Corn IRewl^orftS ell mniv erstt^ ; f Hgriculture OF THE State College oi 3SI8 Cornell University Library HF 5635.R86 Bookkeeping and accountancy; presenting t 3 1924 013 824 531 Cornell University Library The original of this book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924013824531 Rowe's Bookkeeping and Accountancy Abridged Text Presenting the art of bookkeeping in accordance with the principles of modern accountancy By HARRY M. ROWE, Ph.D. Author of "Commercial and Industrial Bookkeeping," "Business and Office Practice," "Business Bookkeeping and Practice," Etc, SCRIPT BY C. P. ZANER BALTIMORE THE H. M. ROWE COMPANY EDUCATIONAL PUBLISaEBS COLOKS USED IN THE RULINGS IN THIS BOOK AND ACCOMPANYING BLANK BOOKS. Science has determined that the combination of colors least trying to the eye are neutral shades of brown and green, and that the most trying are red and blue. For this reason the brown and green colora used in the rulings in this book and the blank books accompanying it have been substituted for the red and blue usually found in books of this character. ^ 'iL Pf Copyright 1910 Copyright 1911 BY Harry M. Rowe Entered in Stationers' Hall London, 191Q Entered in Stationers' Hall London, 1911 BY HabRT M. E.OWE Copyright protects all the copyrightable com- ponent parts of this work and prohibits all unlaw- ful use of its composition, illustrations, methods, etc. Infringers will be punished to the full extent of the law. PREFACE. "Bookkeeping and Accountancy" is intended to impart a training in the art of bookkeeping that is based upon the fundamental principles of accountancy. It is intended for students of the age usually found in commercial schools, public and private, who are ready to begin a study of the subject. The completion of the full course of study provided will not only qualify for a high degree of proficiency in the art of bookkeeping, but it will also lead up to a very thorough understanding of the general principles and practices of accountancy. While for many years I have closely followed the development of ac- countancj^ as a science, particularly in its economic relations, I am no longer a practicing accountant, therefore, I have presented accountancy 'in this work as I have found it, particularly as reflected in the practical experience of many eminent accountants with whom I have consulted. My principal task has been to simplify the presentation of accountancy so that it may be understood by the average commercial student, and to prepare book- keeping sets in various lines of business that would illustrate the application of its principles. I have found that in reclassifying accoxmts to conform with the theory and practice of accountancy, the art of bookkeeping has been made easier to learn and easier to teach, rather than more difficult. . True science simplifies any subjecc of which it treats, and accountancy is the true science of bookkeeping. Five distinct subjects are included: — the fundamental and elementary prin- ciples of accoimtancy, the art of bookkeeping as applied in various lines of business, business methods and practices, office methods and practices, and office appliances. The following are some of the features of particular interest: 1. For students who are beginning, teachers can have their choice of (1) the account, or skeleton ledger method, (2) the theory method, using transactions stated in the form of memorandums, or (3) the illustrated theory method, in which the business papers received and issued are used in connection with the printed text, either for purely illustrative purposes, or as data from which records are to be made in the various books. The subject matter is the same, except that it is presented in different order in each method. 2. The transactions are classified and entered in the books in which they properly belong, from the start. Purchases, sales, notes and acceptances, cash, receipts and payments, etc., are entered directly in their respective books, from which the proper accounts in the ledger are debited and credited. 3. Various price Usts are provided with each set, which may be used, if desired. IV FKEFACE 4. Business practice with offices may be conducted with each set, if desired. 5. The transactions of each set are confined to those usually found in the particular line of business illustrated. All unnecessary and unbusinesslike trans- actions are omitted. 6. The transactions of each set and the accounts growing out of them are classified according to the principles and rules of modern accountancy. 7. The business methods commonly followed in the various lines of business illustrated in the different sets are fully explained in connection with the transac- tions to which they apply. 8. The trading and profit and loss statements, statements of resources and liabiUties, and the other statements, analysis sheets, etc., required in connection with each set conform strictly to the established forms of these statements employed by accountants. , 9. The business papers and forms are selections from the best lithography produced, many of them showing unique and practical ideas in design and arrange- ment to facilitate and safeguard business transactions. 10. Ledger closings, the grouping of accounts, the use of controlling accounts, the analysis of accounts, and the preparation of various supplementary and sup- porting statements are given special attention and thorough treatment. 11. Manufacturing accounts and statements, corporation accounts, the voucher system of accounts, branch store, agency, and other special accounts are fully explained and illustrated. 12. Cost accounting, cost records and systems are given ample treatment for the elementary student. , 13. The principles, rules and practices of accountancy are fully set forth in a separate chapter. 14. Office systems and apphances are explained and illustrated in a separate chapter, with incidental reference to their use at various points in the different sets. 15. Supplementary drills, that feature which proved to be so valuable in my older bookkeeping publications, are provided wherever needed. < I wish to acknowledge the valuable services rendered in the preparation of manuscript and the reading of the proof by my good friend, B. P. Leister, C.P.A., a former pupil, who was for many years a most successful teacher of the conmier- cial branches, and who is now in full practice as a certified pubhc accountant. 1 also wish to acknowledge my obligation to the many other accountants who have assisted me in various ways in the preparation of this book, and who have responded so freely to my requests for suggestions and criticisms. The Author. Baltimore, Md. June 10, 1910. CONTENTS Definitions 1 Accounts 3 Debiting and Crediting Accounts. 4 Classification of Debit and Credit Items 5 Personal Accounts 5 Ownership Accounts 16 Proprietor's and Partner's Capital Accounts 17 Relationship Between the Owner and the Business 21 Proprietor's and Partner's Personal Accounts 22 Notes Receivable and Notes Payable ' 24 Notes Receivable Account 25 Notes Payable Account 31 Cash Account 37 Merchandise Accounts 42 Principal and Subsidiary "Trading Accounts 42 Purchases Account — A Principal Trading Account 43 Sales Account — ^A Principal Trading Account 49 Inventory Accounts 53 Subsidiary Trading Accounts 56 Freight '. 56 "Freight In" Account 57 Warehouse Accounts 58 Warehouse Supplies Account 58 Warehouse Labor Account 60 Rebates and Allowances, ! 62 Merchandise Discounts 63 Purchase Discounts Account 64 Sales Discounts Account 66 The Trading Statement '69 Profit and Loss Accounts 79 Current Expenses and Incomes : Use and Service Accounts 81 Selling Expense Accounts 81 Outgoing Freight Express Drayage, etc 85 Delivery Expense Account 87 Administration Expense Account 88 General Expense Accounts 91 Insurance Account 94 Insurance Expense Account 98 Interest and Discount Account 100 Property Investment Expense and Income Accounts 104 Real Estate 106 The Investment Account — Real Estate 106 Real Estate Expense and Income Accounts 108 VI CONTENTS Property Investment Expense and Income Accounts — Continued Furniture and Fixtures Account 112 Repairsand Renewals Account 114 Delivery Equipment Account 117 Profit and Loss Statement 118 Distribution of Undivided Profits 127 Journalizing, Posting, Checking Trial Balances, etc , 130 Trial Balances, Inventories, Statements, etc 131 Closing the Books, Statements, etc 137 Combined Trading and Profit and Loss Statement 142 Statement of Resources and Liabilities'. 145 Analysis Sheets ." 147 Explanation of Other Accounts ; 154 Shipments and Consignments 154 Shipment Accounts 155 Consignment Accounts 157 Commission Accounts 160 Branch Store Accounts 161 Briefer Explanations of Accounts 164 Business Papers 173 Account Books 186 Cash Book 187 Purchases Book ' . . 187 Sales Book 187 Notes and Acceptance Books 188 The Journal— Other Books— The Ledger : 189 ■ Closing the Ledger 190 Errors in Trial Balances 190 Corporations 193 Difference Between Partnerships and Corporations 195 Corporation Accounts ^. ^ ....... ., ..,,,..,..,... 196 BOOKKEEPING AND ACCOUNTANCY 1. Bookkeeping. The art of classifying and recording business transactions and facts systematically is called bookkeejying . 2. Accountancy is that branch of practical science which treats of the methods of classifying and recording business transactions and accounts so that the facts they exhibit shall be shown in their proper relations, expressed in terms that will most fully provide the information necessary to successful business and financial ad- ministration. 3. A business transaction is an exchange of something for something between persons ; that is, one person receives something of value from another for which he gives something of equivalent value in exchange. 4. Value is represented in anything that has worth, purchasing power, or utility, such as property, merchandise, money, uses, and services. 5. As to the time of transfer by each party, transactions are of two kinds, completed and uncompleted. 6. A completed transaction is one in which the exchange of value is made by both parties at the same time. 7. An uncompleted transaction is one in which the transfer is made by one party but not by the other, the transfer by the second party being made at some future time. Such a transfer is said to be "on account." 8. An uncompleted transaction is completed when the transfer by the second party is made to the first, the transfer by the first party having been made at some previous time. Such a transfer is said to be "on account." 9. During the interval of time between the transfer by the first party and the transfer in payment by the second party, which interval of time is known as the "term of credit," the second party owes or is in debt to the first party and the first party irwsfe or gives credit to the second party, therefore, — a BOOKKEEPING AND AOCOUNTANCT 10. A debtor is one who owes or is in debt or has been trusted, and the amount he owes is known as a debit in the account kept with him by the creditor. He is the receiver of something of value for which he does not at that time give value. 11. A creditor is one who is owed or has given credit or trust, and the amount that is owed to him is known as a credit in the account kept with him by the debtor. He is the giver of value for which he does not at that time receive value. 12. An important distinction. Thewords"debtor" and "creditor "refer onlyto persons, and, in the sense of owing or being owed, debit and credit can only be used in connection with personal accounts. Debit and credit as applied to all other ac- counts are used only as convenient terms to designate which side of the account is referred to, and do not imply that the things represented by these accounts owe or are owed. 13. Things represented by impersonal accounts cannot owe or be owed, although some writers erroneously personify them so as to apply the principles of debit and credit relating to personal accounts. This can never be done, however, without violating the simplest principlesof logic and reason. Merchandise couldnot owe or be owed, since it belongs to the owner and is in his possession. Merchandise ac- counts show the costs of purchases and the feturns from sales. Likewise cash is in the possession of the owner, and cash account shows receipts on one side and pay- ments on the other. The various expense items show what the expenses of the busi- ness cost, i. e., the outlays necessary to earn the incomes of the business as shown in the various incorn? accounts. The only reason for using the terms "Dr." and "Cr." to designate the two sides of impersonal accounts is because they are the most convenient and the briefest terms that can be used. 14. A creditor trusts or gives credit to a debtor because of an expressed or im- plied promise or contract on the part of the debtor to pay the creditor at some future time. When expressed, the promise or contract may be made orally, i. e., "by word of mouth," or in writing. When in writing it becomes a "written promise to pay," and is usually in the form of a promissory note or of an acceptance. 15. An oral promise or contract to pay may afterwards be changed into a writ- ten promise or contract to pay, in the form of a promissory note, accepted draft, or other written obligation. LEDGER ACCOUNTS 3 ACCOUNTS 16. An account is a record of one or more items relating to the same person or thing, kept mider an appropriate heading or title. It is the custom to place the debit items on the left-hand side and the credit items on the right-hand side of the accounts in the ledger. Accounts show similar items arranged in the most conveni- ent form for arithmetical solution and analysis. They are divided into several classes depending upon their purpose and'the results they show. The following is the standard form of a ledger account. LEDGER ACCOUNTS Year Month Day Explanation I {When used, but/ re-) quently omitted fage, \ of Voole tain-' orig- inal, entry \ Dollare Cents. J^'J^ Day It T Explanation (When used, but/re-) . quently omxlUd) jPoi/e ii Dollars f Cents ' 0/ .: J I hook ' f ■tain- - inaUL . entry {j 17. The Ledger is the book of accounts. The debit and credit "items arising from the various kinds of trainsactions are transferred from the different books in which the transactions are classified and recorded to the proper accounts in the led- ger. These books are the cash book, sales book, purchase book, journal, notes re- ceivable and notes payable books, and such other books as may be required, de- pending upon the nature and extent of the business. These are known as books of original entry. 17a. A GRAPHIC ILLUSTRATION OF THE COURSE OP TRANSACTIONS, AND THE RE- LATIONS OF BUSINESS AND TEACHING TO THE SUBJECTS OP BOOKKEEPING AND ACCOUNTING. SL/S//\^£SS s oo/c/^riSEi/^/A/a A COOC//V TA A/C y s^ s 1 \ \ \ 1 1 *^ 72->4 C/f/A/C d BOOKKEEPING AND ACCOUNTANCY DEBITING AND CREDITING ACCOUNTS 18. To determine what accounts are to be debited and what accounts are to be credited in any transaction we apply the laws of debits and credits which are expressed in rules of bookkeeping. They are derived from the customs and practices of business men, and conform with the principles of accoimtancy. 19. A law is a statement of a principle. It is a rule of action. 20. In every transaction there are one or more debit items and one or more credit items. 21. Debit and credit items are of three kinds, (a) those relating to personal accounts, (b) those relating to accounts with cash, notes, acceptances, and other mediums of exchange, and (c) those relating to accounts with property, with uses, with services, with allowances, with expenses, and with incomes and revenues. 22. Debit and credit items relating to accounts with persons invariably show that each person debited is the receiver of something of value without at that time giving value in return, and that each person credited is the giver of something of value without at that time receiving value in return. (HIO and 11.) Such items usually relate to "uncompleted transactions." (1f7 and 8.) 22a. Remember that the "receiver" is the 226. Remember that the "giver" is the party who receives something of value party who gives something of value to from us without at that time giving vol- us without at that time receiving value in ue in return. return. , 23. Debit and credit items relating to accounts with cash, notes, acceptances and other mediums of exchange, invariably show that each account is debited for the face value of what is received (or redeemed), and that each account is credited for the face value of what is given (paid, issued, or parted with). The principal accounts of this kind are cash account, notes receivable account and notes payable account. 24. Debit and credit items relating to accounts with property, uses, services, allowances, expenses, incomes, etc., invariably show that each account is debited for the cost of what is represented by the account, and that each account is credited for returns from what is represented by the account. The principal accounts of this kind are those relating to the purchase and sale of merchandise, real estate and buildings, stocks and bonds, furniture, fixtures, and other forms of property and in- vestments of capital, and those showing the expenses and incomes such as in- terest, discount, commission, merchandise discounts, freight and express charges, rent, insurance, taxes, wages, salaries, and all other accounts showing the sources of the losses and the gains of the business. DETERMINING DEBITS AND CEEDITS <^LASSIFrCATION OF DEBIT AND CREDIT ITEMS. 25. Notice that in debiting accounts as stated in the preceding paragra- phs, 22, 23 and 24, in every instance in debiting a personal account the receiver is debited; in debiting cash, notes receivable and notes payable ac- counts, they are debited for what is received; and in debiting all other ac- counts they are debited for the cost of something of value received. 26. Notice that in crediting accounts as stated in the preceding paragraphs 22, 23 and 24, in every instance in crediting a personal account the giver is credited; in crediting cash, notes re- ceivable and notes payable accounts, they are credited for what is given; and in crediting all other accounts they are credited for the returns from something of value given. 27. From the classification of items, as given in paragraphs 25 and 26, the following simple rule for debiting and crediting the proper accounts for all items growing out of the current transactions of business is derived. GENERAL RULE FOR DEBITING AND CREDITING ACCOUNTS. 28. Debit the Receiver, what is received, 29. Credit theGiver, what is given, and and that which costs value. that which returns value. 30. The various applications of this general rule to all kinds of business trans- actions will be shown under the different accounts, explained on the following pages. PERSONAL ACCOUNTS. 31. These are accounts with individuals, firms, and corporations (persons), which are required in "uncompleted transactions, "or those transactions "in which the transfer is made at that timehy one party but not by the other." (1f7 and 8) Such transactions are said to be "on account." 32. The object is to ascertain what others owe to us on account or what we owe to others on account "during the interval of time between the transfer by the first party and the transfer in payment by the second party." (1f9) During the "inter- val of time," if a personal account shows an amount owing to us, it is a resource (^[461) ; if it shows an amount owing to others, it is a liability. (1[462) BOOKKEEPING AND ACCOtTNTANCT Rule foe Debiting and Crediting Personal Accottnts. 33. Debit the receiver: credit the giver. 34a Debit the receiver in the proper 346. Credit the giver in the proper account, account. 35. The various applications of the rule for debiting and crediting personal ac- counts are as follows: {Not to be memorized. To be used only as called for.) 36. d. /. h. Debit persons in their accounts, For the amount they owe us at the begin- ning of business. For all goods or property sold to them on account. For all money paid or loaned to them on account, or paid by us to others at their request. For all goods, etc., we return to them for which we have previously credited them. For all notes made by us (notes pay- able) and given to tliem on account. For notes and acceptances of others (notes receivable) transferred by us to them on account. For all drafts drawn by them and accep- ted or paid by us on account. For our drafts or orders on others drawn (or indorsed) by us in their favor on account. For discounts or other allowances made to us on account. For "shortage," "damage," or "over- charge" claims they allow to us on goods for which we have previously credited them. For freight or express charges paid by us when goods are purchased from them f. o. b. delivery point, or when goods are sold to them f. o. b. shipping point. For the amount "thrown off" a debt when they agree to accept a part of what we owe them in full satisfaction of the debt. 37. 38 Observe that in every instance the party debited is the receiver of some- thing of value front us without at that time giving value in return i-iience the rule. 39 Credit persons in their accounts, For the amount we owe them at the beginning of business. For all goods or property bought from them on account. For all checks, money or other cash re- ceived from them on account, or paid by them to others at our request. For all goods, etc., they return to us for which we have previously debited them. For all notes made by them and given to us (notes receivable) on account. For notes and acceptances of others (including our own notes, etc.,) trans- ferred by them to us on account. For drafts drawn on them by us on ac- count. For their drafts on others drawn (or endorsed) by them in our favor . on account. For discounts or other allowances made to them on account. For "shortage" "damage," or "over- charge" claims allowed to theln on goods for which they have previously been debited. For freight or express charges when paid by them on goods purchased from them f. o. b. shipping point, or when goods are sold to them f. o. b. delivery point. For the amount lost by us when we agree to accept a part of what they owe us in full satisfaction of the debt, or when the account is uncollectable. Observe that in every instance the party credited is the giver of something of value to us without at that time receiv- ing value in return: hence the rule. PERSONAL ACCOUNTS / Note to the teacher and student: The various applications stated under each account are not to be memorized; but are intended to assist the student in apply- ing the rule. As they are applied to transactions, they should be carefully studied until their relation to the rule is clearly understood. 40. Transactions Illustrating the Various Applications of the Rule (33) for Debiting and Crediting Personal Accounts. Transactions with R. J. Maclean & Co., 912 Wabash Ave., Chicago, 111. (The paragraph numbers in brackets refer to the various applications of the rule for debit- ing and crediting personal accounts.) Jan. 1. They owe us on account, at the beginning of business, $112.50. (Tf36a) — Jan. 3. Sold them merchandise on account, $975. (1[366) — Jan. 5. Re- ceived cash on account $100. (1f37o) — Jan. 6. Bought merchandise on account, $316.50. (37?i) - - Jan. 7. Paid them cash to apply on bill of Jan. 6, $56.50. (1[36c) Jan. 7. They returned for credit goods ordered by mistake on Jan. 3, amounting to $7.75. (TI37p) — Jan. 9. Received their note at 30 days to apply on bill of Jan. 3, $125. {%37q) — Jan. 10. We returned to them for credit goods purchased Jan. 6, amounting to $12.60. (1I36d) — Jan. 11. We gave them our note at 60 days, on accoimt of bill purchased Jan. 6, $50. (1f36e) — Jan. 11. Received from them, to apply on account, Jones & Co's note, which they transferred to us by endorsement, for $37.50. (UStr) — Jan. 12. We have drawn a draft at 10-days sight on them on accoimt, in favor of Charles Adams, for $75. (1[37s) — Jan. 13. Received from them, to apply on account, their draft at 5 days sight on Alex. King & Co., Cleveland, O., drawn in our favor, for $91.61. (1[37i) — Jan. 14. We accepted their draft at 10 days' sight drawn on us, to apply on account of bill purchased Jan. 6, in favor of Harris Grocery Co., for $23.46. (1[36g'). On the same day we transferred to them, by endorsement, to apply on account of the same purchase, A. S. Baird & Co.'s note in our favor for $45. (ir36/) — Jan. 16. They report short weight in flour sold them of Jan. 3, amoimting to $4.50, which we allow. (1I37y) — Jan. 16. We prepaid freight charges on goods sold to them on Jan. 3, for their account, $2.20. (1f36A;) — Jan. 17. We allow them a discount of 1% on bill purchased Jan. 3, $9.75. i*i37u) - - Jan. 17. They allow us a discount of 2% on bill of Jan. 6, $6. 33. (1f36i) — Jan. 19. They have allowed us an overcharge claim which we made on their bill of Jan. 6, for $2.41. (Tf36y) - - Jan. 19. We drew a draft at 5 days' sight in their favor, in full for their bill of Jan. 6, on H. S. Gray & Sons, for $120.20. (1f36A) — - Jan. 20. They forwarded us a receipted freight bill for $1.65, which was paid by them on goods shipped Jan. 3, which were to be shipped f. d. b. delivery point. (1f37tw) — Jan. 21. They have offered to give us a check of $110 in full payment of the amount owed us on account, Jan. 1, which we have accepted. (1[37o). -- The amount lost is $2.50. (1137x) --Jan. 30. Received from them, on account, John G. Taylor's acceptance for $150 (1f37r) and their check for $75 (11370). What is the balance of account January 31? BOOKKEEPING AND ACCOUNTANCY EXERCISE. Prepare a ledger account for the above transactions on ledger paper, as (7/ you do not have ledger paper, rule the form of a ledger page on blank 40... follows : paper.] (1)" Read and study each transaction carefully. (2) Read the special application, for each transaction, of the rule for debiting and crediting personal accounts, indicated by the paragraph number. (3) Apply the rule (33) and make the proper debit or credit entries in the account, as shown in the illustration (1). When completed, submit for approval. Illdstbation 1. ' 3t£:^E: 406. The illustration shows the ledger account as it appears at the end of ^ the month, January 31, with the figures in the posting columns omitted. The small figures showing the footings of each column and the balance of the account, $299.44, are pencil figures, written when the account is footed, preparatory to tak- ing the trial balance. If it is desired to close the account for either of the reasons stated in lf44, the account would be ruled and footed, as shown in illustration 2. (1145) Illttstbatxon 2. CLOSING PERSONAL ACCOUNTS 9 40c. Indicating canceling items. Whea payments are to be applied to a par- ticular bill, the canceling items may be indicated by letters used in the order of the alphabet as each item is posted. (^46c) The same method applies when the balance ofthe bill is to be determined or paid, or when the account is to be analyzed. Notice that in the transactions for the account of R. J. Maclean & Co. (140), the second transaction of January 19 states that the amount is "in full for their bill of Jan. 6;" consequently, the sum ofthe items received to apply in payment of tnat bill should equal and cancel the amount of the bill. The first three of the canceling items of tue purchase of Jan. 6, on the debit side of the account, are indicated by the letter "a" in the illustration. 40d. Begin with the transaction of Jan. 7, and place the letter "a" opposite each item in the account you have just prepared on the double line opposite the amount. If the sum of these items equals the total amount of the bill, $316.50, place tne letter "a" opposite that amount, ^i like manner, indicate the items on the credit side of the account, canceUng the debit item of Jan. 1, for $112.50, by inserting the letter "b" on the double hne opposite the amounts on each side of the account. This method of indicating canceling items illustrates a very common practice in proving or analyzing accounts. This is a mixed account. (1151) To Close Personal Accounts. 41. The object is to ascertain the amount owed to us by each person or by us to each person having an open account on our books. 42. The diflference between the two sides of a personal account (if any) will show the amount owed to us or by us. If the debit side is the larger it will show the amount (balance) owed to us, which is a resource. (1f461) If the credit side is the larger it will show the amoi::it (balance) owed by us, which is a liability. (1462.) In either case the balance should appear as an item in the statement of resources and liabihties (1487), or in the balance shown by the "accounts receivable" or "accounts payable" accounts in that statement. 43. The difference shown by a personal account is always a balance, but if the balance is uncoUectable, then it shows a loss. When a personal account is consid- ered of doubtful value, or if any part of it is likely to be uncoUectable, it may be closed into a "doubtful accounts" account until sucn time as it is found to be posi- tively uncoUectable, when it should be considered as a loss. 44. To close. Personal accoimts should never be closed'unless they are paid in full and, consequently, balance" themselves, except in the following cases: 10 BOOKKEEPING AND ACCOUNTANCY (a^when an adjustment of the account has been made and the correct balance deter- mined, when it may be ruled up and, the balance brought down to begin a new ac- count, (6) when the space allotted is filled and it is necessary to f o; vard the account to another page, or to a new ledger, when the balance only should be forwarded, and (c) when the party becomes insolvent and the account is uncoL otable, when it should be closed into "bad debts" account or, if there are few such entries, directly into the profit and loss account. Ruling Personal Accounts. 45. The proper ruling for a personal accoimt depends somewhat upon the ng,ture of the business transacted, and more particularly upon the method followed in the payment of bills. In this respect, personal accounts may be divided into four classes, (a) those accounts in which each item or bill is paid separately, (6) those accounts where several items or bills are paid at one time, (c) those accounts where one item or bill is paid in two or more pajonents, and (d) those accounts where pay- ments are made "on account" but not in full settlement of any particular item or bill, which are known as "running accounts." Any one or more of these various methods of payment may be shown in a single accoimt, and the account may be either an account receivable or an account payable. (1149 and 1f50.) 46. The following accounts illustrate the various methods of payment refer- red to and the proper rulings for each. Illustration 3. -/-^LAJeyi. 46a. Explanation. This account belongs to the class described in 1[45a and 1[456. It shows that the item debited March 6 was paid March 16, that the item debited March 12 was paid March 23, and that the item debited March 15 was paid March 30. The items of March 25 and 29 were paid April 7 in one amount. The red lines were ruled underneath the balancing items as each credit entry was made. The items of April 5 and 24 are unpaid, and their sum, shown in pencil figures, is the balance of the account. This is an account receivable. (1[49) RULING PERSONAL ACCOUNTS 11 Illustration 4 ^^u^, S jZcz..i.Ji^ 9 IC^czi^M-. _ _ --=e-^^ /z 1 X3 ..£ u _ '^■^ // // f^ 466. Explanation. The items of August 12, 16 and 25 are for purchases which were paid in one amount September 5, at which time the red lines were ruled under the balancing items. The pencil footing on the credit side shows the balance of the account September 30. This is an account payable. (1[50) It illustrates the class of accounts described in 1f456. Illusthation 5 J;g^ty-^-ig^g-^>^-^9'^^^<;?z-^>c transferred to us, on account, anote made by Marshall & Com- pany, in their favor for |100. June 12. Received cash in full of bill of June 6, $54.56. {Rule out balancing items.) June 24. Sold them goods on account, $96.36. - June 29. We allowed the n an overcharge claim on goods sold on June 24, $3.60. - - June 30. Sold them merchandise on account, $23.50. June 30. Received cash in full for bill sold June 24, $92.76. {Rule out canceling items. I twill be necessary to rule on different lines.) (1f46c) What ig the balance shown by the account? What metnod in the payment of bills is shown by this account? (1[45c) Is it an account receivable or an account payable? (If 49.) (4) Transactions with Williams & Reynolds. Jan. 1. At the beginning of business they owe us on account, $78.50. We owe them for an unpaid coal bill, $14.50. Jan. 4. Sold them goods on account, $668.70. Jan. 5. They return us goods amounting to $10.25. Jan. 8. Bought from them on account goods amounting to $463.61. Jan. 9. Received Hall & Go's acceptance in their favor, which they have transferred to us on account, $55.30. Jan. 10. We allow their claim of $1.38 for an overcharge on goods sold them Jan. 4. Jan. 10. Accepted their draft at 10 days' sight, on account of bill of Jan. 8, $165. Jan. 12. Allowed them a discount of 1% on bill sold them Jan. 4, $6.69. Jan. 14. We transferred to them, on account of bill of Jan. 8, F. C. Archer's acceptance in our favor, $132.50. Jan. 15. We made draft on Miller Brothers, in their favor, on account of bill of Jan. 8, for $100. Jan. 15. They allowed us a discount on bill purchased Jan. 8, $9.37. — Jan. 17. We paid them balance due on bill purchased Jan. 8, $56.74. {The items canceling the bill purchased Jan. 8 may be indicated in the account, as instructed in ^40c and If^^c.) — Jan. 18. Received cash in payment of amount due us Jan. 1, $78.50. {Check canceling items as instructed for the preceding transaction.) Jan. 19. Received their draft on Perkins Brothers, in our favor, on account, $350. Jan. 19. Paid them in settlement of coal bill owed to them Jan. 1, $14.50. {Check canceling items.) (l[40c and 46c) Jan. 21. They desire to settle their account. What is the balance shown by the account? Is this an account receivable, an account payable, or a mixed account? (1151) As it stands, Jan. 21, to which group does it belong? . (5) Transactions with Rodney, Gates & Go. (Note that these, are our transactions with them, not theirs with us.) Sept. 1. Bought merchandise on account, $128.15. Sept. 3. Bought merchandise on account, $216.45. Sept. 4. By paying cash, we are entitled to a discount of 2% on bill of Sept. 1, $2.56. (1[36i) We paid them the balance in cash, $125.59. (1f36c) {Check canceling items as instructed in 1[40c in this arid other transactions in this account.) Sept. 10. Bought merchandise on account, $33.62. Sept. 12. Bought merchandise, $92.18. Sept. 14. Deducted 2% discount -on bill of Sept. 12, $1.84. Paid balance of the bill in cash, $90.34. {Check canceling items.) — Sept. 15. Accepted draft at 30 days in payment of bill of Sept 10, for $33.62. Sept. 17. We are allowed an overcharge claim on bill of Sept. 3 for $4.16. We give our note at 60 days for the balance, $212.29. Sept. 20. We have paid a freight bill on goods received Sept. 3, which should have been prepaid by Rodney, Gates & Go., $9.41. What is the balance shown by the 14 BOOKKEEPING AND ACCOUNTANCY account? Is it a resource or a liability? What method was followed in the payment of bills in this account? As it stands, is it an account receivable or an account payable? Ordinarily, to which group of accounts would it belong? (6) Transactions with Morrell Mfg. Co. Nov. 1. Sold them a milling machine, on account, $340. - - Nov. 20. Bought from them 1 Acme forge, $72.50. Nov. 21. Paid them cash in full for the Acme forge, $69.60, they allowing us a 4% discount on the bill, or $2.90. {Check canceling items.) - - Nov. 26. Received their draft on King's Sons, drawn in their favor and endorsed by them to us, in payment of bill sold Nov. 1 , $340. Nov. 29. Received cash from them as a deposit, in part payment of 1 " Hanover " lathe No. 3, not yet delivered to them, $150. Nov. 30. Shipped them 1 No. 3 "Hanover" lathe, as per contract, $490. What is the balance of the account? To what class of accounts does this account belong? (7) Transactions with S. R. Brown. Dec. 10. Loaned him cash, $75, which he returned in payments as follows: Dec. 20, $10'; Dec. 23, $20; Dec. 27, $30; Dec. 30, $10. Does the balance of the account show a resource or a liability? How does the account differ from an ordi- nary account receivable or account payable? (If51) Gbouping Personal A6counts. 48. For accounting purposes, and particularly to provide a convenient ar- rangement of the accounts in the ledger, personal accounts are divided into two groups known as accounts receivable and accounts payable. 49. Accounts receivable are the accounts with persons to whom we sell, and usually show debit balances (if any) which are resources or assets. The sum of those balances shows the amount owing from accounts receivable, which should be included as a resource item in the statement of resources and liabilities. (Illus- tration 93) Illustration 6. Notice that the sum of these balances equals the balance shown by the accounts receivable account. (1f54) PERSONAL ACCOUNTS 15 50. Accounts payable are the accounts with persons from whom we buy, and usually show credit -balances (if any) which are liabilities. The sum of these balances shows the total amount owing on accounts payable, which should be in- cluded as a liability item in the statement of resources and liabilities. (Illus- tration 93.) Illustration 7. 7 2 4^-? r-y iLJj.^J.2-.. Notice that the sum of these balances equals the balance shown by the accounts payable account. (1154.) 51. Personal accounts showing transactions outside of those usually relating to the purchase and sale of goods, which cannot properly be classed with either ac- counts receivable or accounts payable, are not infrequent. These are sometimes called mixed accounts, and usually appear as separate items, or in a separate group, in the trial balance. They may show either resources or liabilities, which in either case should be included in the statement of resources and liabilities. Again, goods may be purchased from and sold to the same party, and the account would, there- fore, possess the characteristics of both an account receivable and an account payable. It is not unusual for separate accounts to be kept with the same per- son, one for purchases and one for sales, and in some systems of bookkeeping it is necessary. 52. When all the accounts of a business are kept in one ledger, it is pref- erable to group the accounts receivable in one section of the ledger and the accounts payable in another section of the ledger, reserving a third section for the general accounts. 53. When separate ledgers are kept for any one or more of these groups, they are usually designated as the sales or customers ledger for accounts receivable, the purchase ledger for accounts payable, and the general ledger for the general accounts. Where a private ledger is kept, it should contain the capital accounts of the owners and any other accounts which it is desired to keep private. 54. When separate purchase and sales ledgers are kept, it is customary to keep a controlling account for each ledger in the general ledger, to which is posted the totals of special coliunns in the various books of original entry in which are entered the items affecting the accounts in each ledger. The sum of the balances 16 BOOKKEEPING AND ACCOUNTANCY in either ledger must equal the balance shown by the controlling account in the general ledger. (For fuller description, read ^566) 54a. Illustrations 8 and 9 show the controlling accounts in the general ledger footed, closed, and the balances brought down. These accoiints are usually- closed at the end of each fiscal period when the books are closed. It is from these accounts that the balances shown in the trial balance (11483) are taken. iLLTTfiTBATZON S (Z■C'C'cn■c^!'v^A..y/c^yC^-■'Z-^!^2^r''Sc--z^i'C2-^'-Ce^ 54&. In illustrations 8 and 9, the letters "s," "]," "c," etc., which appear next to the single line tothe left of the amount column on each side of the account, in(icate the books from which the entries are posted. The letters represent- ing the principal books kept in an ordinary set are, "p" for purchase book, "s" for sales book, "c" for cash book, "n" fornotebooks, "j" forjournal, etc. "While the student is not required to enter these letters in the examples to be worked up under the various accounts, if they are noted by him it will assist him in under- standing the books from which the various items are posted. OWNERSHIP ACCOUNTS. 