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The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: Title: American business and accounting. ..6V. Place: Detroit Date: [1908-1909] COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET MASTER NEGATIVE # ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD "r*"?^ -» T »l I I ■ « .( • ■ i> y-yjf. i-M 1 404, AmSn American business and accounting encyclopedia. Rev. ed. , A standard reference book* for accountants and busi- ness men, profusely illustrated with hundreds of special forms ami plates.' Ed. by W. W. Thorne ... Detroit, Mich., The Business man's publishing company, Imi- ited f lOOS-'^OQj 6 V. illus., forms (part fold.) 27i^™. 3d ed. (1901) Comp. by E. H. Beach and W. W. Thorne. _1. Encyclopedias and dictionaries. 2.3i_siness— Dictionaries, i. Thorne, William Winter, 1870- ed. Library of Congress Copyright O HK 3001.A4 . 8-31991 __J RESTRICTIONS ON USE: TECHNICAL MICROFORM DATA FILM SIZE: SDyx\W\ REDUCTION RATIO: \^)C IMAGE PLACEMENT: lA { HA ) IB IIB DATE FILMED: g)AA-^S INITIALS: 1^?) ^^i\^l TRACKING # : l/>SH QSl^^^ Qglfc^^ OSlt^^ O^lt^ . 0^\C^^ OS^IfA FILMED BY PRESERVATION RESOURCES, BETHLEHEM, PA. > J^ 00 o 3 3 a? <^/ 3 3 fU cr O >> > ^a 05.0 — .m =.m FGHIJKLIV jklmnopqr — — -p IJKLM nopqr W -7 OPQR uvwxy OPQ uvwx N CO ^ ^ »-'— 1 N CO N>r- i-'-i UVW 2345 CX)M a>x ^D >>j-< COM ■ VD '^* V U1 3 3 > 0,0 ^S o m fD O '^'=;^ Old ^ ^ o O < —I $<= N fSI i 3 3 A^ .a^ > A^' ..'^^^ (11 o 3 3 % ', "V^'' A^ > Ul "I ^^^ .-v^ '\/. az ^i', .'& .^Z o o 3 3 r«^ tS' V s^^ KC ^fo ^CP 1^^ ^fo^ I? i r ^ ^ bo c> 00 b ro 2.0 mm ABCDEFGHUKLMNOPORSTUVWXYZ abcdefghi|klmnopqrstuvwxy; 1234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyzl234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 '^ m O O ■o GI "o > C («> I TJ ^ 0(0 5 m »! o m 2.5 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 01 3 3 IS) O 3 3 €8 IS 3 ^ •< TO H (/) CTiX ^-< 00 NJ & Is »< 3D ^— « 00 fM 8 Au " V IS) CJI 3 3 .8 0.3 doX •-3-C N>= 5c (Ai^P oias ^^^ c c/> < -• ^c X < r>4 < O ^e^ -r^- c^ '-<^ 4^ li 1 % H Columbia ®niDerj(itp intftfCitpofJI^rtngork THE LIBRARIES GRADUATE SCIiOOL OF BUSINESS LIBRARY 1 N0N-CIRCULATIN6' American Business and Accounting Encyclopedia REVISED EDITION A Standard Reference Book for Accountants and Business Men. profusely illustrated with hundreds of special forms and plates VOL I. COMPLETE IN SIX VOLUMES The Business Man's Publishing Company, Limited DETROIT. MICHIGAN jk I INTRODUCTION L- - Entered according to Act of Congress, in the year 1908, by rwt Blsixess Man's Publishing Company, Limitej> Dbtroit, Michigan In the otfice of the Librarian of Congreas All rights reserved vClA^A^-Q-^c-cm/Q^-c IN presenting the American Business and Accounting Encyclo- pedia to the public, we beg to call attention to the meaning of the words we have adopted as the title of this undertaknig. "Encyclopedia" is defined as a comprehensive summary of knowl- edge, or of a branch of knowledge. In this encyclopedia we propose to endeavor to furnish a comprehensive summary of information pertaining to the science of accounts and other mat- ters connected with business management, and when considered desirable, to expand the summary into a description, or discus- sion, according to our judgment. It will undoubtedly be found that this work will not cover nor refer to everything pertaining to the science of accounts, nor is such the aim of the editors; but it will include every- thing of any importance or value that comes within the scope of our own observation and knowledge, and that of the many experts who are associated with us in this enterprise. Included under different headings will be found a number of special articles of considerable importance and value to the student of accounting, and we hope to give particular attention to subjects not to be found in any detail in the text books on accounting hitherto to be obtained, and neither time nor expense will be spared to make this work as complete as possible, with a due regard to conciseness and clearness of expression. In this revised edition we have the advantage of the assist- ance of the most celebrated Certified Public Accountant authori- ties in the United States who, by contributing to the general information contained in this Encyclopedia, have conferred their approval on the work we are endeavoring to accomplish. An encyclopedia covering the business field, in order to be entirely practical and of value to the reader, must necessarily be in harmony with commercial advancement and progression, but it is well understood that there are many rules and methods in connection with special business which cannot be improved upon, but which are as practical today as when originated. The general scheme of this Encyclopedia is, therefore, to combine everything old that is good with everything new which is desir- able, and we hope that those who study this work will find that it is of assistance in broadening the mind and assisting in per- fecting their technical knowledge. After completing: the arduous labors connected with the publication of the REVISED AMERICAN BUSINESS AND ACCOUNTING ENCYCLOPEDIA we submit the result with confidence that it will be found helpful in the office to the business man, credit man, general office man, accountant and book-keeper. We desire to express our obligation to those up-to-date accountants to Whom 'we are indebted for a number of special articles used in this encyclopedia whose names are hereunder published. The commercial law section has been contributed by the Hon. Chas. C. Simons, late Senator of the Michigan State Legislature, who is an acknowledged authority on the subject. The authors of many of the principal articles contained in the revised American Business and Accounting Encyclopedia are as follows : Dr. Joseph French Johnson, Dean of New York University School of Commerce, Accounts and Finance, New York City. Geo. Wilkinson, of Wilkinson, Reckitt, Williams & Co., Certified Public Accountants, New York City. Robt. H. Montgomery, Lybrand, Ross Bros. & Montgomery, Certified Public Accountants, New York City. W. H. Prendergast, Ex-Sec'y. National Assn't of Credit Men, New York City. C. N. Smith, Business Systems Manager, Burroughs Adding Machine Co., Detroit, Mich. J. F. Ruark, Certified Public Accountant, New York City. Thos. Conyngton, Manager and Treasurer, The Ronald Press, New York City. Robert J. Bennett, C. P. A., Detroit, Mich. N. T. Ficker, Civil Engineer, New York City. L. U. Crawford, Building Society Expert, Kansas City, Missouri. Charles B. Cook, Chief Accountant, Royal Typewriter Co., Hartford, Conn. A. J. Conen, Accountant, Louisville Soap Co., Louisville, Kentucky. J. H. K. Shannahan, Accountant, Maryland Steel Co., Sparrow's Point, Maryland. D. C. Eggleston, Cost Accountant, Winthrop, Massachusetts. G. E. Hutchison, Auditor, Pittsburg, Belmont Coal Co., Cleveland, Ohio. M. V. White, Trust and Deposit Company of Onondaga, Syracuse, New York. J. A. Finnegan, Systematizer, Philadelphia, Pennsylvania. H. L. Leister, Principal, Zanesville Business College, Zanesville, Ohio. G. Brownlee, Cost Accountant, Woodside Cotton Mills, Greenville, South Carolina. R. G. Alcorn, Cashier, First Nat'l Bank of Hopedale, Ohio. G. Jacobsson, B. A., Public Accountant, Chicago, Illinois. C. B. Smeeton, Public Accountant, Chicago, Illinois. L. Joseph, Accountant, Wilmerding, Loewe Co., San Francisco, California. I The American Business and Accounting Encyclopedia (REVISED EDITION) ( 1 ) ABATEMENT. (See Rebate.) — A discount allowed for prompt payment; the de- duction from fixed debts at the custom house on account of damage or loss to goods while detained in warehouse. A term used to signify a deduction or allowance from the value of goods as invoiced on account of damage, loss, or some kindred cause. (2) ABSTRACT. To abridge, to summarize, to epitomize. A term used by accountants to* describe their analysis of account books made in connection with an audit. It generally consists of independent postings from original books of entry Such abstracts are usually confined to nominal or impersonal accounts and summary accounts representing custoiners' and creditors' accounts. A term used by credit men to describe the report required by them from customers in order to determine the advisability and limit of credit. A term used to describe the report on transfer of real estate, showing in whose name title or ownership is vested. (See Real Estate.) (3) ACCEPTOR. The person upon whom a bill of exchange is drawn (the drawee) by signifying his assent to the document by writing his name upon it, becomes the acceptor. ( (4) ACCOMMODATION. Temporary pecuniary aid given by one trader to another or by a banker to his customers. The loan of money or value without consideration. (5) ACCOUNT. An epitome of transactions for reference. A group of entries in a ledger relating to one particular person or to one particular class of transaction. A record of transactions for reference. I Ace. American Business and Accounting Encyclopedia O O 1- PUBLISHCnS DETROrr. MKH, »■■«««. Fm Si. OUCACO. ILL. IMiraa NmsJ Bat Mh. F. A.IAUDCII..M^ OrNa- YmNo- THE BOOK-KEEPER CAPITAL STOCK $ IOO.OOO Sold to U)NfX)N ENC. NEW YOWC N. V, A. W. KNAPP. ito. siw«i v»- The copy of the charge entered up in the books of account of the seller against the purchaser. "A particular group or class of entries in a ledger relating to a person, or kind of property, or a branch of the profit and loss account." A monthly statement furnished by the creditor to the debtor frequently itemizing the month's transactions and exhibiting the balance due. (6) account books, manufacture of. The story of the manufacture of a blank book properly begins with a description of the paper which makes up its pages. Blank books require a special kind of paper— a paper having a smooth writing surface, proper sizing to permit erasures, a permanent white color, great strength to prevent tearing, and sufficient body to make it lie flat. The kind of paper which has all these qualities, and which is used on all the better grade of blank books, is called ledger paper. There are various grades of ledger paper, the grade being determined by the degree in which they possess the qualities mentioned above. Ledger paper is carried in many sizes, the most used being Cap 14x17, Demy 16x21, Medium 18x23, Double Cap 17x28. These same names which designate the size of the sheet of ledger paper, also designate the size of the blank book which is made from that sheet. For example, we speak of a demy ledger, a medium cash book, or a double cap journal. The demy ledger has a page about 10j4xl5}i, the size of a folded sheet of demy trimmed down slightly. In the same way, a medium cash book would have a page about 111 i4xl7>^ and the double cap journal, 133/^xl6j/S. After the ledger paper of proper grade and size has been selected, a quantity of sheets, dependent on the number of pages wished in the book, is counted out and sent to the ruling room. Here the flat sheets are fed into the ruling machines and ruled up either in the customary form of ledger, cash, journal, day book, voucher register, etc., or to special copy which may be furnished. The pens in the bar of the ruling machine can American Business and Accounting ENcvcLorEDiA F/LLED BYL. 3roct< ^er^r to Bif^OERr^ f?ec'D IN .roP.O.. in. Of?D£fr£D BK For AoDf?£SS- ./90. Job 'Ao . ^Mir'f^i/^c D/ze^CT/ON'S. £>£^IT£D /-AC£ Ar>, D P fft rtT£D BACfT TO CO I' r ^*^ no Cow£f? ^Srocf- IQSS^M. S-^^ YOKUM l£DG£/^ FOi./0 Cut. -X. _70 .5 H££ T .TO S /-/££ T Job /='/?o/^i-s£d ^CJ. — ■S£r>iT- D£l. iy£ff£0. ISO.. '90^ ^UT ^,.^TO^ fl^T,r~.^.^ /^ a^ ^r^^£f^T >y-F HA,r£_iiAT,OMS COMPO^lTOf? HOUf-i Mm HOOff-^ M /rt ■ D//^£cr/or*s T-o f='/^£ss fr^/^ C/y/»/vo ^-s — Coi.nff " «• Ir^tr ^Bi-*>CK — ■• At> Of=^Fe£D£ft No OF ^ff£SS Ooi.o^ O^ //v/r No FofTM^ T, r-l f F^£SS MA /W Moults F^ in -T BinOlNCr I rsST RUCT IONS 3Tri.£ Pj-AJ f^ PADS /OO^-' : /no£x. CtJT_ r^oT . V_ .f\irtCM. NOT X_ " M£ASU/f£M£/Vr — OVTSIOt pac,£ Z":":'" >m "■"' P£jrFo/rA T£ D"P£CT'/OA*s TO fi'ui.e^. rn^/i A Ar/a FoffMB B OTM f^Cf/ FO rH€ ^fiM€ 9QLtN£S TO TM£ £HtreT-6j.inFSTO TH F inCH- firArr aCl/F Ciy/Qe 4 . '^£^ ^K^/Tr- ^•■''j./n£ Rui.£/^ no. or Fecoe^ no OF MACM MOultS MtM ■Stock #- COf^POSiTiort/ t- £i.£CfVr&S £TC. »_ F'/^£S^ iVo/Pfr f _ /PUi-ZNCi %. B/r/0£/fr- ♦_ Li TMOtil^A'nC,*. Ter-Ai. Cost ». Plr>lC £ l.£TT£/flMCt on Bmcte SlO£ o 5 PFCIAL lNSTf?UCTIOr>lS O Pf,.sT£ L/P' p/fooF OF i-i£ADinc. Afvo riLinc, our s MOnv i.isr Of nffT ic i.£s m c. Ai.i.£ IT roifn _^_^__^_^___.^ 6 Ace. American Business and Accounting Encyclopedia 6 be placed so as to make columns of any width, and as every pen is fed with ink by a saturated worsted cord, any number of colored lines may be obtained, — a double red line, a triple green, or a single purple — all are made at the same time. Although several colors can be run simultan- eously, the sheet cannot, however, be ruled in more than one direction at a time, or on more than one side at a time. It must run through the machine once for the horizontal lines, and again for the perpendicular lines, and twice more for the same result on the other side of the sheet. Oftentimes where the form to be ruled is complicated with interlining or special lines, the sheet must go through the machine half a dozen times to accomplish the result. The horizontal lines — the lines which are used to write on, are called "feint" lines, while the perpendicular lines which make the columns, are called "down" lines. When the sheets have been ruled to the desired form, they are sent either to the bindery or to the press room, depending on whether or not a printed heading is desired. The printed head book requires two opera- tions more than the blank head book, and so is more expensive. The first of these operations is the setting of the type. The type has to be spaced out and built into a form which will fit the ruling, so that the word "date," for instance, will be at the top of the date column and the word "amount" at the top of the amount column, etc. When such a type form has been set up, it is put on a printing press and the ruled sheets are run through first on one side and then on the other. A very accurate press register is required. They then go to the bindery. The term binding is very inclusive. It covers folding, sewing, trimming, forwarding, finishing, tooling, indexing, paging, numbering, lettering, etc., and so, although generally speaking the making of a blank book may be said to consist merely of ruling, printing and binding, these three terms in reality cover ten or a dozen distinct oper- ations. We have seen that so far the sheets have been handled flat. When they reach the bindery, they are folded once through the center in sections of five or six sheets each. The flat piece of paper we have called the "sheet," but the folded sheet we must now refer to as "leaves" or "pages." A "leaf" is half a sheet, measured from the fold to the edge. A "page" is half a leaf, or, rather, one side of a leaf. Therefore, a book with 200 leaves will contain 400 pages. A book with 500 pages will contain 250 leaves, etc. A leaf is sometimes spoken of as a "folio" or a "folio page.'