Plant and Equipment                 64,938
        Merchandise Inventory               21,737
        Prepaid Expenses                     5,081
        Overdraft, Bank B                    5,003
        Accounts Payable                    19,747
        Mortgage Payable                    25,000
        Notes Payable                       20,000

    From a comparison of the financial statements at the
    beginning and the end of the year, you find that the item of
    “Plant and Equipment” is stated in an amount less by $11,460
    than it was at the beginning of the year, plus additions
    during the year.

    The financial statement for the beginning of the year showed
    a surplus of $35,703.

    From your analysis of the disbursements and unpaid accounts
    at the beginning and end of the year, you find total
    purchases amounting to $661,910, and expenses for salaries,
    wages, supplies, repairs, etc., amounting to $120,115.

    The purchases, however, included $450 paid out for John
    Smith, an employee, for which he has not reimbursed the
    company; and the total expense of $120,115 included $250 in
    the hands of a buyer as a working fund.

    The inventory of merchandise at the beginning of the year
    was $18,125 and of prepaid expense was $2,653.

    There was canceled on the customers ledger during the year
    $3,206 of uncollectible accounts.

    There was paid for interest and discount on notes payable
    $1,061, and for interest on mortgage $1,500.

    A 10% dividend was declared but not paid.

    From the foregoing prepare: (a) a balance sheet as at
    December 31, 19—; (b) a profit and loss statement
    exhibiting net sales, cost of sales, and gross and net
    profit for the year.

            INTEREST, DISCOUNT, AND PROPORTION

    39. What single rate of discount is equivalent to the series
    20%, 20%, and 15%? 50%, 25%, and 15%?

    40. An invoice amounting to $1,000 reads: “Less 30%, 10%,
    and 5%. Terms 2/10, n/30.” It is dated January 19, 19— and
    paid January 28, 19—.

  Explain and distinguish between these reductions of the list
    price. Give the amount of the check sent in payment of the
    invoice.

    41. Keene owed Sharpe $2,000. Sharpe offered a discount of
    5% cash. Not having the ready money, Keene discounted his
    note at the bank for 60 days at the rate of 6%, the note
    producing the sum required to discount Sharpe’s claim.

  Calculate the amount of this note and make the necessary
    journal entries to take care of the entire transaction.

    42. Equate the following account and find the cash balance
    due October 1, money being worth 7% per annum, 30 days to
    the month.

                             CHARLES L. BROWN
    =================================+==================================
    19—                              | 19—
    Apr. 6  Mdse., 60 days  2,850.00 | Apr. 14  Cash              800.00
        15    ”    90 days  1,475.00 |          Returned Mdse.    125.00
        28    ”    30 days  3,000.00 | July  6  Cash            1,000.00
                                     |      17  Note, 30 days   1,000.00

    43. A note for $2,500 dated September 15, 1920, bearing
    interest at 6%, had payments indorsed as follows: November
    28, 1920, $750; May 6, 1921, $500; August 12, 1921, $300;
    January 18, 1922, $600.

  Find the amount due May 8, 1922.

    44. In a manufacturing concern the total value of property
    subject to insurance was $500,000, distributed as follows:
    assembling station $100,000; finished goods warehouse
    $200,000; raw materials warehouse $100,000; and the
    remainder on building. The annual insurance premium amounts
    to $18,890 per year.

  Find the insurance burden chargeable to each department
    if the assembling room rate is 2½ times the raw materials
    warehouse rate; the finished goods warehouse, 80% of the
    rate of the assembling room and the manufacturing building
    rate, three times the assembling room rate.




        INDEX

          A
  ACCEPTANCE (See “Trade Acceptance”)
  ACCOUNTING,
    Function of, 4
    Fundamentals, 7
    Place of, in business, 3
    Purpose of, 5
    Relation to economics, 6
    Relation to law, 7
    Terms, 7
  ACCOUNTS, 67-84
       (See also “Classification of Accounts,” and special kinds,
        as “Controlling Accounts,” “Customers’ Accounts,”
        “Notes Receivable Account,” etc.)
    Analysis of, 477
        Form, 478
      Necessary to determine values, 40
    Arrangement in ledger, 220
    Asset, balance of account, 73
    Averaging, 486
    Balancing, 72, 107-110, 477-484
    Capital stock, 338 (See also “Capital Stock, Account”)
    Chart, 75, 217-220
    Current, 468-476
      Form, 470
      Adjustment, 469-471, 473, 476
        Form, 470
      Bank account as, 472-476
      Date of value, 469
      Defined, 468
      Entries, 469-472
      Interest charges on, 468, 469
      Partnership, 469
    Liability,
      Balance of account, 73
    Mechanism of, 69
    Mixed, 97-105, 215
      Adjustment of, 237
    Nominal, 216
    Number of, 71
    Real, 216
    Sections, 69
    Statement of, 190
    Surplus, 338 (See also “Surplus Account”)
    “T” account, 528
    Title of, 68, 72
    Transferring, 110
      Form, 112
  ACCOUNTS PAYABLE,
    Controlling account, 269, 276
    Debit and credit of, 89
    Liability, 14
    Relation to purchases and cash, 61
    Summary, under controlling account system, 276
  ACCOUNTS RECEIVABLE,
    Asset, 12
    Balance sheet items, 26
    Controlling account, 264, 276
    Customers’ account as, 264
    Debit and credit, 85
    Ratio to sales, 65
    Relation to sales and cash, 61
    Summary, under controlling account system, 276
    Valuation, 409
  ACCRUED EXPENSES (See “Expenses”)
  ACCRUED INCOME (See “Income, Accrued”)
  ACCURACY, PROOF OF,
    Preliminary to closing entries, 221
  ADJUNCT ACCOUNT,
    Defined, 103
  ADJUSTMENTS, 115-131 (See also “Summarization”)
    Accounts current, 473, 476
    Book entries, 237-244
      Accrued expenses, 242
      Accrued income, 241
      Bad and doubtful accounts, 240
      Deferred expenses, 241
      Deferred income, 243
      Depreciation, 240
      Illustration, 245
      Inventories, 238
      Preliminary work, 221
      Work sheet methods, 223, 224-230
    Corporate, 359-365
    Made in journal previous to ledger, 237
    Trial balance, 483
  ADMINISTRATION, 3
  ADVENTURE ACCOUNTS, 460-467
    Joint, 460
      Accounting, 461-467
      Interest charges, 468
    Relation of parties, 460
    Single, 460
  ADVERTISING,
    Expenses, 47
  AGENCY LAW, APPLIED TO CONSIGNMENT, 447
  AGENT, 448
  ALLOWANCES GRANTED TO CUSTOMERS, 45
    Credits and returned goods invoices, 188
    Debit and credit, 87
    Journal, 253
    Sales analysis of, 435
  ANALYSIS,
    Account marked for,
      Form, 478
    Ledger, 477-483
    Procedure, 478
    Sheet, 479
      Form, 480
  ANALYSIS PAPER,
    Used for work sheet, 221
  ANALYTICAL JOURNALS, 163, 251-257
      Form, 164
  APPRAISAL (See also “Estimates,” “Valuation”)
    Defined, 103
    Single-entry bookkeeping, 500
  APPROVAL SALES, 442-444
  ASSETS,
    Account, 213, 214
      Adjusted at close of fiscal period, 215
      Analysis of, 123
      Balance of account, 73
      Chart, 217
      Debit and credit applied to, 85-90
      Fixed assets, debit and credit to, 88
    Classified, 11-13
    Comparison, 34
    Current,
      Balance sheet items, 26
      Ratio of, to current liabilities, 27
      Valuation, 407
    Decrease covered by credit entry, 82
    Described, 11-13
    Fixed,
      Balance sheet items, 27
      Capital and revenue expenditures, 104
      Comparison, 35
      Debit and credit to account of, 88
      Depreciation account, 102, 123
      Valuation, 124, 408, 413
    Increase covered by debit entry, 82
    Increase in value of, 94
    Not subject to depreciation,
      Valuation, 413
    Sale of in liquidation, 324
    Subject to depreciation,
      Valuation of, 414
    Valuation, 29, 407-419
  ASSETS AND LIABILITIES,
    Balance sheet arrangement, 25
    Changes in value of, 57, 77
  AVERAGING OF ACCOUNTS, 486
    Cash balance, 490
    Compound equation, 489