55. The owner or proprietor of a business may be an individual, a firm, or a corporation. When the owner is an individual, his investment or capital is kept in an account under his name, followed by the word "Capital," as, "Charles Graham, Capital." When two or more persons unite in conducting a business, OWNERSHIP ACCOUNTS 17 each contributing a part of the investment or capital, the union of capital and time, etc., is called &firm or partnership, and eaah partner's investment or capital is kept in an accoimt under his name followed by the word "Partner," as, "0. B. Harvey, Partner." When the owner is a corporation, the investment or cap- ital account is kept imder a general title, such as "Capital Stock," etc., which is fully explained in the chapters devoted to corporations. • 56. Two accotints. Usually the proprietor or each partner snould have two accounts — a capital account showing his interest in the business, and a personal account. In the capital account only those items affecting the permanent invest- ment of the ovvmer should be recorded, while the personal account should contain the items growing out of his routine transactions, such as withdrawals of money for salary or on accoimt, or of goods taken for private use, etc. PROPRIETOR'S AND PARTNER'S CAPITAL ACCOUNTS. 57. These accounts, while widely different in their purpose, are kept much like ordinary personal accounts. They, however, are affected by the gains and losses resulting from and -incidental to the business conducted, and, therefore, are not closed until after the gains and lasses have been ascertained. They should be kept in the general ledger or in a private ledger 58. The object is to show the interest, equity, or ownership of the proprietor or partner in the business. 58a. There should be a distinction made between the owner's or proprietor's capital and the business capital of a concern. The former represents the interest or equity of the owner or proprietor after all the debts of the concern have been paid, which is shown by the difference between the total resources and the total liabili- ties, while the latter is represented by the total resources or possessions of the con- cern including what is owing to the creditors. 58b. The business c ipital of a concern is, therefore, made up of the owners' capital, and the creditors' capital, whose interest or equity is shown by the lia- bilities. If there are no creditors, there is no division of interest in the ownership. Creditors have the first claim against resources, and are given precedence over the claims of owners. For this reason, when the owner is a corporation it is not unusual to designate its obligations to its stockholders as secondary liabilities. Owners' claims, whether the ownership is vested in an individual, a firm, or a cor- poration, must be met from what remains of the resources after all other creditors have been satisfied. If the remaining resources are not sufficient to meet the owners' claims, the shortage is the owners' loss. Where the ownership is represented by partners or stockholders, the resources remaining after all other creditors are satisfied are distributed pro rata among them. 18 BOOKKEEPING AND ACCOUNTANCY Rule for Debiting and Crediting Proprietor's and Partner's Capital Accounts. 59. Debit the receiver: credit the giver. 59a. Debit the proprietor or partner in his capital account for withdrawals from his capital investment. 596. Credit the proprietor or partner in his capital account for his capital invest- ment, or when he increases his capital investment. 60. The various applications of the rule for debiting and crediting capital accounts are as follows: 61. Debit the proprietor or partner in his capital account. - a. For what he owes to others at the begin- ning of business to be paid from the funds of the business. b. For all withdrawals of money or prop- erty from the capital of the business. c. For all his personal debts paid from his capital. d. For the debit balance shown by his personal account, if it is to be deducted from his capital investment. e. For his net loss, or that part of it which is to be deducted from his capital as shown by the profit and loss statement, or by the profit and loss account, when that account is closed. 62. Credit the proprietor or partner in his capital account. /. For what he invests at the beginning of business as capital. g. For his subsequent investments of capital. h. For any debts of the busines paid by him from his private funds, as an addi- tional investment of capital. i. For the credit balance shown by his per- sonal account, if it is to be added to his capital investment. j. For his net profit, or that part of it which is to' be added to his capital as shown by the profit and loss statement, or by the profit and loss account, when that account is closed. 63. Transactions Illustrating the Various Applications of the Rule for Debiting and Crediting Proprietor's and Partner's Capital Accounts. Capital account of F. A. Raymond. March 1. He invests $8000. (If 62/) He owes on a personal account to be paid from the funds of the business, $140. (1f61a) May 1. He adds to his capital investment, $5000. (1f62gr) Sept. 1. He withdraws from his capital, $1500. (1f61&) Nov. 1. He pays a note, on which he had borrowed money that was used in the business, from his private funds, as an additional invest- ment of capital, $6000. {^Q2h) Dec. 1. His personal note for $100 is paid, which is to be deducted from his capital. (1[61c) Dec. 31. He is debited CAPITAL ACCOTTNTS 19 for his net loss, as shown by the profit and loss statement, $453, at which time his account is closed, footed, and the balance brought down, showing a net capital of $16,807. (161e, 66) - - Jan. 12. He withdraws cash from his capital, $1000. Jan. 31. His personal account shows a debit balance of $200, which he wishes to be deducted from his capital account. (1I61d, 71a) — Jan. 31. He is credited for his net profit, as shown by the profit and loss statement, $1202.46 {^62j, 66), What is his net capital; January 31? EXERCISE. 63a Prepare a ledger account for the above transactions on ledger paper, as follows : (i) Read and study each transaction carefully. (2) Read the special application for each transaction of the rule for debiting and crediting capital accounts, indicated by paragraph numbers. (3) Apply the rule (59) and make the proper debit and credit entries in the account as shown in illustration 10. When completed, submit for approval. Illdstsation 10. / '^r?or - J/ Tz^f-jea^b^iZ^zZ. VLIi-ff^ V/^ 4-t ! ' 1 I 63& The illustration shows the account as it appears at the end of the month. The figures are omitted from the posting columns. The small pencil figures show- ing the footings of each column and the balance of the account are written when the account is footed preparatory to taking the trial balance. The account is balanced, ruled, and the balance brought down after the net profit for the year and the balance shown by the proprietor's personal account are posted from the clos- ing entries in the journal. 20 BOOKKEEPING AND ACCOUNTANCY To Close Proprietor's or Partner's Capital Account. 64. The object is to ascertain the amount of his net capital or net insolvency at a certain date. 65. The difference between the two sides of a capital account, after the net profit or the -net loss of the proprietor or partner and any other accounts affecting it have been closed into it, shows the proprietor's or partner's net capital or net insolvency, (a) net capital when the credit side is the larger, (b) net insolvency when the debit cude is the larger. In either case they should be shown in a sep- arate section of the statement of resources and liabilities, which is the last section of that statement. 66. To close. — After the net profit or the net loss is posted from the closing entry in the journal, if the credit side is the larger, enter on the debit side in red ink, (1) the amount of the differei^ce, (2) the date of closing, and (3) the words "Net Capital" or "Balance." Then rule the account as shown in illustration 10, and bring down the balance (in black ink) on the opposite side, entering the date of the next business day. (See second closing.) 67. If the debit side is the Zarger, enter the difference on the credit side using the words "Net Insolvency" or "Balance." After the account is ruled and footed the amount is brought down on the debit side of the account. Exercises in Proprietor's and Partner's Capital Accounts. 68. Prepare ledger accounts for the following examples. As each entry is made, insert the paragraph number and letter of the particular application of the rule for debiting and crediting capital accounts which applies. Foot, balance and rule up the accounts and bring down the balance when so instructed. (1) Capital account of Henry B. Walters. Jan. 1. He invested $5,000. (1[62/) - - July 1. He invested $2,000. -- Oct. 1. He drew out $800. (11616). What was the balance shown by his account at the close of the year, Dec. 31, at the time of taking the trial balance? Dec. 31. When the profit and loss statement was made out for the year's business, it was found that his net gain was $1,275. (t62j) What was his net capital? Show the account ruled and closed, as illustrated in example. (2) Capital account of George Henderson. Jan. 1. He invested $10,000. Jan. 1. He owed to others to be paid from the funds of the business, $1,150. Feb. 1. He invested an additional $3,,000. - - April 1. He withdrew from his investment, $1,000. July 1. He pur- THE OWNEH AND THE BUSINESS 21 chased a warehouse and lot for his business, for which he paid from his private funds as an additional investment of capital, $4,000. (1f62/i) Dec. 31. At the close of the year's business his profit and loss statement showed a net profit tor the year of $4,250. (1f62j) What was his net capital at the beginning of the- isecond year's business? (3) Capital account of Charles E. Ford, Partner , Jan. 1. -He invested $26,700. He owed on notes, which were assumed by the (irm, $1,700. June 10. He purchased an automobile, for which the firm's check was given, to be deducted from his capital, $1,600. June 30. His net loss for the half year, as shown by the profit and loss statement, was $790. Prepare the account showing his net capital June 30, with the account properly ruled and footed. July 15. He paid from his private funds the firm's note for $3,000 as an additional investment. Sept. 1. He withdrew from his capital invest- ed, $1,000. Dec. 31. His net gain was shown to be $7,450. Show his net capital Jan. 1, with the account properly footed and ruled. THE RELATIONSHIP BETWEEN THE OWNER AND THE BUSINESS. 69. Many authors have adopted the plan of 'personifying the business, whether it be the business of an individual, a firm, or a corporation, not only in formulating rules for capital accounts, such as "Credit the proprietor for what ths business receives, " but for the general accounts as well; hence we see such rules as "Debit wHat the business receives," "Credit what the business disposes of," "Debit cash for all cash the business receives, "."Debit expense for all expenses of the business, " etc. These and many similar statements set up the theory that a business is an active personality with power to receive and dispose of — ^to do or not to do; but this theory is illogical and untenable, because a business is merely the creation of the parties who own, control, manage, and conduct it, whether they are real or fictitious (corporate) persons. It has power of itself to do nothing. It could not exist without an owner. Only the owner can sue or be sued. Therefore, this theory is not recognized in this work. 69a. The only purely personal relation established in connection with any business is between the owner (represented in the real or fictitious persons conduct- ing it) and the persons who deal with the owner, which is the usual relation of debtor and creditor. (If 11 and ^12.) 696. There is, however, a semi-personal relation estabhshed between the owner and the business itself, but it is a relation between the owner and something which is hot or could not be a debtor or a creditor. "While the owner is credited in his capital account for what he puts into the business, the business does not become in- debted to him in any way, nor is his investment considered as a liability of the business, because he mvns the business and its success or failure rests with him. If he with- draws from the capital, he is debited in his capital account, not that he owes anything, but because he, as the owner, is charged back with something that he form- erly put into the business or that he has earned in conducting the business. The same is true of the owner in a corporation, although the earnings pass to the stock- holders through a dividend instead of through the capital accoimt. 22 BOOKKEEPING AND ACCOUNTANCY PROPRIETOR'S AND PARTNER'S PERSONAL ACCOUNTS. 70. The personal account of a proprietor or partner is treated like any other personal account. It is indicated by adding the word "Personal" in the heading. It is opened for the purpose of keeping incidental items, such as withdrawals on account of salary, etc., separate from the items entered in the more permanent capital account. 71. The personal account of a proprietor or partner is debited (a) for all sums withdrawn for private use which are not to be deducted from the capital investment, (6) for any personal debts paid or to be paid from the funds of the business, (c) for all sums collected from, customers and retained by the proprietor orpartner. Itis credited (d) for any sums paid in subject to immediate withdrawal, (e) for any debts of the business paid from private funds which are not to apply on the capital investment and (/) for such part of the net gain as is to be withdrawn as salary or otherwise. Jig. The balances shown by the proprietor's or partner's personal or capital accounts are not to be included with accounts receivable or accounts payable, which include only those with outside parties. (1[49 and 1[50) 72. The difference shows the balance owed to or by the proprietor orpartner, the same as any other personal account, and the account is closed in the same manner. When the account is to be closed into the proprietor's or partner's capital account, it must be done by a separate journal entry. (T|72a). 72a. The final disposition of a balance shown by a proprietor's personal ac- count is determined entirely by the wishes of the individual or bp agreement between partners. When such an, account is not credited with any stated salary and is charged with sums withdrawn from time to time, it is not unusual for the account to be closed by debiting the capital accr>uT?t and crediting the personal account for the amount necessary to balance the personal account, which must be done by separate journal entry; or should the personal account show a credit balance which it is desired to add to the capital investment, the personal account may be debited and the capital account credited for the amount to close. 726. Transactions Illustrating the Various Applications of the Rule FOR Debiting and Crediting the Proprietor's and Partner's Personal Accounts. Personal account of F. A. Raymond. The following sums were paid by Mr. Raymond for his personal account: - - Jan, 5. He paid his gas bill, $7.50. (1f716.) ~ - Jan. 10. He paid his life insurance premium, $47.52 Jan. 16. He paid his grocery bill, $31.40. - - Jan. 21. He withdrew cash, $75. (1f71a.) - Jan. 25. He paid his house rent, $35. - Jan. 31. He paid his electric hght bill, $3.58. EXERCISES IN OWNEES' PERSONAL ACCOUNTS 23 72c. Prepare a ledger account for the above transactions, as instructed in 1163a. Illustbation 11. 3 1 eA^.^p^^£-,££, 3/ j2<^^bHZi!^'Vc>- Z II S-Si . I \ _ : ' — 200, 1 i ! 1 1 i — 1 21} 72d. The illustration (11) shows the account as it appears closed at the end of the month, after the journal entry transferring the total amount, $200, to his capital account, had been made and posted as per his instructions. (if72a) The proper journal entry for making the transfer is shown in illustration 12. xa a. Exercises in Proprietor's and Partner's Personal Accounts. 72e. Prepare ledger accounts for the following examples: (1) F. A. Raymond's personal account was debited and credited for the fol- lowing items during the month of February: Feb. 3. He collected a bill from a customer and retained it for his private use, $15. (1171c.) Feb. 7. A bill for coal used in his residence was paid in cash, $10.50. (1f71&) Feb. 15. He withdrew cash for his personal use, $100. , Feb. 18. He paid bill of his family physician, by check, $24. Feb. 28. He instructed that his account be credited with his monthly salary of $200. (171/.) What was the balance shown by his account? (2) The personal account of B. M. Beck, partner in the firm of Beck & Bald- win, was debited and credited for the following transactions: April 10. He withdrew cash, on accountof salary, $25. April 18; He deposited cash in the firm's bank account, $100. (1[71d.) April 24. He col- lected from a customer and kept for his personal use, $16 April 25. He with- drew, by check, the cash deposited in the firm's account April 18, $100. — April 24 BOOKKEEPING AND ACCOUNTANCY 30. His account was credited for one month's salary, $150. What was the balance shown by his account? NOTES RECEIVABLE AND NOTES PAYABLE 73. Notes receivable are the "written promises to pay" of others which are received by us. 74. Notes payable are our own "written promises to pay" given (issued) to others. 75. Written promises to pay are usually in the form of promissory notes or accepted drafts. (1fl5) Illustration 13 A Phomissort Note (34^ / ^ v .. .^^^.-'■X^y^ e^.t^^^^~- ■^J JL Xlltjbtbation 14 An Accepted Draft — ^Acceptance ^yT^^m^^, %(y^^ ^^'^'^^'^ ^,.^^/^e^ 9^^^^A^ v^^_ -^^ . ^ gz^f^!S^-?-Ti^^^r^ '-^^ y^^ /Sip^t^/,^-^^ y^,^^^ MEDIUMS OF EXCHANGE — NOTES AND DRAFTS 25 76. They both show a condition of indebtedness, notes receivable correspond- ing with accounts receivable (1[49) and notes payable corresponding with accoimts payable ( 1[50) . The principal difference between a note receivable or a note payable and a personal account is that the one is a written promise to pay, and the other is an oral or implied promise to pay. (1fl4) 77. Notes and acceptances are generally received and issued in settlement of personal accounts, thus changing an oral promise to a written promise, which is in fact a written contract. 77a. If A owes B on account and afterwards A gives B his note or acceptance in settlement, while the record of A's indebtedness in B's books is transferred from A's personal account to the notes receivable account, A's indebtedness to B remains just the same, except that in some states and under some circumstances the written promise (note or acceptance) may be more binding upon A. 78. The principal advantage of notes and acceptances is that they are negotiable, that is, they are transferable from one person to another, which lends to them the characteristics of mediums of exchange, and greatly increases their useful- ness in the transaction of business. 79. Because of their negotiability, notes and acceptances are frequently bought and sold, are discounted at bank to raise funds, are transferred " on account, " and are sometimes given as security for loans or for debts. NOTES RECEIVABLE ACCOUNT. 80. Notes receivable account is one of the class in which items relating to mediums of exchange are recorded. (1[21, lf23, 1f78) 81. Notes receivable consist of notes and accepted drafts (acceptances) the value of which we are to receive when due. 82. The object of the aceount is'to show (a) the amount of notes and accept- ances received from others, (&) the amount of these notes and acceptances which have been redeemed and returned (given back) to those who issued them, or which have been disposed of to others, and (c) the amount of notes and acceptances on hand, at any date, which is a resource. 82a. "On hand" includes all notes and acceptances sent to banks for col- lection> or in attorney's hands for collection. All notes receivable are considered "on hand" until actual payment has been received. Any note receivable that cannot be collected is a loss. 83. All items must first appear on the debit side of this accoimt before they can appear on the credit side, because others' obligations to pay must be received before. they can be given back to those who issued them. 26 BOOKKEEPING AND ACCOUNTANCY RoLE FOR Debiting and Crediting Notes Receivable Account. 84. Debit what is received: credit what is given. 84a. Debit notes receivable (at face value) for notes and acceptances of others received. 846. Credit notes receivable (at face value) for notes and acceptances of others given. 85. The various applications of the rule for debiting and crediting notes receivable are as follows: 86. Debit notes receivable account (at face value), — . a. For all notes and acceptances of others invested in the business. 6. For all notes and acceptances received which are made or drawn in our favor. c. For all notes and acceptances made pay- able to others and transferred to us by endorsement or otherwise. d. For all time drafts drawn by ourselves in our own favor, when received after acceptance. 88. Observe that in every instance notes receivable account is debited for the amount of notes and acceptances of others received; hence the rule. 87. Credit notes receivable account (at face value), — e. For all notes and acceptances we hold against others when paid and returned (given back) to them. /. For all notes and acceptances of others which we sell or have discounted. g. For all notes and acceptances which we transfer to others "on account" or for any purpose, by endorsement or other- wise. h. For all part payments received on others' notes and acceptances. 89. Observe that in every instance notes receivable account is credited for the amount of notes and acceptances of others given (paid, redeemed, or dis- posed of); hence the rule. 90. Transactions Illustrating the Various Applications of the Rule (1f84) FOR Debiting and Crediting Notes Receivable Account. Jan. 1. Arthur Gordon's note, due on Jan. 16, was invested in thfe business, $500. (1186a) Jan. 4. Received Richardson & Co's note, at 20 days, for $450 (1[866.) Jan. 6. Received Moore & Nevin's acceptance in our favor, at 15 days, on account, $375. (1[866.) Jan. 15. R. S. Wiley has transferred to us by endorsement, to apply on account, Dane & Ritchie's note, due Feb. 15, for $220.10 (If 86c) Jan. 15. Received cash in payment of Arthur Gordon's note invested Jan. 1, $500. (1I87e.) Jan. 17. Received our draft on F. B. Moore, drawn in our own favor at 30 days' sight, for $360.75, which he has returned to us after acceptance (^86d.) - - Jan. 19. Received R. N. Willis' note at 60 days on account, $900. Jan. 21. Received cash payment of Moore & Nevin's accep- tance of Jan. 6, due today, $375. (Tf87e) Jan. 23. Received King Mfg. Co's acceptance at 60 days, on account, $102.14. Jan. 24. Received cash in payment of Richardson & Co.'s note received Jan. 4, due today, $450. Jan. 25. Transferred to M. F. Marshall, F. B. Moore's acceptance in our favor, received Jan. 17, on account, $360.75. (1f87fif) - - Jan. 26. We had R. N. Willis' MEDIUMS OF EXCHANGE — NOTES RECEIVABLE ACCOUNT 27 note for S900, received Jan.' 19, discounted at bank, receiving credit for the proceeds. (1187/) Jan. 30. Received Arthur Gordon's note at 60 days, on account, $377.76. Jan. 31. Received Moore & Nevin's acceptance at 30 days, on account, $400. Jan. 31. Received from King Mfg. Company, in part pay- ment of their acceptance received Jan. 23, $200. (1f87/i) What is the balance shown by the account January 31? EXERCISES. 90a. Prepare a ledger account for the above transactions on ledger paper, as follows : (1) Read and study each transaction carefully. (2) Read the special application, for each transaction, of the rule for debiting and crediting notes receivable account indicated by the paragraph number. (3) Apply the rule (1184) and make the^Droper debit and credit entries in the account, as shown in illustration 15 and submit for approval. Illustration 15. -7^ -A- -XJ-i— 2Z0 /O -^?- -^"h- -i^ -J7_ ^. 3 6,0 y.j- 2i^ J/ ^J^^l-l^ '^or) SOU _^_^ a^ JiO 7^ ^iPq zap _J_ _ 906. The illustration shows the account as it appears on Jan. 3 1 , with the figures in the posting columns omitted. The small pencil figures show the footings of each column and the balance of the account. (1I40&) The letters "aa, " "bb, " show canceling items. (1140c 1[97) To Close Notes Receivable Account. 91. The difference between the two sides of the notes receivable account (if any) will show the amount (balance) of others' paper on hand, which is a resource. that should be included as an item in the statement of resources and liabilities. The sum of the notes and acceptances on hand must agree with the balance shown by account. (If 82c) 92. To close. Notes receivable account should never be closed unless the account balances, except when it is necessary to forward the account toanother 28 BOOKKEEPING AND ACCOUNTANCY page when the balance should be entered on the credit side in red ink and forwarded to another page in black ink on the opposite side of the page. (1198) 93. When all items balance above a given point they may be "ruled out," as shown in illustration 15. It is generally the practice to rule out all items that balance above any two given points on each side of the account, whether they are on the same line or not. 94. When the amounts of the paper received are entered separately on the debit side of the accoimt, it is not an uncommon custom to credit the paper, when paid, on the same line on the opposite side of the account. This method, however, frequently disarranges the account, as the credit items may not appear in their chronological order, thereby making the account more difficult to audit. 95. When the amount of each paper is entered separately and the debit side of the account becomes full, many bookkeepers prefer to enter the new debit items on another page, leaving the old account open until all the debit items in that account are credited, the account, consequently, balancing up to that point, rather than to foot and rule the account and forward the balance. This method has the objections referred to In the preceding paragraph. 96. When there are part payments received on the same note or acceptance two or more entries may be made on 'the same line. 97. Another plan is to check the canceling items on both sides of the account as the entries are made on the credit side, as shown in illustration 1 5, using the letters of the alphabet to indicate corresponding items. The unchecked items on the debit side will then show the different papers on hand and unpaid. This plan is excel- lent and is highly recommended. 98. When a notes receivable book is kept and used as a posting medium, which is the best practice under all circumstances, only the total amount of the notes and acceptances received during the month appears on the debit side of the ledger account, as shown in illustration 16. If a special column for "Notes Receivable Cr.," is kept in the cash book, only the total of the payments received on notes and acceptance will usually appear in the ledger account, as shown in the illustra- tion; otherwise, a separate credit entry is required for each note or acceptance paid. When a notes receivable book is kept, the suggestions contained in K94, ^[95. If 96 and 1|97 do not apply. NOTES RECEIVABLE ACCOUNT 29 Illitstration 16. ^/a^ J/ ??Uz^. 3/ (Z^, so iiiv. 4 -" 7Z-za^,,3/ 9^7 3/^ ji -ti.<^-^/0!,^c^^o-z^^^z-Szey M^U^ / ^eL^ex.'n^cey .-^.\ .■ Z2l,¥ LZl ExEEcisEs IN Notes Receivable Accounts. 99. Prepare the ledger accounts for the following examples, applying the rule (1184) in each transaction. Rule out the items that balance on each side of the account as the balancing credit entries are made. Follow the special instructions for each example carefully. (1) The transactions in George Warren's books relating to notes receivable are as follows: ;. Feb. 1. He invests, in the business William Brown's 30-day note, dated Jan. 15, for $250.16; also James Dean's 60-day acceptance, dated Jan. -13, for $311.17. Feb. 5. He receives from R.M. Walters his note at 30 days, dated February 2, for $364; also H. A. Harvey's acceptance at 30 days, dated, January 28, for $276.50. - - Feb. ID. J. Watkins & Co. transfers to him C. N. Laws' d,cceptance at 30 days, dated Feb. 2, for $300, to apply on account. : — Feb. 14. He receives payment for William Brown's note of Jan. 15, $250.16.. {Rule out balancing items.) Feb. 15. He' transfers. H. A. Harvey's acceptance of Jan. 28 at 30 davs to A. C. Hatfield, to apply on account, $276.50. Feb 18. He had Jam^ss Dean's acceptance of Jan. 13 discounted at baiik, $311.17 Feb. 25. R. W. Day accepted and returned his draft at 30 days after dat« for $116.40. 30 BOOKKEEPING AND ACCOUN;rANCY What is the balance of his notes receivable account February 28? Indicate canceling items by using the letters alphabetically, beginning with the first credit item. Louis Bessler & Go's notes receivable account contains entries for the following transactions : July 1. They invested four notes made by Rand & Co., all dated June 15, — one at 30 days for $200, one at 40 days for $300, one at 50 days for $400, and one at 60 days for $376.18. July 6. They received from James Ross, on account, his acceptance at 30 days for $275. July IC. They received in payment for merchandise sold to Bennett & Sons their note at 30 days for $275. July 12. Charles Adams transferred to them J. Harman& Co.'s note, dated July 1, at 30 days, to apply on account, $125. July 15. They received cash from Rand & Co., in payment of note of June 15 at 30 days, $200. (Rule out balanc- ing items.) July 18. They transferred Rand & Co.'s note of June 15 at 40 days to First National Bank for collection. (No entry is made until the col- lection is reported by the bank. (Read 82ci.) July 20. They transferred Jarnes Ross' acceptance of July 6 to Hatfield Bros., to apply on account, $275. July 25. The First National Bank notified them that they have collected Rand & Co.'s note left for collection July 18, and have placed the amount to their credit, $300 July 30. They had Rand & Co.'s note at 60 days discounted at bank, $376.18. July 31. They received in part payment of J. Harman & Co.'s note of July 1 at 30 days $75. Indicate canceling items as previously instructed. (3) Jan. 1. Redmond Bros, received note of Arthur Jones, dated Dec. 20 at 30 days, for $650; also J. M. Pugh's note, dated Dec. 8 at 60 days, for $700. Jan. 5. They received Jones & Jones' note, dated Jan. 1 at 30 days, for $250; they also received Adams Bros, acceptance, dated Dec. 24 at 30 days, for $236.75. Jan. 10. W. A. Andrews transferred to them H. A. Kelly & Co.'s acceptance, dated Jan. 2 at 30 days, for $350, to apply on account. Jan. 19. They received cash in payment of Arthur Jones' note of Dec. 20 for $650. {Ruk out balancing items on the same line.) Jan. 20. They had J. M. Pugh's note of Dec. 8 discounted at bank, receiving credit for the proceeds, $700. {Rule out balancing items.) Jan. 25. They transferred Jones & Jones' note of Jan. 1, for $250 to R. M. Wade & Co. on account. (Rule out balancing items.) Jan. 30. Received cash of H. A. Kelly in payment of his acceptance, $350. What is the balance shown by their notes receivable account Jan. 31' Indicate canceling items as heretofore instructed. (4) Transactions relating to notes receivable in the books of Davis & Co. July 3. Received R. B. Small's note, dated July 1 at 30 days, on account, $500; also Duncan & Kane's note, dated June 8 at 30 days, $450. — July 5! Received from W. H. Corwinon account his note dated July 2 at 2 months, $159.38. - - July 6. Received from D. A. Davidson, to balance account, his note dated July 3 at 30 days, $237.45. July 6. R. B. Small prepaid his note in cash, $500. (Rule) July 7. Received from J. A. Oilman our draft of July 3. MEDIUMS OP ■EXCHANGE — NOTES PAYABLE 31 on him at 30 days' sight, which he returns accepted July 6, $376.50. — July 8. Received Duncan & Kane's check, in payment of their note, due today, $450. July 9. Received from A.B.Jones his note at 30 days, in full of account, $300. July 11. Sold G. A. Mann & Co., for their note at 30 days, mer- chandise, $574.50. July 15. Received from E. Norton his draft in our favor at 30 days' sight, on W. W. Colburn, which was accepted July 15, $458.47. - July 18. Received from F. R. Perkins his note at 30 days, on which we loaned him cash, $400. y5) Adam Ross, conducting an installment business, receives the following notes : Aug. 2, note from A for $100, dated Aug. 1, payable $10 per month; note from B for $50, dated Aug. 1, payable $5 per month; note from C for $60, dated Aug. 1, payable $6 per month. Sept. 1. A, B, & C pay their installments. Oct. 1. A & C pay their installments. Nov. 1. He received note from D for $36, payable $4 per month. Nov. 2. B & C pay all installments to date. Dec. 1. A, B, C & D pay all installments due to date. Use letters of alphabet to denote payments applying against their respective notes. What is the balance shown by the account? When these accounts have been carefully prepared, submit them for approval. NOTES PAYABLE ACCOUNT. 100. Notes payable account is one of the class in which items relating to mediums of exchange are recorded. (11216, 1[23, If 78) 101. Notes payable consist of our own notes and of accepted drafts (accept- ances) the value of which we are obligated to pay when due. (If 77) 102. The object of this account is to show (a) the amount of our notes and acceptances issued to others , (6) the amount of these notes and acceptances which have been redeemed by and returned to us, and (c) the amount we still owe on outstanding notes and acceptances at any date, which is a liability. 103. Bonds or mortgages payable should not be included in the ordinary notes payable account, but should be kept in separate accounts, under appropriate titles. Likewise bonds and mortgages receivable should be kept in separate ac- counts. Not infrequently the account for such securities is kept under the title "Bonds and Mortgages Receivable," or "Bonds and Mortgages Payable." 104. All items that appear on the debit side of this accoimt must first appear on the credit side, because our obligations to pay must be issued before they can be redeemed. 32 BOOKKEEPING AND ACCOUNTANCY Rule fob Debiting and Ckeditinq Notes Payable Acootjnt. 105. Debit what is received: credit what is given. 105a. Debit notes payable (at face value) — for our notes and acceptances re- ceived (paid and redeemed). 1056. Credit notes payable (at face value) — for our notes and acceptances given (issued). 106. The various applications of the rule for debiting and crediting notes payable are as follows. 107. Debit notes payable account (at face value), — a. For all our notes and acceptances when paid or redeemed and received back by us. 6. For all part payments made on note and acceptances issued by us. 109. Observe that in every instance notes payable account is debited for the amount of our own notes and acceptances when paid, redeemed and received back by us ; hence the rule. 108. Credit notes payable account (at face value, — c. For all notes and acceptances held by others against us ' at the beginning of business. d. For all our notes given (issued) and for all drafts accepted by us in favor of oth- ers. ' 110. Observe that in every instance notes payable account is credited for the amount of our own notes and acceptances issued or given out to others by us; hence the rule. 111. Thansactions Illustrating the Various Applications of the Rule FOB Debiting and Crediting Notes Payable Account. Jan. 1. F. A. Ra3Tnond owed on his note, in favor of R. S. Walters & Co., due Jan. 16, $200. (IflOSc) Jan. 4. He gave his note at 20 days to Peterson & Co., on account, $633.45. (IflOSd) - - Jan. 9. He accepted Rich & Hart- ley's draft at 10 days' sight for $89.73 in full of account. (1[108rf) - - Jan. 16. He gave his note to Alex. Chester Sons at30days in full of account, $1,137.68. - - Jan. 19. He paid his acceptance of Jan. 9 in cash, $89.73. {%107a) - - Jan. 21. ^He accepted Brown Bros, draft, in their own favor, at 10 days, in full of account, $113.39. - - Jan. 24. He gave Bennett & Sons his note at 30 days on account, $150. On the same date he paid his note, issued Jan. 4, due today, $633.45. Jan. 26. He pa,id his note, due today, in cash, $200. (Rule out balancing items.) (11116) Jan. 30. He accepted J. H. Van. Sickle's draft at 30 days, in full of account, $212.32. Jan. 31. He paid acceptance of Jan. 21, $113.39. What is the balance shown by the account Jan. 31? Ilia. Prepare a ledger account for the above transactions, as instructed in 90a, applying the rule (11105) in determining the proper entries. Indicate cancel- ing items. Prove the account by seeing that the sum of the unchecked items equals the balance, and submit for approval. NOTES PAYABLE ACCOUNT 33 lliLUSTBATION 18. 1116. The illustration shows the account as it appears Jan. 31, with the figures in the posting columns omitted. The small figures showing the footings and the balance of the account are pencil figures which are inserted when the trial balance is taken. (^406). Notice that the first three items on each side of the account are canceling items and are ruled out (11114) after the third entry on the debit side of the account is made. They could also be indicated by letter, as is illustrated for the canceling items marked "a, a. " The sum of the uncanceled items should equal the balance of the account. (^115). 112. The difference between the two sides of the notes payable account (if any) will show the amount of our notes and acceptances outstanding, which is a liability that should be included in the statement of resources and liabilities (see 93). All items must first appear on the credit side of the account. The sum of the notes and acceptances outstanding must equal the balance shown by the account. 113. To close. Notes payable account should never be closed unless the account balances, except when it is necessary to forward the account to another page, when the balance should be entered in red ink and forwarded in black ink on the opposite side of the page. (1[116a) 114. When all items balance above a given point they may be "ruled out,' ' as shown in illustration 18. (111116) It is the general practice to rule out all items that balance above any two given points on each side of the account, whether they are on the same line or not. 115. When the amoimts of paper issued jire entered separately on the credit side of the account, each item, when paid, may be debited on the same line on the opposite side of the account. This method has objectionable features. (1f94) When the credit side of the account becomes full it is generally preferable to open the new account as suggested for notes receivable. (If 95) When part payments are made on the same note or acceptance, two or more entries may be made on the same line. As the entries showing full payment are made on the debit side, the amounts may be canceled on both sides of the account. (See a, a) The uncanceled items on the credit side show the different papers outstanding and unpaid. (IflUo) 34 BOOKKEEPING AND ACCOUNTANCY 116. When a notes payable book is kept and used as a posting medium, which is the best practice, only the total amount of the notes and acceptances issued for the month will appear in the ledger account, as shown in illustration 19. When a special column for "Notes Payable Dr." is kept -in the cash book, only the total amount of our notes and acceptances redeemed for the month will usually be shown in the ledger account; otherwise the amount of each note or acceptance paid will appear separately on the debit side of the account. Illustration 19. „ '7 Cg^. Zf T^z^i^, 3/ 7i-o^:Ld^/^^,-ciJ^/.&y V 'C3i, sy J)c!^. JL. 93 i>J /kf_ V » a 7 f r ^^^,7 f7 116a. Notes payable account corresponds with accounts payable account (1150) except that it shows our written promises to pay instead of oral promises to pay. The balances in both accounts show /m6iteies. The illustration above shows the account as it appears when the notes payable book is used as a posting medium and a special column for "Notes Payable Dr." is kept in the cash book. On the opposite page the account is shown with the balance transferred. (1[113). Illustration 20. /Z-€^'ti-.dyr-^ -y--eL S-C£^ AdeL.^tz,p^L'<:-^^ ,^. /-TV /J ExEECisEs IN Notes Payable Accounts. 