* Especially is this true -when the ruled form continues across two pages, the right and the left, instead of being complete on each page. But to go back to our story. We left the sheets folded into sections. These sections are now sewn through the center of their fold to three or four strong canvas or parchment tapes,— one section being laid on top of another until the book is built up. The tapes are cut so as to leave a short projection on each side, which is afterwards glued onto the covers of the book. No matter how careful the folding and sewing may have been 6 I « American Business and Accounting Encyclopedia Ace. done, the edges of the book at this stage are rough and unsightly. For this reason a trim is taken from all three sides to smooth them off, and in the majority of cases, they are stained to improve their appearance. Although a plain green stain is often used for the edges, the distinctive blank book edge is the marble comb edge. This is obtained in the follow- ing manner: Liquids of several colors are sprinkled on the surface of a thick solution of gum. The colors remain on the surface of this solution, and can easily be combed out into a pattern. The edges of the blank book are then dipped quickly on to this pattern in the solution and the colors adhere to the edge of the book. We. mentioned above the term "forwarding," and this is the next operation which the book goes through. It includes the casing in of the book, and the putting of it into the leather. The case into which the book is fitted and glued consists of strong binder's board covers, with rounded, backs. This binder's board is a tough substance possessing tljc outward appearance of a rough, thick card board, and made essentially of the same materials, but having the strength and rigidity of a wooden board. The thickness of the binder's board used is determined by the size and weight of the book, and upon the wear and tear to which it is to be put, as well as upon the style of binding which is desired. After the case has been firmly glued to the book and fastened to the projecting tapes, it is ready to be covered with cloth, canvas or leather, or any combination of same which may be desired. The smaller and lighter weight books are usually made with leather back and corners, with black cloth or drab canvas sides, but an entire canvas covering is often used. This is called "full canvas" binding. The large, heavy books are usually covered en- tirely with leather, and this is called "full leather" binding, or the book is spoken of as a 'full bound book," a "full Morocco book," or a "full Russia book." Usually a combination of two kinds of leather is used, most commonly red Russia back and ends, with white leather flesher sides. This is called "Russia Ends and Bands." The leather is moistened be- fore being pasted to the book so as to be easily shaped with rounded corners. The reader has probably heard of "half* bound, "three-quarter" bound, and "ends and bands" books, and wondered what was meant. The half bound books have light weight boards with smooth rounded backs. The three-quarter books have medium weight boards with back reinforced by bands which may be seen to project. The ends and bands books have thick, heavy boards with double band reinforcements on the back. We now have our book cased in and covered over, but it is in a wet, gluey condition, and must have a chance to dry out and season. To prevent warping in this drying process and to allow the glue or paste to set firmly, the book is put under heavy pressure and allowed to stand for two or three days, or if a heavy book, better for two or three weeks. After this time has elapsed, it is ready for finishing. The finishing consists in pasting in the fly leaves, scraping, varnishing and ornamenting the cover. Ace. American Business and Accounting Encyclopedia The ornamentation is either burnt into the leather or put on with gold leaf. The gold leaf is applied with hot iron rollers whose heat causes the gold to cling to the leather. The gold lettering is applied in much the same way. The lettering is set in type, the type is then heated to a high temperature, covered with a sheet of gold and applied with pressure to the leather. With the exception of indexing, paging, and other minor operations, the blank book is now complete. The time consumed in making a blank book by the process described above, is from one week to ten days for a small unprinted book, and from two to three wrecks for the large printed head book, but the longer a book 's allowed to season the stronger it will be, and the longer it will last. The life of a blank book may often be prolonged by the addition of a canvas cover over the binding. This cover can suitably be retained while the book is in current use and taken off when the book is closed, revealing the fresh binding which looks well when the book takes its place on the shelf among other books which have seen active service and have been retired. It may be of interest to know that bindings can often be repaired when worn or damaged, and strengthened when beginning to give way. The books can often be resewed and put back into the old or new covers, renewing their usefulness for many years. Although the life of a blank book depends to a large extent on the care it receives at the hands of the book-keeper, it depends far more on the care of the maker in selection of materials and the kind of labor which goes into it. There is no com- modity which is sold at a wider range of price than the blank book, and no commodity in which the difference in value is less apparent to the average man. We trust that the above explanation of the process of manufacturing will aid the reader in detecting this difference in value, and will teach him to look first at the quality of paper, the form of ruling and the kind of binding before attempting to make any comparison in price. Time tells the story, and after the blank book has been put into use, the discovery of inferior quality comes too late. The loose leaf book has become of late years a new feature in the commercial stationer's stock. Some of the best loose leaf methods of bind- ing are only to be found now in the stationery establishments. The origi- nal period of introduction has passed, and the loose leaf ledger is now a staple article of stock in both large or small stationery houses. It is made on a simple, everyday mechanical principle, and the very best materials the market affords are used in its construction. The salient features are simplicity, durability and strength. The vice-like grip so easily effected with the powerful jaws insures a perfect alignment of the sheets, the great essential feature of a successful loose leaf ledger. Three points of excellence in the ledger are the rounded back which will open flat, the leather covered back which allows for lettering of title, and the absence of exposed metal parts to scratch the office desk. 8 American Business and Accounting Encyclopedia Ace. II Suggestions and Instructions ON PREPARING COPY FOR BLANK BOOKS TO BE MADE TO ORDER. Mark on copy the number or width of feim. .uiing (horizontal lines). If a "box" heading is wanted, rule double head line, as tllustra- ied l.el..w (No. i). Note the width of faint lines on marijin. Write very plainly all copy for printing. No. 1 When getting up a sample of a new form It is desiralile to mike it of a regular size, so thtre maybe no waste of material; tlierefore it is best to know the usual SIZES OF PAPERS USED IN BLANK BOOKS Faint Lines No. 1 1 NAMB UP SIZB Cap • - Demy Medium - Double Cap. Royal - - Super Royal Imperial • Dbl, Demy Dbl. Medium STANDARl WEIGHTS PBR REA\: SIZK OF SHEBT 18 28 and 30 36 a.nd 40 36 and 40 41 U 72 56 and 60 72 ::nd 85 14 X 16 X 18 X 17 X 19 X 20 X 23 X 21 X 23 X SIZE OF FOLDED SHBET I0'4 i\% 14 12 14 16 18 SIZE OF PAGE IN BOOK WHBH MADB UP No. 2 8K lOK n% n% 13% 15 1514 17 '4 13'4 1554 1754 1654 \»% 19H 2054 22% Date i No. In Favor of FOR RULING SAMPLE FOR COPY Trim a sheet of Manila or other plain paper to the size of a folio or page of book wanted. Rule off the head lines at the usual distance from the top. then space off your down columns cxacUy where you want them, allowing V^ inch extra space for the bind- ing In center, or % at side, as your copy may he drawn. If the ruling of each page is the same, use only a half sheet (or one leaf); if the form of ruling extends acrcss the two pages or the two pages are different, you had better use the full width of two pages, showing sufficient space in center (three-quarter inch) lor binding. It is not necessary to send the whole sheet showing length un- less there is different matter or a change below the heading. The width of page determines the usual length; Jf it is to be shorter it»t» U-ngth desir<»d. 1. 2. S. 4. 3. 6. Give Full iiwtructioiw on Copy •» FoUowk Number of PAGEi or Leaves, Size of Paper ok Page in Inches. W:dth of Faint Ruling, Paging. Whether consecutive or In folios. Style of Binding. Lettering on titles, at Top: Center Bottom: Box & Cox. 7. NUMBER of accounts TO A PAGE, as in Ledgers; 40B pages. 1 account; 200 pages. 2 accounts; 20O pa^-es 3 accounts. 8. INDEX. Ifbuund in or separate, and what formf 9. CANVAS COVER. If wanted. _ If the book is to be a duplicate of one we have made, it is un necessary to send copy; see our label inside front ^°^" /"'^^f. vise us of the job number on same; we save duplicate shtet with instructions thereon of all Job-work done in our establi-hment. If the book is to be a duplicate of one made by other parties, cut out the last leaf one-fourth inch from binding, if it can l>e spared; this will show both pages If they vary. Write particulars on copy, as per Items 1 to 9 herewith. Many forms of ruling and sizes of ledger sheets are carried in stock ready for immediate delivery. Besides the ledger and ledger transfers, there may be found loose leaf price books, order, receipt and inventory systems, and holders and binders of all kinds. To a person desiring an account book, we offer the following: Everything that a man needs at his desk, in the counting-room, in his library, in his advertising department, or in his correspondence, can be furnished promptly by the manufacturing stationer so equipped. There is no order too small to receive their prompt and careful attention, and there is no order too large for them to execute satisfactorily. (7) ACCOUNTS PAYABLE ACCOUNT. The ledger account with the creditors. A purchase account. A repre- sentative account to which are posted the totals of accounts payable col- umns from cash book and journal. (7a) ACCOUNTS PAYABLE BOOK. ACCOUNTS PAYABLE RECORD. ACCOUNTS PAYABLE REGISTER. The record of accounts payable is sometimes called a purchase record, 9 : ACc. American Business and Accounting Encyclopedia 7-9 or voucher record. The distinguishing features of these records will be considered under their appropriate headings. In some businesses the record of purchases is called an accounts payable record. All invoices are entered in this book as received and columns are provided for rebates, allowances, cash discounts, transportation, deductions, etc. Distribution columns are also provided for the different accounts to which the goods purchased are to be charged. In most cases the gross amount of the invoices (less legitimate trade discounts) is credited to the accounts payable account in the general ledger, the posting being the total of the amount column in the accounts payable record. The totals of the col- umns provided for cash discounts, rebates, allowances, etc., will be posted to the delii cl accounts payable account or charged to accounts which are negative to accounts payable account. Where the accounts payable record is kept as above indicated, the total of the invoices entered therein is at the close of each month credited to an accounts payable account kept in the general ledger. A special column is provided in the cash book headed "accounts payable" and the total of this column is at the close of each month posted to the credit of the accounts payable account in the general ledger. Allowances, discounts, etc., are credited to interest and discount, or similar accounts, and debited to accounts payable account, so that the balance of this account will always reveal the amount of outstanding indebtedness on accounts payable. This method is particularly convenient where it is customary to discount all bills, or for taking care of small accounts payable where they are very numerous. The balance of the account can always be verified by inventory of unpaid bills on file. (8) accounts payable ledger. A purchase or creditors' ledger in which are carried the individual accounts with creditors. (9) ACCOUNTS RECEIVABLE ACCOUNT. (a) The ledger account with a customer, or debtor. A sales account. (b) A sundry account receivable is one in which a number of small accounts are bunched, the balance being drawn at the close of the month by subtracting the total of the credits to all the accounts as if it were an account with one individual. The credits to sundry accounts receivable account should be posted consecutively, and checked alphabetically, or numerically, with the debits to which they relate. When the system is adopted of placing each credit opposite to its corresponding debit, the entire account to be footed anew every time a balance is taken, the account is always in great confusion and a prolific source of error. There are many ways of treating accounts receivable from the time the letter is received which contains the remittance in payment of the account to the posting of same to the ledger. As a tule the letter and 10 4 9-13 American Business and Accounting Encyclopedia Ace. check are handed to the cashier (or book-keeper when he combines the duties of cashier and book-keeper), and he makes a notation on the letter of the page of the cash book on which the remittance is entered, and at the same time examines the correctness of all deductions for discount, freight, allowances, claims, etc. After the entry has been made on the cash book, it is desirable to file the letters in a special accounts receivable file, where they may be traced as vouchers, which will show the net amount of check received in case any question should hereafter arise in regard to the amount of deductions as shown on the cash book. Where deductions have to be referred to a traveling salesman or other party for O. K., the amount of remittance will be entered on the cash book and posted to the ledger, leaving a balance outstanding until the claim can be O. K.'d or refused. (10) ACCOUNTS receivable BOOK. A sales book or record. A book designed to keep track of credits for the use of the credit man. It is usually ruled for months, the customer's name and amount of bills being entered under the due date. Each month, therefore, this book furnishes a list of collections to be made during that month, and space is provided in which to record the steps taken for collection and their result, together with other memoranda. (11) ACCOUNTS receivable AS CAPITAL. Problem : It sometimes happens that in the organization of a cor- poration the original proprietor turns over certain accounts receivable as part payment for stock in the new corporation. As some of this may turn out to be uncollectible, what is the correct way of dealing with such a transaction ? Solution : If the bills and accounts receivable were taken at their face value, open an account with B and as the bills and accounts mature credit B with the interest on the same, if there be any. If any of the bills or accounts prove worthless charge the same to B. By doing this the value of B's capital account will not be affected, and the firm will not be obliged to stand any loss (which does not belong to it) through the in- ability to collect some of the accounts receivable or bills receivable taken from B. — {G. E. Mark.) (12) ACCOUNTS RECEIVABLE DISCOUNTED. ASSIGNED ACCOUNTS. Accounts assigned to a bank. or other party for the purpose of realizing on same before they become due. As this method of discounting accounts receivable is not very common, we will illustrate it as follows : We will assume that W. H. Hunt & Co. have $12,000 out in accounts receivable, distributed as follows: Smith & Co., $2,000; Jones & Co., $4,000; Brown & Co., $6,000. Wishing to raise immediately, say $8,000, 11 L Ace. American Business and Accounting Encvcloi'e DIA 12 they communicate with their bankers, and having obtained their consent to teh loan, copies of each bill (represenitng the $12,00) are made in duplicate, and on the back of each is endorsed the usual ''for value received we do hereby transfer, set over, etc." A statement is attached to each firm's bills, making each account complete. All the firms verbose accounts are being assigned are then notified by Hunt & Co. of the fact, and the bills assigned are specifically mentioned. The bills are then sent to the bank accompanied by addressed and stamped envelopes, in order that they may have as little trouble as possible in the matter. This completes the preliminaries. The bank then makes a demand note for the amount of the loan ($8,000), which embodies the collateral on which the loan is made, i. e., Smith, Jones and Brown's accounts, it being understood that the bank does not loan on the accounts but on the note, which is signed by Hunt & Co., and their account is then credited by the bank and loan account charged. Hunt & Co., first make a journal entry crediting Smith, Jones and Brown and charging assigned accounts, which is really an account against the bank. The reason for this entry is very plain. The moment the assignment is made to the bank, that moment the accounts of the three customers are settled as fully as though they had mailed checks for the proper amounts, so far as they are concerned ; but as a matter of fact the amounts are still "accounts receivable," the only change being the source from which the payment is to be received. Cash is then charged with $8,000 and the item is credited to loan account. Some might prefer calling this account bills payable, which is perfectly proper ; but it has been found more desirable to separate it from the trade notes. The accounts affected by the above entries then stand as follows : SMITH & CO. $2,000 Nov. 26. Asgmt $2,000 Nov. 20. Mdse Nov. 15. Mdse Nov. 15. Mdse Nov. 26. Smith JONES & CO. $^,000 Nov. 20. Asgmt $4,000 BROWX & CO. $6,000 Nov. 2G. Asgmt $6,000 ASSIGNED ACCOUNTS. Smith & Co $2,»)00 Nov. 26. Jones & Co 4,000 Nov. 26. Brown & Co 6,000 LOAN Account (first nat'l bank.) Nov. 26 $8,000 CASH. Nov. 26. Loan $S,000 The bank receives Smitn & Co.'s check for $2,000. They pass it to the credit of Hunt & Co. exactly the same as a deposit made in the regu- lar way. Then a subsequent entry is made,charging H. & Co., and credit- ing loan. Hunt & Co. do exactly the same thing, i. e., charge cash and credit 12-14 American Business and Accounting Encvcloi'euia Ace. w the bank (assigned accounts) and then credit cash and charge loan account. These are the methods applied by the borrower and lender. When the $8,000 has been received by the bank, it closes out the loan and makes up interest charge; which is deducted from the regular deposit account of Hunt & Co., the papers relating to the assignment and the note are all returned, and subsequent payments from Smith, etc., are received by the bank and credited up as straight deposits, while Hunt & Co., credit such payments to assigned accounts until it is closed. (13) ACCOUNTS receivable LEDGER. A 'sales or customers' ledger in which are carried the individual ac- counts with debtors. (14) adjustment or controlling ACCOUNT. A term used to describe an account to which adjusting entries are debited and credited for the purpose of adjusting or correcting books of account. In auditing, it is a common practice to open such an account, charging and crediting to same all differences or errors which may be