          B
  BAD DEBTS,
    Adjustment of entries, 240
    Expense account for, 125
    Expense item, 47
    Handling of, 125
    Valuation, 410
  BAILMENT, DEFINED, 447
  BALANCE SHEET, 22-37, 589 (See also “Trial Balance”)
      Forms, 23, 230, 232
    Accounts receivable items, 26
    Accrued expense item, 27
    Arrangement, 24
    Assets and liabilities, 25-30
    Capital stock items, 344
    Cash items, 25
    Comparative, 32-37
      Content and form, 35
    Confusion of items, 58
    Content, 22, 29
    Corporation proprietorship, 20
    Current assets, 25
    Current liabilities, 26
    Deferred charges item, 27
    Equation of, 74-76
    Fixed assets, 27
    Information on, 24
    Information lacking in, 39
    Interrelation of, and profit and loss statement, 60-64
    Investment items, 26
    Not a part of books, 230
    Notes receivable items, 26
    Partnership proprietorship, 20
    Preliminary to closing entries, 221
    Problems, 403
    Proprietorship, 8-10, 19, 40-43
    Purpose, 22
    Ratio of items, 64
    Single-entry bookkeeping, 500
    Statement of profit and loss, 41
      (For other references see under “Statement of Profit and Loss”)
    Terminology, 23
    Treasury stock on, 354
    Valuation, 403-419
      Based on correct analysis of accounts, 404
      Rules, 407-409
  BALANCING METHODS, 72, 73, 107-110, 477-484
        Form, 109
    Cash book, 151
    Check figures in posting, 482
    Errors, 482
    Ledger analysis, 477-483
        Form, 478, 480
      Sheet, 479
    Postings, 481
    Red ink for, 108
    Rulings, 108
    Trial balance, 477
  BANK,
    Account,
      Handling of, 370, 472-476
      Interest on, 491
      Opening of, 192
    Agent for C. O. D. shipments, 190
    Cash records, 366
    Check book, 192, 194, 371
    Deposit ticket,
      Form, 193
    Discount,
      Calculation of, 492
      Defined, 392
    Draft, 180
    Loans, 195
    Methods, 192-198
    Pass-book, 192, 194
  BANKRUPTCY, CAUSE OF DISSOLUTION, 322
  BETTERMENT, VALUATION, 416
  BILL OF EXCHANGE, FOREIGN DRAFT, 181
  BILL OF LADING, 188
    C. O. D. shipments, 190
  BINDINGS, LEDGER, 263
  BONDS,
    Accounting, 355-357
    Discount and premium, 355, 356
    Interest payments, 356
    Maturity, 356
    Payable, liability, 15
    Sale of, 355
    Sinking funds, 357
    Valuation, 412
  BOOKKEEPING,
    Double-entry, 78
    Single-entry, 495-512
      Accrued and deferred items, 500
      Balance sheet, 500
      Books required, 496
      Cash book, 497
      Change to double, 502
      Compared with double, 501
      Debits and credits, 498
      Inventory and appraisal, 500
      Journal, 496
      Ledger, 497
      Net profit, 511
      Opening entries, 504-511
      Profit and loss statement, 499
      Profits, 501
      Proof of posting, 499
      Proprietorship accounts, 498
      Use of, 497
  BOOKS (See “Journal,” “Ledger”)
  BRANCHES,
    Cash,372
    Sales to,
      Handling of, 437
  BROKER, DEFINED, 448
  BUILDINGS, ASSET, 13
  BUSINESS ORGANIZATION, 2, 16
  BUSINESS PAPERS, DEFINED, 185
  BUSINESS TRANSACTION,
    Accounting classification for, 216
    Analysis of, 80, 98, 132, 251
    Defined as to debit and credit, 79
  BUYING (See “Purchases”)