117. Prepare the ledger accounts for the following examples, applying the rule (11105) in each transaction. Rule out the items that balance on each side of the account as the balancing debit entries are made. Follow carefully the special instructions for indicating the canceling items. EXERCISES IN NOTES PAYABLE 35 (1) The transactions in Brown Bros. & Co.'s books relating to notes payabk are as follows: Jan. 1. Gave J. Doris note at 10 days, on account, $280. Jan. 6. Accepted Charles Paxton's draft dated Dec. 30 at 30 days after date, for $316.40 Jan. 11. Paid note in favor of J. Doris, $280. (Rule) Jan. 12. Gave Jas. Davis our note at 30 days for $328 in full of account. Jan. 19. Made part payment on our acceptance of Jan. 6, $200. (1[1076) Jan. 21. Gave E. N. Ray, note at 30 days, in full of account, $276.14. Jan. 22. Paid balance due on our acceptance of Jan. 6, $116.40. Indicate canceling items (1|111&) and show the balance of the account, Jan. 31. (2) March 1. Frank Brown began business, owing the following notes: Note in favor of John Bentz, dated Feb. 16 at 30 days for $847.19; note in favor of Gard Mfg. Co., dated Feb. 25 at 60 days, $540.16; note in favor of the City National Bank, dated Feb. 15, payable on demand, for $2,000. — March 5. He gave his note at 30 days to Gard Mfg. Co. for $350.75. March 6. He accepted Knight & Day's draft at 30 days' sight for $219.54. - - March 9. He accepted Maxwell & Co.'s draft at 60 days, for $685.20. March 10. He made part payment on note held by City National Bank, $500. - - March 18. He took up note in favor of John Bentz, dated Feb. 16, by giving him cash $500, and a new note at 30 days for $347.19 {Debit the account for the old 'note; credit it for the new note.) March 18. He made part payment on note held by the City National Bank, $500. March 25. He sold merchandise to Gard Mfg. Co., who transferred back to him his note of March 5 at 30 days for $350.75, in part payment. (If 107a) March 30. He paid note in full held by City National Bank, $1,000. Indicate canceling items by letter. (1fll5) (3) Jan. 1. Robinson & Kennedy enter into a partnership, bringing into it all the resources and liabilities of their former separate businesses. Robinson owed a note, dated Dec. 15 at 30 days in favor of A. C. Boyd, for $275. (If 108c) Kennedy owed a note dated Dec. 20 at 60 days in favor of J. M. Byrnes for $300; also his acceptance of Dec. 10 at 30 days in favor of Boyd & Johnson for $116.42. Jan. 5. They borrowed from the Merchants National Bank on their note payable on demand, $5,000. Jan. 8. They issued their note at 40 days to Andrews & Co., for merchandise, $257.10 Jan. 10. They accepted Jones & Go's draft at 10 days' sight for $278.19. - - Jan. 10. They paid their acceptance in favor of Boyd & Johnson, $116.42. Jan. 14. They paid their note in favor of A C, Boyd, dated Dec. 15, for $275. Jan. 15. They paid the Merchants National Bank $500, to apply on their note issued Jan. 5. Jan. 20. J. M. Byrnes transferred to them Kennedy's note of Dec. 20, for $300, in part payment of goods sold him that day. Jan. 26. They accepted W. N. Davidson's draft at 30 days for $398. - - Jan. 28. They made a payment on the note issued Jan. 5 in favor of the Merchants National Bank, $1,000. Jan. 30. They took up their demand note issued Jan. 5 in favor of the Merchants National Bank, by paying the balance in cash. S6 BOOKKEEPING AND ACCOUNTANCV Indicate canceling items by letter, beginning with the first debit item. To find the balance due on note in favor of the Merchants National Bank, indicate the payments on Jan. 15 and Jan. 28, "d, d. " Where the entry for the full pay- ment of the note is made on Jan. 31, indicate that item and the credit entry of Jan. 5 with the same letter. By this method the account will show the three items on the debit side that cancel the one item on the credit side of the account. Show the balance of the account on Jan. 31. (4) John Adams had notes and acceptances outstanding at the beginning of business, June 1, as follows: June 1. A note dated May 10 at 30 days in favor of Auson Byrd & Co., for $200; a note dated May 20 at 40 days in favor of Anson Byrd & Co., for $165.40; an acceptance dated May 15 at 60 days in favor of Calhoun & Co., 1316.20; and an acceptance dated May 27 at 15 days in favor of Wells & Wright, for 195.40. These were all issued in paymeni; of bills purchased to begin business. The following transactions occurred during the month : June 5. Accepted Vermont Stone Co's draft at 30 days' sight, $187.60. June 9. Took up note of May 10 in favor of Anson Byrd & Co., for $200, by paying $100 in cash and issuing a new note at 10 days for $100. June 11. Paid acceptance in favor of Wells & Wright, due today, $95.40. June 19. Paid note issued June 9, for $100. - - June 29. Paid note of May 20 in favor of Anson Byrd & Co., $165.40. June 30. The Vermont Stone Co. returned acceptance of June 5 in part payment of goods purchased. Follow previous instructions. (5) Aug. 1. On commencing business, John Thompson owed an acceptance due Aug. 16 in favor of J. L. Soule, for $525. Aug. 2. He issued note at 30 days to G. H. Mann, for $350. - - Aug. 15. He accepted E. H. Davis' draft at 30 days' sight in favor of H. K. Moore, for $196.34. Aug. 16. He paid acceptance in favor of J. L. Soule. Aug. 17. He accepted M. M. Brown's draft at 10 days' sight in favor of J. V. Chase, for $257.43. Aug. 27. He paid his acceptance due that day. Aug. 28. He received from W. J. Tucker, on account, his note issued Aug. 2 to G. H. Mann. What was the balance shown by his notes payable account, Aug. 31? On Sept. 3, Mr. Thompson accepted a draft at 10 days' sight $150. He paid this and his acceptance of Aug. 15 at maturity. Make the proper entries imder the proper dates, and show the account closed and ruled as it would appear Sept. 30. (11113). MEDIUMS OP EXCHANGE — CASH AOCQTJNT 37 CASH ACCOUNT. 118. Cash includes gold, silver, and coins, bank notes, U. S. Treasury notes, money orders, bank drafts, checks, and whatever else is received or given as money. Cash is the most important of the mediums of exchange. (1[21) 119. The object of this account is to show the receipts andpayments of cash, and from these to ascertain the amount of cash that should be on hand. (If 23) 119a. "On hand" includes the cash in the safe or drawer, to which must be added the balance in bank shown by the check book, or by the "check and deposit book." When accounts are kept in more than one bank, the sum of the balances must be added to the cash in safe or drawer. When a separate ledger account is kept with the bank, "cash on hand" includes only the actual cash in the safe or drawer. Ledger accounts with banks are seldom kept. 120. The cash account is seldom kept in the ledger but is kept in a separate cash book in which the entries for all receipts and payments of cash are made and from which they are posted to the proper accounts in the ledger. When the cash book is kept, no cash items are entered in any other book. Rule fob Debiting and Crediting Cash Account. 121. Debit what is received: credit what is given. 121a. Debit cash when received. 1226. Credit cash when given. (Debit for receipts.) (Credit for payments.) 122. The various apphcations of the rule are few, and are as follows: 123. Debit cash account, — 124. Credit cash account, — a. For the amount of cash invested in the v. For all cash paid out. business. d. For all cash loaned to others or lost. b. For all cash received thereafter. e. For all checks issued (when no bank account is kept in the ledger). /. When a bank account is kept, for all cash deposited. 125. Observe that in every instance 126. Observe that in every instance the the account is debited for the amount of account is credited for the amount of cash cash received (receipts). given (payments). 38 BOOKKEEPING AND ACCOUNTANCY IttUSTHATION 21. ,--^Z<:^->4^^^■£:<^■g<^^5^ \^^^Z^l't^^-n accounts (1fl51, ^152, *[153,TI164,1[165, 11166) while others are entered in special, or subsidiary, accounts which are fully explained under the proper heading. (11176) 138. The subdivision of the accounts relating to the purchase and sale of mer- chandise into tne principle and subsidiary accounts illustrates an important princi- ple of accountancy, which is that each account should show but one specific thing or result; and it follows, therefore, that a separate account should be opened and kept for each particular item of information which it is desired that the books should show or that should appear in the trading statement. 139. This method has an important educational advantage because it permits the one particular purpose of an account to be fully explained so that it may be clearly understood by the student. It has an equally important practical advantage in supplying the data to make intelligent comparisons between the results shown by the various accounts for different fiscal periods. PURCHASES ACCOUNT— A PRINCIPAL TRADING ACCOUNT 140. The object of the purchases account is to show the cost of purchases for the fiscal period covered in the account. "Purchases" includes only those goods bought to be sold. The debit side of the account shows the cost of goods pur- chased, (gross purchases) from which is deducted the value of any goods returned, of rebates, allowances, and of other items that have the effect of decreasing the cost of purchases, these items appearing on the credit or contra side of the account. 141. The cost of purchases in wholesale and jobbing businesses includes not only the invoice price of the goods, but also the cost of any freight, express, drayage or other charges on the goods, of commissions for buying, and of all other expenses 44 BOOKKEEPING AND ACCOUNTANCT necessary until the goods are ready for delivery to the local customer, or are on board cars for shipment. ■ In retail businesses, department stores, etc., when the goods are ready for sale (i. e. are placed on the shelves or in show cases in stockroom) the costs end and the selling ea-penses begin. Rule for Debiting and Crediting Purchases Accounts. 142. Debit for costs: credit for returns. 142a. Debit purchases account for the costs of purchases and charges. 142&. Credit purchases account for goods returned by us, and rebates and allow- ances to us on purchases. 143. The various applications of the rule are as follows: d. 144. Debit purchases account, — ■ tt. For all merchandise purchased. b. For* incoming freight, express and dray- age, (1fl8-l) for duties, storage, and for other similar charges. c. For* purchasing agents' commissions salaries or expenses for buying goods. For boxing, packing and shipping mate- rial(*warehouse supplies) (1fl92)shipping clerks' salaries, warehousemen's wages and expenses (* warehouse labor), and other similar supplies. (1[198) *Vnless subsidiary accounts are kepi. (11152, 11176) flf considered as an income from having sufficient capital to discount bills (1[220b). 146. Observe that in every instance the purchases account is debited for some- thing that adds to or increases the cost of purchases: or whatever increases cos^s is a debit. 145. Credit purchases account, — e. For all goods returned by us after having been purchased, and debited to pur- chases account. /. For all "rebates and allowg.nces on pur- chases, such as shortage, damage or overcharge claims allowed on goods pur- chased when the full amount has been debited to purchases account, (11206) or for *any rebates or returns on freight, express or other charges paid. g. For goods taken from stock for private use or donation, at cost price. h. For goods taken from stock to be ship- ped for sale on commission, or transfer- red to a branch store, when billed at cost price. i. For any returns from material or labor debited to this account. j. For fcash discounts allowed to us on purchases, when* purchase discounts are considered as decreasing the cost of pur- chases. 147. Observe that in every instance the purchases account is credited for some- thing that decreases or lowers the cost of purchases: or whatever decreases costs is a credit. 148. Transactions Illustrating the Various Applications of the Rule (TI 142) FOR Debiting and Crediting Purchases Account F. A. Raymond's transactions affecting the purchases account are as follows: Jan.5. He paid freight charges, $10.15. (1fl446) Jan. 9. Hepaidacom- CLOSING PURCHASES ACCOUNT 45 mission of 1% and other expenses, amounting to $5.50, for goods purchased in New York through an agent. (1[144c) Jan. 12. He was allowed a shortage claim, $2.20. (11145/) Jan. 14. Hg was allowed a rebate for an overcharge on freight paid, $1.60 (ifl45/) Jan. 16. He was allowed a credit for an overcharge on goods purchased, $18.40. (If 145/) Jan. 18. He received an allowance for dam- aged goods purchased, $5.20. (11145/) — Jan. 25. He returned goods which were foundtobeunsalable,amoimtingto$40.16. (^145e) Jan. 28. He paid freight, express and drayage bills, amounting to $27.85. (If 1446, lfl80.) Jan. 31. ' His purchase discounts for the month were shown to be $173.51. (If 145/) He paid salaries and wages for warehouse labor for the month, $120. (If 144d) He paid for boxes, packing and shipping material and other warehouse supplies for the month, $61.35. His total purchases for the month, as shown by the purchase book, were $3180.53 (11144a) What is the net cost of the merchandise purchased? EXERCISE. 148a. Prepare a ledger account for the preceding transactions, as follows: (1) Read and study each transaction carefully, referring to the special applica- tion of the rule for debiting and crediting purchases account indicated by the para- graph numbers. (If 145g, If 145/i and If 145i, will be illustrated in subsequent exercises.) (2) Apply the rule (If 142) and make the proper debit and credit entries in the purchases account, indicating in the explanation column the nature of each item, as shown in the illustration. When completed, submit for approval. Illustration 22. )~>i^cyt-cJ-L-<:!^<^,-£..d^ /.o\ /^ J la^ny; / Z \^,^A.€^'L.t^.^y^g^ .2__j^^^^:2:^^^j5*^t?^^^^i£. ■J' S'O / y ic^MU-^^<<„^^a^ C'^y^CC^Li-^^-t^^'^^i-i'^CiX-^VT j'/ \Z{^i2^,&^.,7<^^i-e^^«a(2i'MV ^^^^£^7^ To Close Sales Account. 164. The difference between the two sides of the sales account always shows a credit balance, which should be included in the trading statement for the period b'£ BOOKKEEPING AND ACCOUNTANCY (^242) . (a) If all the various charges and allowances a^ecting sales are entered di- rectly into the sales account, the balance shows the net returns from merchandise sold for the period. (&) If subsidiary accounts are kept with all the various charges and allowances a,ffecting sales excepting items named in 1[159a and T[160d, the balance shows the net sales for the period. 165. To close. After the trading statement has been prepared, the sales ac- count is closed by a journal entry made up from the trading statement. When the closing item to the sales account has been posted, which should balance the account, rule the closing lines in red ink, as shown in illustrations 26 and 27, and enter the footings in black ink. 166. It is the best practice to enter the items coming under 1[160d, 1fl60e, and 1|159a, being the items of goods sold and of goods returned, directly into the sales account, as these items, if they are required to appear as separate items in the trading statement, can easily be classified on an analysis sheet, particularly if each item is designated in the explanation column as entered. 167. Separate accounts ioT the items named in 1[159b, 1[159c, and other similar items relating to the sales account (excepting those named in 11166) may be kept when it is desired that they should appear separately in the trading statement. When kept, these are known as subsidiary sales accounts. ExEBcisEs IN Sales Accounts 168. Prepare ledger accounts like illustration 26 for the following exam- ples, applying the rule (1[157) for each transaction, indicating briefly in the expla- nation column the nature of each item. Include the entry "Trading % to close" which would be made from the closing journal entry in keeping a set of books. (1) June 7. Goods were returned, $78.25. June 11. Rebate was made for overcharge, $62.56. June 30. Total sales were $8619.71; cash discounts during the month $208.16. What are the net returns from merchandise sold? (2) July 10. Goodswere shippedon consignment at sellingprice, $367.19. July 21. Goods were returned, $116.42, and an allowance of $10 for an overcharge was made. July 27. Claim for damaged goods was allowed, $7.21. Sales discounts, $316.43; total sales, $9716.73. What were the net returns from sales? Arithmetical Problems — Sales Accounts. Find the results for the following problems (1fl55) : INVENTOUT ACCOUNTS 53 Illctbtbation 28. (1) During the month of August the sales on yl ^ ■/■• / account were $2917.60; sales for cash, $216.45; goods -Sfefe^S^SI:' shipped on consignment at selling price, $176.80; -^Sg^fefe^^^ ^ ^ ^^ goods returned, $75.40; allowances for overcharges, '^/■/'mo ^I/'?',J^- $17.40; allowance for goods damaged on account of a,/ i!ve .gJa'/of^-:^ defective boxing, $8.00; sales discounts, $213.40. T372/,3.c A,iA.3-oM>l (2) Sales on account for the month, $7916.70; cash sales, $219.67; sales account credited for undercharges on goods previously billed, $20; goods shipped on consign- ment at selling price, $276.18. Of this shipment, goods were returned amounting to $176, there being no market for them at the point to which they were shipped. Goods returned, $27.16; various allowances and rebates, $38.40; sales discounts, $3.16. What are the net returns from sales? (3) Total sales, $4713.75; goods returned, $96. 18. With separate accounts kept for items included in ^1596 and ^159c, what are the net sales for the month? (1[1646) If there were rebates and allowances amounting to $84.12, and cash dis- counts amounting to $53, what were the net returns from sales? (If 164) INVENTORY ACCOUNTS. 169. A merchandise inventory is a list of merchandise in stock or on hand at the end of any fiscal period taken at cost price, or if market price is less than cost, then Sit market price. The cost price of each article in an inventory is the invoice price plus a proportionate share of freight, express, and other charges and expenses necessary in placing the article in stock. These incidental charges should be and usually are figured in the marked cost price placed upon the article when it is received. They correspond with the debit items charged to the purchases and subsidiary accounts exclusive of the invoices. It is upon the marked cost price that the percentage of profit is added in fixing the selling price. When certain fixed discounts, such as trade discounts, are to be allowed, which are to be excluded from the percentage of profit, they are added to the selling price, in which case the price placed upon the goods is the marked selling price. 169a. Shop-worn goods, goods out of style or out of date, should be inventoried at cost, and the amount of the depreciation between the cost value and the estimated value should be listed separately. The total amount of the depreciation should be charged in the profit and loss statement as a separate item, otherwise the trading profit shown by the trading statement would be affected, which would thus disturb the average per cent of gross profit when the trading profit of one period is compared with that of another. 170. It should be remembered that a merchandise inventory should include only the value of goods on hand which were purchased to be sold at a profit, and that the inventory should not include the value of furniture and fixtures, office appliances, machinery, warehouse implements, boxing and packing materials, or any other 54 BOOKKEEPING AND ACCOUNTANCY property whatsoever except that included in the designation, ''purchased to besold at a profit." 171. The object of the merchandise inventory account is to show the value of the merchandise on hand at the end of any fiscal period. The inventory account shows a resource, which should be included in the statement of resources and liabilities for the period, and is, therefore, known as a resource or asset account. Rule for Debiting and Crediting Inventory Accounts. 172. Debit for the value of the inventory on hand at the end of any fiscal period : credit for the inventory on hand at the close of the last -preceding fiscal period. \72a. Note that the inventory account is 1726. Note that the inventory account is debited for the value of the inventory credited at the close of the next fiscal on hand at the end of any fiscal period. period for the inventory for which it was debited aJ the the close of the last preced- ing fiscal period. 172c. Other inventories are described in 1f465. 173. Transactions Ii.lustraung the Merchandise Inventory Account. The following are monthly inventories covering a period of three months prior to January 31. Prepare a ledger account showing them properly debited and credited : October 31, $6842.19; November 30, 18716.42; December 31, $7516.45; iLLUSTBiTION 29. _^:Jc?^^z-''T^<'-z^^^^^-'i^ -^'^V - - r -/-"^^^ ;-; r-i - i - 173a. Notice that the account is debited for the inventory of October 31 on that date, and that the account is credited for the same inventory on November 30, one month later when the next inventory is taken, at which time the balancing items are ruled out as shown; and that, therefore, the account will always show the value of the merchandise on hand at the close of the last preceding fiscal period. 174. The inventory of the last preceding fiscal period, added to the cost of the purchases for the present fiscal period, less the inventory for the present fiscal period, gives the cost of the merchandise sold. (See trading statement, 1f242). LLUBTBAIION 30. INVENTORY ACCOUNTS 55 IWrEETORY DECEMBER 31, 19 . .97 2413.36 .51 2893.74 .83 634.95 .60 1574.40 7516.45 2488 bu. Wheat 5674 " Oats 765 " Rye 2624 " Com Exercises in Inventory Accounts. 175. Prepare accounts for the following transactions : (1) At the closing of the books, December 31, the inventory of goods on hand was $11360.50. .At the next semi-annual closing, June 30, the inventory was $12448.37. At the next semi-annual closing, December 31, the inventory was 110991.71. What does the account show at that date? (2) In a business where quarterly inventories were taken, the inventory on March31was$23741.49,onJune30, $64927,26, on September 30, $64417.71, and o'i December 31, $45516.85. Show the account as it would appear December 31. Arithmetical Problems — Inventory Accounts. Il.LJJSTRATION 31. (1) The inventory at the close of the last preced- ing fiscal period was $2396.45. The net cost of merchandise purchased for the present fiscal period . -^cr€cct^icn<.o'z£^ '9 ' ^/? I £' J-J fV Uo'n^ iO - : 2. /? ■ ? ^ v ; //. ? ^-y - To Close Sales Discounts Account. 230. The object is to show the total discounts on sales. 231. To close, (a) When considered as a subsidiary trading account show- ing a decrease in the returns from sales, after the trading statement has been pre- pared, sales discounts account is closed by a journal entry made up from the items appearing in the trading statement. When the item closing the account is posted, the explanation "Trading % to close" should be entered as shown in illustration 36. (6) When considered as a profit and loss account showing a decrease in the net profits, after the profit and loss statement has been prepared, the account is closed by a journal entry made up from the items appearing in the profit and loss state- ment, in which ease, when the item closing the account is posted, the explanation, "Pro^t & Loss % to close" should be entered as shown in illustration 37. In either case, when the closing entry for this account has been posted, which should balance it, rule the closing lines in red ink as shown and enter the footings in black ink. Illustration 37. '{2-3 . s/ ,i,a , 68 bookkeeping and accountancy Exercises in Pubchase and Sales Discounts. 232. Prepare ledger accounts for the following examples, applying the rule, and present for approval. (1) Jones & Co.'s purchase discounts, which were posted to the ledger account on the last day of each month, were as follows: January, $317.45; February, $287.50; March, $411.16; April ,$275.76; May, $471.12; June, $386.45. March 10. A discount taken on a bill which was not paid until after the term of discount, was not allowed, $26.11. May 25. A similar discount was not allowed, amoimting to $7.42. What were the total discounts on purchases, and what result would it affect if considered as a subsidiary account to the purchases account? (^220a) What result would it affect if considered as an income from capital? (1f2206) (2) Brown Brothers allowed sales discounts for six months as follows:. July, $326.65; August, $512.62; September, $387.90; October, $216.65; Novem- ber, $312.30; December, $516.80. Sept. 15. An error in calculating discount allowed was discovered, amounting to an over-allowance of $6.50. A similar over- allowance was discovered, November 23, ol $3.65. What were the total discounts on sales? (3) The following transactions affecting purchase and sales discounts ocaurred during the month of April. (Open two accounts.) April 3. Prepaid bill purchased, the discoimt amounting to $14.60. April 5. Allowed a discount on sale of April 2, $3.65. April 8. We prepaid a bill on which discount was $8.12 April 10. We allowed a discount for pre- payment of bill sold, $13.45 April 18. We allowed a sales discount, amount- ing to $6.41 April 20. We allowed a sales discount of $3.66 April 23. We prepaid a bill purchased, saving a discount of $5.75 April 26. We saved a discount by prepaying bill purchased, $6.66 April 30. We allowed a sales discount, amounting to $4.50. What were the Balances shown by the two accounts? Arithmetical Problems — Purchase and Sales Discounts. (1) The following purchase discounts were allowed us: January, $416.21; February, $213.20; March, $67.89. A discount amouhting to $24.83, deducted after the term of discount had expired, was not allowed. What are the net purchase discounts allowed us for the three months? TRADING STATEMENTS 69 2'. We allowed the following sales discounts: July $89.98; August $114.96; September $342.25; October $211.88; November $401; December $740.01. In one of these discounts an error of $55 was discovered and charged back. Another error of $30 was charged back. What was the amount of sales discoimts allowed to others? THE TRADING STATEMENT. 233. This statement is made up from the principal trading accounts (i. e., the inventory, the purchases and the sales accounts) and the various subsidiary trading accounts. This group of accounts contains all the facts relating to the costs of, and the returns from the commodities bought and sold. These facts are arranged in systematic order in the statement with full explanations and not infrequently they are accompanied and supported by various supplementary exhibits such as analysis sheets, comparative statements, etc. (See illustration, 11242) 233a. The explanations and illustrations of the trading statement, in this chapter relate to the trading statement and the accounts of an ordinary trading (mercantile or commercial) business in which merchandise is bought and sold for profit. The trading statement and special accounts of manufacturing and other lines of business will be treated later in this work. 234. The object of the trading statement is to show the gross trading profit or the gross trading loss from sales for the fiscal period represented (If 133). Any account which affects the gross trading profit or the gross trading loss resulting from the sale of merchandise properly belongs to and should be included in the trading statement. 235. The trading statement. when properly made shows the total cost of pur- chases and also the cost of merchandise sold on the debit side against the total or gross sales and the net returns from sales (proceeds) on the other side. 236. The cost of purchases is found by adding to the inventory on hand at the close of the last preceding fiscal period the purchases for the present fiscal period and any other items shown on the debit side of the purchases account or by the subsidiary accounts relating to purchases that have increased the cost of purchases. From their sum, deduct all items shown on the credit side of the purchases account or by the sudsidiary accounts relating to purchases that have decreased the cost of purchases. The difference is the net cost of purchases. (See illustration 1f40.) 237. The cost of merchandise sold is the net cost of purchases less the inventory at the close of the fiscal period, which is shown in the trading statement by deduct- ing the inventory from the net cost of purchases. 70 BOOKKEEPING AND ACCOUNTANCY 238. The returns from sales are found by adding to the gross sales for the pres- ent fiscal period, shown on the credit side of the sales account, any items shown on the credit side of subsidiary accounts relating to sales that have increased the total sales. From their sum deduct all items shown on the debit side of the sales account or by the subsidiary accounts relating to sales that have decreased the total sales. The difference is the net returns or proceeds from sales. "Net sales" is the differ- ences between the gross sales and any deductions therefrom for goods returned, allowances, or other charges. See illustration 40. 239. The difference between the two sides of the. trading statement, after deducting the inventory for the present fiscal period from the net cost of purchases on the debit side (or adding it to the credit side), represents the gross trading profit or the gross trading loss for the period. 239a. Note — The practice among American accountants is to deduct the closing inventory from the debit side in order to show as one item' in the statement the cost of the merchandise sold, which is the best practice, because it is upon the cost of the goods sold that the rate per cent of the gross trading profit or loss is calculated. The English practice is to add the inventory to the credit side. 240. The trading statement is made up from the principal and subsidiary trading accounts shown in the final trial balance taken before closing the ledger. The trading accounts constitute one of the three groups of accounts contained in the trial balance of a commercial or trading business, as explained in T[484. 241. The following is a list of the trading accounts and their balances as they appear in the trial balance shown in illustration 86, which is made up from the illustrative accounts contained in this text. It should be observed, however, that the balances shown by the various trading accounts do not always agree with the items shown in the statement, as the balances do not supply the detailed informa- tion required. In some instances, it is necessary to take the footings shown by each side of an account instead of the balances, and where various subsidiary items have entered directly into the purchases and sales accounts, if it is desired to show them separately in the trading statement, it is first necessary to classify and separate them on an analysis sheet. The analysis sheet is fully explained in 1[490. Illustbation ., J/^L ^7 t — -..- - _ yoxs^-M- •fr7-^^ vs .^ — i,/ JS ^_ /20 /;r3 sjl - •'// i.^^ TRADING STATEMENTS 71 VLLnoraATUw 3 2148 bu. Rye 4745 " Oats 2482 " Corn IFVEIITORY JIITUARY 31, 19 .84 .511/2 .64 1804.32 2443.67 1588.48 5836.47 242. The following illustration (40) shows the report form of the trading statement made up from the accounts contained in the section of the trial balance shown. iLLUbTRAlION 40. ^^rzrjy-a.^f^-t.'j'-i^^t^^^CeyiZi^i'yi^iyp-i^ [^^ /f C7!6iVc^Z-&^«'*<'^-z-2;^^ y/2-¥; 3f ^-£;i/^-*?^^4«J,ii^ jj , ji zoof /^ 249. It will be noted that when the trading account is opened in the ledger it will be debited and credited for the same amount and, therefore, will balance. For this reason the trading account is frequently omittedfrom the ledger as an unneces- sary account, in which case the two journal entries may be combined into one EXEBCISES IN TRADING STATEMENTS 75 by omitting the items debiting and crediting the trading account, as shown in the following illustration 42 of the preceding entries combined as one entry. The only objection to this method is that it is impossible to indicate the opposite account debited or credited in making the entry in the various ledger accounts. "Trading % to close" will overcome this objection. Illustration 42. Xn:i-^'7--t^c-c:z-'t-^ J/, yf ^2i^_ ^iZ^^'t-f'z^^:^^!^ -J /, /^ \^<..e..t-£.i«^-C*-fc<.*L£-^<=^^:j-<^s?-?^ , _ . . - - ...tCUL^e. ^ «i6n^€a. Debit selling expense accounts for the cost of uses, of services, and of materials employed in selling goods. 266&. Credit selling expense accounts for the returns from any uses, services, or materials previously charged to these accounts. 267. The various applications of the rule are as follows: 268. Debit selling expense accounts under appropriate titles, — For salesmen's salaries. For salesmen's commissions. For salesmen's traveling expenses. For cost of sample cases, sample goods, etc. For cost of premiums given away to stimulate the sale of goods. For the cost of all advertising. For delivery expenses and charges, drivers' wages, etc., in retail and depart- ment stores, etc. (11289) For branch office expenses, mercantile references, etc. For outward freight, express and dray- age charges (1[278) For wrapping materials such as paper, twine, etc., and for wrappers' wages. For storage in outside warehouses, of goods ready for shipment. 270. Observe that in every instance selling expense accounts are debited for the cost of the uses, services and materials expended in selling goods. 9- h. k. 269. Credit selling expense accounts under appropriate titles, — 1. For any returns for uses, services, and materials charged to these accounts or employed for other accounts, or for any overcharges or rebates on items charged to these accounts. SUGGESTION. Separate accounts may be kept for any one or more of the items indicated in the opposite column, depending upon the extent of the business and the number of items of the same kind which occur. When separ- ate accounts are kept, they are treated in every respect exactly the same as you have been instructed for the sales expense account. Freight account 1f278 and de- livery expense account 1(289 are examples of separate selling expense accounts. 271 . Observe that in every instance selling expense accounts are credited for the returns from the cost of any use, service, or material charged to these accounts. 272. When separate accounts are kept for any one or more of the items enum- erated in 268a to A; inclusive, appropriate titles are indicated by the words in italics. 273. Transactions Illustrating the Various Applications of the Rule (^266) FOR Debiting and Crediting Selling Expense Accounts. Mr. Raymond's transactions affecting the sales expense account are as follows: Jan. 3. He paid for sample cases, $22.35. (^268d) Jan. 4. He paid for premiums, $27.65. (1[268e) Jan. 8. He paid for advertising, $39. PKOPIT AND LOSS ACCOUNTS 83 (1f268/) - - Jan. 31. He paid for delivery charges, $35. (*f268?) - - Jan. 31. He paid salesmen's salaries, 1120 (l[268a); salesmen's commissions, $10 (1[2686) ; salesmen's traveling expenses, $30.90 (11268c) ; for mercantile references. $6 (^268/i) ; for outward freight on goods sold f .o.b. delivery point, $12.50 (1|268i) ; for wrapping paper and twine, $8 (1[268j) ; for storage in an outside warehouse of goods ready for shipment, $6. (1I268fc) Received cash for one small sample case, $2.20. (1f269Z) What was the cost of the various selling expenses for the month? EXERCISiS. 273o. Prepare a ledger account for the preceding transactions, as follows: (1) Read and study each transaction carefully, referring to the special appli- cation of the rule for debiting and crediting purchases account indicated by the paragraph number. (2) Apply the rule (11266) and make the proper debit and credit entries in the sales expense account, indicating in the explanation column the nature of each item, as shown in the illustration. When completed, submit for approval. Illustration 49. '-jUxA^ 27 (,s 3 / /y^i^ ^i,£^^C^tC'y^'C.e^ 3f ^ra^^J'^y-J^Zc^t'^t^ 30 IfC /2 so -- '- - i --{ - - I 1 ! - - — j -,-- 1 — t — — 2736. Illustration 49 shows the account as it appears January 31, when footed^ preparatory to taking the trial balance. 273c. Illustration 50 shows the account as it appears after the profit and loss statement has been prepared and the journal entry, closing the profit and loss accounts, has been posted, at which time the accounts ruled and footed, as shown. BOOKKEEPING AND ACCOUNTANCY J/ /2 S'O ^^^=^«^ jt/p -1 ^ /}-^= To Close Selling Expense Accounts. 274. The object of these accounts is to show the net cost of the various expenses of the sales department and, incidentally, the amount that is to be deducted from the gross selling profit, as sho^vn by the trading statement, in order to ascertain the net selling profit, a& shown by the profit and loss statement. 275. The difference between the two sides of a sales expense account shows the net cost of making sales for the period, which is a loss that should be shown as a separate item (or items) in the profit and loss statement. 276. To close. After the profit and loss statement has been prepared, the sales expense accounts are closed by a journal entry ijiade up from the profit and loss statement. When the closing item to each sales expense account has been posted, which should balance the account, rule the closing lines in red ink as shown in illustration 50, and enter the footings in black ink. 276a. in 1f465. Resource and liability inventories affecting these accounts are explained Exercises in Sales Expense 'Accounts. 277. Prepare ledger accounts showing the account closed like illustration 50 for the following examples, applying the rule (1[266) for each transaction. Indi- cate briefly in the explanation column the nature of each item. (1) Dec. 31. The sales expenses of the Richards Grocery Company, for the year are as follows: Salesmen's salaries, $1500; Lalesmen's traveling expenses, $846.15; commission allowed to agents, $341.60; sample cases, $85; sample goods, $216.25; premiums. PROFIT AND LOSS ACCOUNTS 85 $180.67; advertising circulars, $218.90; newspaper advertising, $116.45; postage for mailing advertising matter, $190; printing order books, $60; wages of drivers delivering goods, $480; horse feed, $126.60; horse shoeing, $23.25; delivery wagon repairs, $31.75; branch office salaries, $720; wrapping paper and twine,$65.30; wages of wrappers, $211.60; show-room rent, $60. What is the net cost of the various expenses of the sales department for the year? (2) The selling expenses for the Jones Mercantile Company for the half year ending June 30 are as follows: Salesmen's salaries, $1200; traveling expenses, $618.26; sample cases, $45; sample goods, $185.30; premiums, $216.50; advertising, $175.16; order books, $25; wrapping paper, $45.60; delivery automobile supplies and repairs, $213.70; wages of chauffeurs, $600. The services of a salesman were used as a purchasing agent to the amount of $300. (1f269Z) What is the net cost of the sales expenses for the period? Arithmetical Problems — Sales Expense Account. (1) The Ritter Grocery Company's selling expenses for the quarter ending September 30 are as follows: Salesmen's salaries, $900; salesmen's traveling expenses, $316.75; sample goods, $165; premiums, $137.50; printed matter for advertising, $111.60; postage $80; drivers' wages, $300; horse feed, $75; horse shoeing, $18; wagon repairs, ,$26.30. Sample goods were sold amounting to $57.50. The delivery wagon was used in hauling goods purchased to the amount of $78.75. Wrapping paper was used in re-casing goods purchased to the amount of $12. What is the net cost of the selling expenses for the period? (2) The Brown Shoe Company's sales expense accounts show the following footings for the fiscal year ending December 31: Salesmen's commissions %, debit, $1567.18; credit, $9.60. Sample goods %, debit, $216.40; credit, $21.50. Advertising, debit, $262.81. Delivery expense %, debit, $387.90. "Freight out" %, debit $86.50; credit, $4.12. . What is the net cost of the selling expenses for the period? OUTGOING FREIGHT EXPRESS DRAYAGE, ETC. 278. "Freight" or "freight out" is the heading used where a separate account is kept for freight charges on goods sold, which is a selling expense. (1I268i) It 86 BOOKKEEPING AND ACCOUNTANCY includes all freight, express, drayage, cartage, and other charges incurred in the delivery of goods to the consignee by the consignor (i.e., the seller to the buyer) from the time the selling expenses begin, which in a wholesale or jobbing business is from the time when the goods are made ready for delivery to the local customer, or on board cars for shipment, or in a retail business from the time the goods are ready for sale . 