dis- covered in the course of the audit. Where such an account is carried it will be found of great assistance to the accountant, as this account not only contains the details of every difference, but at the same time keeps the books in balance. A title used by accountants to describe balance accounts with ledgers, which are used to assist in locating errors which may have occurred. The original idea was that each departmental ledger (wholesale, retail, city, country, state, etc.) should contain a general ledger adjustment account, while th^ general ledger should contain an adjustment account with each departmental ledger. In practice, however, it has been found unnecessary to carry the adjustment accounts with the general ledger in the depart- mental ledgers, as this merely involves a duplication of work. The adjust- ment account in the departmental ledger has been discontinued also witii the object of preventing the book-keeper keeping the departmental ledger from knowing whether his work is correct or not until it has been incor- porated in the general ledger and compared with the postings to the adjust- ment account from the total columns of the books of original entry. So far as this is concerned, however, the desired object cannot be obtained, as any book-keeper can prove his own work if he has any wish to do so. If he cannot obtain the actual balance of his ledger as a basis for proving his postings, he can establish an imaginary basis which will answer the purpose just as well. The assertions, therefore, of some accountants that they can introduce systems of accounting by which the various book- keepers will be dependent upon the head accountant for the knowledge of the accuracy or inaccuracy of their work are entirely specious and unjusti- fiable. To the adjustment account in the general ledger will be debited and credited the totals of columns provided in the books of original entry for 13 Ace. American Business and Accounting Encyclopedia 14 the purpose of keeping departmental sales; purchase, receipts and pay- ments separate, the balance of the adjustment account thus representing the total of the balances in the departmental ledger with which the account is kept. Such accounts may be kept with great advantage where a number of traveling salesmen are employed, each having a certain territory. In this case the sales ledgers should be subdivided, so many pages being allotted to the customers of each salesman. Separate columns should be provided in sales books, cash book and cross-entry journal for each section, and a representative, or adjustment account opened with each section in the general ledger to which the totals of columns in sales book, cross-entry^ journal, and cash book are posted at the close of each month. If practica- ble, it will be found more convenient to provide a separate ledger for the section covered by each traveler, and the loose leaf system is admirably adapted for this purpose, as it can be made just the size to suit the number of accounts to be carried, and enlarged and diminished at will. The form of ledger we recommend (where exceptional circumstances do not alter cases) would contain the following columns: Date, items, folio, debits, monthly debits, debit balance. Date, items, folio, credits, monthly credits, credit balance. j: F.Robins LEDGER Date rouo DeaiTs Mo. Dm. Balancb 0AT£ Folk. cnaoiTS Mo C/T£0/rj 'A, Bmianc«s Wo u mat Cush 6? J/ 129 i.0 60 6600 ^0 76 3c /9 14- ^/30 Cas/c Jounnat /60 S8 6967 Hi 7 so 9S 70 as 7S The purpose of the "monthly debits" and "debit balance" columns will be explained a little later on. The representative, or adjustment, accounts in the general ledger will at the close of each month show as follows: This account, you will note, displays the total business of J. F. Robins, salesman, and its results, and it can be made still more useful by a little more itemizing. Sales can be kept separate from cross entries on the debit side, and on the credit side returns and allowances may be particularized. The increase of "monthly debits" shows an increase of business, and the increasing or decreasing "debit balance" shows how the customers are paying their accounts. So that this account becomes a valuable compara- tive statement of J. F. Robins' business. In taking the trial balance of the J. F. Robins ledger, draw off monthly debits, monthly credits and the balances, and foot all three columns. Then, 1. 14 14 American Business and Accounting Encyclopedia Ace. if the total of the individual balances does not amount to $7,631.24, you can see at a glance whether your total debits posted are $6,880.20, and your total credits $7,095.75. That means that ninety-nine times out of a hun- dred when there is an error it can be located to the side on which it occurred, which is a tremendous advantage. The principle above outlined can be successfully carried out in any business with manifest benefit. In enterprises of considerable magnitude it will frequently be found convenient to have separate cash books, sales books, etc., as the use of columnar books in such cases will necessitate books of an unwieldly size. The accounts may be sectionalized in many ways as may be found most suitable to the requirements of the business. Some houses sectionalize territorially, as: New York ledger, Pennsylvania ledger, Ohio ledger, etc., etc. Some sectionalize alphabetically, A-F ledger, G-K ledger, L-R ledger, S-Z ledger. A very frequent sectionalization is by departments, as wholesale led- ger, city ; wholesale ledger, foreign ; retail ledger, etc., etc. Where sales tickets are used it will be found useful to have different colored tickets for each section. Where there are a number of sections it is also found useful to carry the separate adjustment accounts in the general ledger, and group them in the private ledger for the benefit of the principals, or officers of the company, thus: For further explanation of the uses of ledger adjustments, or balance accounts, we quote from Dicksee's "Book-keeping for Company Secre- taries" as follows: "The details in connection with adjustment accounts vary under different circumstances, but the general principle is that each separate ledger should be so arranged as to possess within itself all the necessary materials for a complete trial balance. That is to say, each departmental D^T£ 73/ 4/30 Balances N.y L ed^ ' P«, - OMo > Jo XI met NYLtdife^ Pv. • OAio . Cos A.. N.Y.L9df9^ Pa. Oht« . f*« - 0^i« • FOLh o| Deb ITS /76 /90 iJS /0 7SS 997* 9C 4 7S Si 3S JO OSBITS i4€9e Dm. BALANCe \OaT£ ipsa 697J- 60 f0940 4^/30 ft *s Folio CasA N.Y.Ltdi*r Pa. " Oh to • Journal N.y.L€*i*i' Po. OAt'o . 934- 1*4 /7« 170 /OO CmeoiTs S76S 2.x/ 9 7SSO • 7* to 7S •« If Mo i0 9«* • 9 Ace. American Business and Accounting Encyclopedia 14 ledger should contain a 'general ledger adjustment account/ while the general ledger should contain an adjustment account for each of the de- partmental ledgers. To the adjustment accounts in the various depart- mental ledgers are posted contra entries for every single entry that occurs elsewhere in that particular ledger; but, of course, these contra postings are not made in detail, but in totals, as otherwise an enormous amount of labor would be involved. In the same manner the various adjustment ac- counts which occur in the general ledger each contain the contra entries of such other entries as are entered in the general ledger, and which — but for these adjustment accounts — would not have any contra entry at all in that particular ledger. Thus the total of the sales is posted to the sales account in the general ledger; the corresponding debit of this entry would be the debit to the customers in the sold ledger. "When 'self-balancing' ledgers are used, however, the practice is as follows: The various items are still debited to the customer in the sold ledger, and the total sales posted to the sales account in the general ledger. In addition, however, the double entry of the sold ledger is completed by the monthly total of the sales being posted to the credit of the general ledger adjustment account in the sold ledger; while the double entry of the general ledger is completed by the monthly total of the sales, in addi- tion to being posted to the credit of the sales account, being also posted to the debit of the sold ledger adjustment account in the general ledger. All other transactions are treated in a similar manner. Where there is a considerable number of sold ledgers, a separate adjustment account is usually kept for each. "From what has been said it will be seen that the entries which occur in the general ledger adjustment account in the sold ledger will be identi- cal with the entries which occur in the sold ledger adjustment account in the general ledger ; and that therefore the balance of these two adjustment accounts will always be the same if the books are correct. But the balance will fall upon diflferent sides, namely, upon the credit side of the account in the sold ledger, and upon the debit side of the account in the general ledger. If these two balances agree, one may feel reasonably satisfied that the postings are correct, provided each ledger separately balances; but in the event of their not agreeing it ought to be comparatively a very simple matter to trace the difference, because not only should the balance of the two accounts agree, but each separate item should be the same. "To make this clear the following example of these adjustment ac- counts is appended : r u American Business akd Accounting E-\ cyclopedia GENERAL LEDGER (ADJUSTMENT) ACCOUNT. Ace. Dr. 1896. £ s. d. .1896. Oct. 31 To Cash ...700 Oct. 1 Nov. 30 « Discount 20 Oct. 31 (< Discount ... 20 Nov. 30 <( Returns ... 40 Dec. 31 Nov. 30 n Cash ... 800 u Discount ... 25 « Returns . . . 20 Dec. 31 « Cash . . . 600 1897 << Discount ... 15 Jan. 1 tt Returns ... 30 « Bills Receivable ...750 « Bad Debts ... 50 « Balance down . . ..1,250 Cr. £. s.d. By Balance 1,500 " Sales 1,200 " Sales 900 " Sales 700 4,300 B}' Balance down 1,250 4,300 SOLD LEDGER (ADJUSTMENT) ACCOUNT. 1896. Oct. 1 Oct. 31 Nov. 30 Dec. 31 Dr. £. s.d. To Balance 1,500 " Sales 1,200 " Sales 900 " Sales 700 Cr. 4,300 1897. Jan. 1 To Balance down 1,250 1896. £. s. d. Oct. 31 Bv Cash . . . 700 « « Discounts Returns . . . . . 20 ... 40 Nov. 30 « Cash . . . 800 u « Discounts . Returns . .. Cash . . . 25 . . . 20 Dec. 31 ....60C « « Discounts . Returns . . . .. 15 . . . 30 Bills ReceiA •able ... 750 « Bad Debts . . . 50 « Balance down . ...1.250 4.300 Ifi General Principle of Adjustment Accounts. — Before leaving the question of adjustment accounts as a means of balancing ledgers separately, it is well to call attention to the following points which, no doubt, will help to clear up any difficulties which may be experienced in understanding the application of the general principle. The mere fact that one ledger is divided into two or more books does not ipso facto alter its nature. The ledger, as a whole, still records the double effect of each transaction. At any time the sum of its debits will, therefore, always equal the sum of its credits. Consequently, a trial bal- ance of a set of ledgers can always be taken out by abstracting every balance, and the total of the debit balances will always equal the total of the credit balances if the postings are correct. There is thus no difficulty in testing the accuracy of a set of ledgers, provided all the ledger balances 17 Ace. American Business and Accounting Encyclopedia 14 are extracted. On the other hand, when there is more than one ledger — or, at all events, when there are more than two or three ledgers — it will very soon be found that the number of balances is so large that, when the ■trial balance does not agree, it is a very difficult matter to localize the error. Hence, it is very desirable that there should be some means of verifying the accuracy of each ledger separately, and it is for this purpose that the adjustment accounts are introduced. Incidentally it may be men- tioned, however, that they are, in practice, particularly valuable, because, by their means, trade ledgers (which usually contain the heavies* amount of posting") may be separately balanced, not only when a general balance is being struck, but also from time to time throughout the year. In practice it is usual for them to be balanced at least once a month, and without adjustment accounts this could not be done without balancing all the books monthly. Practical Working of Adjustment Accounts. — ^With regard to the practical working of the adjustment accounts, it is necessary that those subsidiary books from which the various ledgers are posted should either be in separate sets (one set for each ledger), or else they should be of the columnar order, a separate column being devoted to the postings which have to go into each ledger. In practice by far the most convenient way is to have separate day books for each ledger ; but with regard to the cash book, it is sometimes best to have one of the columnar type, wlme, in other cases, separate subsidiary cash books are more convenient. With regard to transfers from one ledger to another, these may be conveniently passed through a transfer journal; and for all practical purposes, it will be quite sufficient if the contents of this transfer journal are analyzed at the end of each month, and posted to the various adjustment accounts. "The chief difference in the system of book-keeping, where adjust- ment accounts are used, will be with regard to the general ledger. Ordi- narily speaking, the general ledger is posted up from the totals of the vari- ous day books and the general cash book, and in the case of most trading or manufacturing undertakings the number of journal entries will be very few. It is not really necessary that the number should be increased because adjustment accounts are used, as the necessary postings of day book totals can still just as easily be made from the day books direct as through the journal; but as, in employing self-balancing ledgers, two entries have now to be made in the general ledger itself, it is, perhaps, desirable that journal entries should be made to enable this to be done." Questions sometimes arise where there are branch businesses as to the adjustment of differences between the main office and the branches on account of goods and cash in transit which have been charged by the mam office on a certain date (the books being closed on that date), but have not been credited by the branch office on account of their not having been received on that date. In such a case, the financial statement of the busi- ness, which would be a summary of the accounts of the main office, to- 18 14-16 American Business and Accounting Encyclopedia Acc. gether with the branches, would not be disturbed, and it would be only necessary to record the fact that certain merchandise or cash had been shipped to such a branch and was at the date of preparing the statement in course of transit. f (15) adventure account. A ledger account recording the transactions of a commercial enter- prise outside of the regular line of business, undertaken alone or in co- partnership with another party who shares the proceeds or losses. Example of Adventure Account. A corpooration purchases jointly with another a large invoice of goods, the first company agreeing to finance the account, and the other to handle the selling end of it, the profit from the sales to be divided equally between the two corporations. The first corpor- ation pays for the merchandise invested in, being assisted in so doing by the sum of $3,000 received from the second corporation. The total paid for the merchandise is $11,000, $3,000 of which is paid by the second corpora- tion, and $7,890 of which is paid by the first corporation, who take advan- tage of a cash discount of 1 per cent, the total making $11,000. How should this investment be recorded ? One very simple method would be as follows : Carry a memorandum investment account. To this investment account charge the amount paid for merchandise and the charges for interest, stor- age, and commission. Credit same with 1 per cent discount .and the g^ross sales. The balance of this account will then show the profit jointly made on the investment. In the books of account proper open "Smith and Jones investment account." Charge same with the amount of the total investment, $11,000, when making payment for the goods, the credit being to cash. Charge Jones with his share of the investment, $5,500, and credit investment ac- count. Credit Jones with the $3,000 received on account of investment, the charge being to cash. Also credit the investment account with the 1 per cent discount, the charge being to cash. When Jones renders his account of sales, which we will say amounts to $14,000, less $750 paid out for interest, storage and commission, verify same and obtain his check for the amount due, which on the above basis would be $9,070, crediting $2,500 to balance Jones' account, and $6,570 to investment account. Investment account will then show a profit of $1,180, which will be one-half of the total profit of $2,360. If the charges for interest, storage and commission are paid by Smith instead of Jones, it will, of course, increase the amount due by Jones. (16) advertising account. An account containing a record of advertising expenditures, the bal- ance of. same being transferred at the end of each statistical period to the debit of the selling expense section of profit and loss account. 