          C
  CAPITAL,
    Account, changes in, 93
    Balance sheet, 19
    Borrowed, account, 303
    Defined, 15
    Expenditures, 104
    Invested, 15
      Changes in, 93
    Partnership,
      Accretions through profit, 301
      Adjustments of, 297-300
      Agreements concerning, 297, 558
      Averaging investment, 292, 301
      Interest on partners’, 294, 297-300, 316
      Loans as distinguished from, 302, 317
      Profit-sharing basis, 292
      Sources, 297
    Working defined, 26
  CAPITAL STOCK,
    Account, 338-348
    Certificate book, 337
    Common, 338
      Entries for, 346
    Defined, 15
    Discount and premium,
      Balance sheet item, 345
      Entries for, 343
    Donated (See “Treasury Stock”)
    Entries,
      Discount and premium, 343
      On balance sheet, 344
      On journal, 340
    No-par value, 339
      Entries for, 347
    Preferred, 338
      Dividends, 339
      Entries for, 346
    Subscriptions,
      Book and ledger, 336
      Entries, 338-348
      Instalment payments, 345
      Payment by property, 348
    Transfer book, 337
    Treasury stock, 352-355
    Valuation, 412
  CAPITALIZATION, PARTNERSHIP, 297-304
  CARD LEDGER, 263
  CASH,
    Account,
      Cash journal replaces, 150
      Debit and credit, 85
    Asset, 11
    Balance sheet item, 22
    Bank account handling, 370
    Branch funds, 372
    Discount,
        Form, 400
      Accounting, 156, 396-402
      Defined, 392, 537
      Elements of, 395
      Entries, 398
      Handling, 156, 396-402
      Journal entries, 155
      Trade acceptance and, 402
    Handling of, 366-375
    Internal control, 373
    Paid for merchandise, determination of, 61
    Payments compared to draft, 178
    Petty cash account, handling of, 367
    Petty cash book, 368
      Form, 369
    Received from customers, determination of, 61
    Record,
      Bank, 366
      Double, 366
    Safeguarding, 373
    Sales, handling, 436
    Short and over, 151
    Statement, 375
    Total available balance, determination of, 473-476
    Valuation, 409
  CASH DISBURSEMENTS JOURNAL, 148
      Form, 159
    Analysis, 154
    Columnar analysis, 161
  CASH JOURNAL, 138, 147-161
      Form, 149, 158, 159
    Analysis, 154
    Analytic, 255
    Balancing, 151
    Cash discounts, 155
    Cash purchase and sales, 152
    Cash short and over, 151
    Check entries, 371
    Posting from, 150
    Replaces cash account, 150
    Ruling, 151
    Single-entry bookkeeping, 497
    Summary, Form, 281
      Under controlling account system, 280
  CASH RECEIPTS JOURNAL, 147
    Analysis, 154
    Illustration of, 157-160
    Posting from, 200
  CERTIFICATE OF INCORPORATION, 332
  CERTIFICATES OF STOCK, 337
  CHARGE ACCOUNT,
    Handling of, 437, 444
    Sales tickets, 187, 444
  CHARTER, CORPORATE, 332
  CHARTS, ACCOUNTS, 15
  CHECK BOOK, 192, 194, 371
  CHECK FIGURES IN POSTING, 482
  CHECKS,
    Cash book entries, 371
    Cashing of, 372
    Classified as cash, 11
    Described, 181
    Handling of, 370
    Spoiled, 371
  CLASSIFICATION OF ACCOUNTS, 213-220
    Assignment of account, 216
    Basis of, 214
    Business transaction, classified, 216
    Chart, 217-220
    Detailed, 217
    Divisions, 213
    Fundamentals of, 215
    Purpose, 214
    Three-group, 213, 216
    Two group, 216
  CLOSING
    Entries,
      Accuracy of proof preliminary to, 221
      After adjusting, 245-250
      Consignment sales, 456
      Corporate, 359-365
      Illustration, 247
      Preliminary work to, 221
      Profit and loss account, 249
      Summarizing, 117-123, 214, 221
      Work sheet, 221-230
    Journal, 163
    Journal entries, 167
    Ledger accounting, 129-131
    Merchandise records, 116, 121
  C. O. D. SALES, 442
  C. O. D. SHIPMENTS, 189
  COLLATERAL, NOTES RECEIVABLE AS, 390
  COLUMNAR,
    Adjustments, work sheet, 228
    Cash books,
        Forms, 158, 159
      Analysis, 154-161
    Errors, 483
    Journal,
        Form, 164
      Analytic, 163, 251-263
      Summary entries, 278
        Form, 279
    Purchase journal, 253
    Sales journal, 251
    Sales records, 434
  COMMERCIAL DISCOUNT, DEFINED, 392
  COMMERCIAL DRAFT, 180
  COMMERCIAL PAPER (See “Negotiable Instruments”)
  COMMISSION AGENTS, 448
  COMMISSION MERCHANT (See “Factor”)
  COMMISSIONS,
    Expense item, 47
    Income from, 46
    Salesmen’s, 445
  COMMON STOCK, 338
    Entries, 346
  COMPARATIVE BALANCE SHEET, 32-37
    Content and form, 35
  COMPENSATION, PARTNERS,
    Out of net profit, 313
  COMPOUND INTEREST, 485
  CONDITION OF BUSINESS,
    Balance sheet, 25
    Statements showing, 48
  CONSIGNEE,
    Defined, 447
    Inventory by, 456
  CONSIGNMENT,
    Account,
      Account sales, 450
      Closing of books, 456
      Entries, 452-459
      Expenses charged against, 450
      Profit and loss, 453
      Separate from others, 438, 449
    Accounts by factor, collecting of, 452
    Advantages, 452
    Defined, 447
    Goods in or out on, 431
    Handling by,
      Broker, 448
      Factor, 448-459
    Inventory,
      Consignee’s, 456
      Consignor’s, 454
    Law, 447
    Lien against, 450
  CONSIGNOR,
    Defined, 447
    Inventory by, 454
  CONSOLIDATION, PARTNERSHIP, 310-312
  CONTROL OF BUSINESS BY ACCOUNTING, 38
  CONTROLLING ACCOUNT,
    Accounts payable, 269, 561
      Summary, 276
    Accounts receivable summary, 276, 561
    Advantage of, 264
    Cash journal summary, 280
      Forms, 281
    Credits, 268
    Customers or accounts receivable, 265
    Debits, 266
    Defined, 264
    Equilibrium of ledger changed by, 265
    Errors, 483
    Introduction of, into a system, 272
    Journal summaries, 276-280
      Forms, 279, 282
    Note journal summary, 277
    Posting, 270
    Purchase journal summary, 276
    Sales journal summary, 273, 278
      Form, 279
    Subsidiary ledger accounts, 282
    Summaries, 265, 273-280
      Forms, 278, 282
    Withdrawals of stock-in-trade, 273
  CORPORATIONS,
    Accounting,
      Closing books, 359-365
      Current records, 351
      Opening entries, 340-344
    Advantages, 331
    Bonds, 355-357
    Books, 337
      Minute book, 337
      Stock certificate book and ledger, 337
      Stock transfer book, 337
      Subscription book and ledger, 336
    Capital Stock,
      Account, 338
      Common, 338
      No-par value, 339
      Preferred, 338
    Certificate of incorporation or charter, 332
    Closing of books, 359-365
    Control by stockholders, 359
    Defined, 330
    Directors, 334
    Disadvantages, 331
    Dividends, 339
    Growth of, 330
    Incorporation, 332
    Liability of stockholders, 351
    Officers, 335
    Opening entries, 340-344
    Organization, 18, 331-336
    Organization expense,
      Entries for, 340, 343
    Partnership changed to, 348-350
    Proprietorship, 335, 338
      Balance sheet, 20
    Surplus account, 338
    Treasury stock, 352
      Accounting, 353
  CORRECTIONS, HOW MADE IN BOOKS, 243
  COST OF GOODS SOLD,
    Analysis of, 436
    Determining, 40-43, 117
    Ledger adjustments, 117
    Listed on statement of profit and loss, 50
  COST VALUe, 404
  CREDIT (See also “Debit and Credit”)
    Cash discount for goods sold on, 395
    Returned goods as, 188
  CURRENT ASSETS (See “Assets”)
  CURRENT LIABILITIES (See “Liabilities”)
  CUSTOMERS’ ACCOUNTS,
    Accounts receivable as, 264
    Controlling account, 264
    Debit and credit, 86, 266-269
    Ledger, 265
      Proving, 269
  CYCLE OF OPERATIONS, 25