279. The object is to show (1) the cost of freight, express and drayage charges paid on goods sold, (2) the amount (if any) of these charges rebated and returned (overcharges from mistakes in rating, etc.), and (3) from these to determine the amount to be deducted from the gross profit on sales to ascertain the net profit on sales in the profit and loss statement, which is shown by the difference between the two sides of "Freight Out" account, which should always show a debit balance. 280. This is the only separate freight accoimt usually kept, as freight on pur- chases is properly chargeable to that account, therefore, "freight ' ' account is generally understood by accountants to relate only to freight outward. This account can be omitted by debiting the items directly to sales expense account (lf268'i) Rule fob Debiting and Crediting "Freight Out" Account. 281. Debit for costs: credit for returns. The various applications are: 282. Debit freight out account, — a. For all freigiit, expres.s and drayage charges paid by us on goods delivered to local customers and on goods after they are placed on board cars for ship- ment to out of town customers. b.. For all freight, express and drayage bills paid by others for our account on outgoing goods. 284. Observe that in every instance the account is debited for the cost of charges. 283. Credit freight out account, — c. For all rebates or other returns on charges previously debited to this account. 285. Observe that in every instance the account is credited for any returns. 286. The transactions for the items shown in the following account are not given, as they are all similar and easily distinguished from other selling expenses. Illustration 51. PROFIT AND LOSS ACCOUNTS 87 2^7. The difference between the two sides of "Freight Out" account will show the cost of freight, etc., on goods sold, which is a selling expense that should appear as an item in the "sales expense" section of the profit and loss statement. (Illustration 87) 287a. Note that the difference between the two sides of a " Freight In " accoimt will show a debit balance, which should appear as an item increasing the cost of pur- chases in the trading statement. 288. To close. After the profit and loss statement has been prepared, this account is closed by a journal entry which is made up from the entries appearing in the profit and loss statement. When the closing item for this account has been posted, which should balance it, then rule the closing lines in red ink and enter the footings in black ink. 288a. As this account is in every respect similar to the sales expense account, shown in illustrations 49 and 60, separate exercises are not deemed necessary. 288&. Resource and liability inventories affecting this account are explained in 11465. DELIVERY EXPENSE ACCOUNT. 289. Delivery expense account is a separate account for a class of items that, if preferred, may be charged directly to sales expense account. (1f2683) It is kept to show the cost of maintaining and operating the "delivery equipment, " (If 428) such as costs of repairs and renewals of the equipment, feed supplies, drivers or chauffeurs' wages, gasoline and oil for automobiles, and all other items that enter into the cost of delivering goods. 290. The cost of delivering goods is a selling expense that should appear as an item in the "sales expense" section of the profit and loss statement, which is the reason for keeping a separate account for the items charged to it. 290a. Delivery expenses must not be confused with drayage charges. De- livery expenses include all charges on outgoing goods from the time the goods are ready for delivery to the local customer or on board cars for shipment, while drayage charges include all charges on incoming goods from depots and wharfs up to the time the goods are ready for sale, which should be included in the cost of purchases in the trading statement. (11141, 111446, 11146) 2906. When the same teams, automobiles, etc., are used for hauling the goods received as well as the goods delivered, delivery expense may be charged for the whole amount during the fiscal period. At the end of the fiscal period these expenses should be pro rated. A better method is to pro rate the expenses monthly, because the division would likely be more nearly correct when made monthly than when permitted to lie over until the end of the fiscal period. 88 BOOKKEEPING AND ACCOTJNTANCT Rule for Debiting and Crediting Delivery Expense Account. 291. Debit delivery expense account for costs: credit for any returns from items charged to that account. 292. The various applications of the rule are as follows: 293. Debit delivery expense account, — a. For the cost of repairs and renewals of the delivery equipment. b. For current supplies consumed, such as feed and bedding for horses, gasoline and oil for automobiles, etc. t. For drivers' wages, bridge or ferry tolls, and for any other items that enter into the cost of delivering goods. 294. Credit delivery expense account, — d. For any returns from the sale of items previously charged to this account. e. For any returns or income for the use of the delivery equipment by others. /. For the proportion of these expenses which should be charged to the pur- chases account for drayage on incom- ing goods. 295 . The difference between the two sides of a delivery expense account shows the net cost of delivery expense for the period, which is a loss that should be shown in the sales expense section of the profit and loss statement. ' 296. To close. After the profit and loss statement has been "prepared, in which the results shown by this account should appear as a separate item in the sates expense section, it is closed by a journal entry made up from the profit and loss statement. When the closing item to the account has been posted, which should tialance the account, rule the closing lines in red ink and enter the footings in black ink. 296a. in 1f465. Resource and liability inventories affecting this account are explained ADMINISTRATION EXPENSE ACCOUNT. 297. Administration expenses are the expenses incurred in the general manage- ment of a business considered as a whole, such as the salaries of officers and man- agers and of office help, the cost of office supplies, postage, stationery, travel- ing expenses, and such other miscellaneous expenditures as relate to the general management of the business. 297a. Salaries of officers and office help and traveling expenses represent the cost of services rendered. Postage represents the cost of a service rendered by the government. Office supplies, stationery, etc., represent the cost of materials used. 298. A single account under the head of "Administrative Expense " may be kept. If it is desired to show these expenses separately in the profit and loss state- ment, the items may be classified on an analysis sheet; or separate accounts with the various classes of items may be kept in the ledger, if preferred. PROriT AND LOSS ACCOUNTS 89 Rule for Debiting and Crediting Administrative Expense Accounts. 299. Debit administrative expense accounts for costs: credit for returns. 300. The various applications of the rule are as follows : 301. Debit an administrative expense 302. Credit the proper administrative account, under an appropriate title,— expense account,— o. For officers and managers' salaries. /. For any returns from the services or 6. For salaries or wages of office help. materials charged to that account, c. For office supplies, stationery, postage, or for' any overcharges or rebates on telephone and telegram charges. items charged. d. For traveling expenses of officers or employees of this department. e. For any miscellaneous expenses of the administration, such as legal expenses, directors' fees, etc. 303. Observe that in every instance 304. Observe that in every instance administrative expense accounts are administrative expense accounts are debited for the cost of services and credited for the returns from the cost materials used in that department. of any use, service or material charged to them. 305. Transactions Illusikating the Various Applications op the Rule (t299) FOE Debiting and Crediting Administrative Expense Accounts. Transactions for January affecting administrative expense account are as follows : Jan. 8. Paid for office supplies, $17.50. (1[301c) - - Jan. 12. Paid traveling expenses, $3.60. (IfSOld) Jan. 16. Paid for legal advice, $10. («f301e) - - Jan. 24. Paid for telegrams, $1.60. (IfSOlc) - - Jan. 31. Paid salaries of office help, $100. (^3016) Jan. 31. Paid manager's salary, $150. (If 301a) Jan. 31. The services of one of the office clerks were loaned to the sales department to the amount of $7.70 (*|[302/). What was the cost of the administrative expenses for the month? (1[307) EXERCISE 305a. Prepare a ledger account for the preceding transactions. (1) Before entering each transaction, refer to the special application of the rule indicated in the paragraph num.ber. (2) Then make the proper debit and credit entries in the administrative expense account, applying the rule ^[299. When completed, submit for approval. 90 BOOKKEEPING AND ACCOUNTANCY Illustration 52. To Close Administbative Expense Accounts. 306. The object of administrative expense accounts is to show the net cost of the various expenses of the administration department. 307. The difference between the two sides of an administrative expense account is the net cost of the administrative expenses for the period covered in the account, which is a loss that should appear as a separate item (or items) in the profit and loss statement. 308. To close. After the profit and loss statement has been prepared, admin- istrative expense accounts are closed by a journal entry made up from the profit and loss statement. When the closing item to any administrative expense account has been posted, which should balance the account, rule the closing lines in red ink as shown in illustration 52 and enter the footings in black ink. . 308a. Resource and liability inventories affecting these accounts are explained in 1f465. Exercises in Administrative Expense Accounts. 309. Prepare ledger accounts showing the accounts closed like illustration 52 for the following examples, applying the rule (*[299) for each transaction. No illustration is shown, as this account is in every way similar to the one shown in illustration 52. Indicate briefly in the explanation column the nature of each item. (1) The Adams County Glass Company paid salary of manager, $3000; salary of bookkeeper and stenographer, |l200; stationery and oflnice supplies, $157.16; postage, $122; telephone and telegrams, $71.65; directors' fees, $500; legal expenses, $200; extra office help, $150; traveling expenses of general officers, $346.18. They received a rebate on railroad ticket, $12.50. Received for use of our telephone for long distance calls by other people, $2.60. GENERAL EXPENSE ACCOUNTS 91 What was the net cost of administrative expenses for the year? (2) The Sun Mfg. Company's administrative expenses were as follows: Salaries of management, $5000; salaries of office help, $1800; stationery and office supplies, $142.75; postage, $130; telephone and telegrams, $81.50; legal expenses, $50; miscellaneous traveling expenses, $86.19. What was the net cost? Arithmetical Problems — Administrative Expense Accounts. (1) The Jones & Brown Mfg. Company's expenses for the year were: Salary of manager, $4000; salaries of office help, $1600; stationery, $96.45; postage, $150; telegrams and telephone, $92.35; directors' fees, $700; legal expenses $380; traveling expenses, $167.18. (2) The Midland Rolling Mill Company paid manager's salary, $2500; oflBce help, $975; letter heads and envelopes, $60; postage, $72.30; telephone and tele- grams, $61.25; directors' fees, $250; attorneys' fees for collecting accounts, $75; traveling, $30; banquet for officers, $75. GENERAL EXPENSE ACCOUNTS. 310. An expense is the cost of any use or service from which no definite per- manent value is derived; the cost of anything that is used up in conducting a busi- ness. General expenses consist of all expense items which are not included in the sales, administrative, manufacturing or other special expense accounts, such as the cost of rent, fuel, light, taxes, insurance, and miscellaneous items of similar character. 311. A single account under the head of "General Expense, " or "Expense, " may be kept, or separate accounts may be kept in the ledger with any one or more of the items, if desired. Insurance expense account 1[340 is an example of a separate general expense account. If a single account is kept and it is desired to showtheitems separately in the profit and loss statement, they may be classified on an analysis sheet. 311a. A single account for all expense items, including selling, administra- tive, manufacturing, and all other special and general expenses, may be kept under the heading, "Expense," if it is not convenient or desirable to keep separate accounts for the different classes of expense items. This is frequently advisable in small concerns. When the expense account is so kept, the items may be subdivided and classified to any extent desired, either monthly, quarterly, or annually, on analysis sheets (1[490), which permits of the various statements being prepared showing as much detail as if separate accounts were kept in the ledger for each class of expense items. 92 BOOKKEEPING 4.ND ACCOUNTANCY 3116. It should be remembered that there is no other good reason for opening separate accounts for the different expense items than to show the cost of the various expenses separately in the trading and profit and loss statements. When detailed information regarding expenses is not necessary in the manage- ment of a business, it is a useless waste of time to classify expense items under many accounts. Where the volume of business is of considerable size, however, separate accounts should be kept with selling, administrative, and general expenses. Rule fob Debiting and Ckeditinq Genebal Expense Accounts. 312. Debit general expense accounts for costs: credit for returns. 313. The various applications of the rule are as follows: 314. Debit expense, under a general or 315. Credit expense, under a general or special heading, — special heading, — a. For rent, fuel and light, taxes, insurance b. For any returns from expense items and other miscellaneous items of simi- charged to general expense accounts, lar character. 316. Observe that in every instance the 317. Observe that in every instance the account is debited for the cost of a use or account is credited for the returns from service received. a use or service previously charged to the account. 318. Separate accounts may be kept for any one or more of the items shown in italics in T|314a. 319. Teansactions Illusteating the Vaexous Applications of the Rule (11312) Fort Debiting and Cbediting Genebal Expense Accounts. The following are the general expenses paid for the month: exebcise. Jan. 10. Coal, 111.50. (1[314a) - - Jan. 14. Team License, $3.75. - - Jan. 18. Letter Box, 11.50.- ~ Jan. 31. Electric light, $3.81; rent, $90; rented space, sub-let, $25.00. (1I315&). What are the total general expenses for the month? (1[322). 320. Prepare a ledger account for the preceding transaction -like illustration 53, and present for approval. GENERAL EXPENSE ACCOUNTS Illustration 53. -.,kSi2n M .iz/^ Ci^i2^£,i!3a.d^. ^^gy .J.I7 Ct^Tty.' _/Sl<-^I^2ii!::.^<&2i^ 3 / iJr'A^^^^c.^i-A^ , ^JSi^y^ U-L\£m. d^y ^,1 J . L - I 'fJ Ti. "ii!^^ -l^^i^n^ — 2S ' 10 sL - To Close General Expense Account. 321. The object of this account is to show the cost of the different general expenses incurred in conducting the business. 322. The difference between the two sides of a general expense account shows the net cost of the general expenses for the period, which is a loss that should appear as a separate item (or items) in the profit and loss statement. 323. To close. After the profit and loss statement has been prepared, general expense accounts are closed by a journal entry made up from the profit and loss statement. When the closing item to any general expense account has been posted, which should balance the account, rule the closing lines in red ink, as shown in illustration 53, and enter the footings in black ink. 323a. When insurance premiums are charged to general expense account for policies which do not expire within the fiscal period represented in the account, the premium value of the unexpired policy should be inventoried and general expense account should be credited for the amount. (Read "Resource Inventories," ^468a) This method will have the result of placing the cost of insurance in the period to which it belongs. Another method of disposing of insurance, which is preferred by accountants, is given under the heading of "Insurance Account," «[327. 3236. in 1f465. Resource and liability inventories affecting these accounts are explained Exercises in Geneeal Expense Accounts. 324. Prepare ledger accounts for the following, showing the accounts closed like illustration 53, indicating briefly in the explanation column the nature of each item entered. 9« BOOKKEEPING AND ACCOUNTANCY (1) The following are the expenses of Arthur Jones for January: Rent, $100; coal, $17.50; gas, $30; electric light, $6.50; insurance premiums paid, $48; taxes, $75.84; city directory, $9; street car fares, $7.15. (2) Charles F. Davison had the following expenses for February: Rent, $125, coal, $5.60; gas, $45.60; electric light, $8.96; taxes, $100; rebate on gas bill $2.15; city directory, $8; car tickets, $5. Arithmetical Pkoblems— General Expense Accounts. Charles A. Bell's expenses were as follows: Rent, $125; coal, $26.50; gas, $27.50; taxes, $57.21; insurance premiums paid, $36; extra space rented, $25; directory, $8. What was the net cost of expenses for the period? George Robinson had the following expenses: Rent $200; gas, $113.75; electric light, $21.75; taxes, $98.43; cleaning windows $2 . 50; insurance, $75; desk space rented to others, $12; city directory, $5; meals for employees, $12. What was the net cost? Edward Kelly paid during the month of April the following expenses : Rent, $35; gas, $8.75; electric light, $4.50; taxes, $7.56; insurance premium, $12; rebate on insurance premium, $4; street improvement assessment, $14.87; city directory, $6. What were the total expenses? INSURANCE ACCOUNT. (Unexpired Insurance Premiums) 325. Insurance is a protection against loss which is guaranteed by insurance companies upon the payment of a premium based upon a percentage of the amount insured. 326. There are two methods of disposing of insurance transactions. One is to charge the premiums paid to the general expense account, as explained in 1|314a, 1(318 and 1f323a. INSURANCE ACCOUNT \)b 327. 'Ihe preferred method generally followed by accountants, which is the method here explained, is to debit in; urance account with the cost of all premiums paid on policies, whether fire, boiler, tornado, or indemnity, and to credit that account, at the end of each month, quarter or year, or at the end of a fiscal period, for the premium value of the insurance which has expired or has been canceled, the balance shown by the account being a resource (asset) equal to the value of the uri^ expired premium value of the insurance policies in force. When all policies have ex pired or have been canceled and have been credited, this account will balance. 328. The insurance which has expired under this method is debited to slv insurance expense account, which is explained in the next chapter, ^340. 329. The premium value of the insurance which has expired is found by divid- ing the premium on each policy in the proportion of the expired time (in months) to the total time covered in the policy. For instance, in a policy for one year, the premium on which is $75, the premium value which will expire for each month is one-twelfth of $75, or $6.25. If, when the books are closed at the end of a fiscal period, seven months of the twelve for which the policy is written have expired, the expired premiiun value of the poUcy would be $43.75, which should be charged to expired insurance accoimt. This would leave an unexpired premium value on that policy of $31.25, which would be shown in the balance of the insurance 8,ccount. 330. The purpose of crediting insurance account monthly or at the close of each fiscal period for the expired premium value of the policies is to have the cost of insurance for each month or fiscal period appear in the trial balance or the profit and loss statement covering the period for which the protection was received. Rule for Debiting and Crediting Insurance Account. 331. Debit insurance account for costs: credit for returns. 332. The various applications of the rule are as follows: 333. Debit insurance account, — 334. Credit insurance account, — a. For the cost of all premiums paid in 6- For the proportion of the expired advance. premium value of insurance which hasi • expired or been canceled in the month or the fiscal period covered by the trial balance or by the profit and loss statement in which it is to appear. c. For any rebates on premiums allowed or for any returns from open policies. d. For allowances on premiums of can- celed policies. 96 BOOKKEEPING AND ACCOUNTANCY 335. When premiums are not paid until the expiration of policies, i.e., ncd paid in advance, they should be charged directly to insurance expense account (If 341) or to the general expense account. 336. Transactions Illustrating the Rule (1f331) for Debiting and Crediting Insurance Account. Jan. 1. Placed insurance in the American Insurance Company for policy No. 21316, at the rate of $1.50 per $100, for one year — insurance premium paid, $90. (1f333a) Jan. 81. The expired premium value of the above policy for one month is one-twelfth of $90, or $7.50. (3346) What is the unexpired premium value of the policy Jan. 31, and the expired premium value? (1f337) exercise. 336a. Prepare a ledger account for the preceding transactions. Illustration 54. OatvX / ^, /Si,t>yn yUi^yyt^ t^.^, I / , /^=I..^g,^-;,e-t^^ 337. The difference shown by the insurance account is the current premium value of the unexpired policies on hand which should appear as a resource in the state- ment of resources and liabilities. 338. To close. Aninsuranceaccount is not usually closed unless it is desired to show the value of the premiums on imexpired policies in one item, when the difference should be entered in red ink, or when it is necessary to forward the account to another page. To close the account, first find the difference, then enter on the credit side in red ink, (a) the amount of the difference, (b) the date, and (c) the word, "Balance." Then rule and foot the account, as shown in illustration 54, and bring down the balance on the opposite side (in black ink), entering the date of the next business day. If it is necessary to forward the account to anothei page, instead of bringing the balance down, forward it to the opposite side of a new INSURANCE ACCOUNTS 97 page, entering the number of the new page to which the account is transferred in the page column. In the new account in the page column enter the page from which the accoimt was transferred. When all insurance policies have expired and have been charged off, this account will balance. ExEKcisES IN Insurance Accounts. 339. Prepare ledger accounts for the following, showing the accounts closed like illustration 54, bringing down the balance on the opposite side of the account, as instructed in 1f338, and present for approval. (1) Jennings Brothers placed the following insurance on their stock: March 1, $8000, for one year at 1%, $80 (1[333a) ; Aug 1, $6000, for one year at li%,$75;Nov.l,$1000,for oneyearatli%premium,$12.50. At the closeofthe fiscal year, December 31, the expired premium value on the policy of March 1, for ten months, at $6.66§ per month, is $66.67; on the pohcy of August 1, for five months, at $6.25permonth, $31.25 ;onthe pohcy of November 1, for two months, at $1.04 per month, $2.08; total, $100. (1[3346) What is the premium value of the unexpired policies on hand? (1f337) (2) Harris Carter placed insurance on his stock as follows: January 2, $5000; March 15, $2000 ; April 1, $3000. Each policy is for one year, and the premium is at the rate of 96* per $100. July 1, he canceled the policy of January 2 for the unex- pired time, receiving rebate, $20, being at the rate of m per $100 (1f334&, lf334d). What was the unexpired premium value of the policies in force at the end of the fiscal year, December 31, and what was the balance shown by the insurance account? (3) Johnson & Davis placed insurance on their stock as follows : Jan. 4, $4000; Feb. 28, $2000; March 25, $6000; July 7, $3000; Nov. 1, $2000; Nov. 1, $2000. Each policy is for one year from date, and the premium is at the rate of $1.08 per $100. They desire that the insurance account be credited monthly for the amount of the expired premium value on these policies. What is the current premium value of the unexpired policies on hand Dec. 31? Note: To find the exact expired piemium value for less than a month, divide the amount for one month on the basis of thirty days. If exact value is not required, if less than one- half month, do not count; if one-half month or more, count as one month. 98 BOOKKEEPING AND ACCOUNTANCY INSURANCE EXPENSE ACCOUNT. {Expired Insurance Premiums.) 340. Insurance expense account is kept to show the amount of premiums which have expired during the month or other period represented in the account, which have, therefore, become an expense. The debit items to this account are contra to the credit items in the insurance account, i. e., this account is debited and insurance account is credited monthly, or for any other period, for tlie pro rata expired premium value of insurance policies. Insurance expense account is, there- fore, in a sense, a companion account of the insurance account. 341. Insurance expense is also debited with all assessments on mutual policies for premiimis that are not paid until the expiration of policies, such as "blanket" policies, etc. Rule fob Debiting and Crediting Insubance Expense Account. 342. Debit insurance expense account for costs: credit for returns. 343. The various applications of the rule are as follows: 344. Debit insurance expense, monthly or at the close of the fiscal period, — a. For the expired premium value of insurance policies in force. 6. For premiums paid on mutual policies, or for premiums not paid until expira- tion of policies. 345. Crea.o insurance expense,- — c. For any return- from payments on expired promiums charged to this account. 346. Transactions Illustrating the Various Applications of the Rule (lf342) FOR Debiting and Crediting Insurance Expense Account. Jan. 31. As shown in the second transaction, 1f336, the expired premium value of the policy referred to for one month is $7.50. (1f344a) Illustration 5b. ^i^ aCrCt'CL' - .!it^-et.^>%>^ ^X.^,£^t^Z^ ^=^t.<&«.«'l.£<:^ <^»*i-<:»-t-c-»t-^ fc^^w-^ C^i:^6^-t.A./ ' /^ '^79^ p^ ?9^,£jX.^ik^f'&^^ /U ^^ -^^ ! fol?^-t>^^ ^ / MAy J/Oit^ * - y^. ?Ha^/f .™^ i ro INSURANCE EXPENSE ACCOUNT 99 EXERCISE. Prepare a ledger account showing the expired premium value of the policy for Jaaiuary, like illustration 55. IlXtJSTBATION 55. ^j'-^i^^-e^ =^ J fe»v;.^/ , (tg^t/u^jjlt^^.Am .^t^e' ^^^^fllrJk^tiA "iAn. To close. Insurance expense account shows the expired premMmwaZwe of the insurance policies in force for the period covered in the account, which is a loss that should appear as a separate item in the profit and loss statement. See illus- trations 64 and 65. After the profit and loss statement has been prepared, this ac- CQunt is closed by a journal entry made up from that statement. When the closing item to the account has been posted, which should balance the account, if more than one item appears on either side of the aceoimt, rule the closing lines in red ink and enter the footings in black ink as shown in illustration 54. If but a single item ap- pears on each side of the account, rule the closin'i" lines as shown in illustration 55, as there are no footings to be entered. 348. This account may be omitted from the ledger by chPTging the items to the general expense account. 349. Prepare ledger accounts showing the expired premium value on policies named in transactions 1, 2, and 3, If 339, and present for approval. 350. The following is a simple form of an insurance record book, showing the monthly expiration of premiums. By omitting the columns for each month, this book may be similarly used to show the expired premium value on insurance poli- cies at the close of any fiscal year or period. Jk'~v' JiU- ?Ha^ CZi^ ?H^ J''~^ ,P^^ "^2.^ J'.e^ 0-c^ ?Z,»^ -i&^c- /p< — tti, iiii- 1 _JjC___Si_ 'ii- Afli ujfy — 4m_ VL iJi. iJ-L- 4^J- M jj: — an — 4^_. fj- 100 BOOKKEEPING AND ACCOUNTANCY INTEREST AND DISCOUNT. 351. The use of money is interest. When the use of money is paid for after the use is received, it is called interest; when the use is paid for before, it is received it is called discount. Discount is interest paid in advance. This is really the only differ- ence in the terms and for that reason a single account under the title of "Interest" is usually kept for both interest and discount. Separate accounts may be kept with "Interest " and with " Discount, " or they may be combined under the head of " In- terest & Discount," or the "interest derived from a particular source maybe kept in a separate account, as "Interest on Borrowed Capital," or "Interest on Loans." 351a. Illustration. If A borrows $100 from Bfor one year at 6% interest, at the expiration of that time {after he has received the use or interest) he will return $100 to B plus $6, or $106. The $100 is in payment of the loan. The $6 is in pay- ment for the use (interest) of $100 for one year. If the $6 is deducted from the $100 when the loan is made, it is then called discown^, because it is paid in advance, or before the borrower has had the use of the money. 352. In a bookkeeping sense interest is understood to refer to money borrowed to increase the capital of the business or to money loaned from the surplus funds of the business. Interest on loans should be distinguished from discounts on pur- chases and sales. (1f214) 352a. Interest on partners' capital is not, strictly speaking, an expense of con- ducting the business and therefore should not be debited to interest account . Instead it is generally treated as a direct charge to profit and loss account. Interest on part- ners' capital may be eliminated entirely from both the interest and the profit and loss accounts by considering the total interest due the partners as a liability of the firm, debiting each partner for his share and crediting each partner for the interest owed to him. 353. Interest is calculated on interest bearing notes from the date on which they begin to draw interest to the date they are due. Discount is calculated for the exact number of days from the date of discount to the date due. Interest bearing notes are discounted for the amount of the note, which is the face of the note plv^ the interest. The amount of the note less the discount equals the proceeds. On open accounts interest is calculated from the date on which the account (or items) is due until the date on which it is paid. 354. A clear understanding of interest will be had in connection with any trans- action if the student will ask the question, "Do we receive the wse of money borrowed or loaned, or do we give the use of it?". If we receive the use, it is a debit to interest account (If 28) ; if we give the use, it is a credit (1129). 355. The use received or given must not be confused with the money received or paid. It is the use that is received or given, and the use is paid for in cash or otherwise like any other commodity. interest and discount . Rule for Debiting and Crediting Interest Accounts. 356. Debit interest accounts for costs: credit for returns. 101 356a. Debit interest accounts for the cost of the use of money received. 356&. Credit interest accounts for the returns from the use of money given. 357. The various applications of the rule are as follows : 358. Debit interest, under the proper title, — o. For all interest accrued and owing to us from others on notes receivable, *bonds, accounts, or other claims at the beginning of business, which will be credited to this account when received. h. For the use of money (interest) received by us on our notes (notes pay.), accounts etc., and for which we pay or allow credit. c. For the use of money (discount) re- ceived by us on notes and time drafts that are discounted for us by others. d. For the use of money (discount) received by us, when others prepay their own notes or acceptances (notes rec.) in our favor. e. For the use of money received by us (discount) on notes and drafts we transfer to others before maturity, for purchases or on account. /. For accrued interest owing to others at the close of the fiscal period, as shown by the inventory of accrued interest payable (1[4686). g. For accrued interest owing to us at the close of the last preceding fiscal period, as shown by the inventory of accrued interest receivable. 359. Credit Interest, under the proper title,— h. For all interest accrued and owing to others on notes payable, *bonds ac- counts, etc., at the beginning of busi- ness, which will be debited to this account when paid. i. For the use of money (interest) given to others on their notes (notes rec.) accounts, etc., and for which they pay or give us credit. j. For the use of money (discount) given to others on their notes and acceptances that are discounted for them by us. k. For the use of money (discount) gi"en to others, when we prepay our own notes (notes pay.) in their favor. I. For the use of money (discount) given to others on notes and drafts they transfer to us before maturity for pur- chases or on account. m. For accrued interest owing to us at the close of the fiscal period, as shown by the inventory of accrued interest receiv- able (11468a). n. For accrued interest owing to others at the close of the last preceding fiscal period, as shown by the inventory of accrued interest payable. "Interest on bonds is generally recorded in a separate account, because it is always shown separately in the profit and loss statement. Interest on bonds should always be accrued monthly. 360. Observe that in every instance the account is debited for the cost'ot the use of money received. 361. Observe that in every instance the account is credited for the returns from the use of money given. lifj BOOKKEEPING AND ACCOUNTANCY 36?- Transactions Illustrating the Various Applications of the Rule (1356) FOR Debiting and Crediting Interest Accounts. Transactions for January affecting interest account are as follows : Jan. 1. Interest accrued and owing to us from others at the beginning of busi- ness, $9.17. (1358a) Jan. 1. Interest accrued and owing to others at the beginning of business, $3.47. (1359/^) Jan. 5. Paid for interest on a note maturing today, $3.65. (1358&) Jan. 7. Our note was discounted at bank at 30 days, amount of discount, $2.50. _ (1358c) Jan. 9. Received payment for note in our favor, and also the interest amounting to $4.12. (1359i) Jan. 10. A customer prepaid his note in our favor less discount to maturity, amoimt of discount, $1.17. (1358d) Jan. 12. As an accommodation we discounted a friend's note for $250 at 30 days, amount of discount being $1.25. (1359j) Jan. 14. We prepaid our note in favor of B. A. Watson less dis- coimttomaturity,amountof discount, $3.27. (1359A;) Jan. 15. Hamilton& Company have transferred to us, on account, a note in their favor less dis- count to maturity, discount $5.66. (1359Z) Jan. 17.. We transferred to Mitchell Sons, on account, note in our favor less discount to maturity, the dis- count being $1.12. (1358e) Jan. 31. An inventory of the interest which has accrued on our interest bearing notes in favor of others shows that we owe accrued interest payable, $12.44. (1358/) Jan. 31. An inventory of the accrued interest owing to us on notes in our favor shows that others owe us acrued interest receivable amounting to $7.66. (1359m) Jan. 31. The accrued interest owing to us at the close of the last preceding fiscal period for which this account was then credited was $8.94. (1358^) Jan. 31. The accrued interest owing to others at the close of the last preceding fiscal period for which this accoimt was debited was $6.56. (1359n) What is the gain or loss from interest for January? (1364) v exercise 363. Prepare a ledger account for the preceding transactions like illustration 57, and present for approval. Illustration 57. ^J^?7>?^£>U< a^ INTEREST AND DISCOUNT ACCOUNTS.' 103 To Close Interest and Discount Accounts. 364. The difference between the two sides of an interest or a discount account shows the loss or gain — a loss when the debit side is the larger, a gain when the credit side is the larger. In either case it should appear as a separate item in the profit and loss statement. (Illustration 87) 365. To close — After the profit and loss statement has been prepared, interest and discount accounts are closed by a journal entry made up from the profit and loss statement. When the closing item to any interest or discount account has been posted, which should balance the account, rule the closing lines in red ink, as shown in illustration 57, and enter the footings in black ink. 365a. The method of disposing of inventories for accrued interest receivable and accrued interest payable is explained in ^468. Exercises in Interest and Discount Accounts. 366. Prepare ledger accounts for the following transactions, showing the ac- counts closed like illustration 57, applying the rule (1f356) for each transaction. (1) Oct. 1. Paid for interest on our note due today at bank, 17.45. (1[3586) Oct. 5. The bank discounted for us J. M. Robinson's acceptance in our favor, discount for 30 days, $4.58. (1f358c) Oct. 8. Samuel Walker paid his note in our favor with interest due today; the interest was $7.50. (1[359i) - - Oct. 12. Frank Brown paid his overdue account including interest; interest for three months, $8.25. (1[359i) - - Oct. 15. William Franklin transferred to us J. N. Scott's 30-day note less a discount of $2.54. (^359^ What does the difference of the account show — a loss or a gain and how much? (2) William Bond's transactions affecting interest and discount account for the month of April are as follows: April 2. He paid interest on an overdue account in favor of Johnson & Son, $3.47. April 5. James Richard prepaid his note in Bond's favor by agree- ment; the discount was $2.50. April 9. He transferred J. N.Brown's note in his favor to William Walker on account, less discount, $1.56. April 16. He received interest on William Brown's overdue account, $2.45. April 23. He paid his note in favor of R. N. Bates, less a discount of $2.50." (1[359fc) - - April 30. He owed interest to others, which has accrued to date, on notes and open accounts, $12.45. (1f358/). What is the result shown by his interest and discount account? 104 BOOKKEEPING AND ACCOUNTANCY (3) E. D. Vane & Company's transactions affecting interest and discount account for the year are as follows: Jan. 1. The accrued interest owing to them at the close of the last preceding fiscal period (December 31), as shown by the inventory of accrued interest receiv- able, was $215.12. (^3583) They owed interest to others at the close of the last fiscal period (December 31), as shown by the inventory of accrued interest payable, $14.65. (If359n) Feb. 5. They paid for the use of money borrowed on their notes, $341.90. (11358?)) March 31. They gavq the use of money to their various customers on their notes and acceptances which they discounted, to the value of $74.12. (1[359j) April 30. The discount on notes and drafts which they transferred to others before maturity amounted to $18.25. (1[358e) May 31. During the month they discounted for others various notes and acceptances, the discount on which amounted to $47.76. (T[359j) June 30. They prepaid during the month three of their own notes, thereby saving a discount of $67.77. (^359fc) - - July 31. During the month two customers prepaid their notes, less discount to maturity; the amount of the discount was $18.50. (^358d) Aug. 31. During the month they had various notes, acceptances and time drafts discounted at bank, the discounts amounting to $33.71. (1[358c) - - Sept. 30. The notes and acceptances of various customers were transferred to them before maturity for purchases and to apply on account; the discounts amounted to $84.76. (11359?) Dec. 31. At the close of the year they find they owe on accrued interest payable, $345.75 (1[358/) and that others owe them on accrued interest receivable, $427.27 (1[359m). What result is shown by the interest and discount account at the closing of the books? Arithmetical Problems — Interest Accounts. During the month of November, C. F. Scharfe received and paid interest as follows : Interest on his notes receivable paid in cash, $25.75; discount on notes and acceptances discounted for others, $97.42; discount on his notes that were dis- counted for him by others, $3.50; interest received on money loaned to others, $84.50. What were his net returns from interest? PROPERTY INVESTMENT EXPENSE AND INCOME ACCOUNTS. 