19 Ace. American Business and Accounting Encyclopedia 16-17 In an advertising agency business the advertising account performs the same function as the sales account in an ordinary business. (17) approbation sales account. Goods delivered to customers on approval— that is, on the understand- ing that they may be returned without charge if found unsatisfactory. Such sales should be kept in a separate memorandum sales book until disposed of. If the goods are retained by the customer, they should be entered in the regular sales book ; if returned, a memorandum to that effect should be made in the approbation sales book. In all large businesses where there is danger of approbation sales being overlooked, it is advisable to open an account called "Approbation Sales." To this account charge all goods sent out and credit all goods returned, and At3(DrobflTior) 5^les. iqon- Foil* 1 Debits (bdlaoce Credits Fblio bott 190H- Z 25 Dt^vcf*i0 15 114-1 5o 13 river* 10 2 25" . *n It n 5o 125 nS Ca^h 22 5o 88S ReTuri)^ ■ 1 1 1 1 goods charged in the regular sales book. The balance of this account will thus always show the value of goods out on approbation. A special form of bill can be used in duplicate, the original being handed to the customer with the goods, and the duplicate being retained as a record. The bills can be so devised as to perform the functions of an approbation sales book as above mentioned ; thus saving the labor of making entries in a bound vol- ume. In most businesses these departments, and the records of same, are not as satisfactory as they might be, and the attention of those who are obliged to send out goods to their patrons in this way is particularly directed to the form here presented. Sales on approbation sometimes remain out quite a long time, and where monthly statements of business conditions are required this record will be appreciated as giving full information in the best possible way. Regular sale checks are used by the store clerks for this class of sales, but they are printed in a distinctive color and carry a distinctive series cf numbers. In most establishments we suppose posting would be made direct to customers' accounts from the "on credit" column and the total of that column dissected into departments, and the departmental totals posted to the credit of the regular sales accounts at the end of the month. 20 18-21 American Business and Accounting Encyclopedia Acc. (18) ASSET accounts. Those accounts which record the value of property, possessions and resources. (19) balance account. A summar}; account into which at a given date the balances of other accounts are transferred. See "Adjustment Account." (20) balancing accounts. The computation and entry of balances of ledger accounts when pre- paring for closing of books or making a trial balance. (21) BANK account. A general ledger account to which is posted at the end of each month the balance of cash at bank. An account of moneys deposited with and withdrawn from a bank. One of the most common methods of keeping this account is to make the record of deposits and withdrawals on the stub of the check book, which should be specially ruled so as to conveniently provide for the record of deposits on the reverse of the stub, and permit footings of checks to be made with facility. The check stubs thus form a check register, showing at the close of each day the balance at bank by the simple process of deducting the totals of checks from the totals of deposits. The footings should be carried for- ward to the end of the month before striking a new balance on the stub, for the reason that, if any error is made, the bringing forward of a new balance every day obstructs its discovery. The separate check register is an amplification of the stub record, and is often developed into a bank cash book where all receipts are deposited, the general cash book in this case becoming only a record of minor expendi- tures. The bank account is frequently kept in either cash book, or journal, separate columns being provided, both debit and credit, headed "Bank." The totals of deposits is entered daily in the proper column from the deposit slips (which are filed for reference) and the total of checks issued is also entered daily. The entering of checks in detail in the bank column is unnecessary and profitless labor, and the grand totals only of the bank col- umns should be posted to the ledger at the end of each month for trial balance purposes. The ideal method of treating bank account is to utilize it as a preventa- tive of defalcation by depositing all receipts, and making all payments by check except petty expenditures, and this method is now quite extensively used. Exchange and discount will be charged through the cash book, so that the balance of the cash book must always agree with that of the bank pass book. A petty cashier has charge of necessary incidental cash payments, which are recorded in a petty cash book. He is supplied with money by 21 ACC. American Business and Accounting Encyclopedia 21-22 checks drawn to his order, the amounts of which are charged to his account, while he is credited with approved expenditures. Checks drawn to his order should cover the exact amount disbursed from date of last check, as by this method any unusually large expenditures would at once attract attention. (22) BANK deposit ACCOUNT. It is often lost or mislaid and confusion arises when a new one is issued and the older one is found and presented for balancing by mistake. Bank examiners can never secure all the pass books for the purpose of securing proof of correctness of each separate account. Counter errors in posting sometimes are not discovered for weeks, as the pass book is the final means of locating the same. If some method of reconciling accounts between banker and dealer can be offered overcoming these imperfections, it is the belief of many students, that it would be gladly accepted in many places. The individual ledger department of the bank could be arranged in the following manner for a business of from fifteen hundred to two thousand accounts, with an average number of twelve to fifteen hundred items per day and a total deposit balance of about two million or more dollars. In. L /trmt% ■C^ M«i1K d^ 7 Vouc o. rncd ■ r^e* SmiitrC C Accouo^ R«9J«'«<' /^i.y ffSl I^OM- Cl)ecKs 1 Ct)ecK» 1 Cl)ccks C))Cosin i tyate 0«ld!>c« 1 IM- 12 ''•*C>ol«« Feb! 1 1^? so] H- |0?H- 2 lb 28 b 119 2*j b qoit ^ n I ■ tf 34 • 5 1(f /(j| U). VLfQSOO Co. 3 to lUSSo J 1 — ' The check numbers in the illustration are provided with a view to doing away with the prevalent system of debiting the payment of the bill opposite the credit entry ; likewise in Bills Receivable account crediting the payment opposite the debit entry. This very considerably increases the trouble of getting out the trial balance, and mistakes are very liable :o occur through overlooking the debit or credit which should enter into the trial balance of the particular month on which the work is being done. By using the check numbers, reference to the bill paid is easily made and the monthly trial balance is in no way interfered with. (24) BILLS RECEIVABLE ACCOUNT. A ledger account showing in detail or in totals the amounts of bills, promissory notes, etc., received from customers or debtors; the amount paid on same and balance outstanding. The proper manipulation of bills receivable account and bills receivable register, or record, is so closely interwoven that it is necessary to treat them together. The proper end in view is to devise a system that shall always give complete information promptly when required and dispense with needless labor. Many plans have been evolved to accomplish this, including the combination in one book of the features of register and ledger. This will be considered later on under the head of ''Bills Receivable Led- ger." Where the ordinary bills receivable account is carried in the ledger, we would recommend the use of key numbers instead of endeavoring to write the credit directly opposite the charge when the bill is paid. The latter method results in great inconvenience when taking off the trial bal- ance, which is entirely obviated by the use of key rumbers. We append an example of bills receivable account to illustrate the idea. Oo — Cq Dc^ife No r^ arT^c- TSlio ZVmor->i ZViiCi ft 1 NA/-^ r>r.owr> ^<& 3 30Q 00 ,^ 9 C. & .^r^^^H; .-^Q Ac-><-) A 0. eo ^ Too 00 p, ,^ WT P)n.owr> 3.-5 ."^Ort 00 Oct ^•^ 3 r M r?^«<^k ao c^c, oc? 4 D^) — ^^ 13 00 OC A .■^ J52 ll'^^o 00 .'i &ap. 3 e C n, Dta3 t^ ^ £1 -^^I«.'» o t^ S. _£ ^ »« *o C[ •> ^ - •>« «» 1-" "^ «> ~ -k o u ^^^ >* -J - '^ "^ i o o ^ o ^r 4- \ \x-, n3 -c-.. «^ « i- Q- • h aJ aJ r L v^ 1. ^ •* >«] a« -» <3- ^ O -^ =t t~ *^ «^ »/o aJ z < 4. o u r< Cs r< ^ «T\ ^ i-» ^ ^ *<3 \4^ 1, £1 o «<^ c^ vck ^ < Z H «x; >«a ^ a«j 4- O *-* §s^. '^ ^ cr\ O n ^ -. r-4 OO \f^ Xr! .0 000 ^ ^O t-. -^ ^00^3- 'I c2 '^»^^y^'^oOQ Vi^o O^ q m"^-q^:^ r^T^ ^.^ ^Vvn -s 1^^ .'^ ** -I;* tS il 4- c- r^^. ki?i^ j^^ts^s^uhc^ hk ?k ^ .^^.^ 2 o < 47 Ace. American- Business and Accounting Encyclopedia 76 (76^ PROFIT AND LOSS ACCOUNT. An account showing excess of revenue over expenditures, the balance of which will exhibit net income, this balance being thereafter transferred to surplus, capital, dividend, undistributed profit account, etc., according to the nature and requirements of the business and decision of the directors or proprietors. Not long since the manufacturing and trading expenses were incor- porated in the profit and loss account, and the innovation of a separate trading statement was vigorously opposed by a large number of account- ants This phase of accountancy is fully described under the heading of trading account. The approved practice now seems to be that the profit and ,loss account should be sedulously preserved from all items m any way appertaining to the manufacture, purchase, or sale of goods, the gro.?s profit on sales being the starting point of the profit and loss account. The American Accountants' IManual goes so far as to say that the inclusion of manufacturing expense under any circumstances in the general profit and loss account is a technical error occasioned by an insufficient appreciation of the science of accounting and the statistical knowledge to be obtained thereby. The relation of the trading account to the profit and loss account is illustrated on the preceding Working Balance Sheet. It is desirable, wherever possible to follow the trading account by a section of profit and loss showing separately all selling expenses of the business, carrying the gross profits from this section into a general profit and loss account, which includes running and administrative expense. Special, or extraordinary profits, or losses, which have no connection with the regular business should be established in a fourth section, the object being to show the actual profits or losses made on the legitimate or staple business carried on. Thus, if a business is sold on an exhibit of profits made by some ex- ceptional transactions, the price being based on the profit made on those transactions, such a sale would be illegal, and the vendors would be liable to an action for recovery of the amount paid in purchase. The current profit and loss account should contain nothing but cur- rent items, and items which relate to gains and losses made in a previous fiscal period should be otherwise disposed of— by transfer to surplus account, or any similar representative account. If not so transferred, then the profit and loss account of a given year should stand by itself until it can be closed out. This latter is by no means an uncommon arrangement and there is often seen on a well-ordered trial balance the items, "Profit and Loss, 1S99,- and -Profit and Loss, 1900," etc., etc. An absurd idea of some book-keepers that the title "Profit and Loss" is wrong because profit comes before loss in the ti.le, while in the account the losses appear in the left-hand column and the, gains in the right, is referred to here only as a curiosity. 48 i 76 American Business and Accounting Encyclopedia Ace extract from STANDARD WORK. "A good arrangement which is applicable to most businesses is to have the profit and loss account divided into four sections, the first section be- ing the trading account, which brings out the gross profit on trading after charging all expenses connected with sales. The second section, which may be termed the ordinary business profit and loss account, will have on the credit side the gross profit carried from the first section, together with any income not directly connected with sales, such as rent of premises held by the firm, while on the debit will appear fixed charges, such as rent, taxes, salaries of office, and other expenses which are not directly connected with sales, and which do not vary with a rise or fall of the turnover. The balance on this section will then be carried to the third section, which may be termed the net profit account. On the credit side of this section appears the balance, if any, brought from the previous sec- tion, and such income as interest on investment, interest earned, and cash discounts, which depend on the capital in the concern. This section is debited with charges connected with capital, such as interest on loans. The fourth section, which may be termed the profit and loss appropriation account, is credited with the balance, if any, from the third section, to- gether with the balance of unallocated profit from the previous year. On the debit side is shown how this profit has been allocated, whether in the form of interest on partners' capital, share of profit allocated to capital, or profit reserved for any special purpose. If the business is that of a public company, the dividend paid on the shares is debited to this account, together with any sum carried to the reserve fund, and the balance un- appropriated is carried forward, and appears in the next profit and loss appropriation account. "The form of the account given below should be carefully studied, but its utility can only be appreciated in practice. By the use of such divisions, and by comparing the accounts of one year with another, any looseness in the management of a business, or anything w^hich might endanger its stability, can as a rule be at once detected, and measures taken to prevent further loss." PROFIT AND LOSS ACCOUNT. Expenditure. Income. To cost of goods used (including By sales (alter deducting purely carriage inwards, and after de- trade discounts) $ ducting purely trade discounts). $ To Expenditure directly connected with sales, or which reduces the price realized for the goods, such as — Commission and salaries of travelers, and travelers' ex- penses Wages of salesmen • Wages of porters 49 I( Ace. American Business and Accounting Encyclopedia 76-77 Carriage outwards of goods sold Cash discount allowed on sales To balance carried down, being gross profit To fixed charges not directly con- nected with sales and not vary- ing much with the turnover, such as — Rent, rates, taxes $ Repairs and upkeep of offices. Salaries of office staff and management = Depreciation To business losses, such as — Bad debts Defalcations To balance carried down, being profit on ordinary business ...... $ To expenses connected with capi- tal, such as — Intereft on loans $ To balance carried down, being net profit To allocation of profit — Interest on capital $ Profit allocated to capital Profit a!located to reserve To profit unappropriated, carried forward $ By balance brought down, being gross profit $ By income not directly connected with sales such as — Rent of stores or premises be- longing to the business let to tenants Revenue from royalties By balance brought down, being profit on ordinary business $ By income connected with capital, such as — Revenue from investments.. Interest earned Cash discounts obtained, which depend upon the amount of capital in the business i> ■? By balance brought down, being net profit $ (77) PROMOTION ACCOUNT. See organization account, paragraph 71. • 50 78-87 American Business and Accounting Encyclopedia Ace. (78) purchase account. A representative account showing the amount of material or merchan- dise purchased. (79) purchase ledger controlling account. See controlling account, paragraph 14. (80) RAW MATERIAL ACCOUNT. See material account, paragraph 66. (81) REAL ACCOUNT. An account which represents the values of actual assets or the amount of actual liabilities, such as real estate, machinery, loans, mortgages. (82) RECEIPTS AND PAYMENTS ACCOUNT. A summarized account of actual cash receipts and expenditures dur- ing a given period, starting with the cash balance at date of commence- ment of account and ending with cash balance at close of period covered by the account. (See income and expenditure account, paragraph 52.) (83) RENT ACCOUNT. A general ledger account in which are recorded the amounts paid or received on account of rent. (84) REPRESENTATIVE ACCOUNT. An account (preferably) whose function is to complete the double entry by representing the transactions described or recorded by personal accounts. Thus, sales account furnishes the double entry for customers' account and purchase account that for creditors' accounts. Real estate account represents the value of investments in real estate, etc. (85) REVENUE ACCOUNT. A term sometimes used to designate profit and loss account. (86) REVENUE ACCOUNTS. Those accounts, the balances of which are transferred at closing periods to the debit or credit of profit and loss account, as distinguished from capital accounts which relate exclusively to assets and liabilities belonging to the balance sheet. (87) ROYALTY