          D
  DATA, LEDGER, 132-135
  DATE DRAFT, 180
  DATE DUE, AVERAGE, 486
  DATE OF VALUE, 469
  DEBIT AND CREDIT, 78
    Accounts receivable, 85
    Allowances granted to customers, 87
    Asset account, 85-90
    Cash disbursements journal, 148
    Cash receipts journal, 147
    Controlling account, 266-269
    Customers’ accounts, 86, 266-269
    Discount, 87
    Fixed asset accounts, 88
    Illustrations determining, 82-84
    Journal entry, 134
    Liability account, 85-90
    Merchandise account, 87, 99
    Mixed account, 97-105
    Notes, 384
    Notes payable account, 89
    Posting from journals, 200
    Principle of, 81
    Proprietorship accounts, 91-96
    Schedule, 82
    Single entry bookkeeping, 498
    Use of, 81
    Work sheet adjustments, 221-230
  DEBTS (See also “Bad Debts”)
    Listed on balance sheet, 25
  DEFERRED CHARGES,
    Adjustment of entries, 241
    Asset, 12
    Balance sheet items, 27
    Estimates of, 126
    Single-entry bookkeeping, 500
    Valuation, 408, 413
  DEFICIT, PARTNERSHIP DISTRIBUTION, 318
  “DEL CREDERE” AGENCY, 452
  DELIVERY,
    Goods for future, 432
      Accounting for sales at, 441
    Goods ready for, 432
  DELIVERY EQUIPMENT, ASSET, 13
  DEMURRAGE COST, 550, 569
  DEPARTMENT STORES,
    Approval sales, 442-444
    Charge system, 444
    Sales, 442
  DEPARTMENTS, BUSINESS, 2
  DEPLETION, 413
  DEPRECIATION,
    Account,
      Fixed assets, 102, 123
      Reserves, 103, 123
    Adjustment of entries, 240
    Assets not subject to, valuation, 413
    Assets subject to, valuation, 414
    Calculation of, 414
    Expense item, 47
  DIRECTORS, CORPORATE, 334
  DISCOUNT,
    Bank,
      Calculation of, 492
      Defined, 392
    Cash,
        Form, 400
      Accounting, 156, 396-402
      Defined, 392, 537
      Elements, 395
      Entries, 398
      Handling of, 156, 396-402
      Trade acceptance and, 402
    Cash journal entries, 155
    Commercial defined, 392
    Debit and credit of, 87
    Defined, 392
    Expense item, 47
    Income from, 46
    Note,
      Face value, 215, 382
      Loan through, 195
    Notes receivable, 384-387
    Trade,
      Defined, 392
      Methods, 393-395
      Not recorded, 393
  DISCOUNT AND PREMIUM,
    Bonds, 355, 356
    Capital stock, balance sheet item, 345
    Capital stock sold at, entries for, 343
  DISSOLUTION, PARTNERSHIP, 321-329
     (See also “Partnership”)
  DIVIDENDS, 339
    Declaration of, 359
    Liquidating, 567
    Paid out of profits, 360
  DOUBTFUL ACCOUNTS,
    Adjustment of entries for, 240
    Estimate of, 124
    Handling of, 125
    Reserve for, handling, 410
    Valuation, 410
  DRAFT,
    Accepted discounted, 384-387
    Bank, 180
    C. O. D. shipment, 190
    Commercial, 180
    Compared with cash payments, 178
    Date, 180
    Defined, 175
    Domestic, 180
    Foreign, 180
    Handling of, 176-179
    Kinds of, 179
    Sight, 179
    Time, 180

          E
  ECONOMICS,
    RELATION TO ACCOUNTING, 6
  EMPLOYMENT DEPARTMENT, 3
  ENTRIES,
    Accounts current, 469
    Adjustment, 237-244
      Basis of, 116
      Illustration, 245
      Merchandise records, 115-123
      Necessity of, 115
    Capital stock, 340-348
    Cash discount, 155, 398
    Cash receipts journal, 147
    Closing, 116, 221-250 (See also “Closing Entries”)
      Illustration, 247
    Consignments, 452-459
    Corrections, 243
    Cross-indexing for posting, 201
      Form, 202
    Draft, 177
    Journal, 133
      Adjusting, 167-172
      Closing, 167-172, 359-365
      Opening, 165, 340-344
    Memorandum, 340, 341
    Note journals, 379-383
    Opening,
      Corporate, 340-344
      Single system, 504-511
    Purchase journal, 139-144
    Sales journal, 144-146
    Single, 495-512
  EQUATING ACCOUNTS (See “Averaging of Accounts”)
  EQUATION,
    Balance sheet, 74-76
    Ledger account, 74-76
    Proprietorship, 8-10, 74
  ERRORS,
    Cash short and over, 151
    Columnar books and controlling accounts, 483
    Corrected when discovered, 237
    Posting, 200, 481
    Transplacements, 211
    Transposition of numbers, 209
    Trial balance, 205-212
  ESTIMATES
        (See also “Appraisal,” “Inventories,” “Valuation”)
    Depreciation reserve, 103
    Doubtful accounts, 124
    Prepaid and accrued expenses and income, 126
  EXPENDITURES,
    Capital, 104
    From petty cash fund, 367
    Revenue, 104
    Writing off, 407
  EXPENSE ACCOUNT,
    Bad debts, 125
    Chart, 219
    Debit and credit to, 92-94
    Proprietorship, 92
    Treated as purchases, 254
  EXPENSE BILL,
    Freight, 189
  EXPENSE INVOICE,
    Entry and posting, 254
  EXPENSES,
    Accrued,
      Adjustment of entries, 242
      Balance sheet items, 27
      Estimates of, 126
      Liability, 14
    Advertising, 47
    Bad debts, 47
    Classification of items, 58
    Deferred,
      Adjustment of entries, 241
      Estimates handling of, 126
    Depreciation, 47
    Discounts, 47
    Incurred and unpaid,
      Handled as purchases, 254
    Kinds of, 46
    Liquidating, 324
    Maintenance and repairs, 47
    Non-operating, 46
      Listed on statement of profit and loss, 52
    Operating, 46, 94
      Chart of accounts, 219
      List on statement of profit and loss, 51
    Organization, entries for, 340
    Prepaid, handling estimates of, 126
    Purchasing, 47
    Rent, 47
    Salaries, 46
    Traveling, 46
    Unpaid (See above under “Accrued”)
  EXPRESS MONEY ORDERS, 182