367. In connection with almost every business there is an investment of some part of the capital in various forms of property, such as real estate, furniture, fix- tures, horses, wagons, harness, machinery, tools, patterns, patent rights, etc., that INVESTMENT EXPENSE AND INCOME ACCOUNTS 105 are not included in and form no part of the special line of goods bought, sold or manu- factured, but which are necessary in carrying on the business. The accounts show- ing these investments are known as capital investment accounts. They show the amount of the capital of the concern invested in various kinds of property that is not immediately available for the payment of current debts or expenses. 368. Capital investment accounts should show only the cost value of the property represented in the account. Whenever anything is sold that has been charged to an investment account, an entry should be made which will credit the account for the original cost price of what is sold, the object being to have the account show at all times the original cost price of the property on hand. If the selling price is greater than the original cost, the difference or gain should be credited directly to profit and loss account or it may be credited to a special account imder a title that will indicate the source of the income. If the selling price is less than the original cost price, the difference should be debited to profit and loss account, unless a depreciation or other reserve fimd has been set apart to meet the loss, when the account for that fund should be debited. Losses and gains from capital investment accounts should ap- pear as separate items in the profit and loss statement. 369. In addition to the investment in properties shown by the investment accounts, various expenses are incurred in their maintenance and from many of them an income is returned; consequently a separate expense and income account should be kept with each investment, to show the cost of maintenance, expenses, etc., on one side and the income or returns from the investment on the other. 370. Expense and income accounts relating to investments should show only the gain or loss arising from the current use or employment of the property. Any gain or loss arising from an increase or decrease in the value of the property affects the investment account and should be disposed of as described in 1[368. 371. Observe, therefore, that there are generally two accounts opened in connec- tion with the ownership of property- — one showing the investment in the property and the other showing the expenses of the property and the income from the property and, consequently, the gain or loss resulting from the investment. 372. It is sometimes difficult to determine whether items representing outlays affecting these accounts should be charged to the investment or to the expense and income account. The following are the rules usually observed by accountants: (a) All expenditures made on the property, whether for first cost or for improve- ments, up to the time the property is ready for use or becomes productive should be charged to the investment account 106 BOOKKEEPING AMD ACCOUNTANCY (&) All sums expended on the property which inctease the selling or rental value of the property should be charged to the investme-^t account. (c) All sums expended to maintain the property at its present cost, seUing or rental value should be charged to the expense and income account. 373. As the method is the same for keeping the various investment expense and income accounts, only those for real estate will be explained and illustrated in detail. Briefer explanations of other similar accounts will follow. REAL ESTATE. 374. This is a general name that is applied to what is known as real property which consists of land, houses, etc. Accounts with each property should be kept under appropriate headings, as "House and lot, 96 North St.," or "18th Street Store Property," or "Elm Township Farm," with separate accounts for the invest- ment and for the expenses and incomes. 375. Not infrequently there is a considerable variation in the increase or de- crease of the value of land and the buildings thereon. Usually there is a gradual depreciation in buildings while there is a gradual increase in the value of land. The decrease in the value of the buildings should be taken account of annually, which would directly affect the current gains and losses of the business for the period, while the increase in the value of the land is seldom considered until the land is finally disposed of. For these reasons it is not unusual that two accounts are kept — one with the land, under the title of " Real Estate," and the other with the structures or other property thereon, under the title of "Buildings." .THE INVESTMENT ACCOUNT— REAL ESTATE A capital Investment Account Shovaing a Resource. 376. Real estate investment accoimts should be opened under appropriate headings followed by the word "Investment," as, "Real Estate Investment," or where separate accounts with each property are kept, "House and Lot 96 North St., — Investment." Such accounts are purely resource (asset) accounts. 377. The object is to show the cost of the investment, which includes (a) the first cost of the land or property purchased including the buildings or other improve- ments thereon, also the cost of surveying, examination of title, recording fees, com- missions etc., (6) cost of all permanent improvements which result in increasing the earning or rental value of the property, such as repairs, grading, side-walks, sewers, etc. and (c) cost of taxes, interest on mortages, or other items of cost up to the time the property becomes productive or is ready for use. INVESTMENT ACCOUNTS 107 Rule for Debiting and Crediting Real Estate Investment Accounts. 378. Debit real estate investment accounts for costs: credit for returns. 378o. Debit real estate investment accounts for costs. 3786. Credit real estate investment accounts at the cost price of the property sold or otherwise disposed of. (Read note.) 379. The various applications of ^he rule are as follows: 380. Debit the investment account, under its appropriate title, — o. For the cost or appraised value of the property on hand at the beginning of business. 6. For all purchases of property, and for all additional costs to the property and improvements until it is ready for use or occupancy or becomes productive. c. For all permanent improvements made thereafter that will increase the perma- nent value of the property or the rental OT other income from the investment. d.* For commissions on purchases of the property. 382. Observe that in every instance the ac- count is debited for the cost of the prop- erty represented by the total invest- ment. 381. Credit the investment account, under its appropriate title, — e. For all sales of the property at its cost value, i. e., for the original price charged to the account. Note : The returns or incomes from the property are shown in the expense and in- come account. *Commission on sales represents the cost of a particular service rendered for which it is the best practice to keep a separate com- mission account to which all such items should be debited. 383. Observe that in every instance the ac- count is credited for the original cost price of the property disposed of. 384. Transactions Illustrating the Various Applications of the Rule (1[378) for Debiting and Crediting Real Estate Investment Accounts. (1) Illustrating the transactions and the account for property purchased to be used in connection with the business, i. e., in which the business is located. Jan. 1. Purchased property located at No. 9 W. Main St., consisting of a store building and two lots, $11,500. (^3806) Jan. 5. Paid for permanent improvements on the property by enlarging rear entrance and building shipping platform, $450. (^380c) Jan. 6. Paid for surveying, examination of title, and recording deed, etc., $63.75. (1377a, 3806) Jan. 12. Paid purchasing agent's commission (|%) $86.25. (1f380rf) Jan. 25. Sold unoccupied lot adjoining the lot on which the building is situated for $3600, the cost value of which was $3000, the profit, $600, being retained by the proprietor. (T|381e) What is the cost value of the property on hand at the close of the fiscal period, January 31? (11385) 108 BOOKKEEPING AND ACCOUNTANCY Prepare a ledger account like the following illustration. Il-LTISTRATION 58 //^OO iix-n^2.f_ J£-£:C>_ ^ JJ^ i$nlt» -^3:^0-0 -f/^K ^3e/u. J /Ba.^^i'yt^^^ ^/OO -tJ./,»4>^ To Close Real Estate Investment Accounts. 385. The difference between the two sides of a real estate investment account shows the original cost value of the property on hand, which is a resource (asset) that should appear as an item in the statement of resources and liabilities. (Illustration 93.) 386. To close. A real estate investment account is not usually closed unless it is desired to show the value of the investment in one item or to forward the account to another page, when the difference should be entered as a balance on the credit side of the account in red ink, after which the account should be ruled in red ink and footed in black ink, when the balance should be brought down on the opposite side in black ink as shown in illustration 58 or forwarded to the opposite side of the account on a new page. When the property represented in the account is finally disposed of, the account will balance. REAL ESTATE EXPENSE AND INCOME ACCOUNTS. 387. Real Estate Expense and Income, is an appropriate heading when a single account is kept for one or more properties. If separate accounts are kept with each property, they may be designated by the location of the property, such as " Real Estate, 96 North St. — Expense and Income," or "House and Lot, 26 Elm St.- Expense and Income." Separate accounts with expenses and with incomes may be kept if desired. In many instances this plan is preferable. A real estate expense and income account is a purely profit and loss account and in no way affects the results shown by the investment account. 388. The object is to show' the current expenses of the property after it has been prepared for occupancy or use, such as expenditures for preservation, taxes, insurance, repairs, commissions for renting, interest on mortgages, light, heat, jan- itor service, depreciation, etc., on the one side, i\fid the gross income from rentals or other sources on the other side, and from these to ascertain the amount gained or lost on the investment. It is from this account that the owner is enabled to calcu- late the percentage of profit (oi'loss) on the investment. EXPENSQ AND INCOME ACCOUNTS 109 Rttlb ffOR Debiting and Crediting Real Estate Expense and Income Accounts. 389. Debit real estate expense and income accounts for costs: credit for returns. 390. The various applications of the rule are as follows : 391. Debit the expense and income ac- count under its appropriate title. — ■ a. For the cost of repairs, preservation, or other improvements to maintain the property in good condition when such improvements do not increase its rental valiie. b. For taxes, insurance, interest, and other similar charges on the property for the fiscal period. c. For the cost of light, heat, janitor ser- vice, etc., when payment for the same is included in the income from rentals. d. For agents' commissions for renting, collecting rent, etc. 392. Credit the expense and income ac- count under its appropriate title, — e. For all returns in the way of rents, sales of products or other incomes from the property. /. In the case of farms or other property operated by the owner, for the sale of all products, andf or the value of all products taken for private use at market price. Note: Property used by the owner as a residence or place of business is seldom credited for any income value, although when used as a place of business, it is not unusual to consider its rental value as an income which, when credited, should be debited to the proper expense account. 393. Observe that in every instance the ac- count is debited for the cost of some outlay which is an expense to the prop- erty. 394. Observe that in every instance the ac- count is credited for the returns from some income from the property. 395. Transactions Illustrating the Various Applications of the Rulb (1[389) for Debiting and Crediting Real Estate Expense and Income Accounts. (1) Example illustrating the transactions and the account for property in which the business of the owner is conducted. Jan. 16. Paid for repairs to the roof , $16.50. - - Jan. 25. Paid for replacing broken glass in windows, $2.56. Jan. 31. The monthly proportion of taxes paid is $3.50; the monthly proportion of insurance is $8.50. What is the net cost of the expenses on real estate for the month? 110 BOOKKEEPING AND ACCOUNTANCT Prepare a ledger account like the following illustration. IlLTJSTHATION 59. /B'^J^f.M^^J^y (£ciJ! y..-7^u££/y-Jl>z.c>!'y'y7^ -^fny, ;, /.f /&^i.c&t.^^^^A^c^i£^-^^ J9i SO 1 SjcA-ttU.^^ / 7 sa ' f 1c^s^6a**^4-<-Z5--i^ 7S f c^e-*^^*^ c^ -^rr' <^/^<^->'-ty^ 2- ^^-fL.i.^j^ ^ ZOO so . 30 __:Ue^^yi^___ 3/ ^Oj^sfSi^^f^— / Z -fi^.ZS' .-*d«^l-»<.£-**/ 2S S Z J^.,c.y,.A^Z^ ■ f so'\ 2S '^A^'Ud-e^ /SO Z ?' ^^S^ji^*^' (^S _. , J. S' '^l^iz/Vyt^ca^ v/3 J-o ,.(- '?"/ ? .^Q ! } - ^--'v ■ J II : I IS I 'IJii .■J-Q 433. The difference between the two sides of a delivery equipment account shows the original cost value of the property on hand, which is a resource which should appear as an item in the statement of resources and liabilities. 434. To close. Follow the instructions for closing real estate investment ac- counts 1[386. PROFIT AND LOSS STATEMENT. 435. The profit and loss statement is made up from the various ledger accounts showing losses and gains. PROFIT AND LOSS STATEMENTS 119 436. Profit and loss accounts contain all the facts relating to the costs of expenses and the returns from incomes. These facts are so arranged in the profit and loss statement that the expenses and incomes are shown ' 'in their proper relations . ' ' ( T|2) . They may be shown in detail to any extent desired by the sub-division of ac- counts, or by the sub-division of the items shown by the different accounts on analy- sis sheets. Like the trading statement, the profit and loss statement is frequently accompanied and supported by various supplementary statements, exhibits, etc. 437. The final result shown by a profit and loss statement is the net profit for the fiscal period represented. 438. The accounts affecting the profit and loss statement are shown in the following list made up from the illustrative accounts showing losses and gains in the preceding pages, as they appear in the trial balance. (Illustration 85) The amounts shown represent the differences between the two sides of the various accounts. When both expenses and incomes are shown in the same account, if it is desired to show them separately in the statement, the footings of the account instead of the difference, should be entered on separate lines in the trial balance. An illustration of an account showing both expenses and incomes is the real estate expense and income account. (If 388) Section of Trial Balance Showing Profit and Loss AccouiiTs. Illdsthation 63. :- 27S-i 4! ^&^»^-.iit«<^ci^„6^,i^i^<^-, - - - -^ /-T.SLl. . - l___(fc^2i.i-i^ — - - / -JiO^ _. L__45=!^2=&4.<:-^^ ^ - /- '■■ - J&si^_£i^^:z,ii^ &c^iu^f-i..i.i^'^/Jh^ - J /-4a Li — — . ^sSi:^>i^j't,u:u'U^'¥fz^5c^:^^^Ajc^,y^!i^^ -^j Z^ — it - - — ~ 439. The first item shown in the illustration of the profit and loss statement (illustration 64) is the gross trading profit shown by the profit and loss account, which was opened when the journal entry closing the trading accounts, after the trading statement was prepared, was posted to the ledger. This account, therefore, does not appear in the final trial balance shown in illustration 85 or in the section shown in illustration 63. 439a. It should be observed that the closing journal entry made after the trading statement is prepared, when posted, will close all the trading accounts in the ledger, and that the gross trading profit transferred to the profit and loss account 120 BOOKKEEPING AND ACCOUNTANCY equals the difference between the total debit and total credit balances shown by the trading accounts, and that, consequently, when this item is posted it will main- tain the equilibrium of debits and credits in the ledger, and that the ledger will be in balance. The posting of the closing journal entry for the trading account simply eliminates these accoimts from the ledger and introduces in their stead the item showing the gross trading profit. 440. This form of the profit and loss statement is known as the report form, which is generally preferred for comparative purposes, and for that reason has some advantages for purposes of instruction, as it is somewhat simpler than the technical form shown in illustration 97. Illustbation 64. ^i_z^__c^i; ' /?^7v/: 440a. Illustration 64 shows the simplest form of the profit and loss statement made up from the differences (balances) shown by the profit and loss accounts as they appear in the trial balance, without including any detailed information as to the various items constituting the amount shown. 4406. Illustration 65 shows the same statement, with the important items entering into the cost, selling expenses, administrative expenses, and general expen- ses given in detail. The items can be readily ascertained by referring to the sakes expense, administrative expense, and general expense accoimts, the amount on the statement being composed of one or more of the items given in the explanation columns of the accounts. • 440c. To secure this detailed information in accounts containing any con- siderable number of items or extending over the usual fiscal period of one year, it will be necessary to separate them, for each account, on an analysis sheet, which is fully explained and illustrated in 1[490. PHOFIT AND LOSS STATEMENTS 121 iLLirSTBAXlON 65. - ^^^-'^ _ -^^/rr^ ,- .,f&M^ £^^^c-i J ^'^i'lX^u-i/c^t^ CcCf6^iX.^i'C^ -3jC1^^& ^- ^^?zE?«^ __ ___ 3J£.ioL- _ /7^a /■S.3/ ^^^u^Ci^^^^a-^zA^ztta/ -^2^ tS Si, fer^^-«^2i«'i^—j:> Preparation of the Profit and Loss Statement. CREDITS. 440d. Explanation. Read carefully 1f435 to 11440c inclusive. The creditsi are shown first in this (the report) form of the profit and loss statement. (1) The gross trading profit, $2009.18, is'the profit shown by the trading state- ment. (^242, ill. 40) Other credits, shown by any account in which incomes are entered, should follow this item, as will be shown in later examples. 122 BOOKKEEPING AND ACCOUNTANCY DEBITS. (1) When the statement is made up from the differences shown by the profit and loss accounts, the first three accounts should be entered in the order shown on the statement, i.e., selling expenses first, administrative expenses second, general expenses third. Other items may appear in whatever order they occur in the trial balance. (2; When the various expenditures included in the sales, administrative, and general expense accounts are to be given in detail, as shown in illustration 65, they must first be ascertained before the profit and loss statement can be prepared. The method of ascertaining these various expenditures is fully explained in ^490. (3) The net profit for the period is found by taking the difference between the total debits and the total credits. If the debits are the larger, the difference is the net loss for the period. (4) I'n preparing the profit and loss statement, refer to the ledger accounts for detailed information, when necessary. 441. Prepare a profit and loss statement like illustration 64, referring to the section of the trial balance for each item as it is entered, and present for approval. 441a. Prepare a profit and loss statement like illustration 65, showing on a separate sheet the items named in the ledger accounts which make up the various expenditures shown in the profit and loss statement, and present for approval. Principles Involved in the Making of a Pbofit and Loss Statement. 442. Observe that the following principles apply in determining the net profit or the net loss in the profit and loss statement: (a) Any account or item that has increased the cost of expenses or decreased the returns from incomes has decreased the net profit or increased the net loss for the period. • (b) Any account or item that has decreased the cost of expenses or increased the returns from incomes has increased the net profit or decreased the net loss for the period. 443. To find the net trading profit. The gross trading profit less the selling ex- penses gives the net trading profit, which is the profit on the goods sold after both cost price and the selling expenses have been deducted. 444. The object of finding the net trading profit is (a) to ascertain whether or not the sales have been made on a proper margin of profit, (b) to ascertain whether or not the total selhng expense is in proper proportion to the total salesmade,and (c) to permit of a comparison of the net selling profit on the sales of one fiscal period with the net selling profit on the sales of another similar fiscal period. PROFIT AND LOSS PEKCENTAGBS 12b 444a. The difference between the net trading profit and the gross trading profit is that the former is the profit after the selling expenspa have been deducted, while the latter is the profit before the selling expenses Ixave been deducted. 444f). In the profit and loss statement, illustration 65, the net trading profit is the difference between $2009.18, the gross trading profit, and $380.60, the selling expenses, or $1628.58. 445. Comparisons of the facts shown in a profit and loss statement are usually made on a percentage basis. The percentages are found as follows : (a) The total selling expense divided by the gross trading profit will give the percentage of the gross trading profit required to meet the selling expenses. (b) The total administrative expense divided by the gross trading profit will give the percentage of the gross trading profit required to meet administrative expenses. (c) The total general expense divided by the gross trading profit will give the percentage of the gross trading profit required to meet general expenses. (d) The percentage of the gross profit required to meet any other expenses may be found in the same manner. (e) The total selling expense divided by the cost of the merchandise sold will give the percentage of the cost price which must be added to meet selling expenses. The percentage to be added to the cost price of the merchandise sold to meet administrative or any other expenses may be found in the same manner. These percentages are useful in fixing the selling prices of goods. Note. — These percentages must not be confused with the percentages on capital. To Close Ledgeb Accounts Shown in the Profit and Loss State- ment BY Separate Journal Entries. 446. When the profit and loss statement has been completed, a journal entry is prepared to close all the accounts in the ledger containing the amounts shown in the statement, the net profit or the net loss appearing as one or more items in the entry to balance it, which is transferred to the proper side of the undivided profits account in the ledger, or to such capital, reserve, surplus or other accounts as should receive the distribution of all or part of the profits or losses. 447. The purpose of closing the various accounts included in the profit and loss statement is to indicate the close of a business period, and thus to eliminate them as open accounts in the ledger, preparatory to their receiving the entries of a new busi- ness period. This is the principal reason for closing any account in the ledger. Rule for Closing Profit and Loss Accounts. 448. Debit profit and loss accounts showing credit balances. Credit profit and loss accounts showing debit balances- 124 BOOKKEEPING AND ACCOUNTANCY 448a. Illustration 66 shows the correct journal entry to close the accounts in- cluded in the profit and loss statement when it is desired to open an undivided profits account (1f450) in the ledger. Prepare this journal entry and present for approval. Illustration 66. ^SL- //_ ■s/s 2a - ^ l.J'-V-O x;s., ^s sL 7 50^^ 7- J/ '^i ^- --aa-^ — / za2 ^^L~- 4486. Undivided profits account may be omitted from the ledger, as explained ^486a. Exercises in Prepahing Profit and Loss Statements. 449. Prepare profit and loss statements for the following profit and loss ac- counts as they appear on the various trial balances shown, and present for approval. The first example is an exact duplication in form of the profit and loss statements shown in illustrations 66 and 65, the only difference being in the amounts and in the length of the fiscal period, which is one year instead of one month. (1) The profit and loss accounts as they appear in the trial balance of Hughes & Hillen for the fiscal year ending December 31 are shown in illustration 67. The gross trading profit shown bv the trading statement for the period is $23,876.40 Illustration 67. ii2ezS»^>-2^t:«>-^-<-««oSl-<2-^5^l-'iS^£^^ V/27 A-Z .^sSifUiA-i^i^ 3S •Sa (a) Prepare a profit and loss statement showing the net profit tor the period, using illustration 64 as a model, and then prepare the journal entry to close the profit and loss accounts in the ledger, and present for approval. EXERCISES IN PROFIT AND LOSS STATEMENTS , 125 (6) An analysis of the sales, administrative, and general expense accounts for the year shows that the items for which these expenditures were made are as follows : Selling- expenses, — sample cases, $90.44; advertising and premiums, $642.20; delivery charges, $426.25; salesmen's salaries and commissions, $1400; traveling expenses, $125.10; miscellaneous, $152.51. Total, $2836.50. Administrative expenses, — office supplies, $152.16; legal advice, $15; salaries of office help, $815.60; managers' salaries, $3000; miscellaneous, $144.86. Total, $4127.62. (c) Prepare a profit and loss statement showing in detail the selling, adminis- trative and general expenses, using illustration 65 as a model, and present for approval. General expenses, — light and heat, $315.25; rent, $1200; miscellaneous, $25.99. Total, $1541.24. Note: The journal entry to close the profit and loss accounts are the same for both forms of the profit and loss statement. (2) Negley & Company's gross trading profit shown by the trading statement for the half year endingJune30is$34,881. 18. The various profit and loss accounts appearing in their trial balance oi that date are shown in illustration 68. Illustration 68. J^TT.'/ ^5^J \ />?(), , i^z/^k/ i: ///.^v i J/s\zo_ * is\^ .^ 1 1 -^■~-"- r'.^|^_^ /.^ ]j"i? -• 7^" 7 f/00 J/ (7i_ ___- -- JfZ \so_ ~ - " Zo, „ v/.^\sa ife.1?- /y JfZ7? 7. r^.. I 484. The accounts contained in the final trial balance, illustration 85, are en- tered in the order in which they appear in the preceding pages, to correspond with the order in which they are usually taken from the ledger. (1[458) . Illustration 86 shows the same accounts arranged in groups — one for the trading, another for the pro- fit and loss, and the third for the resource and liability statements, in the order in which they usually appear in those statements. This is sometimes done to facilitate the preparation of the statements, and is valuable in assisting the student to dis- tinguish between the various accounts. Note that the merchandise inventory ac- count appears not only in the trading statement, but also in the statement of resources FINAL miAL BALANCE 141 and liabilities. The statement in which each account appears is also indi- cated by letters on the left-hand margin of the trial balance in illustration 85. 484o. Observe the following distinctions at the time of closing the books between the merchandise inventory taken at the close of the preceding fiscal period and the inventory taken at the close of the present fiscal period : (1) That the inventory of the preceding period is the only one which at the time of closing the books is shown on the face of the ledger and in the trial balance, and that it is used in making up the trading statement, but that it does not appear in the statement of resources and liabilities. (2) That the inventory taken at the close of the present period does not appear in the trial balance, and will not be shown on the face of the ledger until after the closing entry for the period has been posted, but that it does appear in the statement of resources and liabilities. (3) Note in other words that while both inventories appear in the trading statement, one appears in the trial balance but not in the statement of resources and liabilities, and the other appears in the statement of resources and liabilities but not in the trial balance. Illustration c TRIAL BALANCE, JABUARY 31, 19 F. A. RAYMOHD. ■ff^L. 'PyL. Oaah __ Accounts Heceivable Notes Recsivatle Real Estate Investment a/c Furniture & Fixtures Delivery Equipment Insurance - Unexpired Premiums F. A. Raymond, Personal F. A. Raymond, Capital Botes Payable Accounts Payable Mdse. Inventory Purchases Warehouse Labor Warehouse Supplies Sales Discount Sales Purchase Discount Selling Expense Freight Administrative Expense General Expense Insurance Expense Real Estate Expense & Income Furniture & Fixtures Repairs 4 Renewals Interest 2444.21 3667.50 900. 9100. 392.50 413.60 82.50 200. 7516.46 3156.47 120. 51.35 171.64 316.20 65.40 276. 85.56 7.50 31.06 20. 7. 15807. isoo. 4527.22 7025.11 173.51 142 BOOKKEEPING AND ACCOUNTANCY , COMBINED TRADING AND PROFIT AND LOSS STATEMENT. 485. Full instructions for preparing the trading statement and the profit and loss statement separately are given in preceding chapters, beginning with 1[233 and 11435. Illustration 87 shows the trading and profit and loss statements combined into a single statement, including the distribution of the net profit. Illustbation 87. TEADIKG AND PHOFIT 4 LOSS STATEMENT, JANUARY 31, 19 F. A. RAYMOiro. Keturps Gross sales Jifiaa Rebates and allowances Goods returned Deduct Sales discounts Net returns from sales Costs Inventory, December 31, 19 Purchases T.ftRH Rebates and allowances Goods returned -Add Warehouse supplies Warehouse labor Total cost of purchases Deduct Purchase discounts Net cost of purchases Lees Inventory, January 31, 19 Cost of merchandise sold Gross trading profit Erofng8,s Selling expenses Sales Ex. a/o Sample cases Advertising and premiums Delivery charges Salesmen's salaries and commissions Traveling expenses Miscellaneous 27.40 40.16 35.14 64.13 3224.03 67.56 Total Freight Administrative expenses Adal. Ex. a/c Office supplies Legal advice Salaries office help Manager's salary Miscellaneous General expenses Light and heat Rent Miscellaneous Insurance Interest JteSl estate repairs and renewals Furniture and fixtures repairs and renewals Net profit for month to F. A. Raymond's capital 17.50 10. 92.30 150. ■S.20 15.31 65. R.ZS i/c 7516.45 3156.47 61.35 _ 120. 10854.27 173.51 10680.76 5' 836.47 380.60 275. 85.66 7.50 7. 31.06 _Z0. 7025.11 171.64 6853.47 4844.29 2009.18 806.72 120a.46 PROFIT AND LOSS STATEMENT 143 485a. Review previous instructions for preparing trading and profit and loss statements, and then prepare a combined trading and profit and loss statement from the trial balance, as shown in illustrations 85 and 86, using illustration 87 as r^ model, and present for appi'oval. Closing the Ledger by a Single Journal Entry. 486. Illustration 88 shows the journal entry made up from the final trial bal- ance and the inventories at the date of closing, to close all accounts in the ledger ex- cept those showing resources and liabilities, including reserve surplus, undivided profits and ownership accounts. This journal entry is, in fact, the journal entries shown in illustrations 42, 66 and 71, combined into a single journal entry. Illdbtration- ! '^ J /si i^J _ i/ 3s:_ /2 /?/ ^^_ S/S Z£L^ is ^a 2/S rs Si;, _ 7 s-(i__ 7 - -_ -2.1? 486a. When a single journal entry is made to close the ledger, as shown in the above illustration, neither a trading nor a profit and loss account is opened in the ledger. This method has become the rule, as the opening of the accounts mentioned is considered to be unnecessary. 4866. Accounts in the ledger may be closed by transferring the differences shown by the various trading and loss and gain accounts to the "trading" or the "profit and loss" accounts after the old method of closing the ledger. When this method is followed, the trading and profit andloss accounts should be opened. This method is obsolete, however, and is not approved by accountants. 144 BOOKKEEPING AND ACCOUNTANCY 486c. The illustrations underneath show the form of the profit and loss state- ment when the net profit is divided between partners equally, and the part of the journal entry which distributes the net profit to the proper accounts. It is assumed that F. A. Raymond and John Patton are equal partners, each entitled to one-half of the net profits. Illustbation 89. Net profit for the month F. A. Eaymond'3 capital a/o, l/2 profit, John Patton's capital a/o, l/Z profit. 601.23 601.22 1202.46 1202.46 1202.46 In the j ournal entry, instead of " F. A Raymond Capital, for net profit, $1202.46 , ' ' write the following: iLLUSTBATIOM SO. 486C^ _ Ce^tA^ '.Ais:^;if^^^£fUw -lf:a^?n.,,i'C.^£Z^it^-~3-/.- v.^- y!Zt-ay .iJiiJ .£:& -v/.j' .-rti .r2 so ^f- 1 jzrji'Cf /sao C, 02-7 i-:2- '^raf J-/ L 146 BOOKKEEPING AND ACCOUNTANCY 4876. The current liabilities are likewise given precedence in ttie order of their importance. Other liabilities, such as bonds or mortgages payable, which are more remote as to the time of payment, are frequently designated as "fixed liabilities," which usually appear, however, in connection with the business of a corporation, and therefore are not included in the illustration. 488. The difference between the total resources and the total liabilities shows the net resources or the net liabilities of the concern, which must equal the net cap- ital or the net insolvency at the close of the last fiscal period plus the net profit or minus the net loss for the present period. 488a. Observe that the difference between the total resources and the total liabilities equals the net resources, which represents the owner's equity or owner- ship in the business and is shown by the amount of his capital at the beginning of the period represented in the statement plus the net profit for the period, or minus the net loss for the period. The illustration shows the personal account of the proprietor deducted from his investment, the difference equaling the net resources, i. e., the net capital. 488&. The net capital represented in the ownership accounts may properly be classed as a secondary liability of the concern. After all creditors have been paid, the capital accounts show what is left for the owner ; but to say that the capital of a concern is a liability would be equivalent to saying that the owner of the busi- ness owes himself the amount of his net capital. Read chapters on ownership ac- counts, 1f55 and 1f69. Exercises in Preparing Combined Trading and Profit and Loss Statements AND Statements of Resources and Liabilities. 489. Prepare a trading and profit and loss statement and a statement of resources and liabilities from each of the trial balances shown, and present for approval. Example two is almost an exact duplication of the trial balance shown in illustration 85, except that the business is owned by a firm instead of a single proprietor; therefore, illustrations 87, 88, 90 and 93 may be used as models in the preparation of the statements and the journal entry. (1) Prepare a trading and profit and loss statement, including detailed in- formation relating to purchases and sales (see 1[242a-2 and 3; also 1|242a-8), with journal entry to close, and a statement of the resources and liabilities shown on the trial balance (illustration 85), including the merchandise inventory of January 31 of $5836.47. (2) The trial balance of Hicks & Anthony for the year ending December 31, when the inventory of the merchandise on hand at that date was $9524.15, showed the following debits and credits: ANALYSIS SHEETS 147 Accounts receivable 7946.27 Accomita payable 6423.19 N. W. Hicks capital a/c 11174.93 N. W. Hicks personal a/c 1200. A. R. Anthony capital a 'c 11174.92 A. R. Anthony personal a/c 1150. Notes Receivable 1690. Notes Payable 2346.12 Cash 916.36 Purchases 12618.35 Sales 29341.37 Inventory 19444.50 Warehouse supplies 221.50 Warehouse labor for the year 1560.45 Purchase Discounts 821.76 Sales Discounts 1425.80 Sales Expense 2436. , Administrative Expense 1833.75 General Expense 721.60 Insurance (Unexpired Premiums) 61.50 Insurance Expense 528.37 Interest 72.12 Real Estate and Building 6500. Real Estate Expense 114.50 Furniture and Fixtures 286.90 Delivery Equipment 554.32 - 61282.29 61282.29 ANALYSIS SHEETS. 490. Analysis sheets have been referred to a number of times in the preceding pages. "Analysis sheet" is a general term applied to any working paper used for the purpose of analyzing or separating the various items appearing in an account. They have no set form or arrangement, but maybe designed and ruled up for whatever purpose desired. An analysis sheet may contain any number of columns required for the purpose intended. 490a. Two forms of an analysis sheet are shown — one separating into groups the various items shown in a single account and the other showing the cumulative additions to the items shown in the account month by month. These forms can be, used to analyze any account, as they admit of expansion to any degree necessary. 148 BOOKKEEPING AND ACCOUNTANCY Illdsibation 95. 3. C^xlJ- 4 ./-L 2-¥ CZcj^'CU^^i^i.^-^ui^— , , 2t. 3 JT^. ^ 4. 3 ^O'' V SO X so ss 1 so 2 SS ' 2S / i, dj 2.£- o o ss so s-s :M4..,„^ ?7'i.U.<^.tJ£a^- 6^ I 3 5?>£;ui rr 7S zs / 70 0£- 4906. The illustration on the left shows a section of the general expense account for the month. The illustration on the right shows the items separated into groups. These groups might be extended indefinitely, if desired, with a separate column for each particular item. The same form could be used for the analysis of any account for any length of time, the number of columns in the analysis sheet being deter- mined by the number of groups into which the items are to be divided. Illtjbtration { ABALYSIS SHEET Illustrating General Expense Account. Total Total Itama Month Month two moB. Month three mos. of Jan. of Feb. to Feb. 28 of Moh. 10.00 to Moh. 31 Coal 7.00 11.20 18.20 28.20 Vehicle License 4.50 4.50 4.50 Electric Light 2.10 2.05 4.15 l.SO 5.95 Gaa 8.40 9.00 17.40 7.50 24.90 Stationery & Printing 11.50 6.00 17.50 12.50 30.00 Postage 5.00 6.00 11.00 7.50 18.50 Cleaning office 2.50 2.50 5.00 2.50 7.50 Hepairing chairs 1.75 1.75 .25 2.00 Bent 90.00 90.00 180.00 90.00 .270.00 Telephone 3.75 4.15 7.90 3.75 11.65 Telegrams 1.20 .85 2.05 .60 2.65 City Directory 6.00 6.00 6.00 Street oar tickets 2.25 2.25 2.00 4.25 Brooms 4 Mops 1.50 1.50 1.50 Soap 2.50 2.50 2.50 Cr. Sale of carbon paper 1.00 1.00 1.00 143.70 X 137.00 280.70 X 138.40 419.10 I Items marked "x" would agree with balance of gener""" '^'• balances of these dates . PREPARING ANALYSIS SHEETS 149 490t . The foregoing cut illustrates the analysis sheet used to show the cumula- tive cost of the various items entering into the general expense account from month to month. These sheets are generally of twenty-four columns, each ruled as shown, and are kept in a binder. Notice that the items entered in the 'irst left-hand column show all details of the charges to the expense account during the month of January. Where there are many items in an account, these details are first ascertained by using an analysis sheet like the one shown in illustration 95. The total, $143.70, should, of course, agree with the balance of the account shown in the trial balance for that month. The next column shows February expenses, column three showing the total for the two months ending February 28, 1280.70, which should agree with the general expense balance in the trial balance for February, and so on throughout the year. Note the figures in red in the month of February. They appear as a credit to the account in the ledger for a small sale of carbon paper, and indicate the method of disposing of such items. Exercises in Preparing Analysis Sheets The following illustration shows the items appearing in the debit column of a general expense account for three months. Prepare two analysis sheets, one show- ing the various items separated in groups for one month, similar to illustration 95, and another showing the cumulative results of the account for the three months, similar to illustration 96. (1) The expense account of Smith & Son shows the following items: April 1. Goal bill, |16. --4. Electric light bill, $9.63. --10. Gas bill, $6.15. — 14. Cleaning office and windows, $3.50. — 16. Telephone bill, $12.50. 