ACCOUNT. An account representing amounts paid as royalty. In books designed for use by manufacturers it is generally very im- portant that they should be so planned that the proprietor can readily •deternnine the totals of various items of cost or sources of profit, so as to ascertain their relative influence on the business done. Among such items either of cost or profit, royalties paid or received constitute a factor of more or less importance, according to circumstances. Most manufacturers have to pay to owners of patents for the privilege of making goods under such patents, paying at a certain rate or ratio for 61 Ace. American Business and Accounting Encyclopedia 97 articles as manufactured or as sold. The terms of the contracts vary, but the essential thing to a royalty is that it is a payment contemplated at a definite ratio to product— although it may be commuted so that a fixed amount is agreed upon in lieu of a varying sum. Royalties may be divided into two classes, those paid, and hence entering into cost of product, and those received, and hence entering into profits of business. ROYALTY income ACCOUNT. Let us take the less frequent account first. Competing manufacturers wish to use a patented article or process and agree to pay to its owner for the privilege. He uses the article himself, but derives an mcome or profit by allowing others also to use it. Such items should be credited as earned to royalty income account, and represented in the profit and loss account as an item of profit apart from the gross profit on sales. The same remarks would apply of course when a manufacturer own- ing or controlling a patent was paid by others to abstain from using it, as is done by some of the associations. Also to a case where a m'anufacturer controls patents which he does not use but from which he receives the royalty income. In fact to any class of arrangements by which the manufacturer derives an income specially attributable to his controlling certain patents or similar privileges, which income bears a direct or estimated ratio to some basis of production. ROYALTY expense ACCOUNT. Frequently, however, the manufacturer is the source of the revenue rather than its recipient. In many cases the rights involved are controlled by some private person, who temporarily yields some or all of them m exchange for the payments agreed upon. Such expense should be charged as earned to royalty expense account, and where departments are used to the royalty expense account of the proper department. As to the proper disposal of the royalty expense accounts there seems to be room for difference of opinion. Some accountants contend that it should be included in the costs of manufacturing, but stated as a separate item, so that such cost would be composed of material, labor, manufactur- ing expense and royalty expense. Other accountants seem inclined to treat it as an account negative to sales always to be stated as a separate item, showing that total sales were so much, and after deducting royalties payable the net sales were so much. Although the latter course is open to criticism it has one point of ad- vantage over the other method, under which plan, if a large amount was naid for royalties, the average cost of output would be unwarrantedly in- creased although in fact labor, material and general manufacturing expenses might be less than in other periods. It is not generally speaking, a profit and loss account, because applicable only to a special part of the business, and besides under ordinary 52 87-91 American Business and Accounting Encyclopedia Ace. circumstances is distinctly a manufacturing account. The least objectionable course then will be to class royalty expense account as contra to sales account, considering the net sales to be only the amount remaining after royalties have been deducted. It should be borne in mind in this connection that while royalties make it necessary to increase the selling price of goods, they do not, to any extent, increase the cost of manufacturing or selling them. Therefore, so that the item shall not disturb other comparisons which should be made, royalties should be kept distinct in books and statements from expenses of manufacture or of sale. To do this readily the items must be kept m royalty expense account as previously stated and exhibited on statements as negative sales so that net sales will then mean gross sales, minus returned goods and royalty expense. — F. Lines. (88) SALES ACCOUNT. A representative account in the general ledger recording amount of sales to customers and returns and allowances in connection with same and belonging to the credit side of the trading account. Goods sold to other manufacturers at cost (as an accommodation) or to employes at a nominal profit should not be credited to the regular sales account, as statistical comparisons, and deductions therefrom, would there- by be seriously interfered with were the amounts at all large. Such sales should be carried in a separate account and not included in the trading statement of a business as though sold at the regular rate of profit. (89) SALES LEDGER CONTROLLING ACCOUNT. See controlling account, paragraph 14. (90) SAMPLE ACCOUNT. A special account usually carried with a salesman which records the cost of the samples furnished him for exhibition to customers. (See travel- ing salesmen's accounts.) (91) STOCK ACCOUNT. STORES ACCOUNT. 53 Ace. American Business and Accounting Encyclopedia 91-93 An account kept in the factory with goods and supplies received and distributed, and balances on hand. (92) SUMMARY ACCOUNT. An account dealing with totals and not with items. As the use of columnar cash books, journals, and auxiliary record books increases, the number of summary accounts tends to outnumber itemized impersonal accounts. - Controlling or adjustment accounts are good types of the summary account. (93) SUNDRIES ACCOUNT. An account into which are posted all charges to temporary customers who are not expected to purchase again. The ordinary sundry account is a source of considerable trouble to the book-keeper. When the credits are posted opposite to the debits, the same annoyance in obtaining the correct balance of the account arises as in the case of bills receivable account when kept in a similar manner. Several expedients have therefore been devised to obviate this annoy- ance, one of which is illustrated below. The sundry debtors' account is SUND RY DEBTORS. Page When Paid. Dr. Fb 4 J. A. Felton • 41 Feb. 12 25 00 Feb: 4. T. O. Densmore 41 Feb.. 12 25 Feb. 4. Geo. Winder ••.•• 41 25 00 Feb. 4. Wm. Wintermute 41 ^^ Feb 4. H. A. Merritt 41 Feb. 5 25 00 Cr. Feb'To. F. Ulman Cash 22 10 00 Feb 5 H. A. Merritt Cash 22 25 00 Feb.' 9.' Tilman Jones Cash 22 5 00 Feb.l0. N. Miller ^isc. 109 2 00 Feb.ll. Geo. Hanlon ^^^^^^^^^^^^.CashJ^_^O_0O___ treated as though it were an ordinary account with one person, both credits and debits following in order of date. A special column is provided on the debit side, in which is entered the date of payment of the account, so that if it is desired to refer to J. A. Felton's account it will be seen that it was paid on February 12th, and the entry of credit will be found under that date. , . Another method is to carry all sundry accounts in a self-indexing petty ledger. , , . • *• "There are arguments against using a petty ledger in conjunction with a general ledger. Some claim that when you want to look for an account there should be only one place to find it, and that is in the general ledger. For instance, if the book-keeper is out and the proprietor wishes to look up an account, he will at once turn to this book and find it ; and, not finding it there, he will use some uncomplimentary terms regarding his book-keeper and where he keeps his accounts. He will 64 93 American Business and Accounting Encyclopedia Acc forget, or perhaps he may be ignorant of the fact that there is a petty ledger in existence in the office. But this objection is a small one when the expediency of the book is explained, as anyone can readily see its ad- vantages. Besides, in most every business of any magnitude nowadays there are used several ledgers and very infrequently only one as formerly. "When no petty ledger is used the general ledgers will contain a great nxany ^accounts with perhaps only one or two entries. Xow this is a waste of time and ledger space. The experienced book-keeper will readily notice a name which he will know will require little space in his book. Perhaps he will not make another entry to this account during the next two years, or perhaps never again. Now is it not better to put spch accounts in a small book indexed alphabetically at the sides, rather than waste space with it in the general ledger? The mere loss of the page or leaf Is nothing, but when you have, say, a hundred of just such accounts the trouble and annoyance of them is considerable. Every time a trial balance is taken or you go through the ledger you must wade through this useless timber. "When an account is in the petty ledger it may be found in an in- stant, and when it is settled it can be canceled in red ink. At the end of the year, when the annual statement is made up, all accounts in the petty ledger can be reckoned in the assets of the business by deducting a certain percentage, and adding in the amount to the merchandise on hand. "If the account thus treated proves to be more extended than at first supposed, it can easily be opened in the general ledger and reference made to former entries in the petty ledger. "When an account is paid the amount is credited to merchandise in the cash book and reference is made to the place where the account is kept." Still another method is to use a numerical or alphabetical check against the debits canceled by payment ; i. e., by this method J. A. Felton's deb.t would be checked "A" and J. A. Felton's payment would also be checked "A," thus constituting quickereference from one entry to the other. Still another method is to open a new sundries account each month, treating the account, and entering its balance on the trial balance, as though it were an individual account. Another method is to open a new account as each page is filled up. "The two sides of the sundries account can be footed when desirable in small pencil or red ink figures and the difference between the two sides placed between the two columns. This will show the net amount due from the sundry debtors on that page of the ledger and it can be verified at any time by looking down the 'when paid' column and taking off only those accounts not marked paid. New items can be posted in from time to time till near the bottom of the page, when another general account called Sundry Debtors No. 2 can be opened and treated the same as No. 1. "When it is desirable to transfer the account the name and number can be transferred to another part of the book, with the unpaid balance, crediting it in red ink by the balance so transferred. 65 I - Ace. American Business and Accounting Encyclopedia 93-i)S 98-103 AiMERiCAN Business and Accounting Encyclopedia Ace. "As many of these general accounts can be used as needed. If an- other charge should occur to one of the names in the general account, credit that name by balance in red ink and bring the name down debit to bottom of the list on that page, if there is room ; if not, carry it to another page; then post in next to it the additional charge. When an item is transferred write also in red ink in the 'when paid' column where it is carried to. If part of an item in the general account is paid, interline over the name the amount and give the general account credit for it, and instead of writing the date in the Svhen paid' column make an interrogation mark in it with pencil that can be erased. "When the balance of the item is paid erase the interrogation mark and write in the date of payment. The interrogation mark attracts the eye while hastily running down the column and calls attention to the fact that part of that item has been paid." (94) surplus account. An account to which is transferred yearly the balance of the profit and loss account, thus providing that the profit and loss account shall only exhibit the current year's results. (95) suspense account. A summarv account to which are transferred the balance of doubt- ful accounts from the customer's ledger, and in which they are retained nutil such time as they can be definitely disposed of. In this way they are not lost sight of, and can be estimated in the balance sheet at their proper value. (96) TRADING account. There is considerable diversity in the make-up of trading accounts constructed for different lines of business, although the principles are the same. . j- -j j • * * ^ In the manufacturing business this statement is divided mto two sections The first section is known as the manufacturing account, cover- ing all expenditures in relation to cost of production. The total cost is then transferred to the debit of the second section of the trading account. This section is credited with sales and new inventory. In wholesale business no division of trading account is necessary, while in general or department stores a separate trading account is carried with each department. (97) treasurer's account. In many corporations and institutions an account is carried on the main books with the treasurer instead of with cash and bank. He is debited with all money received and credited with all expenditures. In his department he keeps cash and book accounts for his own information. (98) TREASURY STOCK ACCOUNT. (A) A corporation account recording the amount of capital stock unscribed. 56 The question as to whether it is justifiable to include treasury stock on the balance sheet as an asset is, we think, of fictitious importance, for the reason that the amount of treasury stock on the asset side is always offset by an equal amount of stock in the captital stock account on the liability side. As previously indicated in this Encyclopedia, we prefer method adopted by foreign corporations, of placing the nominal capital in an inner column and including only paid up capital stock in the actual liability column. (B) Stock donated by subscribers for the purpose of sale in order to raise working capital. (C) Stock, the possession of which has been acquired by purchase by a corporation from its original owners. (99) UNDIVIDED PROFITS ACCOUNT. An account representing the amount of profits undistributed by way of dividend. A surplus account. (100) VENTURE ACCOUNT. See adventure account, paragraph 15. (101) VESSEL ACCOUNT. VOYAGE ACCOUNT. An account carried with each vessel for each voyage to which all expenditures in connection with the voyage are charged and to which all receipts from freight and passenger traffic are credited. The balance of this account then shows the profit on the trip. (102) WAGES ACCOUNT. A general ledger account to which is debited the amount of wages paid. (103) WORK IN PROCESS ACCOUNT. A factory account recording the value of work on uncompleted orders and consisting of perpetual inventory of material and supplies issued from stores room, wages on account of labor performed up to date, and per- centage of overhead or shop expense. A good method of providing for this perpetual inventory is through a memorandum "manufacturing account," to be kept by the cost clerk, or whoever it may be, whose duty it is to attend to the factory records. If daily job cards are issued to the workmen, a recapitulation may be made from them with an adding machine, and the total debited to this manufacturing account. A recapitulation is also made of the value of material issued from the requisitions turned in by the store-keeper, and the total of this recapitulation debited to manufacturing account, as the shop orders are received on account of completed work, the value of material used and time consumed on them will be credited to manufacturing account This account should be ruled on the debit with two columns— one for material and one for labor, so that they may always available ; and on the 57 Ace. American Business and Accounting Encyclopedia 103-105 I credit side with two columns, the second side providing for a record of unusuer a material returned to the stockroom. When reporting inventory of uncompleted work to the main office, it is only necessary to add the proper percentage of factory expense to the total labor, and the balance of this account then exhibits the required amount of the inventory. (104) ACCOUNT CURRENT. An account which runs indefinitely as compared with one regularly bal- anced. Interest is usually charged at periodical intervals, and this subject will be considered under the heading of averaging accounts. (105) ACCOUNTANT. Some definitions of the duties and status of the public accountant,, certified, chartered, incorporated, or otherwise, and the kinds of work he is expected to do may be described and quoted as follows: "The public accountant is the consulting physician of finance and commerce. He understands the anatomy and physiology of business and the rules of health of corporations, partnerships and individual enterprises. He diagnoses abnormal conditions, and suggests approved remedies. His study and interest is the soundness of the world of affairs." The kinds of work he is expected to do are thus described : "Auditing and reporting on the accounts of companies, corporations, public bodies, societies, institutions, private firms and individuals. "Drawing up balance sheets, states of affairs, schemes of division, and other statements of