          F
  FACE VALUE,
    Notes, 215, 382
  FACTOR,
    Accounting, 448-459
    Collecting of accounts by, 452
    Compensation of, 452
    Defined, 448
    Duties, 449
    Expenses, 450
    Lien on consigned goods, 450
  FEES,
    Income from, 46
  FINANCE, 3
    Purchasing and, 421
  FINANCIAL STATEMENTS (See also “Balance Sheet”)
    Fiscal period for making, 48
    Periodic, value of, 230, 236
    Summary of results, 214
  FISCAL PERIOD,
    Accounts at end of, 214
    Financial statements, 48
  FIXED ASSETS (See “Assets, Fixed”)
  FIXED LIABILITIES (See “Liabilities, Fixed”)
  FIXTURES,
    Asset, 13
  FOOL-PROOF BALANCE, 477
  FREIGHT BILL, 189
  FREIGHT CLAIMS, 560
  FREIGHT CHARGES, 565
    Apportioning, 493
  FREIGHT NOTICE, 189
  FUNDS (See “Sinking Funds”)
  FURNITURE,
    Asset, 13
  FUTURE DELIVERY,
    Accounting for goods sold at, 441
    Inventory of goods sold at, 432

          G
  GOOD-WILL,
    Dissolution of partnership, 328
    Valuation, 418
  GOODS (See “Merchandise”)
  GROSS PROFIT,
    Listed on statement of profit and loss, 50

          H
  HORIZONTAL RULINGS, 434

          I
  INCOME,
    Account, proprietorship, 92
    Accrued,
      Adjustment of entries, 241
      Single-entry bookkeeping, 500
      Valuation, 413
    Classification of items, 58
    Deferred,
      Adjustment of entries, 243
    Defined, 44
    Estimates of, handling, 126
    Kinds of, 44
    Non-operating, 45
      Listed on statement of profit and loss, 52
      Operating, 44
    Sources of,
      Commissions, 46
      Discounts, 46
      Fees, 46
      Interest, 46, 127
      Rentals, 46, 127
      Sales, 45, 61
  INCORPORATION (See “Organization”)
  INDEXING,
    Posting, 201, 552
      Form, 202
    Work sheet entries, 224
  INDORSEMENT,
    Negotiable instruments, 183
  INK,
    Use of red, 108
  INSTALMENTS,
    Accounting, 439-441
    Capital stock subscriptions,
      Entries for, 345
    Contracts, 439
    Distribution of proceeds by, during liquidation, 327
    Sales on, 439-441
  INSURANCE,
    Paid and deferred expenses, 126
  INTEREST,
    Account, 128, 129, 383
    Average due date, 486
    Averaging of accounts, 486-490
      Cash balance, 490
      Compound equation, 489
      100% method, 488
    Balance sheet item, 26
    Bank balances, 491
    Bank discount, 492
    Calculation, 195-198
    Compound, 485
    Cost, separate account for, 129
    Date of value basis, 469
    During construction period,
      Charged to assets, 407
    Expense item, 47
    Income from, 46, 127
    Nature of, 485
    On accounts current, 468, 469
    On bonds, payment of, 356
    On notes, 382
    On partial payments, 491
    On partners’ investment, 294, 297-300, 316
    Partners’ loan, 317
    Rate on partnership investment, 314
    Simple, 485
  INTERNAL CHECK, 373
  INTERSTATE COMMERCE COMMISSION,
    Bill of lading, 188
  INVENTORIES (See also “Estimates”)
    Consignee’s, 456
    Consignor’s, 454
    Entries,
      Adjustment, 238
      Transferred to purchase account, 239
    Goods for future delivery, 432
    Goods in or out on consignment, 431
    Goods in transit, 430
    Goods ready for current delivery, 432
    Goods received but not yet booked, 431
    Mark-on, 425
    Methods, 424
    Perpetual formula, 424
    Records for, 48
    Retail system, 424
    Single-entry bookkeeping, 500
    Stock control card, 429
      Form, 430
    Valuation, 411
      Methods, 239
  INVESTMENTS, 550, 558
    Asset, 12
    Balance sheet items, 26
    Partners’ interest on, 294, 298
    Valuation, 294
  INVOICE,
    Charge and cash sales, 187
    Credit for returned goods, 188
    Defined, 185
    Expense, 254
    Purchase, 186
    Purchasing procedure, 422
    Sales, 187
      Charge account, 444
    Statement of account, 190

          J
  JOINT VENTURE, 460-467
  JOINT-STOCK COMPANY, 288
  JOURNAL,
      Form, 135
    Analysis in, depends upon classification in ledger, 434
    Analytic, 163, 251, 256
      Form, 164
    Cash, 138, 147-161 (See also “Cash Journal”)
    Closing, 163
    Columnar records, 163, 251, 278
      Form, 279
    Defined, 133
    Entries,
      Adjustment, 167-172, 237
      Capital stock, 338-348
      Cash discount, 398
        Form, 400
      Closing, 167-172
      Debit and credit, 134
      Opening, 165
    Explanations, 163
    Nature of, 133, 162
    Note, 111, 255
      Form, 113
    Opening entries, 165, 340-344
    Posting from, 163, 199-203 (see “Ledger, Posting”)
    Purchase, 138, 139-144 (See also “Purchase Journals”)
    Rulings, 251-257
    Sales, 138, 144-146 (See also “Sales Journal”)
    Single-entry bookkeeping, 496
    Special, 137
    Subdivisions, 136-138
    Subsidiary, 138, 144-146, 200, 251
    Summary entries,
        Form, 279
      Columnar books, 278
    Use of, 162

          L
  LAND ASSET, 13
  LAW,
    Principal and agent, 447
    Relation of accountancy to, 7
  LEDGER,
    Accounts,
        Form, 70, 112, 113
      Accounts payable, 269
      Accounts receivable, 265
      Arrangement of, 220
      Classification, 213-220
         (See also “Classification of Accounts”)
      Construction of, 74
      Controlling, 264-271
      Customers’, 265-271
      Defined, 68
      Equation of, 74-76
    Subdivision, 257
    “T” account, 528
  Adjustment of current entries, 115-131
  Analysis, 257, 477-484
  Analysis sheet, 479
    Form, 480
  Balancing, 107-110, 477-484
  Bindings, 263
  Capital stock subscription, 336
  Card, 263
  Cash account, cash book replaces, 150
  Changes in assets and liabilities recorded, 77
  Closing, 129-131
  Cost of goods sold, 117
  Data, sources of, 132-135
  Defined, 67
  Entries, 111
    Adjustment of, 237
  Loose-leaf, 263
  Open account, 204
  Periodic work on, 106-131
  Posting, 133, 199-203, 560
      Form, 202
    Cash journal, 150, 200
    Check figures, 482
    Controlling account, 266, 270
    Cross-indexing, 201, 552
    Errors in, 200
    Expense invoices, 254
    Explanatory matter, 203
    Profit and loss account, 249
    Proof by slip or reverse method, 481
    Proof, in single-entry bookkeeping, 499
    Purchase journal, 143, 200
    Sales journal, 145, 200
    Time for, 199
  Profit and loss account, 129
  Record,
    Insufficiency of, 132
    Original or first, 132
    Trial balance usage, 204
  Rulings, 108, 111, 261
    Form, 258-260, 262
  Sales account,
    Posting, 160
    Rulings, 434
  Single-entry bookkeeping, 497
  Subsidiary, 257
    For controlling accounts, 283
    Self-balancing of, 271
  Trial balance, 106 (See also “Trial Balance”)
  Transferring accounts, 110
    Form, 112
    True financial condition reflected after adjusting entries, 244
  LIABILITIES (See also “Assets and Liabilities”)
    Accounts, 213, 214
      Balance of account, 73
      Chart, 218
      Debit and credit, 85-90
    Classified, 14
    Comparison, 34
    Contingent, transfer of note, 384
    Current,
      Balance sheet items, 26
      Ratio of, to current assets, 27
    Decrease covered by debit entry, 82
    Described, 14
    Fixed defined, 28
    Increase covered by credit entry, 82
    Note discounted as, 215
    Valuation, 29, 419
  LIEN,
    Factor’s on consigned goods, 450
  LIQUIDATION,
    Partnership, 321-329 (See also “Partnership, Dissolution”)
    Value, 404
  LIQUIDATOR, 324
  LOANS,
    Accounts, partners’, 302
    Bank, 195
    Borrowed capital, 303
    Capital accretions as, 302
    Partners, 302, 317
  LONG-TERM LIABILITIES (See “Liabilities, Fixed”)
  LOOSE-LEAF LEDGER, 263
  LOSSES,
    Distributing a deficit, 318
    Distribution of in partnership dissolution, 325