17. Telegrams, $1.75. 18. Stationery and printing, $3.50. 20. Postage, $10. — 24. Postage, $3.00. --27. Stationery, $9.60. --30. Cleaning office and windows, $3.50. --30. Telegrams, $2.75. — 30. Rent, $85. May 2. Gas bill, $6.75. --4. Telegrams, $1.30. --8. Electric light bill, $11.50. — 9. Postage, $2.60. — 12. Telephone, $12.50. — 18. Stationery and printing, $7.75. — 19. Long distance telephone charges, $3.20. — 25. Vehicle hcense, $6.00. - - 31. Rent, $85. June 5. Electric light bill, $9.50; gas bill, $3.20. - - 10. Postage, $10 '-15. Cleaning office, $2.40. — 17. City directory, $4.00. — 20. Broomsand janitor's supphes, $3.35. — 23. Repairing typewriters, $7.50. — 25. Cleaning rugs and carpets, $8.25. — 30. Rent, $85. AMERICAN, OR CONTINENTAL, FORM OF TRADING STATEMENT. 491. The trading and profit and loss statement shown in illustration (97) differs in its arrangement from the report form of the same statement shown in illustration 87, although it is prepared from exactly similar data and for the same purpose. It is variously known as the American, the Continental, and the "technical " form of statement, and is the form usually preferred by accountants. 150 BOOKKEEPING AND ACCOUNTANCY Illustration 97. Trading and Pro.fit & Loss Statement. Year ending DEBITS. Merchandise on hand Deo. 31, 19 , per inventories 25 000 00 -add- Purohases for year 125,000.00 Less rebates and allowances 15,000.00 LIO 000 600 00 00 Bozing, packing and shipping Warehouse labor and expenses 300 00 l35 900 00 -deduot- Merohandise on hand Dec. 31, 19 , per inventor j es 65 000 00 Cost of merchandise sold 70 900 00 Gross profit on trading 24 600 00 95 700 00 Administrative expenses - Salaries of officers 2,000.00 Salaries of office help 1,600.00 Office 'supplies 600.00 Postage & stationery- 500.00 Miscellaneous 150.00 4 850 00 Selling expenses - Salesmen's salaries 1,000.00 Salesmen's commissions 1,000.00 Salesmen's traveling expenses 1,000.00 Samples, sample oases 1,000.00 Premiuas 500.00 Advertising 500.00 5 000 00 Rent .1,200.00 Insurance 400.00 Taxes 200.00 1 800 00 Bad debts 650 00 Repairs and renewals to buildings ■ -BOO 00' Met profit 15 740 GO \ ^ 28 840 00 ; Disposition of profit - Reserve for items in inventory not staples 1,000.00 Reserve for doubtful accounts 1,000.00 Reserve for depreciation of buildings 740.00 2 740 00 Interest on Jones' capital 10,000 1 yr. at &f 600.00 Interest on Brown's " 20,000 1 yr. at 6^ 1,200.00 1 800 00 l/s profit to Jones' capital a/c 2/3 " " Brown's " " 3,733.33 7,466.67 11 200 00' j 15 740 00! 1 STATEMENTS 151 John W. BroTOi Merchandise Company. December 31, 19 CREDITS. Gross sales Less - Rebates & allowances - Returned sales Disoovrnts on sales Net sales 1,000.00 1,200.00 2.100.00 100 000 00 4 300 ; 00 95 700 00 Gross profit on trading brought down Purchase discounts Sale of old material Interest on accounts Warehouse rental Dividends received on accounts written off as bad 95 700' 00 24 800 00 3 000 00 400 00 100 00 500 1 00 40100 Net profit (year's business) brought down 28 640 15 740 15 740 aa= 00 00 152 BOOKKEEPING AND ACCOUNTANOY IlLTJBI RATION flfi. Statement of Resources & Liabilities. Year ending RESOUROES . Cash on hand Cash in bank (First National) Postage on hand Mdse - per inventories (at cost) Less reserve for Items not staples Notes receivable Accrued interest on notes Accounts receivable Due in 30 days Due in 60 days Past due (Good) Past due (Doubtful) Total Less resenre for doubtful accounts Accrued warehouse rental Total current resources Supplies on hand - per Inventories Unexpired insurance premiums Advances to agents Property & equipment Furniture & fixtures Delivery equipment Real estate Buildings (subject to mortgage per contra). Total Less reserve for depreciation on bldg. Total resources 65,000.00 1,000.00 6,000.00 30.00 15,000.00 5,000.00 2,000.00 1,400.00 23,400.00 1,000.00 700.00 1,600.00 10,000.00 14.800.00 27,100.00 740.00 100 2 500 15 64 000 6 030 22 400 100 95 145 1 200 1 450 340 26 360 124 495 00 00 00 00 00 00 00 00 00 00 00 00 00 STATEMENTS 153 December 31, 19 John W. Brown Merchandise Oonpany. LIABILITIKS. Overdraft - Second Uat'l Batik; Hotes payable - bank loans' Notes payable - mdse. notes Accrued interest on notes & mtg. Accrued commission Accrued taxes Aftoounts payable Total current liabilities Mortgage payable (on building per contra) Total liabilities J. Jones Investment Add interest on capital Add 1/3 net profit B. Brcwn - Investment Add interest on capital Add 2/3 net profit Total liabilities & capital 30,000.00 15,000.00 10,000.00 600.00 3.7,55.33 20,000.00 1,200.00 7,466.67 340 45 000 355 1 000 300 26 600 73 495 8 000 81 495 14 333 00 00 00 00 00 00 00 00 00 33 154 BOOKKEEPING AND ACCOUNTANCY While the amounts differ, and there are several items included in illustration 97 which are not found in illustration 87, a careful comparison will reveal the simi- larity between the statements. The principal differences are noted in the follow- ing paragraph. 491a. The principal differences are as follows: (1) The debits appear on one side and the credits on the other side of the state- ment 97, corresponding with the two sides of an account, instead of the debits appearing under the credits as shown in illustration 87. (2) In illustration 97, sales discounts are considered as decreasing returns from sales (^226a, 1[231a), while purchase discoimts are considered as showing an income derived from having the capital available to prepay bills. (2206, *^225b) (3) Observe that several credit items are shown in the profit and loss section which are not shown in illustration 87, such as "Salesof old material, " "Interest on accounts." "Warehouse rental," "Dividends received," etc. (4) Note that in the disposition of the net profit, reserves are set apart for depreciation in the inventory, for doubtful accounts and for depreciation of buildings. (5) Note also that deductions for the interest on each partner's capital are made before the division of profits between the partners is made. 492. The statement of resources and liabilities shown in illustration 98 is similarly known as the American, the Continental, or "analytical" form of that statement. It contains results that are exactly similar to those as shown in the statement of resources and liabilities in illustration 93. Like the statement shown in illustration 97, this form is preferred by accountants. EXPLANATION OF OTHER ACCOUNTS. 493. In addition to the accounts explained in the preceding pages, there are many others required in various lines of business. A number of these accounts are explained in more or less detail in this chapter. SHIPMENTS AND CONSIGNMENTS. 494. Goods are frequently shipped by one person to another to be sold ' ' on com- mission" by the second party, who acts as the representative or agent of the first party. 495. The party making the shipment is known as the consignor, and he keeps a record of the shipment in an account known as a "shipment" account. 496. The party receiving the shipment is known as the consignee, and he keeps anaccount of the goods received under the name of "consignment" account. The consignee does not purchase the goods; they still belong to the consignor. When the goods are shipped, they are accompanied by an "invoice of shipment." (1f688.) SHIPMENTS AND CONSIGNMENTS 155 497. After the consignee sells the goods, he deducts a certain percentage on the total sales as payment for his services, which is known as his commission, and also for any other charges which may have been incurred in effecting the sale of the goods. The remainder, which is known as the "net proceeds," belongs to the consignor. 498. According to the laws of agency, the consignee becomes indebted to the con- signor for the net proceeds of the goods as soon as they have been sold, hence the net proceeds should be remitted or credited at once to the consignor by the consignee. 499. A statement known as an "account sales" is rendered by the consignee to the consignor, showing in detail, (1) the sales, (2) the charges, and (3) the net pro- ceeds. An account sales may be rendered when the goods are but partly sold, if so desired. (If 589) 500. The object of shipment accounts is to record our deahngs with "agents" or "commission merchants " to whom we ship goods for sale on commission, — that is, for sale for our account and at our risk. 501. The object of consignment accoimts is to record our deahngs with those who ship goods to us to be sold for their account and at their risk. 502. Shipment and consignment accoxmts as they are shown in this chapter are intended to familiarize the student with the principles of debit and credit involved and to show the manner in which a few shipment and consignment accounts may be kept in the books of an ordinary mercantile business. They are not intended to illustrate the best methods of keeping these accounts in a regular shipping or com- mission business, which will be fully illustrated and explained in the special commis- sion set accompanying this Vv^ork. SHIPMENT ACCOUNTS. 503. The record of a shipment is kept in the books of the consignor under the title of "Shipment." 504. There are two general methods of keeping shipment accounts. One is to open a separate account for each shipment, adding the name of the party to whom the shipment is made, for instance, "Shipment to Wm. F. Day & Sons, Chicago." Where more than one shipment is made to the same party, they may be numbered as No. 1, No. 2, etc. Another method is to open a general " goods on consignment" account, to which all the items relating to the various shipments are credited and debited, with a separate account with each shipment entered as a memorandum account in a special book kept for that purpose. The last method does not differ from the first method, except that it shows in one account the same results that would be shown in a number of accounts under the first method. 505. The object is to ascertain the amount gained or lost on our different ship- ments of goods to others for sale on commission. When account sales are received for but part of the goods shipped, in closing the shipment account those remaming 156 BOOKKEEPING AND ACCOUNTANCY unsold in the hands of the consignee are treated as an inventory balance, under the designation "Goods on consignment," exactly as in a merchandise account, until an account sales for the remainder of the shipment is received. 506. When goods are shipped on consignment, they are usually entered by the shipper on the invoice of shipment at cost price, although sometimes the market or selling price is given. Not infrequently in such lines of business as those con- ducted by stockmen, dairymen, fruit growers and gardeners, where the cost price of the goods shipped is not definitely known, no prices whatever are given on t'he invoice of shipment. Full details of the practices common among shippers and com- mission merchants are given in the commission set accompanying this work. 506a. It is not unusual, particularly when only occasional shipments are made, to omit opening a separate ledger account for them. Instead a memorandum record of each shipment is made in a separate shipment book kept for that purpose. The record is a practical reproduction of t^e invoice of shipment. When the account sales is received the proceeds are credited to sales account, the same as a regular sale. At the same time a record of the proceeds is entered in the shipment book, which will then show the shipment closed. The loss or gain on each shipment can be ascertained, if desired. When this method is followed, the value of the goods for which account sales have not been received must be added to the inventory at the time of closing the books, being designated as "goods on consignment." This method is not recommended, as it is liable to lead to confusion and inaccuracies in the trading statement. Rule foe Debiting and Crediting Shipment Acc6unts. 507. Debit shipment accounts for costs: credit for returns. 507a. Debit the shipment, under an appro- priate title, for all costs. 507b. Credit the shipment, under an appro- priate title, for all returns. 508. The various applications of the rule are as follows: 509. Debit shipments, — a. For the invoice (generally the cost)" value of the goods shipped. 6. For all charges, such as drayage, insur- ance, freight prepaid, etc. c. For drafts drawn on us or for cash ad- vanced by us on account of the ship- ment. 511. Observe that in every instance the ac- ooimt is debited for the cost of any- thing of value relating to the shipment. 510. Credit shipments, — d. For all drafts drawn by us or other ad- vances made to us on account of the shipment. e. For all returns (proceeds) when account sales are received. /. For all goods returned for which the shipment had been previously debited. g. For insurancereceived on goods damaged or destroyed. 512. Observe that in every instance the ac- count is credited for the returns from anything of value relating to the ship- ment. SHIPMENTS AND CONSIGNMENTS 157 513. It will be observed that a shipment account is similar to a personal accountin manyrespects. It is debited when the agent is the receiver oi anything of value from us and is credited when he is the giver of anything of value to us. The difference between the two sides of the account, however, shows a loss or a gain to us, instead of a resource or liability as in a personal account. 514. Acting on the principle that the consignee is responsible for all goods consigned to him until an account sales has been received or a settlement made, many bookkeepers follow the practice of charging the personal account of the con- signee with the value of the shipment and charges until an account sales with re- turns is received, when the personal account of the consignee is credited to close, with the difference transferred to the profit and loss account or to a separate account under an appropriate title, such as "Shipment Gains & Losses." For occasional shipments this method is approved. To Close Shipment Account. 515. The difference between the two sides of a shipment account, before an account sales has been received and returns (proceeds) credited, will show a balance which is a resource; after an account sales has been received for all the goods shipped and the proceeds credited to the account, the difference will show a gain or a loss — a gain if the credit side is the larger, a loss if the debit side is the larger. 516. If an account sales is received before all the goods are sold, and the shipment account is credited for the returns (proceeds) shown by the account sales for that portion of the goods which has been sold, the difference between the two sides of the account, offer the account is credited "hy inventory" for the value of the goods remaining unsold in the hands of the consignee, will show the gain or the loss on the goods sold and reported in the account sales. The inventory is considered as a sundry resource inventory described in 1f468a, the shipment account being credited for the amount. 517. To close. After the trading statement has been prepared, shipment accounts are closed by a journal entry made up from the trading statement. When the closing item for any shipment account has been posted, which should balance the account, rule the closing lines in red ink and enter the footings in black ink. CONSIGNMENT ACCOUNTS. 518. Consignment accounts (or "commission sales" as they are called by most commission merchants) differ in several important particulars from shipment 158 BOOKKEEPING AND ACCOUNTANCY accounts. When an agent receives goods to sell on commission, he does not in any sense buy them, and when he expends money upon them in paying the freight, drayage or other charges, and debits the consignment, he does so, it is true, with the idea that the property received is "good for it, " and with the expectation that he will get his money back from the proceeds of sales, but nevertheless with a knowledge of the fact that the consignor (shipper) is personally responsible to him (the agent) for all such expenditures and also his charges (commission, etc.) for selling. - On the other hand, the consignor looks to the consignee (agent) as being personally responsible to him for the proper care of the goods while in his possession, as well as for any proceeds that the shipment may return to him. 519. A change takes place, however, in the relations existing between the con- signee and the consignor the moment the goods are sold. Prior to that time the con- signee is not responsible for the value of the goods, nor could he be held responsible for any loss that might occur so long as he exercises ordinary diligence in their care; but the moment the goods are sold, the consignee becomes directly indebted and is personally responsible to the consignor for the value of the goods sold after his charges have been deducted. Even if he sells the goods on credit and the party to whom he sells should fail, he is still held responsible to the consignor. He may, however, deduct a certain percentage for taking such risk, unless the consignor instructed him to sell for cash only. 520. Consignment accoxmts, therefore, in reality closely resemble personal accounts ( If 5 1 3) . When the consignment is debited, the consignor would be debited if he received the value direct from the consignee, and when the consignment is credited, the consignor would be credited if he gave the consignee the value direct. The consignment account, therefore, represents the consignor. 521. Consignment accounts are not debited for the value of the goods received but only (a) for outlays made on account of consignments, such as freight, drayage, advances, etc., (&) when account sales are rendered for commissions, or other charges deducted, and (c) for the net proceeds. The account is credited for all sales. 522. Consignment accounts are kept under a designating title, such as "0. B. Wharton's Consignment, Columbus, O. " and if different consignments are received from the same party, they should be numbered consecutively. In commission houses it is usually the custom to number all consignments in the order received and thereafter to refer to each consignment by number. 522a. Those who make a specialty of selling goods on commission are known as "commission merchants". When they sell stocks, bonds and other securities, they are called "brokers." CONSIGNMENT ACCOUNTS 159 Rule foe Debiting and Cbediting Consignment Accounts. 523. Debit consignment accounts far costs: credit for returns. 523a. Debit the consignment, under an appropriate title for all costs. 523&. Credit the consignment, under an appropriate title, for all returns. 524. The various applications of the rule are as follows: 525. Debit consignments, — a. At the time received, for all charges paid such as freight, drayage, etc. 6. When on hand, for all charges for cooper- age, boxing, bagging, repacking, adver- tising, or other outlays necessary for the preservation of or for effecting the sale of the goods. c. For all goods returned to us after having been sold and credited to the consign- ment, and for shortage, damage or over- charge claims allowed on goods previ- ously sold. For all drafts accepted or paid, or for other advances made on account of the consignment. When' account sales are rendered, for our charges, such as commission, insurance, storage, guarantee, etc. For the consignor's proceeds remitted with the account sales or credited to his personal account. d /. 527. Observe that in every instance the ac- count is debited for the cost to the con- signor of all outlays, advances, etc., made on account of the consignment by the consignee, and for his charges and for the proceeds remitted or credited to the consignor. 526. Credit consignments, — g. For all sales of goods belonging to them. h. For allrebates for overcharges on freight, drayage, etc., or for other charges re- bated, previously debited to the account. I. When the charges exceed the total sales, for the amount to close the account (owed by the consignor). 528. Observe that in every instance the ac- count is credited for the returns from sales, allowances, etc., received by the consignee for the account of the consign- ment. 529. In a regular commission business, consignment accounts are kept in special books and, therefore, do not appear separately in the ledger. In some systems of commission accoimting, controlling accounts are kept in the general ledger. The latest and best methods in commission accounting are fully explained in the regular commission set accompanying this text. 160 BOOKKEBPINQ AND ACCOUNTANCY To Close Consignment Accounts. 530. The object is to ascertain the amount of the consignor's proceeds and the consignee's compensation, such as commissions, storage, guarantee, etc. 531. Before closing it is customary (1) to prepare the account sales, (2) then to make the proper entries for the charges, etc., and for the net proceeds, after which the proceeds are remitted or credited to the consignor. 532. To prepare the account sales. From the consignment account it is cus- tomary to make out the account-sales as follows: (a) fill out the heading of the account-sales; (b) from the credit side of the consignment account enter the amount of sales, referring, if necessary, to the books of original entry for the items; (c) from the debit side of the account enter the amount of the charges already paid; (d) calculate and enter on thei account-sales the charges for commission, insurance, storage, guarantee, etc.; (e) deduct the total charges from the total sales, which will give the proceeds belonging to the consignor. 533. To close. When the accoimt sales has been prepared, it will be observed that the entries for the sales and for the freight and other charges already paid (1[525 a, b, c) havebeenmadeinthebooks, and the only entries that remain to be made are for the commission and other charges, and for the proceeds, which are not deter- mined until the account sales is prepared. Therefore, to close the account, make the proper entry for the charges not yet entered, and for the proceeds if they are to be credited to the consignor's account. If the proceeds are to be remitted, write the check or note or other paper for the proper amount and make the proper entries for the same. When these are posted, the consignment account should balance, when the proper closing lines and footings should be entered. COMMISSION ACCOUNT. 534. Conunission is a percentage charged by commission merchants, agents, or brokers for services in buying and selling merchandise, real estate, stocks, bonds, mortgages, insurance, or other forms of property. This account is, therefore, a service account. It is debited for the cost of all commission services received (which we pay for) and credited for the returns from all commission services given. When commissions from various sources are to be shown separately in the profit and loss statement, they may be classified to whatever extent desired by distribut- ing them on an analysis sheet. COMMISSION ACCOUNT 161 RuiiE FOR Debiting and Crediting Commission Accounts. 535. Debit commission accounts for costs: credit for returns. 536. Debit commission account, under the 537. Credit commission account, under the proper heading, — proper heading, — a. For the value of all commission services c. For the value of all commission services earned and unpaid, owed to us by others ' earned and unpaid, owed to others by at the beginning of business. us at the beginning of business. 6. For the value of commission services d. For the value of commission services received from others and paid for by us given to "others for which they pay us or or credited to them. we debit them. 538. Observe that in every instance the ac- 539. Observe that in every instance the count is debited for the cost of commis- account is credited for the returns from sion services received. commission services given. 540. The difference between the two sides of a commission account shows a loss when the debit side is the larger and a gain when the credit side is the larger. 541. To close. After the profit and loss statement has been prepared, com- mission accoimts are closed by a journal entry made up from the profit and loss statement. When the closing item to a commission account has been posted, which should balance the account, rule the closing lines in red ink, and enter the footings in black ink. BRANCH STORE ACCOUNTS. 541. When one or more branch stores are conducted, either in the same or other cities, accounts with each of them should be kept in the ledger of the main .store. Several methods of keeping such accounts are in common use. Two of the simplest and most practical are here explained, one being an amplification of the other. 541a. First method. This method involves the opening of but one account with the branch store. This account is opened under a title that designates the location of the store, as "Market Street Store," or if in another city, "Omaha Store — 96 Main St. " The account is debited for everything furnished by the main store or for account of the main store, i.e., for all costs of the branch store; and it is credited for all returns to the main store of cash, notes, or any other value sent in for credit from the branch store. The account is treated exactly the same as a merchandise account, except that at closing, the total net resources of the branch store must be included as an inventory. A single account may be kept, or separate accounts — one for costs and the other for returns — may be kept. All bills of goods intended for the branch store should be returned to the main store, after having been checked, found correct, and entered in the books of the branch store. 162 BOOKKEEPING AND ACCOUNTANCY Second method. This method is exactly similar in principle to the method already described, except that separate accounts are kept in the books of the main store for the various items represented in the costs and returns of the branch store, which are exactly similar to the accounts kept for the same costs and returns of the main store. RuiE FOR Debiting and Chediting Branch Store Accounts. 542. Debit branch store accounts for costs: credit for returns. 543. Debit the branch store, under its proper title, or sub-title, in the books of the naain store, — a. For all goods or money furnished it from the liaain store. 6. For all goods bought for it or by it for account of main store and sent direct to the branch store. c. For all outlays for furniture, fixtures, delivery equipment, salaries, rents, taxes, drayage, or other investments or expenses on account of the branch store. 544. Credit the branch store, under its proper title or sub-title, in the books of the main store, — d. For all cash, notes, acceptances, ac- counts, etc., returned to the main store, and for all cash deposited in bank to the credit of the main store. e. For all goods sold, as shown by reports of sales, when a separate account for sales is kept. /. For all merchandise or other property returned to the main store after it has been charged to the branch store. g. For all returns from any investment, ex- pense or other account turned into the main store. 545. When separate principal and subsidiary trading accounts are kept for the branch store in the books of the main store, the items indicated in 1[543a and 1f544d correspond with the debit and credit items of an ordinary personal account. Items inchided in 1[5436 and 1[544e-/ correspond with the ordinary purchase, sales and subsidiary trading accounts and items indicated in 1[543c, and ^544^ cor- respond to similar items appearing in the usual investment, expense and income accounts. 545a. When the second method is used, the inventories are distributed to the various accounts which they affect in the preparation of the trading statement at the closing of the ledger. 5456. When branch stores are located at a considerable distance from the main store, as a matter of convenience the cash received is sometimes deposited in a nearby bank other than the one in which the account with the main store is kept. When such is the case, it is deposited in the name of the owner and is subject to his check. This does not in any way affect the manner of keeping the accounts ex- cept that a different check book and bank book, are kept and when cash is balanced the balance in this bank must be added to the balance in the regular bank of the concern. BRANCH STORE ACCOUNTS 163 545c. The books in the branch store are kept exactly like the books of any other store except that the main store account represents the owner's interest and should be kept in the same way. Its title should be the same as that represent- ing the ownership in the vr^»m store. The main store account should be credited for the net gain or debited for the net loss at the time of closing the books. 545d. From this it will be seen that the branch store has no accounts with the parties from whom goods are bought, whether shipped direct to the branch store or not. After seeing that the bills are correct, they are turned over to the main store, first making the proper entries for the same in the books of the branch store, crediting the main store. 545e. Branch stores are required to make daily, weekly, or monthly state- ments showing purchases, sales, receipts, payments, expenses, incomes, etc., and at stated times complete trading and profit and loss statements, and statements of re- source and liabilities are sent in, which are checked against the accounts of the main store, and from which adjusting entries are made. To Close Branch Store Accounts. 546. The object is to show the profit or the loss derived from conducting the branch store. 547. The inventories relating to branch store accounts consist of an inventory of the total resources of the branch store, which includes not only the merchandise, but also furniture and fixtures, cash on hand, personal accounts receivable, notes receivable or any other thing of value, as shown by the statement of resources and liabilitites taken from the books of the branch store, and an inventory of the total liabilities, if any, of the branch store, as shown by the same statement. After these inventories are disposed of, as instructed in 1J464 to 474c, the difference between the two sides of the branch store account will show a net gain or loss — a gain if the credit side is the larger, a loss if the debit side is the larger. This net gain or loss should appear as an iteln in the trading statement of the main store. 548. To close. After the trading statement has been prepared, this account is closed by a journal entry made up from the items appearing in the trading state- ment. When the closing item for this account has been posted, which should balance it, then rule the closing lines in red ink and enter the footings in black ink, as shown in other similar accounts. 164 BOOKKEEPING AND ACCOUNTANCY BRIEFER EXPLANATIONS OF ACCOUNTS. 549. Stocks and bonds. A general account may be kept under this title, or a separate account may be kept with each kind of stocks or bonds purchased, such as "Penna. R. R. Stock," or "U. S. Bonds." The account is debited for all costs and credited for all returns, and is kept exactly like property investment accounts (1[376), a separate expense and income account being kept for any outlays or re- turns in the shape of taxes, dividends, interest, etc. 549a. Stocks and bonds are inventoried at cost price, or at market price when less than cost price. If it is desired to carry stock or bonds at cost on the ledger, if the market price is less than the cost price, a reserve account may be opened, which should be credited for the amountof the depreciation at the time of closing the books. The expense and income account belongs to the profit and loss statement. 550. Sundry debtors and sundry creditors accounts. "Sundry Debtors" is a title under which accounts with transient or irregular customers are entered, the purpose being to avoid the necessity of opening a separate account with each person. When a sale is made to a transient customer, sundry debtors' account is debited for the amount, the name of the party being written in the explanation col- umn. When payment is received, the party is credited for the amount on the same line on the credit side of the account. The difference between the two sides of the account shows the amount owed to us by others and is, therefore, a resource, which should be included in the list of accounts receivable in the statement of resources and liabilities. IliDSTBATlON 99. C. i&z^tiio^ii^ , I i's I 550a. Sundry creditors' account is kept in the same manner as the sundry debtors' account, the only difference being that sundry creditors' account is first credited, and is then debited on the line opposite when the credit item is paid. The difference shows a liability, and this account should be included in the list of accounts payable. EXPLANATION OF ACCOUNTS 166 551. Executors and administrators' accounts. It is frequently necessary for business men to ta.ke charge of the settlement of estates. To avoid the necessity of keeping a separate set of books, the necessary accounts are sometimes carried in the books of their business, although this practice is not commended, on the princi- ple that such accounts should not be mixed with the regular accounts of a business. In some states it is prohibited by law. When this plan is followed, however, a gen- eral account with the estate should be kept under the name of the estate, as, "Estate of Henry Wilson," which is debited and credited like an owner's account. It is credited for all the assets of the estate and debited for all the liabilities. Sepa- rate accounts for these assets and liabilities should be opened under appropriate titles. Separate personal accounts should be kept with each heir or legatee, which should be charged for all money paid to them on account of the estate. When it is desired to make a report of the affairs of the estate prior to or at the time of its final settlement, the accounts belonging to the estate should be made up in a sepa- rate statement, any profits or losses belonging to the estate being closed in the usual way into the general account of the estate. 551o. When closing the books of a business which includes executors or adminis- trators' accounts, these accounts should not appear in the statement of resources and liabilities of the business, but the difference between the total debits and the total credits of these accounts should be shown in a single item in the statement of resources and liabilities as a personal resource or liability of the executor ori administrator of the estate, this being necessary in order to maintain an equilib- rium of debits and credits in the trial balance. 551&. In recent years the trust companies of the country have been acting in the capacity of executors and administrators for estates, and have largely superseded individuals. Their methods of keeping such accounts are similar in principle to those already described. 552. Leasehold account. This is an account which is opened when a lease covering a term of years is purchased. The value of the lease, therefore, is reduced each year, as it expires, in proportion to the number of years it has to run. This account is treated in every respect like an insurance account (1[325), the monthly, quarterly or annual expired value of the lease being credited to the leasehold account and debited to leasehold expense, rent, or general expense. It is a resource account, and should be included in the statement of resources and liabilities. 553. Collection and exchange is an account which is kept to show the cost of making collections through banks, collection agencies, etc. It is debited for the cost of making collections from others and credited for any returns for like service rendered to others. It is seldom kept as a separate account except in banks, as 166 BOOKKEEPING AND ACCOUNTANCY Buch items are usually charged to general expense, although a separate account may be kept where there is a sufficient number of items to justify. It is a service account and should be included in the profit and loss statement. 554, Good-will account. The good-will of a business is frequently considered valuable and may be bought and sold in the transfer of the business into new hands. Good-will is the value placed upon the disposition or inclination of the people to patronize a particular business, owing to the reputation it has already established. 554a. When the purchaser is a corporation and the bill of sale covers a specified amount to be paid for good- will, for which that account is debited when opened, the rule is to let it stand without change at the close of subsequent fiscal periods, as the amount does not mean anything except to show what the good-will cost in the first instance. The practice is not unusual, where sufficient profits are being made, to write off against profits a certain percentage of the amount charged to good-will account; but it should not be overlooked that this practice, unless it be to correct an actual shrinkage in the value of the good-will since the date it was acquired is, in a sense setting aside a secret reserve, which is condemned by some authorities. However, if a special reserve for that specified purpose is set up so that the entire transaction is shown in the statements of the company, it would seem that no valid objection to this practice could be sustained. 5546. When the purchaser is an individual or a firm, the account is usually credited at the close of each fiscal period for such proportion of the amount debited as may be determined upon by the owners, which should be charged to profit and loss and should appear as a separate item in the profit and loss statement. 554c. The difference shown by a good-will account is considered as a fixed resource (asset), since its value is fixed and it cannot be used as working capital. Good- will is taxable in some states. It should appear in the statement of resources and liabilities. If treated as indicated in ^[5546, the account will eventually dis- appear; and it is generally preferred by business men that it should be wiped off the books as soon as possible, 'certainly as soon as the good-will of the old concern can fairly be considered as being merged into the new concern. 555. C. O. D. accounts. Where goods are sold C. 0. D. (collect on delivery), various methods are followed. With some it is the custom to charge the express company with the amount of the bill instead of the party to whom the goods are shipped, because the express company is responsible either for the return of the money or of the goods. When this method is followed the name of the express company should be followed by the letters " C. 0. D." Another method is to debit the account of the party to whom the goods are shipped, writing the letters "C. 0. D." in connection with the charge made and in the explanation column of the ac- count in the ledger. In any event, the account is treated the same as a personal account, the difference showing a debit balance, which is a resource that should be included in the statement of resources andiiabilities. KESERVE ACCOUNTS 167 556. Agents' accounts. The method of keeping these accounts varies, depend- ing upon the contract made with the agent. In case his duties are limited to those of a salesman or " drummer," his account is not different from an ordinary personal account, being debited for all cash or goods advanced to him and credited for the amount of his expenses as per his expense bills, and also for his salary or commission at stated intervals. In this case the account shows what he owes or what is owed to him, and the balanceis, therefore, a resource or a liability. If, however, he acts as a resident agent in another city and goods are shipped in his care, it is the best practice to open a separate account for the goods, which is in every way kept and closed like a shipment account, as described in 1[503,1[515, etc. 557. Reserve, surplus and undivided profits accounts. These are accounts which are usually opened in the books of stock companies or corporations to show the amount of the annual profits which have been retained in the working capital of the business for special purposes and not distributed among the stockholders. (1[450 to 11453). Such accounts usually show credit balances. 557a. Reserve account, setting apart a sufficient amount of the profits to meet any contingent expense or loss of the business, may be opened to offset charges against profits, such as bad debts, depreciation, etc. A reserve account is credited for the amount of the profits set apart for the particular purpose indicated in the title of the account. It is debited for such sums as are necessary to meet the purpose for which the profits were reserved. 