accounts. "Investigating books and accounts with the view of certifying as to profits, accounting for losses, or tracing defalcations. "Reporting on and unraveling accounts under orders from the courts. "Designing systems of book-keeping and keeping accounts, and advis- ing thereon. "Anyone proposing to become an accountant should pre-eminently possess the mathematical mind. He must have accurate perception, strong power of concentration, and clear and logical reasoning faculties. So endowed, he may be considered a fit subject for the training offered in the office of a practicing accountant. In the course of this training he should be taught orderly and methodical habits, and specially the habit of verifying for himself every figure or fact of which he makes use, thus laying the foundation of that character for accuracy and reliability without which no one need expect to succeed as an accountant. In the course of service he should acquire familiarity with the details of professional work, and the recognized societies lay down rules and prescribe examinations, as here- after explained, for further guidance in his professional education. But withal, he will still want something of the equipment of the 'perfect accoun- tant.' He must be possessed of practical business sagacity, a demeanor such as inspires the confidence of his clients, and, it need scarcely be said, a character of the strictest rectitude. There are few professions 58 Ace. American Business and Accounting Encyclopedia 105-100 where a keen power of discrimination between the straight and the crooked is more frequently required, and where any laxity in following sound prin- ciples has more far-reaching consequences. "The professional accountant, as now recognized, is of quite recent origin. He is not a book-keeper, but his duty consists in the examination of the work of book-keepers with a view to establishing the accuracy of their work. The official auditor of a corporation should not be confused with the professional accountant. Most large enterprises employ account- ants whom they term auditors, but such accountants have generally had very little of that special experience which qualifies the professional ac- countant to examine the accounts of any business, no matter what system may be employed. "The public accountant is the consulting physician o^ finance and com- merce. He understands the anatomy and physiology of ousiness and the rules of health of corporations," partnerships and individual enterprises. He diagnoses abnormal conditions, and suggests approved remedies. His study and interest is the soundness of the world of affairs." ( 106) ACCOUNTANTS' ASSOCIATIONS. The American Association of Public Accountants in 1908 consists of the following state branches : California Society of Certified Public Accountants. Colorado Society of Public Accountants, The. Georgia State Association of Public Accountants. Illinois Society of Certified Public Accountants. Maryland Association of Certified Public Accountants. Massachusetts, Incorporated Public Accountants of. Michigan Association of Certified Public Accountants. Minnesota Society of Public Accountants. Missouri Society of Public Accountants. New Jersey, Society of Certified Public Accountants of the State of. New York Society of Certified Public Accountants, The. Ohio State Society of Public Accountants, The. Pennsylvania Institute of Certified Public Accountants. Tennessee Society of Public Accountants. Washington Society of Certified Public Accountants. The Institute of Chartered Accountants in England and Wales in 1908 reported a membership as follows: Fellows g^j Associates in practice , j g28 Associates not in practice '992 Members not in England or Wales .! . . . 255 "^^^^^ ^6 59 I Ace. AxMERICAX BUSIXI3SS AND ACCOUNTING ENCYCLOPEDIA 106 The latest report of the Incorporated Accountants of London, Eng- land, quotes the membership as follows : Fellows , . , 1,343 Associates Total ^ 2.194 From the latest information published of the Chartered Accountants of Scotland, we find the membership to be as follows : The Society of Accountants in Edinburgh '*34 The Institute of Accountants in Glasgow ^^^ The Society of Accountants in Aberdeen • ^^ Total ^^^ Branches of both the Institute of Chartered Accountants of England and Wales, and of the Society of Accountants and Auditors of London, England, have been organized in the principal British colonies. In the United States a large number of associations, consisting of public accountants, corporation auditors and book-keepers, has been organ- ized, of which the following are the more important : Incorporated Accountants of Maryland. Incorporated Accountants of Illinois. Incorporated Accountants of Michigan. Incorporated Accountants of New Yorlc. Incorporated Accountants of Pennsylvania. International Accountants' Society of Massachusetts. New York Society of Accountants and Book-keepers. Illinois Institute of Accountants. Chicago Association of Accountants and Book-keepers. Milwaukee Association of Accountants and Book-keepers. Incorporated Accountants of Indiana. Incorporated Accountants of Ohio. Cincinnati Chapter. Cleveland Chapter. St. Louis Society of Book-keepers and Accountants. THE UNIVERSITY OF ILLINOIS REGULATIONS FOR THE CONDUCT OF EXAMINATIONS FOR CER- TIFIED PUBLIC ACCOUNTANTS. 1. The supervision of all matters under the law shall be in the hands of a committee under the immediate supervision of the president of the university, consisting of the head of the department of economics, the professor of industry and transportation, and the registrar. 2. This committee shall receive all applications for examinations and shall issue to approved applicants certificates of admission to the examina- tions, and no candidate shall be examined who does not present to the 60 lOG American Business and Accounting Encyclopedia Acc. board of examiners at the time and place of examination, as advertised, such certificate of admission, signed by the registrar. 3. This committee shall appoint the times and places of examination and shall advertise the same according to the provisions of the law. 4. This committee shall receive from the board of examiners the questions to be used at the examinations, and shall print and distribute these examination questions to the examining board in time for conduct- ing the examinations as advertised. 5. This committee shall receive the reports of the examinations from the board of examiners, and shall certify to the president the successful candidates. 6. This committee shall receive and certify to the president all state- ments of expenses and fees of the board of examiners. 7. This committee shall also examine the papers of applicants under Sec. 3 of the law. and shall certify to the president the names of those who are eligible under this section to receive the degree of certified public accountant. Board of Examiners. 1. The board of examiners for the examina- tion of candidates for the degree of certified public accountant shall con- sist, according to law, of three members, at least two of whom shall be skilled in the practice of accounting and actively engaged therein in the state of Illinois. 2. The members of this board of examiners shall be nominated by the president of the university and approved by the board of trustees. 3. Vacancies on the board, due to any cause, shall be filled for the remainder of the term of office, at the first meeting of the board of trustees which occurs after the occurrence of such vacancy. Appointments to expir- ing terms shall also be on nomination of the president for approval by the board of trustees. 4. The term of office of these examiners shall be three years, except for the members first appointed. Of these, one shall be appointed for three years, one for two years, and the third for one year. At the annual meet- ing of the board of trustees of the university in June, the place of the retiring member shall be filled by action of the board of trustees. 5. After July 1, 1904, no one shall be appointed a member of this board, who is not authorized under the law to practice in the state of Illinois as a certified public accountant. 6. Each member of the board of examiners who shall be engaged in the duty of conducting examinations at the time and place appointed by the university authorities as provided herein, shall send to the university committee in charge a statement of the time actually spent in the discharge of his duties as a member of this board in conducting said examinations, together with a statement of actual traveling expenses incurred in per- forming said duty. This statement shall be certified to the president by 61 Ace. American Business and Accounting Encyclopedia 106 the committee in charge at the university and no fees cr bills for expenses of the members of this board of examiners shall be paid, excepting on approval of the president after this certification. Applications. 1. Applicants for the degree of C. P. A. on the basis of previous practice, under Sec. 3, of the law, shall file their applications with the university committee on accountancy, together with a sworn statement setting forth their age, legal residence, the length of time during which they had practiced, the place where such practice was had, and the time, place and scope of examinations, if any, passed in accountancy. 2. Applicants for examinations shall file their applications, and all papers necessary to show their qualifications for admission to the examina- tions, with the university committee on accountancy, as provided herein. Applicants must submit certificates of graduation from a four year high school, or evidence of having had an equivalent education, together with certificates of age and good character. They shall also submit the names of three suitable references, at least two of whom must be residents of the state of Illinois. 3. Applicants for examination or for the degree under Sec. 3, of the law, shall send a fee of $25. payable to the university, in accordance with Sec. 4, of the act. Examinations. 1. Examinations shall be held by the board of examiners at the times and places determined by the university commit- tee in charge. 2. The time and place of holding these examinations shall be adver- tised according to the law for not less than three consecutive days in one daily newspaper published in each of the places where the examinations are to be held, not less than thirty days prior to the date of each examine tion. 3. The examinations shall take place as often as may be deemed nec- essary in the judgment of the university committee, but not less frequently than once each year. The annual examination shall be held on the first Monday in May. 4. The examinations shall be in the theory of accounting, the practice of accounting, auditing, and commercial law as affecting accountancy. 5. Each applicant for examination must present to the board of examiners, before the examination begins, a certificate of admission to the examination, issued by the university committee on accountancy. These certificates shall be returned by the board of examiners to the chairman of the university committee. 6. The period allotted to the examination in each subject shall be determined beforehand by the university committee, on the advice of the board of examiners, and shall be printed on the examination papers. 7. Examinations shall be written in books supplied by the university 62 locr American Business and Accounting Encyclopedia Ace. to the board of examiners as provided for by action of the board of trus- tees in December, 1901. 8. The examination books shall be marked in plain figures, on the scale of 100, by the board of examiners, and, together with the certified statement of the board of examiners of the grades of each candidate in each subject in which he is examined, shall be forwarded to the chairman of the university committee. This certified statement must be signed by at least two of the board of examiners. 9. The list of successful applicants, as certified by the board of examiners, shall be certified to the president of the university by the university committee in charge, unless, in the opinion of that committee, there exists some question concerning the eligibility or the honesty of the examination on the part of the candidate. In that case, the matter shall be referred back to the board of examiners, if it is a question of honesty in examination. If they, certify to the honesty of the examination, the name of the candidate shall be certified by the committee to the president. 10. In order to entitle any applicant to a recommendation for the degree, he must secure a grade of at least 75 per cent in each subject on which he is examined. 11. The applications and credentials of applicants for the degree of C. P. A. on the basis of previous experience, under Sec. 3, of the law, shall be examined by the board of examiners. If the credentials furnished by such an applicant are sufficient, in the judgment of the board of examiners, they shall certify him to the university committee for the degree of C. P. A. as in the case of applicants who seek the degree by examination. Diplo- mas shall be issued in the same way and under the same conditions as for applicants by examination. Records. 1. Candidates who meet all the requirements for eligibility and are duly certified as above required, shall receive a diploma conferring upon them the degree of certified public accountant (C. P. A.). This diploma shall be issued in the name of the university and shall be signed by the president of the university and the secretary of the board of trustees. 2. The registrar shall open a set of books in which he shall keep the records of all successful candidates for the degree, which shall set forth the time and place of the examination at which each candidate met the require- ments for the degree, the grades obtained on the examinations, the num- ber of the diloma issued, and the date of its issue. 3. The fees from applicants shall be turned over to the business manager of the university who shall keep a separate account of all receipts and expenditures under the law. typical c. p. a. examination questions. Theory of Accounts.— (Time allowed, three hours.) 1. At the close of a fiscal period, how should consigned goods appear on the books : (a) Of the consignor, 63 Ace. American Business and Accounting Encyclopedia 106 (b) Of the consignee? , • i 2 On an independent appraisement being made of the physical assets of a manufacturing corporation, the appraisement shows appreciations and depreciations, as compared with the book values, as follows : „ . ^ . . ^. $20,000 Real Estate— Appreciation • "^ ^'^^ Buildings— Depreciation ' Machinery— Depreciation "' _ , • .\. 3,000 Tools — Depreciation The directors desire to bring the book values into agreement with the appraisement. Draft entries to show how, in your opinion, this should be done. 3. A wholesale house ha s on its books 200 individual accounts with creditors. 500 with city customers, and 1,500 with country customers, besides about 75 impersonal, or representative, accounts. Owing to the methods of book-keeping in force, it is necessary, in order to ascertain the amount of accounts receivable or payable, to take off a complete list of the accounts in question. You are called upon to advise as to how this diffi- culty can be overcome, and also as to whether the book-keeping work on the accounts payable cannot be reduced, having regard to the fact that the firm discounts all its bills. Embody your suggestions in a brief report. 4. In order to facilitate the preparation of monthly profit and loss statements by a corporation, how would you recommend that the following items be treated on its books from month to month: (a) Interest Payable, (b) Insurance, (c) Taxes, (d) Depreciation? 5. Outline any svstem of cost accounts with which you are acquainted. Classify the accounts in their sequential order. 6. Suggest a plan for recording and posting, with the least possible loss of time, the remittances received from customers by a concern whose ledger is in several divisions, with a book-keeper to each division. 7. Define : (a) Depreciation, (b) Good Will. (c) Reserve Fund. 8. State what, in your judgment, are the principal defects of the pre- vailing methods of municipal accounting. What is your conception of the information that should be given in the periodic statements of a munici- pality? In what way would this materially dift'er from and be an improve- ment upon the information now commonly furnished by such statements? Practical Accounting.— (Time allowed, four hours.) 1. A and B, who had hitherto been in business separately, decided to enter into partner- ship on July 1, 1905. The balance sheets of A and B were on that date as follows : 64 106 American Business and Accounting Encvclopedia A. LIABILITIES. Accounts Payable $1,000 Capital Account 5,000 $6,000 assets. Furniture ^ $ 750 Accounts Receivable (face value) 2.500 Merchandise 2,550 Cash 200 $6,000 B. liabilities. Accounts Payable $1,500 Capital Account 3,000 $4,500 ASSETS. Furniture $ 600 Accounts Receivable (face value) 1,500 Merchandise 2.000 Cash 400 $4,500 Acc. It was agreed that A and B should make over their respective accounts receivable at $200 and $150 less than the face value shown in the balance sheets, these amounts to be charged against their capital accounts and carried on the partnership books as a reserve for bad and doubtful ac- counts. Of B's furniture, only $250 was to be taken over by the partner- ship. With the above exceptions the assets and liabilities of the parties were to be taken over by the partnership at the balance sheet figures, ex- cept that B was to invest in the partnership, in cash, a sum which, after making the adjustments above referred to, would make his capital account the same as that of A. Draw the balance sheet of the A and B partnership on July 1. 