          M
  MAINTENANCE EXPENSE ITEM, 47, 405
  MARK DOWN, 425
  MARK-ON, 425
  MARK-UP, 425
  MARKETING, 3
  MEMORANDUM ENTRY, 340, 341
  MERCHANDISE,
    Account,
      Adjustments, 115, 123
      Analysis of, 100, 117
      Assets subject to depreciation, 102
      Content and significance, 87
      Debit and credit, 87, 99
      Mixed, 97-105
      Summarization, 117-123
    Adjustment of inventory entries, 238
    Asset, 12
    Average stock to be carried, 426
    Cash paid for, determination of, 61
    Control, 424, 426
    Goods for future delivery, 432
    Goods in or out on consignment, 431
    Goods in transit, 430
    Goods ready for current delivery, 432
    Goods received but not yet booked, 431
    On hand, balance sheet item, 26
    Stock control card, 429
      Form, 430
    Valuation, 411
    Withdrawal, entered in sales journal, 273
  MERCHANDISE TRADING ACCOUNT, 364
  MINING PARTNERSHIP, 289
  MINUTE BOOK, 337
  MIXED ACCOUNTS, 97-105, 215
    Adjustment of, 237
  MONEY (See “Cash”)
  MONEY ORDERS, 182
  MORTGAGES, PAYABLE, LIABILITY, 14

          N
  NAME OF FIRM,
    On balance sheet, 24
    On statement of profit and loss, 49
  NEGOTIABLE INSTRUMENTS, 173-184
       (See also “Notes Payable”,  “Notes Receivable”)
    Checks, 181
    Draft, 175-181
    Indorsements, 183
    Kinds, 175
    Money orders, 182
    Trade acceptance, 181
    Uses and requisites, 174
    Warehouse receipts, 182
    Writing of, 183
  NET PROFIT,
    Determination of, 55
      Under single-entry system, 511
    Distribution of, 53
  NET WORTH (See also “Proprietorship”)
    Balance sheet expansion, 40
    Comparison, 32, 40
    Shown under single-entry system, 500
  NOMINAL ACCOUNT, 216
  NO-PAR-VALUE STOCK, 339
    Entries for, 347
  NOTE JOURNALS, 111, 255, 379
      Form, 113, 380
    Entries, 379-383
    Summary, under controlling account system, 277
  NOTES,
    Accounting of, 379-391
    Contingent liability incurred by, 384
    Discounting, 384-387
      Face value, 215, 382
      Loan through, 195
    Dishonored, 387-390
    Face value, always entered at, 382
    History of, 376
    Interest on, 382
    Liquidity of, 378
    Relation of open account to, 377
    Renewal, 390
  NOTES PAYABLE,
    Account,
        Form, 113
      Debit and credit, 89
      Posting, 203
      Rulings and entries, 111
    Credits record, 384
    Defined, 377
    Liability, 14
    Partner’s, 302
  NOTES RECEIVABLE,
    Accepted draft, entries, 177
    Account,
      Debit and credit, 85
      Posting, 203
      Rulings and entries, 111
    As collateral, 390
    Asset, 11
    Balance sheet item, 26
    Classification of, 390
    Credits record, 384
    Defined, 377
    Discounted, 384-387
    Dishonored, 387-390
    Partial payments, 390
    Use of, 173
    Valuation, 409

          O
  OBSOLESCENCE, 414
  OFFICERS, CORPORATE, 335
  OFFSET ACCOUNT, DEFINED, 103
  100% METHOD, AVERAGING ACCOUNTS, 488
  OPEN ACCOUNT, 204 (See also “Accounts, Current”)
    Liquidity of, 378
    Relation of note to, 377
  OPEN-TO-BUY ESTIMATE, 427
  OPENING,
    Corporate books, 338-350
    Entries under single-entry system, 504-511
    Journal entries, 165
  ORDERS, PURCHASE, 422
  ORGANIZATION, 2
    Corporation, 17
    Expenses,
      Entries for, 340
      Sale of stock charged to account, 343
      Writing off, 406
    Partnership, 17
    Single proprietorship, 16
    Types of, 16