5576. Surplus and undivided profits are practica ly synonymous accounts, both showing profits belonging to the owners which have not been distributed. Surplus account, however, is generally understood to represent that part of the profits which has been set apart as a permanent addition to the working capital. Undivided profits account generally represents that part of the net profits which is "leftover" after the different sums for the various reserve, dividend, surplus and other accounts have been set apart and deducted. Surplus and undivided profits accounts are credited for the amounts of the profits set apart for the purpose indicated in the title of the account. They are debited when the purposes for which they were opened have been accomplished. 557c. The difference shown by a reserve, surplus or undivided profits account always appears as a credit balance, representing the unused or available value of the particular reserve, surplus, etc., indicated in the title of the account. When reserve accounts are set up for a special purpose, such as reserves for depreciation of property or other resources, for doubtful accounts, etc., such reserves should be deducted from the book value of those accounts on the statement of resources and liabilities, the net amount being extended as the actual resource. This method is required by banks where financial statements are prepared with the object of secur- ing loans. Balances shown by surplus, undivided profits and other similar accounts which are general in character, are classed as secondary liabilities of the concern, and as such should appear as separate items in the section of the statement of re- sources and liabilities (If 4886) representing the ownership of the business. Observe, however, that such accounts as " Reserve for Depreciation," "Reserve for Doubtful 168 BOOKKEEPING AND ACCOTTNTANCT Accounts," or other accounts which are specific in their character, are not classed as liabilities but as offsets against resources (assets) and should be deducted from the corresponding resource account in the statement of resources and liabilities. A fund reserve account that offsets a fund account is more in the nature of a respon- sibility than a liability. 557 d. Reserve accounts, as described in the preceding paragraphs (1f557, etc.) must not be confused with fund accounts, which represent funds that are actually taken from the working capital in cash and set apart to create sinking, redemption and other funds, as described in T[558. The distinction is clearly shown when we say: Sinking fund 1 f Sinking fund reserve Redemption fund } as contra to | Redemption fund reserve Interest fund j [ Interest fund reserve 558. Sinking and redemption funds, etc. "A fund" maybe created for a number of purposes, among them, (1) to liquidate a known existing liability, such as bonded indebtedness, (2) to provide an available or quick asset to meet a specific future obligation, such as plant renewal or betterment, and (3) to provide against any embarrassing contingency or unexpected losses. These funds are usually taken out of the cash assets of the business, and may be deposited in a separate bank ac- count or converted into interest-bearing securities or other form of property which will earn an income, or they maybe transferred to a trustee or other agent who shall invest them in such securities or make such disposition of them as is required by the agreement with the trustee or agent. Two classes of accounts are required for the proper record of such funds, one class representing the profits set apart for the creation of these funds, which are known as fund reserve accounts. These accounts are similar to those described in 1f557a, except that they include in their titles the name of the corresponding fund account to which they belong. The other class shows the investment or disposition of these funds (the actual cash or equivalent) .which are known as sinking or redemption fund accounts, of which several accounts may be required to show the transactions in relation to a single sinking or redemp- tion fund. In large corporations a separate set of books is usually kept to contain the sinking fund accoimts. In both classes of accounts, the identity of the fund to which such accounts belong should be indicated in the title, such as "Sinking Fund Reserve," "Redemption Fund Reserve," "Bonds in Sinking Fund," "Sink- ing Fund Trustee," etc. It should be remembered that the reserve accounts show the amount of the profits that has been set apart for the creation of the fund, while the fund accounts show the investment or disposition that has been made of the fund; consequently, they are contra accounts, one offsetting the other in purpose, although they may differ in the amounts shown in each account at a given time. Hence, reserve accounts usually show credit balances, while fund accounts usually show debit balances. RESEEVE ACCOUNTS 169 Rules for Debiting and Crediting Fund Reserve Accounts. 558a. Debit fund reserve accounts, — 1. For premiums on investments when it is desired to carry the investments at par. 2. For losses incurred in connection with realizing on securities. 3. For taxes on the investments or incomes therefrom, in states where they are tax- able. 4. For expenses incurred in making invest- ments. 5. For amount "to close" when the reserve has served its purpose. 5586. Credit fund reserve accounts, — 1. For all amounts set apart from profits to create the reserve named in the title. 2. For interest received on bonds pur- chased for and belonging to the fund. 3. For dividends received on stocks pur- chased for and belonging to the fund. 4. For interest received on mortgages (if any) belonging to the fund. 5. For interest received on current bank balance in the fund. 6. For profits on sales of any securities belonging to the fund. 7. For discount on bonds or stocks when it is desired to carry them at par in the fund. 8. For accrued income on sinking fund investments at time of closing books. 558c. The items for each sinking, redemption, or other fund, may be kept in a single account, but they are usually separated into three accounts, one for the cash belonging to the fund, another for the investments belonging to the fund, and a third for accruals. The titles of these accounts for a sinking fund would be, "Sinking Fund Cash," "Sinking Fund Investments," "Sinking Fund Accruals." Rules for Debiting and Crediting the Various Fund Accounts. 558d. Debit fund cash accounts, — 1. For all periodical payments of cash to this fund. For all incomes received from invest- ments belonging to the fund, as (a) interest on bonds, (&) interest on bank balances, (c) dividends on stock, etc. For profits on sales of securities in fund. For cash received from sale of invest- ment securities. For cash received from accruals col- lected. 2. 558/. Debit fund investment accounts, — 1. For cost of all securities purchased (generally at par.) 558e. Credit fund cash accounts, — 1. For all investments made from fund, paid in cash. 2. For premiums paid on investments. 3. For expenses paid in making invest- ments. 4. For all cash paid from this fund in liqui- dating the liabilities for which it was created. 5. For any other payments made from the fund. 6. For the amount "to close" when the fund has served its purpose. 558^^. Credit fund investment accounts, — 1. For returns from all securities sold, at the amount for which they were car- ried in the fund (generally at par.) 558/l. Debit fund accrual accounts, — 1. For all payments due the fund at the time of closing books. 2. For all accrued income at time of doB- ing the books. 558i. Credit fund accrual accounts, — 1. For cash received for anything previ- ously debited. 170 BOOKKEEPING AND ACCOUNTANCY 55Sj. The three accounts explained in the preceding paragraph may be combined in a single account when the, fund is small, although in any case it is better to open separate accounts as required. Investments may be carried in the investment account either at cost or at par value. 55Sk. All balances shown by fund reserve accounts represent what may be classed as secondary liabilities, similar to surplus and undivided profits accounts, and should appear contra to the corresponding sinking ot redemption fund accounts, which show resources in the statement of resourfces and liabilities. The sinking fund accounts show real assets, while the reserve accounts show secondary liabilities in the sense that when the balances represented are released or transferred from these accounts, they will go back into the surplus or undivided profits account, and will then be available for distribution among the owners of the business, or for other purposes. , 558L Accounts relating to sinking and redemption funds, and the correspond- ing reserve accounts, admit of a great variety of treatment, depending upon the conditions under which the funds are created. 559. Bonus accounts. Frequently in organizing the affairs of corporations it is necessary to offer a bonus to secure the services of promoters, effect sales of stock, or secure a franchise or a charter. In such cases a bonus account is opened, which is debited for the value of all such bonuses allowed. This account is similar to good-will and leasehold accounts. A certain proportion of the amount charged to the account should be closed off into profit and loss at the close of each fiscal period, until the account is finally wiped out and closed. 560. Patent and copyright accounts. These accounts are kept under two conditions. (1) When a patent or copyright is purchased, the account, under an appro- priate title, is debited for the cost of the patent or copyright. When all or any part of the patent or copyright is sold or otherwise disposed of, the account is credited at the cost value of what is sold, i.e., for the original price charged to the account. It must be remembered, however, that both patents and copyrights eventually expire as determined by law, and that, consequently, their value is decreased year by year. The account should, therefore, be credited annually for the propor- tionate part of the cost which has been eliminated by the passage of time. The amount of such decrease, when credited to the investment account, is debited to the income account, or to a separate account, or, in the absence of these, to profit and loss account. Preferably, such amounts should appear as separate items in the profit and loss statement. (2) When only the right or privilege is secured to manufacture or sell an article under a copyright or a patent upon payment of a percentage or royalty, the account is kept for the purpose of showing the cost of the royalties paid. This cost is, there- fore, a part of the cost of the article manufactured or sold, and, consequently, prop- EXPLANATION OP ACCOUNTS 171 erly belongs to the trading statement. A separate account may be kept under an appropriate title, or the royalties paid may be charged directly to the principal account showing the cost of the goods manufactured or sold. 561. Dividend account. This is an account opened in the books of corporations' and stock companies when profits are to be divided among the stockholders. A separate account is generally opened for each dividend declared, as "Dividend No. 1," "Dividend No. 2," and is kept for the purpose of showing the amount of each dividend declared and also to show the amount of the different dividends that have been paid to stockholders. 561a. When the dividend is declared, the account is credited for the amount. As each stockholder is paid his share of the dividend, the account is debited for that amount, so that when the dividends owing to all stockholders are paid in full the account should balance. If at the close of a fiscal period all dividends declared have not been paid, the difference shows the amount due to stockholders and is, there- fore, a liability, which should appear in the ownership section of the statement of resources and liabilities. 562. Plant account. This is a general title that is not infrequently used in manufacturing concerns to include the cost of machinery, implements, and other property, excepting real estate, used in the manufacture of goods or articles pro- duced, although it is the better practice to open separate accounts for each. Plant account is an investment account which is debited and credited exactly as real estate investment accounts are debited and credited. Separate accounts should be kept for repairs and renewals and other expenses connected with the maintenance of the property represented in a plant account, for which proper reserve accounts should be set up. This account is sometimes opened under the title of " Machinery " account, or "Machinery and Implements," or "Machinery and Tools." 563. Labor account. This is an account which is usually found in connection with the books of manufacturing concerns. It is credited for the total amount of labor performed, as shown by the daily, weekly or monthly pay-roll. The cost of the labor should be charged to the department of the business in which the labor was performed. 563a. The account isdebitedioi the total amount paid to employees included in the pay-roll, whether in cash or otherwise. The account should balance when all the employees have been paid. 5636. The difference, if any, shows what is owing to employees and, therefore, is a liability which should appear as a separate item in the statement of resources and liabilities at the close of the fiscal period. A labor accoimt is in reality a con- 172 BOOKKEEPING AND ACCOUNTANCY densed personal account. However, it should not be included with the ordimapy accounts payable, as in most states those who are owed for labor performed are considered as preferred creditors. ' 564. Franchise account. Public corporations frequently secure valuable fran- chises and privileges from cities and municipal corporations, sometimes for, and frequently without a consideration. Such franchises are usually of great value to the corporation owning them. When a franchise is purchased, the account is debited for the cost value. If there is no cost value, formal accounts are seldom kept, such franchises being classified as non-ledger assets. Under the laws of most states, however, certain limitations are placed upon including the value of franchises in statements of resources and liabilities. 565. Doubtful accounts. Formerly it was the rule to open an account under this heading to show the amount owed to the concern on personal accounts which were considered of doubtful value. This method has been superseded, however, by that of making a list of such accounts at the close of each fiscal period, and then setting up a "Reserve for Doubtful Accounts" account sufficient to meet antici- pated losses resulting from doubtful accounts, no entry, being made in the personal account of the doubtful debtor until the account is finally considered as uncollect- able and of no value, when it is charged against the " Reserve for Doubtful Accounts" account. In the absence of such reserve account, uncoUectable accounts should be closed directlyinto profit and loss account, and their sum should appear as a separate item in the profit and loss statement. 566. Controlling accounts. These are general ledger accounts that are used when separate ledgers are kept for different classes of accounts, such as accounts receivable, accounts payable, depositors' accounts in banks, etc. Each controlling account is kept under a title that indicates the class of accounts included in the sep- arate ledger which it represents . A separate ledger, with its accompanying con- trolling account in the general ledger, may be kept for any class of accounts which may be classified by the use of special columns in the various books from which the items affecting them are posted. These separate ledgers are sometimes desig- nated as subordinate ledgers. 566a. When a controlling account representing a separate ledger is opened in the general ledger, it is debited or credited foi; the total sum of the balances of the accounts in the ledger it represents. At stated times thereafter, usually at the end of each month, the controlling account is debited and credited for the total of the debit and credit items that have been posted from the different posting books to the accounts in the ledger it represents; for instance, if the total sales for the month charged to accounts in the sales ledger, as shown by the sales book, are EXPLANATION OF ACCOUNTS 173 $10,000, at the close of the month " accounts receivable" (the controlling account in the general ledger representing the sales ledger) is debited for that amount, the ' ' sales" account being credited. If the total cash received for the month in payment of accounts contained in the sales ledger is $9,000, accounts receivable account is credited for that amount. It should also be credited with other items, such as dis- counts, allowances, goods returned, as shown by the footings of special columns in other books relating to customers' accounts. The difference between the two sides of the accounts receivable account will then show the sum of the balances shown by the accounts in the sales ledger. 5666. To facilitate the work of classifying the items posted to the various subordinate ledgers, and of posting their totals to the controlling accounts in the general ledger, special columns for that purpose should be provided in the cash book, purchase book, sales book, note books, journal, and in any other book used as a posting medium. The items in these spedal coluinns are footed and forwarded until the end of the month, when the total amounts are posted to their respective controlling accounts in the general ledger. 566c. To prove the correctness ^of the balance shown by a controlling account, the sum of all the balances in the ledger it represents (less any contra balances) should equal it. The adding machine can be used advantageously for this purpose. Contra balances refer to those that are credit balances in a debit ledger, such as the sales ledger, and to those that are debit balances in a credit ledger, such as a purchase ledger. BUSINESS PAPERS. 567. These are papers of every description that are used in business, the most important of which are notes, drafts and acceptances, checks, bills, receipts, orders, statements, shipping invoices, account sales, bills of lading, warehouse receipts, letters, vouchers and memoranda of every description. Notes, checks and drafts are generally called commercial paper. 567a. The use of commercial paper has greatly facilitated and lessened the cost of transacting business. Over 90 per cent of the exchanges of money are effected through the medium of checks, drafts, etc. The charges for exchange between different points, which was formerly quite an item in effecting settlements, have been almost entirely abolished. 568. Written contracts, such as articles of co-partnership, bonds, mortgages, powers of attorney, leases, deeds, certificates of incorporation, insurance policies, licerises, etc., are business papers, but are more properly classed as legal forms. * 569. A promissory note is an unconditional promise to pay a specified sum of money at a definite future time. 174 BOOKKEEPING AND ACCOUNTANCY 570. Parties. There are two principal (and original) parties to a note, the maker and the payee. The maker is the party who signs the note — who makes the promise. The payee is the party in whose favor the note is made — the one to whom the money is to be paid. FB0MIS30BY Note. MS/'.^ PEOPLES BANK i;^^^ f..,^y//i'^ y/.O AT The Peoples Bank of Buffalo, N.Y. 10,JLj^ y^^^,^rr ^^ 570a. In the above note, John P. Stewart is the maker and Henry M. Prentiss is the payee. Observe that the note is made payable at bank, which is presumably the bank of the payee. Pbomissobt Notb. ^Z' i^ y^^^^s-^-2^ - ^>4d^^-.r<^i^.^i^..^^^^^7 7^:.^^. e7!:r^^^^ ■i^%^^^ '.i^^^JYYyy%^' ^:rA^^. /U/^ yffc^a,s; y , M^u^^j^^^J^J 4^.^i^, ^f 5706. In the above note, the maker is the Bridgeville Realty Company, and the payee is Garden & Whistler. Notice that the note, drawn December 3]., at two months, matures on February 28, which is the last day of the second month following December. If this note had been made at sixty days instead of two months, the dat'^ of maturity would have been March 1. BUSINESS PAPERS 175 Note With iNTHRaaT. :?- ■^.^^i^f^^j/ --^..cf-xfjyj^ t>^^^:^^<^-g.^>c<>.,<;i¥^<>?^z^,5^vU5^^ ''y^,rr, ^A^^s^M/eaf/i^^Ml^ 'f?.' y'l'^.^^^^^J^ ^^<r^ ^^.-T^-^^ 7^^^— ^^.^^ ^r-r/^J-^^J-^-^^-l^W^ /7.f7^.l,7->^^^ A- ^,<^.^ ^:-^R^-L.'--r..yC^£^^-i,-z^y— 'c-T^y'7 6/y%^7f^/^^::f!>f-^^^..'- 4 A r^ 4- '«> :Si.?l-i,fe * * 4. * ii * S, "^^ ^-^z - „-.*****/. .Oi.A i$> (MAMUFiffiTiIIiEiis OF bAUMDEDr Supplies & £> A £ ->^^iis.ji, (^'mdeni~Xeari^z,ie!^ A. « a a a a JgK3;.j}, ((^a'n^aeni i:^(€ar^!&tie^ ^ « a * * . T*-. 33 fT> Vv j^ J^ ^~ ''~'' " ■» 4 A ' BAYS SIGHT ***&«4a***4i. •?. A * S> S> ib Si S> a> S> :i- ti> ij !£' '• ^j^^^-a-^g-^^^^^^^^t-^ a .■?- t'e.do', ®^\x(y, r2.^c ^ /^— in iDaytothBDniErQr ^O'^^^^ .^■ X^f%JV Sft. CO. XCEAI. ESXAXB. RE:»-rB>rG &riGL&.I«B. ]«J9 £SX- *9 Xi_f^.,^i^ TO THE FOUlt^Hi^A|jONAL BANK ATLANTA, GA. \ S. B.TURMATtf S(CO. -SI 581. When a check has been "certified" by a bank as shown in the illustration, the bank becomes responsible for its payment. When a bank certifies a check it is immediately charged to the account of the drawer. BUSINESS PAPERS 181 582. A cashier's check is a form of check issued by banks in paying money to those who are not depositors, and is usually signed by the cashier, or it may be signed by the president or any authorized officer. Cabhibb's Check. Des Moines IVational Bartk DesMoines, lo^va ^a^TOTJlE ORI3ER OF. - -^^^^.^^^^^ L/^n^^'\Pe^c.^i^^^^^y ^^ ^..a^K^^.^1^^ ''y^^ Cash;1£RS Check. ^-^-^ /cy No.^/ -$Zi22i -DOLLAKS ■ . — i_^ -. — - - ,- - -- - - - - * » •» -r A 583. A certificate of deposit is an instrument issued by banks certifying that the party named therein has deposited funds to the amount stated. Such deposits draw interest when made for a definite period, but, unless otherwise stated, certifi- cates of deposit are payable on presentation. Certificate op Deposit. /m/y ^y^i^^^iC^^ y^^^ ^yC^^yl-r^ /J.. ^ ^ 584. A receipt is a written acknowledgment of money received, generally setting forth the purpose for which it was paid. BOOKKEEPING AND ACCOUNTANCY Z-^?.-^-^^^^^ //7. / o 1- yz^,£.^:Z^^=/t^.^'-^.,-^.j!^^-^ ^^^y^— ':Q0y€>^^a^?n' =^^ //n/ 0-i jjj^^ ^ t^^^^jSlfi^^j^^ 585. A bill is a statement setting forth the amount of a debt, usually for goods sold or services rendered, with items, prices and terms stated in detail. A bill, when received from others, is often known as an invoice. Bill. (71 0r^ TELEPHONE 6700 RIVERSi6e STORAGE, REPAIRS. SUPPLIES. ETC. SI-SS WEST 93'°STREET. 2^>%J^^Jy>. '^^^yT^yyl^ T^^.^j'^rrrh- *y..y., 2aoo ZMJt^^ // /?.J^„^^^^^^^C^^^ ZjS-gn / (^.^>-r^yiyj'yiyJ^j.^^^,^C!>^y?^.„r^ji' ^y.?a='^ / 77^ / ^7 r ^^p r-J^^f^ /^/ a Ya /^l^.i liL. i£i:y£. / 7 586. An order is a written request of a first party to a second party, either in favor of a third party or the first party, usually to pay money or deliver goods. It closely resembles a draft, except that the time of payment is not usually indicated and it is generally less formal in expression. BUSINESS PAPERS 183 MONTHLY STATEMENT. -/^^y^^.,^ 997.^ (l:,^^ ^o&edance/ irnr 'Tfl /^ n <7bi^mou/U^t^/ refKierp■ »s- \ J U — - . 587. A statement of account is a statement of an open account showing its present condition. It may show only the amounts of the debit and credit items, or the nature of each item may be specified in detail. Shipping Invoice or Statement. THE GARFORD COMPANY. ELYRIA.OHIO. October 3, 19 Messrs. G. M> Hanmell & Co,., Newark, N. J. Gentlemen: We are shipping you today, via Lake Shore and Erie Railroads, l. .«- and M. S. oar 15,416-, per bill of lading enclosed, to be sold for our account, at our risk, on terms stated I'n yours of September 25: 1000 baskets Concord grapes - 8 lbs. 360 " Catawba " " 200 bbls. Northern Spy apples. Freight charges prepaid to Dunkirk, N. Y. , $7.86. This fruit v/as shipped in first-class condition. We trust yoTjif^^ //y fa -r.-1-z^ > ^u£eiu 186 BOOKKEEPING AND ACCOUNTANCY different rouues. Bills of exchange are usually employed in making remittances to foreign countries. 594. Filing of business papers. This is a most important feature of modern office practice. There are many devices and plans for the filing of business papers and letters, the object being to locate them so that they may be easily and readily referred to at any future time. Tt has become the common practice to file all checkSj notes, drafts, etc., with the original bill for which they were issued in pay- ment. For instance, if a bill is paid by note, and later the note is paid by check, both the note and the check should be filed with the bill. This note not only exhib- its the entire transaction in case of future reference, but it also keeps the papers in the most convenient form for audit. This is one of the features of the voucher system which has made it so popular. 595. Auditing accounts consists of the accounts of a business being examined and verified with the original business papers or vouchers by an accountant, auditor or other authorized party. The accounts of banks, and of trust, transportation, insurance and similar public companies and corporations are audited at stated intervals, and the practice is rapidly extending to private corporations and firms. ACCOUNT BOOKS. 596. As previously stated (^454), journalizing is the classification of transac- tions. This classification is greatly simplified by providing a special book for each kind of transactions, and where there are a great many transactions to be recorded, • this plan permits of the work being distributed among a number of bookkeepers, clerks, etc. For these and other reasons, account books vary greatly in number and design, depending largely upon the extent and nature of the business conducted. Books with special columns and other features designed to sliow certain desired results are found in almost every office, and in this respect wonderful advancement has been made in recent years. 597. It should be remembered that no arrangement of books or system of accounts can be shown which would be applicable for use in every line of business. While the various sets illustrated in this work are accurate representations of stand- ard bookkeeping methods in the various lines of business represented, certain modi- fications would likely have to be made to exactly meet the requirements of a particu- lar business. Whether or not specially designed books or the use of special columns in any book can be used profitably, depends upon the classification of accounts employed, the amount of detailed information desired, and particularly upon the frequency with which similar transactions occur. 598. To organize the very best system of accounts for a particular business, which will show those results which will be of the greatest value in its management, requires the services of one possessed of a high order of accounting ability, skill and experience. ACCOUNT BOOKS IS7 CASH BOOK. 599. In this book the entries for all cash received and all cash paid out are recorded. It shows receipts and payments of cash. It is used as a posting medium, no cash items, therefore, being entered in any other book. 600. All items of cash received are entered on the left or debit side of the cash book, and are posted to the right or credit side of the ledger account named. 601. All items of cash paid out are entered on the right or credit side of the cash book, and are posted to the left or debit side of the ledger account named. 602. The difference between the two sides of the cash book shows the balance of cash which should be on hand, that is, the cash in safe or drawer plus that on deposit in bank. Cash should be footed and proved daily, and the cash book should be ruled up at least once monthly, or, if desired, it may be ruled up daily or weekly. A simple form of the cash book is shown in illustration 20. PURCHASES BOOK. 603. This book receives the entries for all purchases of merchandise. There are many forms of this book, their purpose, however, being the same. Each party from whom a purchase is made is credited for the amount in his account in the ledger, and "Purchases" is debited for the total amount of purchases for the month, unless separate purchase accounts are kept for different lines of goods handled, when a special column is kept for each account. 604. ' ' Cash purchases, ' ' a term that is applied to bills which are paid immediately, may be disposed of in two ways, either by entering the bill in the usual way in the purchase book and the cash paid in the cash book, checking the one against the other, or by debiting the purchases account directly from the cash book, for which a special column for that purpose may be kept, if desired. SALES BOOK. 605. This book receives the entries for all sales of merchandise for which bills are made out, whether paid for at once or later. This book is also used as a posting medium. Each party to whom a sale is made is debited for the amount of the sale in his account in the ledger, and the total footing for the month is posted to the credit side of the sales account in the ledger, thus preserving the equality 188 BOOKKEEPING AND ACCOtTNTANCY of debits and credits. If separate sales accounts are kept for different lines of goods, special columns may be kept in this book for that purpose. In addition, other special columns, which will be described in the various sets of this work, may be used. 606. Some difficulty is experienced by beginners in distinguishing between "cash sales" and sales that are made on "terms cash" or for "spot cash." Cash sales refer to those sales in which goods are delivered and paid for at once, for which no account is kept with the buyer in the books of the concern, the goods being de- liveredandthecashreceivedasinthecaseof cashsalesinretail stores. Forcash sales it is the custom to make out a cash slip or to use a cash register, or both, and at the close of each day's business the total cash received for cash sales must equal the total amount shown by the cash slips or cash register. This amount is then centered directly into the cash book to the credit of sales account, or in a department store to the credit of the several department accounts of the business, if such are kept. Cash sales are, therefore, not entered in the sales book. 607. Sales "terms cash" or for "spot cash," however, are treated differently. In a wholesale or jobbing house, "terms cash" generally means that cash may be paid any time within ten days, and in many lines of business within thirty or even sixty days. "Spot cash" generally means that the goods are paid for as soon as sold and billed to a customer. In either case, the entry is made in the sales book the same as if the goods were sold on account. If the cash is received at once, the en- tries in the cash book and the sales book may be checked one against the other, which debits cash and credits sales, without passing through a personal account. If the sale is made to a regular customer, however, it is the rule to pass the transac- tion through his account by debiting him in the sales book and crediting him in the cash book. NOTE AND ACCEPTANCE BOOKS. 608. The notes receivable book and notes payable book are kept to show a record, in detail, of all the notes and acceptances received and issued. These books are designed to show all the particulars pertaining to each paper in a compact form for ready reference, especially as to its date, maturity, the parties thereto, and its final disposition. These books are used as posting mediums, all entries being posted directly to the ledger, although they may be posted through the journal. When used as posting mediums, the total of the notes and acceptances received and issued for the month or other period are postedto their proper accounts in the led- ger, the several contra entries being posted to the different accounts named. ACCOUNT . BOOKS 189 . THE JOURNAL. _. :::il -■'-.:. ^ ::' r:./ 609. This book is kept to receive only such entries as cannot properly be made in any other book. It may include special columns for different purposes, although many forms of this book, which were once quite popular (for instance, the six-column journal, the special columns of which have been nullified by the cash, purchase, sales and other books) are now almost obsolete. However, the journal still remains an important book, and in many lines of business is susceptible of great utility by the introduction of special columns. 610. The cash journal is a combination of the cash book and journal, which is very popular in some lines of business. It is fully illustrated in one of the sets accompanying this work. OTHER BOOKS. 611. There are many other books in common use in which transactions are recorded, each usually designated by a name indicating the purpose for which it is kept, such as the voucher register when the voucher system is used, the commission sales book or ledger and account sales register used in commission houses, the time book, pay roll book, cost book, and many others used in manufacturing lines, and a number of special books used in banking and financial concerns, which are fully described in the various sets illustrating the various lines of business. THE LEDGER. 612. As described in 1[ 17, this is the book of accounts. It is the book to which the items and totals of the various books in which transactions are classified and recorded are transferred. It is from this book that the trial balance is taken, and it is from the trial balance that the trading and profit and loss statements, the statement of resources and liabilities, and other statements which show the results of the business for the fiscal period covered are prepared. 613. Ledger accounts may be classified as general accounts, accounts receivable, accoimts payable, etc. The general accounts may be kept separately in a general ledger, or these accounts may be again sub-divided into those kept in a general ledger and those kept in a private ledger, the private ledger- usually containing those accounts which show the proprietary interests of the owners of the business. Accounts receivable may be kept jn a ^;epafate',l.edg©r.kn.gwti as a sales ledger, and the sales ledger may again be sub-divided into a city ledger and a country ledger, or ah -Eastern ledger and h Western ledger, or, wher£ihei:aare:maay accounts, several ledgersmay be kept, as"Ledger,AtoM,""Leic%epSL±ctZ;!?e(tc-'. Accauni® payable may be kept in a separate purchase kdger... febanks^-ihe accounts with depositors 190 BOOKKEEPING AND ACCOU.NTANCY are kept in a ledger known as the individuaL or depositor's ledger. A number of ledgers may also be kept for these accounts in divisions of the letters of the alphabet. CLOSING THE LEDGER. 614. This is a term used to express the closing of the books at the end of each fiscal period, which is usually once a year, although books may be closed every three or six months, or even monthly, which, however, is unusual. "Closing the books " is another term used to indicate the same proceeding. The purpose of clos- ing the ledger, as stated in 1[247 and If 447, is to indicate the close of a business 'period, and thus to eliminate all open current trading and profit and loss accounts in the ledger preparatory to their receiving the entries of a new business period. Accounts showing resources and liabilities and those showing fixed reserve, surplus, sinking fund or other similar accounts are not closed except in the following cases: (o) when an adjustment of the account has been made and it is desired to show the cor- rect balance in one amount, and (&) when the space allotted to an account is filled and it is necessary to forward it to another page or to a new ledger. This applies to all excepting the cash account, which is usually balanced,, footed and ruled and the balance carried down or forward at least once monthly. When it becomes nec- essary to forward an account showing a resource or a liability to a new page or a a,ew ledger, only the balance shown by the account should be forwarded and not the footings. 615. Preparatory to closing the ledger, all inventories should be taken and ad- jsting entries for them and for any other items should be made, after which the final trial balance is taken. The various trading and profit and loss statements and the statement of resources and liabilities are then prepared and proved, after which the entry or entries to close the trading, the profit and loss, and such other accounts as are to be closed, and to distribute the net profit or the net loss to the proper accounts, are made up and entered in the journal. When the items of the closing entry or entries have been posted, and the accounts footed and ruled, the ledger will again be in its primal condition, showing open accounts which should agree with those shown by the statement of resources and liabilities. The ledger is then ready to receive entries for the next succeeding fiscal period. ERRORS IN TRIAL BALANCES. 616. This subject may be discussed to best advantage uilder three heads: ^ (1) preventing errors, (2) finding errors, (3) correcting errors. It is better to be iJBXpert in.avoiding errors than expert inrdetectiag th,em. EBROES IN TRIAL BALANCES 191 616a. Preventing errors. One source of errors is in posting to the wrong side of accounts. These errors can be prevented to a large extent by posting the debits first and afterwards the credits from each book. Another plan is to have the pages or books from which debit items are posted paged in even numbers, and the pages or books from which credit items are posted paged in odd numbers. Under this plan, the sales book, and the credit side of the cash book, which contains debit items, would be paged in odd numbers, as 1, 3, 5, 7, etc., while the purchase book, and the debit side of the cash book, which contains credit items, would be paged in even numbers such as 2, 4, 6, 8, etc. Other books containing separate debit and credit items should be paged accordingly. When the posting books have been thus paged " odd and even," as suggested, all page numbers on the debit side of the ledger should show odd numbers, and those on the credit side should show even numbers. In case of an error, a rapid examination through the ledger will quickly show an item that has been posted to the wrong side of an account. 6166. In forwarding footings in posting books, or from one account to another in the ledger, care should be observed to place them in the proper columns without transposing the figures. Transposition of figures is a very common source of error in posting and forwarding amounts. Various methods and check systems for find- ing a transposition of figures have been suggested, but none of them are absolutely certain, and many of them require an amount of work which makes them impractic- able. They have been superseded by systematic checking methods which are more practical, one of which is hereafter described. 616c. Finding errors. Too much importance cannot be attached to a careful checking of each day's postings. The simplest method of checking is described in 11 456. One of the very best methods of checking is given below. 616d. Reverse checking or proof posting. This method may be used in connec- tion with any set of books, however large or small. It avoids the use of "check figures," or any of the more or less complicated schemes and devices so frequently met with, and if carried out as indicated will make errors in posting practically impossible. The plan is as follows: — only one book is posted to the ledger at a time. As each item is posted to its ledger account, a slip of paper (say two by six inches in size) is inserted at the account, with the end of the slip protruding slightly at the top of the book. When the posting from each book is completed, beginning with the first slip in the ledger, each unchecked item in the ledger is entered on a sheet of paper ruled in columns and known as a "check sheet." As each item is transferred to the check sheet, it is checked on the ledger account. When all the items posted have been entered on the check sheet, it is footed and the sum of the items on the check sheet must equal the sum of the items posted, as shown by the footing of the column in the posting book. The totals of each succeeding day are added to the footing of the previous day on the check sheet, so that at the end of the month the total footing of the check sheet must equal the total footing shown 192 BOOKKEEPING AND ACCOUNTANCY in the posting boolj. Any omissions in posting or transpositions of figures are at once discovered by this method, and if ordinary care is exercised, accounts posted to the wrong side of the ledger will also be discovered. If more than one item i^ posted to the same account from the same book, a separate slip should be inserted for each item. Separate check sheets should be kept for each posting book. These sheets are generally known- as "cash check sheets," "sales check sheets," etc. 616e. The adding machine may be used very advantageously to prove postings, whether to principal or subsidiary ledgers, in connection with the method of reverse checking and proof posting explained in the preceding paragraph. When the month- ly trial balance is "out", the adding machine maybe used to prove the postings from any book by finding the sum of all the postings from that book found in the ledger for the month. In like manner the controlling account for any subordinate ledger may be proved. 