1905, giving effect to the foregoing provisions. 2. How would you change a set of books from single entry to double entry? 3. What do you understand by the term "Perpetual Inventory?'* Give an example. State what you consider the advantage (or disadvantage) of its use ; and might there be circumstances in which its adoption would be impracticable? and if so, give an instance. 4. Two parties, A and B, have been in business for the three years ending December 31, 1904, on which date they agree to dissolve partner- ship. A takes over the business, paying B $7,500 for his share of the good will. A has drawn out each year $2,000 and B $3,000. A's capital at start was $10,000, and B's $12,500, and the profits of each year have been $3,500, $4,200 and $4,600 respectively. There was no deed of partnership nor any arrangement as to interest on capital. Draft accounts showing A's capital on taking over the business, and the amount B will receive on retiring. 65 1 Ace. American Business and .Accounting Encyclopedia 106 5. X and Y enter into partnership, X*s capital being $20,000, and Y's $15,000. Capital is to bear interest at 10 per cent per annum ; profits are to be divided equally between the parties. The profits for the first two years (after charging interest on capital) were: 1st year $6,000 2nd year - "^'^UO and the drawings of the partners (in excess of salaries) were: 1st year 2nd year X $1,500 $1,750 Y 1.200 1.500 At the end of the 2nd year, Z was admitted to partnership, and put into the business the same amount of capital as Y had in the business at that time, and on the same conditions as to interest and division of profits. The profits of the business for the third year were $12,000, and the partners' drawings in excess of salary were: X $1,760 Y 1.600 2 \\ 1 , 500 Construct the capital accounts of the partners for each of the three years, showing the balance on each at the end of the third year. 6. X receives from his customer, Y, a note in settlement of his ac- count. This note X discounts at his bank. Draft entries. 7. Before making the charges referred to below, the profit and loss account of a corporation for the year shows a credit balance of $60,000. The accounts receivable are $40,700, and the plant and the machinery ac- count is $55,000. The 6 per cent preferred stock is $50,000 and the com- mpn stock $150,000. It is decided (a) to provide out of the above named profit and loss balance 7//^ per cent depreciation on plant and machinery; (b) to write off as uncollectible $1,500 of the accounts receivable and to make a reserve of 2 per cent on the remainder of the accounts receivable to provide for possible losses thereon; (c) to provide for the preferred stock dividend for the year; (d) to provide for a bonus of $7,500 to the employes; (e) to provide for a dividend on the common stock of 15 per cent for the year; and (f) to carry the balance then remaining on profit and loss account to undivided profits account. Draft entries to comply with the above provisions. 8. A, B and C were equal partners. In the event of the death of either of them, during the existence of the partnership, the two survivors were, in terms of the deed of partner- ship, to have the prior right of purchase of the deceased partner's interest in the business, as at the date of his death — the computation of the value of said interest to be based on two years' purchase price of the average profits of the three years preceding the date of his death. The accounts were kept by single-entry, and were made up half- yearly, to June 30th and December 31st; and the statement of affairs was signed by each of the partners, as acknowledging their agreement as to 106 American Business and Accounting Encyclopedia Ace the profits shown thereby to have been earned during each of these fiscal periods, respectively. The profits of the six half-years to June 30th, 1905, were, as acknowl- edged by the three partners, as follows: — To December 31, 1903 $14,200.50 To June 30, 1903 16,089.50 To December 31, 1903 14,200.50 To June 30, 1904 18,006.50 To December 31, 1904 13,453.50 To June 30, 1905 20,500.00 A died on October 31, 1905 ; and it is agreed that his partnership ceased as at that date, and that the partnership then had as assets: Good Book Debts $41,995.00 Furniture and Fixtures, worth 3,600.00 Cash in Bank and Office 9,450.00 And liabilities, amounting, in all, to 3,250.00 A's capital account showed at the same time $20,000 to his credit, and his personal account a debit of $2,165, (the latter forming part of the asset of $41,995, for Good Book Debts). The profits for the half-year during which A died were ascertained at the next usual fiscal term — viz.: December 31, 1905, when they were shown by B and C to be $26,380 and the administrator of A's estate is satisfied as to its correctness. Make statement showing amount A's estate is entitled to receive from B and C, without reckoning any interest on the balances of either of the partners' capital or personal accounts. Auditing. (Time allowed, three hours.) 1. The entries on the credit side of a cash book which you are audit- ing include payments by cash and payments by check, it not being the custom of the proprietor to deposit all receipts in bank. How would you proceed to verify (a) the bank account; (b) the balance as shown by the cash book? 2. At the close of his financial year, a contractor has a number of uncompleted contracts in hand. On his balance sheet appears, as an asset, the item "Work in progress $100,000." and in his profit and loss account appears the credit item "Profit on contracts $20,000." How would you, as auditor, verify these figures? * 3. How would you audit a set of single entry books? 4. A purchases B's business as a going concern, paying part of the purchase price in cash on the date of the transfer and giving interest- bearing notes for the balance. How would you, as auditor, expect to find the interest on the notes treated in A's books? 5. (a) How would you, as auditor, satisfy yourself as to the value of (1) accounts receivable, (2) bills receivable? (b) How should "bills receivable discounted" be shown on a balance •^heet? i Ace. American Business and Accounting Encyclopedia 106 6. Outline a plan for the audit of any mercantile business with which you are acquainted. 7. You are instructed to make a partial audit of a lighting company in connection with a proposed issue of bonds. State the points to which you would consider it necessary to give particular attention. 8. A corporation was duly authorized to do business in this state, capitalized at $100,000, which amount was fully subscribed for before incorporating. Only 50 per cent of that amount was called in— viz., $50,000; and, after completing the first year's operations, it was decided that it would be unnecessary to call in the balance of the amount sub- scribed for. At a general meeting of the members of the corporation, a resolution was passed, unanimously, and recorded in the minutes, reducing the capital to $50,000, and authorizing and directing the book-keeper to clear off the balance of $50,000 standing at the debit of subscription account. As auditor, would you consider that those entries called for comment? If so, state fully for what reason. Commercial Law. (Time allowed, two and one-half hours.) 1. With regard to a corporation ; what is necessary to be done: (a) To form and incorporate, (b) To increase capital, (c) To decrease capital, (d) To disincorporate voluntarily. What rights and powers of a corporation would be sustained by com- mon law, even if they were not expressly stipulated in its charter? 2. What benefits, or disadvantages, may obtain as between common partnership and holding stock in a corporation? In what respect does the individual partner's, or stockholder's, liability to creditors differ? Are there any circumstances under which one of the partners in an unincor- porated firm could limit his liability? If so, state how. 3. Describe: Common stock. Preferred stock, Cumulative preference stock. 4. Describe: Personal property, Real property. . . What satisfaction would you, as auditor, require, to prove validity of transfer of (a) personal, (b) real, property? Under which of these classifications would you place the capital stock of a corporation that exists only for the purpose of selling its own real estate; and why would you so classify it? 5. Describe : Interest, Compound interest. Usury. What is the legal rate of interest in this state? Can a higher rate be enforced, if stipulated by previous contract, and to what extent, if so? 106-107 American Business and Accounting Encyclopedia Acc. If a note were made in this state, payable in Idaho, and assuming the legal rate of interest to be different in the other state, which rate could be enforced if it were necessary to sue for payment of interest? If a similar note was drawn without specifying where payment was to be made, whether would the Washington or the Idaho law govern? If A, who obtains a loan from B, were to agree, by definite and specific contract, in writing, to pay therefor a rate of interest known by both of them to be usurious, what would be the result of an action at law if A were, afterwards, to refuse to comply with the terms of that contract? 6. Define: (a) Mortgage, (b) Trust deed, (c) Equity of redemption, (d) Warranty deed, (e) Quit claim, (f) Abstract of title. Why is a trust deed irequcnlly preferred to a mortgage? 7. Describe : Insolvency, Bankruptcy — voluntary, Bankruptcy — involuntary. If A makes an assignment to B for the benefit of his creditors, of all his possessions, is he, ipso facto, absolved of further liability if the pro- ceeds thereof are insufficient to pay the whole of his indebtedness? if not, wliat further steps must he take? State three reasons for which the court might refuse to grant dis- charge in bankruptcy. 8. (a) Define: Agreement, Contract, Bond, (b) Name a variety of municipal bonds; their rank in priority and against what treasury revenues as claims; describe city's liability, condition liability and non-liability (if ever). ^ (c) Define sinking fund and set out purposes thereof. i:i07) ACCOUNTANCY.— (ERRORS IN PRINCIPLK) .... Secret Reserves. It is wrong to establish secret reserves for the pur- pose of reducing dividends, especially in the case of a corporation whose stock is sold on the public market. The seller of such stock is practically defrauded out of a part of the price he should obtain, as the market value depends on the profits earned and distributed. It would appear that there should be some legal remedy in cases of this kind. Sales to Branches. It is wrong to charge branches at selling price, as by this process the main office profits are incorrectly inflated. Sales to branches should not be credited to the main office sales ac- count at cost, as this renders any statistics, or percentages, in connection with distributing expense, etc., entirely valueless. 68 69 I ■ I 1 I I Acc. American Business and Accounting Encyclopedia 107-108 Sales to branches should be credited to a special account. A good plan to follow is to open purchase and sales accounts on main store books for each branch. On the purchase account charge them with goods at cost in one colunm, crediting main store purchase account, and provide another column in which to charge them with the same goods at selling price. The difference between the purchase account at the selling price and the sales account should equal amount of goods on hand at the branch at selling price, and should agree with the branch reports; while the difference between the branch purchase account at cost, less inventory and sales, will show gross profit. Instalment Accounts. These should not be credited to sales at full price, as the subsequent expense of collection should be taken into consid- eration. When the first year is given the whole of the profit on the sale without consideration of future collection expense, it necessitates an erron- eous showing of profits. Consignment Sales. These should not be entered in the ordinary sales book, but in a seperate record, from which they may be transferred as actual sales are accomplished. Freight and Cartage. In a manufacturing business the accountant should be careful to discriminate between in-freight and cartage and out- freight and cartage, the former being a part of cost of production and the latter expense of distribution. Suspense Account. It is a very common practice for business men to transfer bad and doubtful debts to a suspense account, this account being included in the balance sheet as an asset, so that the transfer makes no difference whatever in the business showing. The proper plan is to establish a reserve against bad debts, which will appear on the liability side of the balance sheet, the assets being correspondingly reduced. (108) ACCOUNTANCY, ETHICS OF. It is generally considered by professional accountants to be opposed to the best traditions of propriety for one professional man to canvass the client of another for business. One of the reasons for this point of etiquette among accountants is that information of the most delicate and momentous nature is frequently committed in confidence by the client to the accountant, the accountant standing in relation to his client as an advisor and confidant, and it may be readily recognized that under these circumstances it is to the interest of the client to restrict such con- fidences as much as possible to one reliable person. Advertising is also a violation of the accountant's code of ethics, but there appears to be a distinction drawn between direct advertising and indirect advertising, in the way of an accountant keeping his name continu- ally before the public as treasurer or auditor of philanthropical, or chari- table, or other public institutions in connection with which he expects to be brought into contact with possible clients. This portion of the code 70 108-109 American Business and Accounting Encyclopedia Acc. of ethics is not much respected in the United States, where professional men have reduced copies of their photographs, and quotations of their terms, and sometimes even a reduced copy of their certificates of member- ship in the society to which they may belong, on the back of their business cards. As a rule, it is safe to assume that the accountant who advertises his business and terms in this way, depends rather upon advertising than upon the necessary qualifications in order to obtain clients. Touting is also very strongly condemned by English accountants, and we hear of chartered accountants in New York who would not send a man across the street to obtain business, if the business could be secured in no other way. This extreme delicacy of feeling does not appear to be suitable to the conditions of the United States. If accountants in this country desire to prosper, it is undoubtedly necessary to keep up a persistent cam- paign so that the business public may be educated to the necessity of efficient methods for keeping a record of their accounts, the accuracy of which should be unquestioned, and this can only be accomplished by a certain amount of touting and advertising. (109) ACCOUNTANTS' ACCOUNTS. Owing to the peculiarities of their business, it is very desirable that accountants should keep suitable books of accounts, particularly so as it IS a part of their occupation to recommend to others proper and efficient methods of accounting. Example is supposed to be better than precept, but we are afraid that if many accountants' clients could have the oppor- tunity to examine the accounting methods in use by their professional mentors, they would be surprised and disappointed. Accountants obtain business by contract and by time, and it is very necessary for them to keep an accurate record of the value of time en- ployed by themselves and their assistants in the work performed as this time represents the same to them as the cost of production in a manu- factory. By contract we mean that the work is done for a certain pre- scribed fee, whether per annum or for the particular audit or examination The accountant's day book fs therefore frequently represented by a specially ruled diary, which contains each day's appointments, and against these appointments are entered each day the time consumed. Money columns are also provided in the diary for the extension of the value of the time, and a folio column is provided and the various amounts charged up to the client's account. Where business is large, it is customary to have a specially ruled book or sheet, one column being devoted to each client's account. The amounts are then entered each day on this sheet or sheets, from the diary, the totals only of the columns being charged to the client s account at the end of the month. If this method is followed for contract work as well as time work, the advantage will be that the contract accounts will always exhibit the loss or gross profit made. Where losses are incurred, the causes can be investigated and precaution uken 71 Ace. American Business and Accounting Encyclopedia 109-110 to prevent a recurrence. Such losses are usually the fault of a defective appreciation of the conditions of the work to be