          P
  PARCELS POST, C. O. D. SHIPMENTS, 190
  PARTIAL PAYMENTS, INTEREST ON, 491
  PARTNERS,
    Compensation out of net profit, 313
    Deceased, 323
    Liability, 284, 287
    Loans, 302, 317
    New, admission of, 295, 305-310, 320
    Nominal, 289
    Notes payable, 302
    Ostensible, 289
    Profits, closing of, 318
    Salaries, 316
    Secret, 289
    Silent, 289
    Withdrawing, 319
      Liability of, 321
  PARTNERSHIP, 17
    Accounts current, 469
    Bankrupt, dissolution of, 322
    Capital,
      Accretions through profit, 301
      Adjustments of, 297-300
      Averaging investments, 292, 301
      Interest on partners’, 294, 297-300, 316
      Interest rate on, 314
      Investment, original, 294, 550, 558
      Valuation of original investment, 294, 550, 558
    Capitalization, 297-304
    Consolidation, 310-312
    Defined, 284
    Dissolution, 321-329
      By liquidation, 323
      By mutual consent, 322
      Causes of, 321
      Deceased partner, 323
      Distribution by instalments, 327
      Distribution of losses, 325-327
      Distribution of proceeds, 324
      Good-will, treatment of, 328
      Liquidation expenses, 324
      Methods of, 323
      On account of war, 322
      Problems of, 322
      Withdrawal of partner to admit new, 321
    Illegal, dissolution of, 322
    Incorporation, 348-350
    Interest of new partner, 295
    Joint adventure accounts, 460-467
    Limited, dissolution of, 322
    Liquidation (See above under “Dissolution”)
    Loans,
      Distinguished from capital, 302, 317
      Interest on, 317
    Mining, 289
    New partners, methods of admitting, 295, 305-310
    Organization,
      Characteristics of, 285
      Classification of, 287
      Contract, 286
      Joint-stock company, 288
      Nature of, 284
    Partner’s loans accounts, 302, 316
    Profit and loss account, 314-316
    Profit-sharing, 290-294
      Closing to partners’ accounts, 318
      Distributing a deficit, 318
      Interest on partners’ investment, 294
      Investment average as a basis for, 292
      Principles governing, 290
      Ratio, 292, 301
    Profits, 290-294, 313-320
      Defined, 314
      Determination upon admitting new partner, 320
      Net, 314
      Reserved, 317
    Proprietorship, balance sheet, 20
    Sale or transfer of, 322
    Special, 287
      Profit-sharing basis, 292
  PERSONAL ACCOUNT,
    Changes in, 93
    Posting, 203
    Rulings and entries, 111
      Form, 113
  PERSONNEL DEPARTMENT, 3
  PETTY CASH,
    Account,
      Handling of, 367
      Vouchers, 367
    Book, 368
      Form, 369
  P. M.’S, 446
  POSTAGE, EXPENSE ITEM, 47
  POSTAL MONEY ORDERS, 182
  POSTAL SERVICE, C. O. D. SHIPMENTS, 190
  POSTING (See “Ledger,” “Journal”)
  PREFERRED STOCK, 338
    Dividends, 339
    Entries, 346
  PREMIUM (See “Discount and Premium”)
  PRINCIPAL AND AGENT, 447
  PRODUCTION, 3
  PROFIT (See also “Gross Profit,” “Net Profit”)
    As reserves, 360
    Capital accretions through, 301
    Corporate, handling of, 360
    Defined, 313
    Determined by single-entry system, 501
    Dividends declared before distribution, 359
    Dividends paid out of, 360
    Net, 314
    Net operating, 52
    Partnership, 290-294, 313-320
      Closing to partners’ account, 318
      Defined, 314
      Determination upon admitting new partner, 320
      Distributing deficit, 318
      Reserved profit, 317
    Reserved, 317
    Surplus, retained in the business, 301
    Undivided, defined, 16
  PROFIT AND LOSS (See also “Statement of Profit and Loss”)
    Account,
      Appropriation section, 318
      Closing, 249
      Closing profits to partners’ accounts, 318
      Consignments, 453
      Opening, 129
      Partnership, 314-316
      Posting, 203
      Transfer of reserve profit, 317
    Determination, 38-56
    Liquidating partnership, 324-327
    Relation to financial element, 57
    Summary, 44-56
  PROFIT-SHARING,
    Average investment as a basis for, 292
    Partnership, 290-294
      Ratio, 292, 301
  PROMISSORY NOTES
         (See “Draft,” “Negotiable Instruments,” “Notes,”
              “Notes  Payable,” “Notes Receivable”)
  PROOF,
    Postings, 481
    Single-entry bookkeeping, 499
  PROPERTY ASSET, 13
  PROPORTION, 492-494
  PROPRIETORSHIP (See also “Net Worth”)
    Accounts, 213, 214
      Capital account, 93
      Chart, 218
      Debit and credit, 91-96
      Defined, 91
      Expense, 92-94
      Income, 92
      Ledger adjustments, 129
      Personal account, 93
      Single-entry bookkeeping, 498
      Temporary, 129, 214
      Vested, 93, 214
    Balance sheet, 8-10, 19, 40-43
    Corporations, 335, 338
    Double-entry bookkeeping, 78
    Equation, 8-10, 74
    Kinds of, 15
    Single, 16
    Temporary records, 40, 42, 57
    Valuation, 419
  PURCHASE ACCOUNT,
    Adjustment of, 239
    Transfer of inventory to, 239
  PURCHASE DISCOUNT, 395
  PURCHASE INVOICE, 186
  PURCHASE JOURNAL, 138, 139-144
    Analytic, 253
    Expenses handled through, 254
    Posting from, 143, 200
    Summary, under controlling account system, 273
  PURCHASES,
    Analysis of, 436
    Buying,
      Average stock to be carried, 426
      Buying quota, 427
      Control methods, 426
      Department, 421
      Estimates, 426
        “Open-to-buy,” 427
      Financing, 421
      Function, of buying, 420
      Orders, 422
      Policies, 426
      Procedure, 422
      Records, use of, 426
      Requisition, 421
      Returned, 436
      Stock control card, 429
        Form, 430
      Successful buying, elements of, 423
    Cash disbursements, journal, 152, 154
    Cash paid for, 61
    Expense item, 47
    Transaction, analysis of, 139
  PURCHASING AGENT, 422

          R
  RATIO,
    Accounts receivable to sales, 65
    Balance sheet and profit and loss statement, 64
    Profit-sharing of special partnership, 292
    Proportion, 492
    Turnover, 64
  REAL ACCOUNT, 216
  RECEIPTS AND DISBURSEMENTS, STATEMENT OF, 375
  RECONCILIATION OF BANK BALANCE, 472-476
  RECORDS,
    Functions, 1
    Kinds of, 39
  RENEWALS, 405, 416
  RENT,
    Expense item, 47
    Income from, 46
      Paid and deferred, 127
  REPAIRS,
    Expense item, 47
    Valuation, 405, 416
  REPLACEMENTS,
    Defined, 405
    Valuation, 416
  REQUISITIONS, PURCHASES, 422
  RESERVE,
    Account,
      Depreciation, 103, 123
      Doubtful accounts, 125
    Created from profits distinguished from
         valuation accounts, 318
    Defined, 16
    Depreciation, 103, 123
    Doubtful accounts, handling, 410
    Out of profits, 360
    Reserve profits, 317
    Sinking fund, 358
  RETAIL TRADE, INVENTORY SYSTEM, 424
  RETURNED GOODS, 45
    Analysis of, in sales, 435
    Crediting of, 188
    Debit and credit of, 87
    Journal, 253
    Purchases, 436
  REVENUE EXPENDITURES, 104
  REVERSE POSTING, 481
  RULINGS,
    Balancing an account, 108
    Cash book, 151
    Cash journal, 157-160
      Form, 158, 159
    Horizontal and vertical, 434
    Journals, 251-257
    Ledger, 261
      Forms, 258-260, 262
    Note accounts, 111
      Form, 113
    Personal Account, 111
      Form, 113