616/. When credits to customers' accounts, which are generally made to cover a specified bill or bills, are posted, if canceling items on each side of the account are carefully compared and indicated by placing a small cross-mark or letter to the left of the amounts, it will generally discover any errors which have been made in entering the wrong amount, while it leaves the account in the best shape to quickly ascertain the correctness of subsequent payments on the account. 616g'. Correcting errors. When an error is found, it should never be corrected by an erasure. If an item has been posted to the wrong side of an account, or if the wrong amount has been posted, a red line should be ruled through the amount and the proper entry made. When necessary, adjusting entries in the journal may be made. Such entries, however, should contain a full and explicit statement of the error and of the correction made, so that at any time it would be perfectly under- stood. CORPORATIONS. 617. A Corporation was defined by Chief Justice Marshall as "an artificial being, invisible, intangible, and existing only in contemplation of law." It is sometimes termed an "artificial person." 617a. Corporations are necessary to provide a convenient means of combining the funds which a number of individuals may have for investment, in order to supply the capital required to conduct and carry on large commercial and indus- trial enterprises without requiring those who contribute this capital, whether in large or in small amounts, to assume the responsibilities and liabilities of the ordinary partner; consequently, laws have been enacted, by the legislatu;res of the different states creating for corporations a separate legal existence, and extend- ing to stockholders certain privileges and exemptions from liability, and other advantages which cannot be secured in the ordinary partnership relation. Cor- porations, as a rule, may be formed for any legitimate purpose. 6176. Corporations are created in two ways, by charter and by general statute. When created by charter, a special act must be passed for each corporation, which is known as its charter. This charter defines its powers and privileges. When cre- ated by general statute, all that is necessary is to comply with the provisions of the statute, which defines its powers and privileges. Nearly all corporations are now created by general statute, and very few by special charter. 617c. The method of procedure in forming a corporation by general statute is very simple. The required number of individuals (not less than two and usually not less than five) join in a written instrument known as "Articles of Incorpora- tion," which, when properly acknowledged before some competent officer, is sub- mitted to the judge of a court for his examination as to whether or not it conforms with the law creating it, and when properly approved and certified by him it becomes a certificate of incorporation, the act under which the corporation is formed being its charter. After this certificate is propex'ly recorded the corpora- tion is formed, and when by-laws are adopted and the board of directors anc officers are elected the corporation is ready to proceed ia conducting the busines: for which it was created. Note — The legal part of the formation of a corporation should invariably be entrusted to an attorney. 618. Terms and definitions. There are certain terms and definitions used in connection with corporations with which you should be familiar. Some of them are here described. 619. The capital stock is the amount of stock authorized by the charter or certificate of incorporation, at its par value. The paid-in capital is the amount paid on the subscribed shares of stock by the stockholders. 1Q3 194 BOOKKEEPING AND ACCOUNTANCY 620. Treasury stock is stock of a corporation which has been previously issued to stockholders, and is later purchased from the funds of the corpora- tion or is secured by donation or gift. Unissued shares of the authorized capital stock must not be considered as treasury stock. Treasury stock does not participate in dividends. "Treasury stock is the stock of a company issued as fully paid, which subsequently comes back to the company: (a) as settlement of an account due the company; (6) as a purchase by the company; or (c) as stock donated for working capital." 621. The stockholders of a corporation are the individuals who own the property of the corporation, each stockholder's interest being measured by the number and value of the shares he holds. 621a. A stock certificate is a document issued by the corporation to each stockholder, certifying that he is the owner of a certain specified number of shares of the capital stock of a specified par value. 622. The board of directors is elected by the stockholders and represents them. It is vested with the management and direction of all the affairs of the corporation through its officers, who are generally elected from among its own number. These officers are usually a president, vice-president, secretary, and treasurer, whose duties are defined in the by-laws. 623. The president is the chief executive officer, who presides at the meet- ings of the board and ordinarily exercises the authority of the board when it is not in session. 624. The secretary keeps the official records of the corporation. He is custodian of and is responsible for the charter and seal of the corporation, and for the minute book and the various other books containing the records relating to the stockholders of the corporation. The most important of these books are : (a) The minute book, in which is recorded the proceedings of all the meetings of the stock- holders and of the board of directors. This record should be most complete, as the officers must look to it for the necessary authority to conduct the affairs of their respective offices, and in case of litigation it is taken as prima facie evidence for the acts of the board of directors and officers. It should contain the by-laws of the corporation, and the minutes of each meeting should be signed by the secretary and also by the president. (fc) The stock certificate hook is a book of printed certificates, with stubs, which are filled out and issued to the stockholders. DIFFERENCES BETWEEN PAETNEESHIPS AND CORPORATIONS 196 (c) The transfer book, or journal, receives entries for all transfers of stock from one stock- holder to another and from it the proper entries are made in the different accounts in the stock ledger. Entries for the original certificates issued may be entered in this book also, and posted from it to the stock ledger. When this is done, the amount of the original stock issued should be charged to "Capital Stock Issued" account in the stock ledger, which would then show a debit balance equal to the credit balance shown by the capital stock account in the general ledger, as well as the sum of the credits to the various stockholdejrs' accounts in the stock ledger, thus making the stock ledger self-balancing. {d) The stock ledger contains the accounts with the different stockholders, and shows the number and the par value of the shares of stock owned by each. It is a subordinate ledger, of wliich thf) capital stock account in the general ledger is the controlling account. It receives its entries from the stock certificate book and from the transfer book. From the stock book, each stockholder is credited for the number of shares and the par value of the stock issued to him. From the transfer book, he is debited for the number of shares and the par value of stock transferred by him to others. The balance shown by each account is the par value of the stock owned by the stockholder. (e) The dividend book is kept to show the dividends declared and paid to each stockholder. A dividend is a certain percentage declared on the capital stock to be paid from the surplus earnings of the company. 625 The treasurer is the financial ofiicer of the corporation. He is usually the custodian of and is responsible for all the funds of the corporation. The ordi- nary books of account in which is recorded the general business of the company are kepi; in his oflSce. It should be remembered that the books of the secretary and those of the treasurer are distinct and separate, although the duties of one, either in whole or in part, may be and frequently are performed by the other, to suit the requirements of a particular business or as required by the board of directors or by the by-laws. SOME DIFFERENCES BETWEEN PARTNERSHIPS AND CORPORATIONS. 626. Formation. A partnership is an association of two or more persons for the purpose of conducting a business and sharing in the profits and losses accruing, with all the powers and privileges under the law that each partner enjoys as an individual. A corporation is an association of individuals authorized by law to act as a single person, with powers and privileges restricted to those definitely set forth in its special charter or in the general corporation statute (act) under which it is formed. 627. How formed. A partnership is formed by an agreement (either written or verbal) between two or more persons to contribute capital, ability or service, or all of them, for a certain purpose, and the associated partners are known as a, firm. A corporation is formed by the association of two or more per- 196 BOOEKEEPiNG AND ACCOUNTANCY sons under a special charter or under a certificate of incorporation issued by some officer of the state, in accordance with the general or special law under which it is created, and is usually designated as a company. 628. Liability. In a partnership each partner is liable for all the debts of the firm. In a corporation each stockholder is liable only for such an amount as is defined by law, which is usually the amount of his stock, but always in propot- tion to his share in the capital stock of the corporation. 629. Continuation. A partnership continues until the expiration of the time agreed upon for dissolution or until the death or legal disability of one of the partners. A corporation continues until the expiration of its charter, which may be perpetual. The death or disability of a stockholder does not affect a corporation. 630. Powers. A partnership has no restrictions that the individuals composing it do not have, and it may engage in any line of business so long as it is legal. A corporation is restricted to the performance of only such acts as are nec- essary to conduct the particular business or accomplish the particular purpose for which it was created. 631. By whom conducted. The affairs of a partnership are conducted by the members of the firm, or such of them or their agents as are so authorized by the agreement between the partners. The affairs of a corporation are transacted only through the officers elected by the stockholders, or their legal representatives, as authorized and defined by the charter and by-laws, who act as agents of the corporation. CORPORATION ACCOUNTS. 632. The accounts of a corporation are in no ^way different from those of a firm or an individual proprietor in so far as they relate to the routine transactions of the businsss conducted, but there are a number of accounts necessitated by the requiremencs of corporate ownership which are found only in connection with corporation accounting and are not found elsewhere. These accounts relate to the investments of the stockholders and the distribution of profits. 633. Capital stock account. This account, in a way, corresponds with the capital account of a proprietor or partner, since it is an ownership account (read ^55, 586), and shows the par value of the stock owned by the stockholders; but it is not affected by the gains or losses of the business, which are shown in undivided profits, surplus^ and other similar accounts, nor by the purchase and sale of the stock between the stockholders. COHPORATION ACCOtTNTS 197 Paragraph 6^ — Continued. a. It is credited for the par value of the stock issued, up to the amount of the authorized stock. h. It is debited, when the capital stock is reduced, for the amount of shares retired and canceled, at their par value. c. The balance shows the amount of stock of the corporation, at its par value, in the hands of its stockholders, and it should equal the sum of the balances shown by the accounts with the different stockholders in the stock ledger. If treasury stock is held, its par value must be added to the sum of the balances in the stock ledger to equal the balanceof the capitalstock account. Capital stock represents a secondary liability of the corporation. Note — It should be credited only for the actual stock issued, and not for the total author- ized capital stock unless all of it has been issued. 634. Treasury stock account. This account shows the amount of the capi- tal stock of the corporation previously issued to stockholders, which "has been secured from them by purchase, gift or donation. a. It is debited for the cost of all treasury stock purchased by the corporation or for the market value of stock received by gift or donation. 6. It is credited when treasury stock is disposed of, for the cost of the stock if purchased or for the market value of the stock if received by gift or donation. If sold for more or less than the price charged in the account, surplus account should be debited or credited for the differ- ence between that price and the selling price. If the stock is retired and canceled, credit the account for the amount for which it was debited when the stock was received, and debitor credit surplus account with the difference between that amount and the par value of the stock retired, debiting capital stock account for the par value of the stock retired and canceled. c. The balance shows either the cost or the market value of the treasury stock on hand, which is a resource. Note — Treasury stock does not participate in dividends declared, and in many states tha purchase of its own stock by corporations, as treasury stock or otherwise, is forbidden. 635. Subscription Account. This account is opened to show the par value of stock which has been subscribed but not issued. It is credited at par value for the amount of stock subscribed and not issued at that time; it is debited for such stock when finally issued. The balance, if any, shows the par value of stock subscribed but not issued. 636. Reserve, surplus and undivided profits accounts. (Read ^[657 to 557d inclusive, page 167.) 198 bookkeeping and accountancy Accounts Debited and Credited in Connection with Transactions Relating to the Stockholders of a Corporation. 637. In disposing of the transactions relating to stockholders in the becks of a corporation, the names of the accounts to be debited and credited are given, following each proposition stated : a. Where stock is subscribed and immediately paid for: Cash, Dr. For par value of the stock sold. Capital Stock, Cr. 6. Where stock is subscribed and not all paid for at one time: Subscriber, Dr. For total amount of stock subscribed, at par Subscription %, Cr. value. c. When part of the subscription price is paid when stock is subscribed, or when part ia paid later: Cash, Dr. For the amount paid in cash or otherwise. To Subscriber, Cr. d. When subscribed stock has been paid for in full and the stock issued : Subscription %, Dr. For the amount of stock issued, at par value. Capital Stock %, Cr. e. When stock is subscribed and payment made by cash, notes and property i.e., if A, B, and C each subscribed for twenty shares of D Company stock, par value $2000 — A pays cash, B pays half cash and the balance by note at thirty days, and C deeds to the company land appraised at $2000: Cash, Dr $2000 For amount of stock issued and paid for, at Capital Stock, Cr $2000 par value, by A. Cash, Dr 1000 For amount of stock issued and paid for, Notes Rec, Dr 1000 at par value, by B — one-half cash and one- Capital Stock, Cr 2000 half note. Land, or Real Estate, or Cost of Property, Dr 2000 For amount of stock issued and paid for, Capital Stock, Cr 2000 at par value, by C, in land. In like manner, if the stock was paid for by a patent right, machinery, services or other value, a corresponding account, under an appropriate title, that would clearly set forth the nature of the transaction should be debited, such as " Patent Rights" %, "Machinery" %, "Cost of Property" %. etc. /. E, F, and G are partners. They decide to incorporate their business, each taking stock for his interest in the old concern. If the business is to be recorded in the old books, the entry to adjust is: E, Dr. Each for the amount of his net capital in the F, Dr. firm, for which he has received stock in the G, Dr. new company at par. Capital Snok, Cr. CORPORATION ACCJOUNTS 199 If they desire to open a new set of books, the accounts shown by the statement of resources and liabilities would be debited and credited for the amounts shown therein, in connection with the entry shown above. If stock was sold to additional stockholders, the entry would in every way be similar to those given in previous examples under like conditions. g. H and I are partners, each with a net capital of $25,000 shown in their capital accounts. They decide to incorporate with a capital stock of $100,000, of which they are to receive $75,000 par value in payment of their interest in the former business, represented by their capital stock, the $25,000 being for good-will. The remaining $25,000 was disposed of to outsiders, at par value. The entry to adjust is: H, Cap. %, Dr $25,000 To close capital % I, Cap. %, Dr 25,000 To close capital % Good-will, Dr 25,000 To open Cash, Dr 25,000 To transfer to new books Capital Stock, Cr $100,000 "Cost of Property" is a term that is used to designate the difference between the current assets and liabilities of a business or property purchased and the purchase price. Oftentimes, when it is desired to state the assets purchased, at their cost, on the books of the company, it is necessary to set up an account called "Reserve for Capital Investment." This reserve is sometimes referred to as "Capital Reserve." h. Where both common and preferred stock are issued to stockholders, their sum equals the capital stock of the company, although separate accounts are opened for each ; for instance, in example g, if the capital stock of $100,000 was divided into $50,000 preferred stock, $50,000 of common stock, instead of capital stock being credited, preferred stock would be credited $50,000, and common stock $50,000. i. When stock is sold at a discount, i.e., if J and K purchase ten shares of stock, par value $100, at $75 per share,, if the shares are paid for in cash the entry is: Cash, Dr $1500 Discount on Stock Sold, Dr 500 Capital Stock, Cr $2000 j. In the above transaction, if one-half is to be paid in cash, the entry is : ,1, Dr $750 K, Dr 750 Discount.on Stock Sold, Dr 500 Subscription %, Cr $2000 As the stock is paid for, "Cash" is debited and J and K credited. When each has paid $750 for the stock and it is issued, the entry to adjust is: Subscription %, Dr $2000 For the par value of the stock issued. Capital Stock, Cr $2000 Note — The preceding examples illustrate the simpler entries required in opening the stock- holders' accounts of a corporation. In these days of holding companies, subsidiary companies, and the many other combinations in corporate ownership, there are many conditions contin- ually arising which require special treatment at the hands of the accountant. This, therefore, is a subject which properly belongs to the most advanced part of higher a-ccoaating work and, consequently, is omitted in this text. 200 BOOKKEEPING ANl/ ACCOUNTANCY MANUFACTURING ACCOUNTS. 638. Commercial and industrial pursuits maybe divided into two classes: those of traders or distributors, who are known as merchants, and those of makers or producers, who are known as manufacturers. 639. The merchant buys and sells; the manufacturer makes and sells, i.e., the merchant buys and sells the finished product, while the manufacturer buys the materials and hires the labor to turn these materials into the finished, product which he sells to the merchant. Sometimes the manufacturer acts as his own merchant or distributor by selling his product directly to the user or the consumer, just as occasionally the merchant may manufacture some part of that which he sells. 640. Just as the principal profit of a mercantile or trading business is derived from the purchase and sale of commodities and is ascertained from that group of accounts known as trading accounts, so, in like manner, the principal profit of a manufacturing or industrial business is derived from the manufacture and sale of commodities, the cost of manufacture being ascertained from that group of accounts known as manufacturing accounts. The cost of finished goods sold in a manufacturing business corresponds with the "cost of merchandise sold" in a trading business, the only difference being that in one case the concern makes the goods and in the other it buys them already made. Similarly, the gross trading profit shown by the trading accounts of a merchant corresponds with the gross profit from sales shown by the accounts of a manufacturing concern. 641. While there are marked similarities between trading and manufac- turing accounts, as indicated in the preceding paragraph, they differ in some im- portant respects owing to the great difference in the elements of cost entering into the manufacture of goods and the corresponding difference in the units of information desired. While the accounts of a small factory may be very simple, in large establishments, where every detail of cost and expense must be shown, elaborate systems must be installed which exemplify the highest expressions of scientific accountancy, and for that reason manufacturing accounts, cost systems, etc., are of special interest. ELEMENTS OF COST. 642. There are three principal elements of cost in manufacturing, namely: the cost of m^aterials, the cost of labor, and the cost of manufacturing expenses. The item.s showing these costs are entered into corresponding accounts known as maAeriaJ ^QQQtmts, labor accounts, and factory expense accounts. The items ELEMENTS OF COST 201 entering into each of these accounts may be further classified in separate accounts to any extent desired, in a manner similar to the classification of items in the prin- cipal and subsidiary accounts of a trading business. (Read 11134 to 139) 643. Materials. In a manufacturing sense, material is that of which any- thing is made. Raw material is material in its natural state, or nearly so, such as coal, cotton or wool. Many materials pass through several stages of manu- facture before they reach their final form in the finished product; for instance, iron ore is converted into metal by one process, into steel by another, and into its final form by a third and, not infrequently, by a fourth or fifth operation. Con- sequently, the finished product of one concern or factory or department may become the material of another; for instance, the finished product of the pig iron manufacturer becomes the material of the steel manufacturer, and his finished product, in turn, becomes the material of the engine builder or the tool maker, etc. 644. Labor. This is a most important element entering into the cost of manu- facture. It represents the cost of converting the material into the finished prod- uct, whether the labor is expended directly upon the material, in the operation of machines, or in other ways connected with the processes of manufacture. 645. Factory expenses, or "shop," or "manufacturing," expenses, as they are variously designated, include the cost of superintendence, incidental labor, supplies, rent, fuel and light, power, taxes on plant, insurance on plant, mainte- nance, repairs, renewals, depreciation, and such other items as enter into the cost of production. These expenses are, in a general way, similar to the general expenses of a trading business, but they include only those thturing expense, or "burden. '' (11719) Theitemsof factory expense are indicated in 1[645, 734a, 6. The items referred to are those of the factory or works only and not those of the office or general establishment. Thrae factory costs, when distributed, aigree exactly with the items credited to the contra manufcs' turing expense account. (T[722c) c. Total cost equals factory cost, plus such general, administrative or other "overhead" expenses, etc., as may be charged to the various orders, jobs or contracts. The items included in the " total cost," or " total cost to make," correspond exactly with those charged to finished goods account. (1[741a) d. The selling price equals the total cost, plus such percentages or other proportions of that cost as are added for selling expenses and for the profit to be made on the goods sold. Selling expenses are not and should never be considered as manufacturing expenses, and should never be included in the production cost of goods manufactured. "Selling price" exactly corresponds to the amount credited to sales count. (1[745) e. The selling expense account oi a manufacturing business corresponds exactly with the same account for a trading business. (11264 to 277) It is a profit and loss account and, like other similar accounts, must be deducted from the gross income shown by the trading statement before the net profit can be ascertained. 667. The cost formula following ^[664 may be further illustrated by the following diagram, in which it will be hoted that 100% represents the "total cost," the percentages below representing the proportions of the different elements 3ntering into the total cost and those above representing the additions to find the sellirg price after providing for selling expenses and profit. ^'"^^^ Ad£l^^^^ Hf^' fooyo ^0% 208 BOOKKEEPING AND ACCOUNTANCY ANOTHER COST FORMULA. 668. The f oilowing formula is described as " Analysis of Sale Price of a Man- ufactured Article."* In this formula it will be seen that there is some difference in the terms used to express the various costs as they are cumulated, "shop charge" being substituted for factory expense, or burden, and "general establishment charge" being substituted for administrative and general expenses, or over- head. In like manner, "works cost" and "inclusive coats" are substituted for factory costs and total costs. <- selling Price $505 -^i Inclusive or So. 3 Coat $420 -Works or Ho. 2 Coet $400 -^ , Inventories, Jan. 1, 19 1400 00 u Manufacturing oipensas Finished goods 850 7000 00 00 Accounts Eeceivabla 17500 00 Machinery 29000 00 Small Tools 1800 00 Office furniture and fixtures 500 00 Store Firtures 500 00 Accrued Taxes 100 00 Accrued Pay-roll 1200 00 Accounts Payable 6000 00 Surplus 8200 00 Beserre for Uncollectable Accounts 350 00 Reserve for Depreciation on Machinery, etc. 1500 00 Capital Stock - Preferred 250 shares at $100 25000 00 Capital Stock - Oomnon 250 " 25000 00 u Materials Purchased 53000 00 u Labor 34000 00 Sales, loss returns, allowancas 4 discounts 116200 00 u Manufacturing Expenses 12000 00 selling Expenses 5000 00 Adminlstrativa Expanses 4100 00 183550 00 183550 00 ' 764. Inventories. The inventories at the close of the period, December 31, are as follows: materials and supplies, $8500; materials in process, $4200; labor in process, $1750; manufacturing expenses, $1480; finished goods, $9420. 242 lliLTTSTBATION IM BOOKKEEPING AND ACCOUNTANCY MUroFACTtmillG STATEMEST FOP. TEAB EHJIItS PECBMBER 31, 19 PrlmoCost. c'y yay IWEiraOHIES, Jan. 1, 19 , materials and aupplles at coat / Uatsrlals in procaas - partly mfg'd goods I labor in process - " POTOHASES OP MATERIALS and other manufacturing supplies during period, including Inward frelglit and ejqpress- age, less returns, allowances, discounts, etc. PEODUOTIVE LABOR for period Production Cost. 'kASnFAOTURIHG EXPENSES of preceding period applicable to partly nanufactured goods PRIME COST of goods manufactured during period, brougjit do-|^n MAHUPAOTURIHO EXPENSES during period; - Rent of factory 2200 Taxes of factory 200 Stationery and supplies 100 Insurance on materials and machinery 500 Superintendence 1500 Wages of foreman and factory clerks 2400 Wages of firemen, engineers and oilers 2500 Fuel and lighting 500 Repairs and renewals on raacMnory 600 Depreciation on machinery I 1500 2700 1400 3800 4100 53000 34000 94900 650 60450 12000 93300 765. Manufacturing statement — department method of accounts. The statement in illustration 104 is made up from the trial balance, illustration 103, and the inventories at the close of the period. The American, or standard form of statement is shown in the illustration. The items in detail, entering into the total manufacturing expenses as shown on the statement, were found by an analy- sis of the manufacturing expense account. The same is true of the items making up the total selling expenses and the total administrative expenses shown in illustrations 105 and 106. 766. Preparation of the manufacturing statement when manufacturing accounts are kept by the department method. Explanation: Notice that Part 1 of the statement shows -prime cost, and that Part 2 shows cost of production, in agreement with the formula for manufacturing statement. (1[664) Part 1. (1) Inventories, January 1, 19 , consisting of three items, ara inventories at the close of the last preceding fiscal period, taken from the trial balance. (^ 174) (2) Purchases of materials are shown by the debit balance of materials account in the trial balance. (3) Productive labor is shown by the debit balance of the labor account in the trial balance. MANXJFACTUHING STATEMENTS jTHB TOED MHDFAOTURIllS CO.. riTTSBUBO, PA^ 243 7C ■jC a.e- PMUE COST (matorialB and labor) of goods inanafaetured during per]K}df carried dxrsn IHVEMTOHIES, leo. 31, 19 , ' Uaterlala and aupplles, at ooet Materials In process - partly mfg'd goods Labor In process MAlItJFAOTUBIllD EXPSHSES applicable to partly manufaotured goods PHOroOTlOH COST of goods oanafaotnred during period, carrljfd to trading statement 4200 1750 80450 8500 5950 94900 1480 91820 93300 (4) Prime cost is the difference between the debit items showing cost of material and productive labor, and the credit items showing the inventories at the close of the period, i.e., it represents the cost of the material and labor entering into the goods manufactured during the period. (5) Inventories, December SI, 19 , consisting of three items, are the inven- tories at the close of the present fiscal period. (1[174) Af;er this item is entered, Part 1 of the statement should be footed and ruled, as shown in the illustration. PaH 2. (6) Manufacturing expenses during preceding period, the first item on the debit side of Part 2, is the inventory of manufacturing expense account at the close of the last preceding fiscal period, as shown in the trial balance. (7) Prime cost is the first item on the credit side of Part 1 brought down. (8) Manufacturing expenses for the period are found in the debit balance of manufacturing expense account in the trial balance, th,e various items being found by an analysis of that account. (9) Manufacturing expenses, the first item on the credit side, is the amount of the inventory of these expenses at the close of the present fiscal period. (10) The production cost of the goods manufactured during the period is the difference between the sum of the debit and the credit items, which completes Part 2 of the statement. The production cost, represented in the last credit item, is the connecting link between the manufacturing and the trading statement, that item being shown as the second item on the debit side of the trading state- ment. 244 Illcstbatioh lOS BOOKKEEPING AND ACCOUNTANCY TEADIEO 5!PATE!IEHT FOR .IEJB,EroinajPBCEMBBR 51, 19 IHVENTOET, Eso. 31, 19 , Uamufaatured goods on lianil at close of ~ praeedlng period GOODS MiHUFAOTnEED during porlod. par manufaoturine statsmsnt Total cost of mannfacturod product Less IHVEFroHY naimfactured goods on hand, at close of this period. Sec. 31, 19 . Cost of goods sold Gross trading profit carried down SELLIHG AMD DISTPIBITPING EXEBHSES, PrelsJit outward Commission for selling Salesmen's salaries mages of shippers and pacmrs Insuiance on stock, eto. Traveling azpeoaes SFlies > Advertising' " ,^ Heat and light -^ Eont show-room ""- ^ Storage, - butslds warehouse Depreciation on fizturas BET TRADIHG FHOFIT carried to profit and loss statement IOC 20C 2500 600 5C 123C 50 100 10 100 50 IC 7000 91820 98820 9420 69400 26800 116200 5000 21600 26800 767. Trading statement. This statement is similar in all essential partic- ulars to the trading statement of a mercantile business. (If 240) It is shown in illustration 105. The statement of resources and liabilities is shown in illus- tration 107. Illustration 106 PROFIT AHD 106S STATEUEBT FOR fflAB EHDIBB DECEMBER 31, 19 flZtUTVB ADMIBISTRATITE EXPENSES Rent of offices Insurance on furniture & Taxes - proportion Interest on loans Officers' salaries Clerics* salaries Audit fee Stationery and office supplies Beat and light Repairs, office furniture Reserve for doubtful accounts Depreciation on furniture SET PROFIT for period, carried down DlVliraD Preferred stook, §25000, at 7% Coimon stoolc, $25000, at 10^ SURPLOS PROFITS carried down Suiplus, Dec. 31, 19 ,08 shown on balance steet 100 16 50 30 2000 1000 200 50 100 60 400 92 1760 2600 4100 17700 21800 21650 21650 MANUFACTUEINO STATEMENTS 245 THs TOBD mmm-CTtmnto co. , httsbobg. fa. Salas - 1»BB retruma, allonances and dlscotmts ;roB8 trading profit bro't doini 11620C. i 116200 26SO0 geeoc 768. Profit and loss statement. This statement, shown in illustration 106, while similar to the profit and loss statement explained in ^[435-445 is divided into three parts, the first showing the net profit for the period, the second showing the distribution of the net profits for the period, and the third showing the undivided profits, or surplus, of the business at the close of the period. THE TODD MABPFACTUBIiro CO. , PITTSBOHJ, PA. SmPlD3 PEOFn:, suirlua a/o, Jan. 1, 19 SURPLUS profit for period, bro't down 17750 21S50 246 Illvbtbatiom IOT BOOKKEEPING AND ACCOUNTANCT gmiSHESfl OF EESOOBCES ABP UiBIIITIES, BEOEllBEH 31, 19 Cash In office Cash in bonis Inventories! - Materials in stock Uaterlals in process Labor on materials in process Uaaufaoturing expenses Finished goods in stocK Accounts receivable Less reserve for \mcollectable aoopunts Total current resonrces (assets) Iiachinsry Less reserve for depreciation Small tools Office furniture and fixtures Stpre fixtures Total resources 200 10200 S500 4200 1750 14S0 9420 17500 350 29000 1500 500 10400 253S0 171S0 52900 27E00 1800 1000 63200 Illustration 108 FIHAL TElAl BALAUCE, ramUBEH 31, 19 THE TODI) MFO. 00: Cash - per C. B. Cash - petty llBteriBla Uaterlals in Process Frsdnctive Labor Ilanufactui-ing Expense Flniahsd Goods Accounts Peceivable Machinery Snail Tools Office Furniture £ Fixtures Store Fixtures Accrued Taxes Aoomed Pay-roll Accounts Payable Surplus Beserve for Unoolleotable Accounts (contra in adnr. ex. a/c) Reserve for Depreciation on Uachineiy, etc. ( contra in Itfg. Sxp. £ Factory Exp. ) Capital Stock Preferred Capital Stock Comion Cost of Sales Sales Selling Expense Administrative Ejgpanse 250 shares at $100 250 » " 100 10200 200 6500 420C 1750 1460 9420 17500 290 DC 1600 500 500 6940C 500C 410C 163550 100 1200 6000 6200 350 ISOC 25000 2S00C 116200 163550 T 769. The final trial balance, taken from a set of books in which the manu- facturing accounts are kept by the cost method (^689), is shown in illustration 108. The amounts were made up from exactly the same transactions that entered into the accounts shown in the trial balance in illustration 103. It will be noted that the trial balance under the cost method is considerably shorter, and that the balances shown by the manufacturing accounts differ from those MANUTACTUHINQ STATEMENTS 'Ma THE TODD MASnPAOTOEIIIO CO. , PITTSBDRO, PA. Aocrued taxes, — estimated Accrued labor Acaoimts pa^ble Total current liabilities DlvidenAs declared Preferred stock, $25000, at 7^ Common " 2S000, " 10)5 Total liabilities Capital stock issued Preferred Common Ge;ieral Profit and Loss acoount Surplus, Jan. 1, 19 , Deo. 31, 19 , 1750 2500 25000 25000 8200 13450 IOC 1200 600C 730C 426C 1155C 5OOO0 2165C 8320C shown in the trial balance under the department method. When both methods are thoroughly understood, however, it is not difficult to reconcib the manufac- turing accounts of one trial balance with those of the other, as is explained in ^771. It should also be noted that while the balances of the materials, materials in process, productive labor, manufacturing expense, and finished goods accounts in illustration 108 show the inventory value of those accounts at the close of the present fiscal period, the balances shown by similar accounts in illustration 103, under the department method of accounts, show the inventory values at the close of the last preceding fiscal period. 770. An interesting exhibit of the manufacturing accounts Under the cost method may be had by opening each account with the inventories shown in the trial balance, illustration 103, and posting the journal entries, shown in illustration 109, which represent in totals the entries made during the year in the various cost journals. It will be seen that the balances shown by these accounts at the close of the period agree with the balances shown in trial balance, illustration 108. Analysis Showing Agreement of Manufacturing Accounts in Trial Balance, Illustration 108, with Similar Accounts in Trial Balance, Illustration 103. 771 . This analysis explains the essential differences between the cost and the department methods of accounts. It shows also that while the results are different in each corresponding account, they are, in fact, harmonious, each being correct under the method employed for keeping it. 248 BOOKKEEPING AND ACCOUNTANCY Illhsteation 109 SEPJES OF EHTPJES SHO^TIKS AGGREGATE AKOOTTS DEBITED ABD CEEDITED 7>e»>. HAmJEACTORIITG ACCOmiTS FOB THE YSAR. EEH THE COST METHOD. TO 747 748 749 ■ 750 751 ISaterlalB / AoootuitB Payable Materials In ProcosB liaterials l&terlals Haterlals In Prooass Productive labor Cash Manufaetiarlng Expenses Factory Expenses Finished Goods Materials In Process Productive Labor Hanufact-nrins Expense Cost of Sales Finished Goods Purchases Rsgxilsltlona , Petumed to stores Pay-roll from cash book Estimate for year, per general journal General Journal 53000 50600 2300 34000 12000 91820 89400 53000 50600 2300 34000 12000 46800 33650 11370 89400 (lmistbatiok 110 MaXk/>^'^^ './Se^ ^J. /^f2^.^Ttr^f:iCo^.tn^ -y!-^--gc^/ 3g'ofi t^ t> P f^/) Me..ey3' ii ^e^lt.KJ.iZi^m^^n '^/iy ftolxWl f Jt - 3<«tfi/¥vt»yij \*rDCo o t-S^ls AjL Qi^:i>0 JptaS^t<.ci£a Lt, 'S'° f If 707) iLLrSTBAIION 111 MANUFACTURING STATEMENTS MjaZeA^^yA J^CBf^/rj'^y * Zlt2jL ^ 'aM/ J / yfejZ.g^^A^ZSeL'^ >g^. /^g^.Ay^ai^ri«r^;, fiOa^.AT-r>4-/r/^7T^n^J :^y firt v-yg<^c SsSoo f-^^n ^ JV i^Z. /^^^S^ A.XZ!Cy^^ry/ %^it<-t^^^^X'^crn-^ f?>n{/Cw\u.-j)ivTAjiyvJivin^ 24S -ajoa ^/'.flni ><-TCt, •5^3 See (b) Materials in process account. The balance in this account, $2700, illustration 111, agrees with the item for that account in trial balance, illustration 103. It is then charged with all goods requisitioned from the materials account for the period. (^711a) The account is credited for any materials returned to the store-room and charged back to the materials account (7126), and for the amount of material used in finished orders, jobs or contracts, at cost. (712c) The balance of the account shows the cost of the material in the uncompleted work in process, $4200, being the amount shown on trial balance, illustration 108. (H713) Illustbation 112 0?^/z^^^/rJ ( ^i /i n/ ^ W yda^,Anri^am.«T,y /^nn g^U y.C'^i^ya^^^^irffr/yi .33£,^a 'i'f^-^ i2Z. ^^-. ~y>.^JU^j^MA: ■S'/ean iL ftfliwa^-Wivw^^vi^ \ \s<; ^ /rUrj/z-Aryr^ CS2-o •rn-r-n ^ '^ 'Jl-cy3r ^ il fi>,:>-i^t^ ^trA^inr^j Mcl£