          S
  SAFEGUARDS, 373
  SALARIES,
    Expenses, 46
    Partners, 316
  SALE VALUE, 404
  SALES,
    Account posting from journal, 160
    Analysis, 98, 434
      Allowances, 435
      Cash sales, 436
      Consignments, 438
      Instalment sales, 439
      Returned goods, 435
      Sales to branches, 437
      Use of ticket in, 435
    Approval, 442-444
    Branches, 437
    Cash,
      Handling of, 436
      Receipts journal, 152, 154
    Charge accounts, handling of, 437
    Classification, 433
    C. O. D., 442
    Consignment, 438, 447-459
       (See also “Consignment”)
    Department, 433
    Department stores, 441
    Discount, 155, 395
    Income from, 45, 61
    Future delivery, 441
    Instalment, 439-441
    Quota, 424, 427
    Ratio of, to accounts receivable, 65
    Returned goods, analysis, 435, 560
    Ticket (See also “Invoice”)
      Charge and cash sales, 187, 444
      Use of, in analysis, 435
  SALES JOURNAL, 138, 144-146
    Columnar analysis, 160, 252
    Methods of recording, 252
    Posting from, 145, 200
      To customers’ accounts, 266
    Returns and allowance journal, 253
    Rulings, 434
    Summary,
        Form, 279
      Under controlling account system, 273, 278
    Withdrawal of stock-in-trade, entered in, 273
  SALES LEDGER, RULINGS, 434
  SALES PRICE, TRADE DISCOUNT, 392, 393-395
  SALESMEN,
    Commission, 445
    Records, 446
  SCHEDULES,
    Balance sheet, 577
    Profit and loss, 589
      Cost of goods sold, 590
  SECURITIES, VALUATION, 412
  SELF-BALANCING LEDGER, 270
  SHIPMENT OF GOODS,
    Bill of lading, 188
    C. O. D., 189
    Freight notice, 189
    Freight or expense bill, 189
    Traffic department, 190
  SIGHT DRAFT, 179
  SIMPLE INTEREST, 485
  SINGLE-ENTRY BOOKKEEPING, 495-512
        (See also “Bookkeeping”)
  SINGLE VENTURE, 460
  SINKING FUNDS, ACCOUNTING, 357
  SLIP OR REVERSE POSTING SYSTEM, 481
  SOLVENCY, HOW JUDGED, 27
  “SPIFS,” 446
  STATEMENT, FINANCIAL (See “Balance Sheet”)
  STATEMENT OF ACCOUNT, 190
  STATEMENT OF PROFIT AND LOSS, 41, 44-56, 589
      Forms, 49, 231, 234
    Arrangement, 50
      Operating expense section, 51
      Trading section, 50
    Confusion of items, 58
    Content, 50
    Equation, 52
    Interrelation of, and comparative balance sheet, 60-64
    Not a part of books, 230
    Preliminary to closing entries, 221
    Ratio of items, 64
    Single-entry bookkeeping, 499
    Title, 49
    When drawn up, 229
  STATEMENT OF RECEIPTS AND DISBURSEMENTS, 375
  STATIONERY, EXPENSE ITEM, 47
  STOCK (See “Capital Stock”)
  STOCKHOLDERS,
    Control by, 359
    Liability of, 351
  STOCK-IN-TRADE (See “Inventories,” “Merchandise”)
  SUBSCRIPTION BOOK, CAPITAL STOCK, 336
  SUBSCRIPTION LEDGER, CAPITAL STOCK, 336
  SUMMARIZATION (See also “Adjustments,” “Closing”)
    Accounts receivable and payable,
      Under controlling account system, 276
    Book entries, 244-250
    Cash journal,
        Form, 281
      Under controlling account system, 280
    Columnar books, 278
      Form, 279
    Merchandise records, 117-123
    Note journals,
      Under controlling account system, 277
    Preliminary to closing books, 221
    Purchase Journal,
      Under controlling account system, 273
    Purpose of, 214, 244
    Sales Journal,
        Form, 279
      Under controlling accounts system, 273, 278
    Work sheet for, 221
  SURPLUS,
    Account, 338
    Defined, 16
    Donated (treasury stock), 352-355

          T
  TELEPHONE AND TELEGRAPH, EXPENSE ITEM, 47
  TEMPORARY PROPRIETORSHIP RECORDS, 40, 42, 57
  TERMS, 7 (See also “Discount, Cash”)
  TICKLER FILE, APPROVAL SALE, 443
  TIME DRAFT, 180
  TITLE, ACCOUNT, 68, 72
  TRADE ACCEPTANCE, 181
    Compared to cash discount, 402
    Distinguished from notes, 377
  TRADE DISCOUNT,
    Defined, 392
    Methods, 393-395
    Not recorded, 393
  TRADING ACCOUNT, 364
  TRAFFIC DEPARTMENT, DUTIES, 190
  TRANSFER OF STOCK, BOOK, 337
  TRANSFERRING AN ACCOUNT, 110
      Form, 112
  TRANSPLACEMENTS, ERRORS IN, 211
  TRANSPOSITION OF NUMBERS, ERRORS OF, 209
  TRAVELING EXPENSES, 46
  TREASURY STOCK, 352
    Accounting, 353
    Purchase and sale, 353
  TRIAL BALANCE, 106
    Adjustment account, 483
    Arrangement for work sheet, 224
    Basis for balance sheet, 221
    Classified, 220
    Errors, 205-212
    “Fool-proof,” 477
    Methods, 204-212
    Post-closing, 250
    Work preliminary to, 107
  TURNOVER,
    Rate, 64, 420

          U
  UNPAID EXPENSES (See “Expenses, Accrued”)

          V
  VALUATION,
    Account defined, 103
    Accounts receivable, 409
    Assets, 407-419
      Subject to cost, 413
      Subject to depreciation, 414
    Bad debts, 410
    Balance sheet, 403-419
      Rules, 407-409
    Betterments, 416
    Bonds, 412
    Cash, 409
    Current assets, 407
    Deferred charges, 408, 413
    Doubtful accounts, 410
    Fixed assets, 124, 408, 413
    Good-will, 418
    Income accrued, 413
    Liabilities, 419
    Merchandise or inventory, 411
    Notes receivable, 409
    Proprietorship, 419
    Repairs and replacements, 416
    Securities, 412
    Stock, 412
  VALUE,
    Cost, 404
    Liquidation, 404
    Sale, 404
  VERTICAL RULINGS, 434
  VESTED PROPRIETORSHIP ACCOUNT, 93
  VOLUME OF BUSINESS,
    Records necessary to show, 39
  VOUCHER SYSTEM, 254
  VOUCHERS, PETTY CASH, 367

          W
  WAGES,
    Expenses, 46
    Paid and deferred expenses, 127
  WAR,
    As a means of dissolving partnership, 322
  WAREHOUSE RECEIPTS, 182
  WORK SHEET, 221-230, 576
    Adjustment entries, 223, 224-230
    Analysis paper for, 221
    Columnar adjustment, 228
    Defined, 221
    Illustration, 222-224
    Indexing, 224
  WORKING CAPITAL,
    Defined, 26
    Turnover, 65