done. (110) ACCOUNTANTS* INVESTIGATIONS. Among the principal duties of the e;cpert accountant is the examina- tion of books of account for the purpose of satisfying clients as to the profits which have been made in a business they desire to purchase, and the genuineness of assets and liabilities represented in the book accounts. It is usual also to make such an investigation on the promotion of a com- pany formed to take over and develop an established business, certifying to the statements published in the prospectus of the promoters as to the profits earned and capital employed. The following rules to be followed in such investigations are very complete, and will form a very valuable guide to those who undertake such investigations. They are quoted from the Incorporated Accountants' Journal. "In commencing an investigation of this nature it is reasonable to expect that a fairly complete set of books should be in existence, as a business that cannot afford good book-keeping is not worth floating as a company. Should the case be otherwise, it is right to insist that the accountant be allowed— indeed, it is essential that he should— make up a complete set of accounts before certifying. It is true it may not be neces- sary to re-post everything, but the examiner must first spend time in learning from the book-keeper or proprietor the exact methods adopted; if he thoroughly grasps these, and keeps in front of him a complete list of books in use, he should be able to take his own short cuts to ascertain ressults and to insure against being misled." The ground-work of every business is "Cash" — and further, it is a commodity that leaves traces of its career, the proprietor will say "in profit" — and that is just the point to test. If the statement is that "everything goes in the ledgers," a simple method would be to dissect them, and thus, at one stroke, get a check on purchases, sales, discounts, and bad debts — but the schedules at start and finish must be carefully scrutinized, also the purchases and sales just prior to and after the beginning and ending of the period to be reviewed. One may find sales suddenly increase or purchases lighten towards the end. The sales should be tested by noting whether paid for at due date; the record of returns from sales for the succeeding year should also be examined; or it may be that an examination of the purchase book for the subsequent period may show an increase ; if so, it would be necessary to call for the produc- tion of all invoices for the two or three months after the period under review, so that any indication of goods having been omitted may be cleared up. An instance came under the notice of the writer, in a company of which he was not the auditor, where on the last day of the financial year an entry for goods to the extent of some $50,000 or more appeared in the day book with the significant notes against a certain portion "for delivery in 72 110 American Business and Accounting Encvclopedia Acc. January," other portions in February, March, etc. As a matter of fact, they were never delivered, but a credit appeared for the same amount two years after. Although not in relation to an investigation for a company flotation, it aptly represents what should be disallowed without the long subsequent credit entry. Stock at commencement and end should be inquired into. If taken on the same basis of valuation on each occasion? If stated to be at market value, the state of the market might be noted, a sudden rise, and consequent appreciation firmly resisted; "cost" (or for damaged goods "value") should be the watchword. Before leaving what one may call the trading account or search for gross profit, a comparison of the amount and the proportion the stock may bear to the turnover can be usefully made; the rate per cent of gross profit should also be worked out. If normal, it is a satisfactory indication that there has not been much cooking. The pro- portion of stock to turnover helps to indicate the correctness of it. If the stock be abnormally large it may result from fraudulent additions, or by reason of the prospective vendor carrying a large proportion of "dead," or non-active stock which it is sought to sell to the proposed company at cost, truly hanging a mill-stone round the neck of the innocent infant." A word as to "work in progress" may well be put in here: It is per- haps the most difficult part to test if proper books have not been kept. Where manufacturing is carried on, the cost record is an essential, and should be called for: The percentage added for standing charges through- out should be ascertained, and no greater percentage allowed on the cost of works in progress at the end of the period, whilst it should be seen that no unusual amount of profit from any uncompleted contract at the com- mencement has been brought in to raise the average. The accountant having thus dealt with and satisfied himself as to gross profit, there remain questions of expense to be looked carefully into. Every class of business has its own ratio of expense, and it is diffi- cult to lay down any close rule, but if the cash has been dealt with and tested, what has not been exhausted in the personal trading accounts will fall into capital expenditure, expenses of business and drawings of partners, and the task here is to see that heading No. 2 (expenses) gets its proper share; in consequence all must be looked at. In all investigations it is necessary to keep in view the motives of those who prepared the accounts. In the present case it is to show as good a profit as possible, consequently it may naturally be expected that debatable points have already been decided in favor of the vendor, and unless the accountant raises a protest, judgment "goes by default." An examination of the various accounts showing a capital expended prior to and during the period should first be made ; by this means some general idea of the requirements of the business will be obtained. Then each item taken or the voucher or invoice examined before the item is passed. The outlay relative to the 73 Ace. American Business and Accounting Encyclofedia 110 capital will indicate to some extent the expected life of the machinery or other kind of plant, and be a guide to the vexed question of depreciation. In many businesses the partners are in the habit of making small payments for the purposes or encouragement of trade, some are careless and take no heed, others compound the outlay and take a weekly sum to cover it. Naturally it will be wrong to omit these items or allow them as drawings. The expense account may be made up in two ways ; either passed through the dissected invoice book or journal at the time of the liability is incurred, or posted direct to the impersonal account from the cash book. If the latter, care must be taken that those outstanding at the end do not exceed the items of a similar character at the beginning, it would be better to rectify each period or year, although on average profit it may be enough to add or deduct the difference between the total wrongly included and that left out at the terminating date. In the event of the premises occupied by the business being the free- hold of the vendor, care must be taken to see that a charge equivalent to rent is included if the company should not be purchasing the freehold. Rents received from underletting premises, if included, should be stated separately. As regards the question of the accountant's certificate, this should be carefully framed to show exactly what the profits certified to include or exclude, or perhaps it might be better to put it— what has been excluded from expenses before arriving at profit. In the certificate of report what is not said is often of greater import- ance than the actual phrases used. The accountant should strive to make the certificate a record of past facts only, and set out such facts so that they may come up to the desideratum required in the courts of justice, viz., that they shall state "the truth, the whole truth and nothing but the truth." In one respect the truth may be told, and yet not the whole truth, that is, in a certificate of average profits that does not give the amount for each seperate year. If the profits are gradually increasing it seems natural that the certificate should say so. If they are not, then a material point necessary to bring out the whole truth has been suppressed. Let your certificate clearly state if and how much depreciation has been deducted, and whether manager's or principal's remuneration has been included in the expenses. It is all very well to certify to profits at, say, $100,000 per annum, but if there has first to be deducted $10,000 for depreciation, anything up to $5,000 for manager, and perhaps another $5,000 for directors' fees, the anticipated dividend so glowingly portrayed by the company promoter is considerably reduced. The public too often forget the diflFerence between the profit as shown in a private concern and the profit of a company available for dividend. We, therefore, cannot insist too frequently on pointing out the difference. 74 110 American Business and Accou:jfTiNG Encyclopedia Acc. In stating that the certificate must only have regard to the past, it does not mean that the accountant having the conduct of the investigation must himself disregard the differing conditions under which it may be contemplated the business shall be carried on. This leads up to the amal- gamation question, which has lately been rather in fashion. Unless the certificate clearly shows that every business is making a profit and how much, the statement of a lumped total is valueless, whilst the statement as to remuneration to proprietors (whose number is some- times legion) is even more necessary. Still worse is it when the proposed company has only an option to purchase a certain number of retail corners, which option is probably only exercised in regard to a part of them, and. if exercised by unscrupulous persons, it may be by a selection of those most profitable to themselves and most unfit for the purposes of the company. Transfer of Business Undertaking. Such transfers may be of two kinds, the client may be purchasing the entire undertaking, or he may be intending to join it in the capacity of a partner; thus it may be necessary to make a distinction even here. Again the chief anxiety must be to see that no legitimate item of expense is omitted, and that the books are true records. Not only should the inner working methods be inquired about, but if it is a ready-money business where there are vouchers or duplicate bills given to customers, or the records of a patent till, these should be examined as vouchers supporting the receipts and showing their nature. A professional man should support his gross earnings by diary or office day books, and so on. The search for expenses follows the line of an ordinary investigation. Another point to be borne in mind is : What diflFerence will there be after the change that would aflfect the results? For instance: Two part- ners may have carried on a business with no charge for services of either, the purchaser, if not intending to have a partner, may be compelled to take a manager, thus at once eating into and reducing the profits that the past would show. It may be thought that private expenditure would be sacred from the gaze of the investigator. I should say, within reasonable limits, "not so." Let me suppose two cases, one where the amount drawn from the business is small indeed, evidently only enough to satisfy the most moderate needs, whilst in another case the total is large. I should look at- the surrounding circumstances, and probably place no prying eye on the details of the first supposed case, whilst in the latter I should scrutinize each item. When attending on one occasion I was refused access to the private ledger, except as to purchases, sales, discounts, and fixed charges for rent, etc.. on the plea that the other expenses are as the purchaser chooses to make them. I need hardly say I referred back to my principal. On another occasion I was refused access to the pass book, and as I declined tc certify without, that business was not transferred. Speaking generally, 75 Ace. American Business and Accounting Encyclofedia 110 unless everything is open to the investigating accountant, he should refuse to certify It is not so much what is placed before him that requires care, as what mav not be put forward. Our anxiety should be to leave nothmg out Everv trade has its technicalities, and if we are without a special knowledge 'of the particular trade, justice to the client requires that, before commencing, we should seek to learn all possible about it. When it is a question of partnership, yet another danger has to be looked for and avoided. The actual position of the person already in the business must be ascertained after being satisfied as to the total profits or earnings. Not only will it be necessary to see that the proposed capital of the combined partnership is sufficient to enable the new ship to float, but the personal position of the other man, both in and outside of the business, should be searched for. If he is a man without other means than is already in the business, the client should know that he is not relied upon for further capital if the firm ever get into a tight corner. Is he in debt outside the business Does he habitually overdraw his account of profits? If so the client should pause, if not retrace his steps altogether. These are legitimate and necessary inquiries, and to ascertain them correctly we must of necessity look into the private accounts where period- ically recurring payments specially require explanations. Too often a partner retires with a desire to get out of a bad thing, not caring who may be drawn in. If possible, any information gleaned from the books bearing upon his retirement may be useful. Are the liabilities being paid as close to due date as, say, at the com- mencement of the three years under investigation ? Are expenses increas- ing? If so, is the increase in points which show carelessness or want of close supervision on the part of the gentleman with whom the client may have to work? All these and many more (whilst not strictly book- keeping) will be valuable information to the client, and perhaps save him from throwing away his money." An investigation where fraud is suspected need not necessarily be to discover actual theft. It may be to detect the falsification of the accounts by a partner who desires to inflate profits in order to draw out a larger proportion than is actually due to him, especially if he be paid partly by commission, or receive a larger share of profits in proportion to his capital than the other partner. Or it may be that one partner desires to reduce the profits in order to buy out the other at a lower rate, and thus acquire the business for his sole use. In such cases the investigation will be similar to those already men- tioned, but inquiry should be made on the following points : (1) What supervision is exercised by the principals, and do they exert any oversight on each other? (2) Is any system of periodical returns in operation? 76 110 American Business and Accounting Encyclopedia Acc. (3) Are all the partners technically acquainted with the business? (4) Is the suspected partner a man of reputed integrity? Is he steady, and what is his private financial position? (5) Are the terms of the partnership deed literally carried out? If. however, the misappropriation of cash is suspected, the following methods of fraud are the most probable : Omission of Debts Collected. In this case the cash received is either entirely omitted and the debt written oflf as bad, or it is entered on a later date, a subsequent sum being retained to meet the deficiency. Sometimes, also, an entry will be made through the returns book, as though the goods had been sent back or allowed for. The counterfoil receipt book (if any) should be checked, the date and discount being specially noted, as over-statement of the latter is a frequent medium for fraud; whilst a careful scrutiny should also be made of the sales ledgers, the balances being traced, and particular note taken of any accounts in which items appear as owing, although subsequent debits have been paid. It is often necessary for the accountant to himself send out statements to all the customers, asking for a verification of their accounts, this being the best possible test to discover any inaccuracies ; but if this course be adopted the items included in the statement should be checked from the journal and cash book to the ledger on the same day that the statements are dispatched, or subsequent alterations may be made, and it is desirable to use a different colored ink for checking each batch. Wages. The most common methods adopted are "dummy men," errors in addition and extensions, and subsequent alterations after payment. An examination of the wages book will reveal the two latter pecula- tions ; whilst to detect the former, the time book should be obtained and compared, a list being obtained from a responsible person of the names of all the men then working on the place. Omission of Sales. Copy invoices should be compared with the order book and goods outward book, and afterwards checked to the sales journal. As regards cash sales of "old machinery," it is only possible to inquire into the system of internal check in existence, and obtain information from extraneous sources. Fictitious Payments. As false or duplicated entries may have been made, the bank pass book, counterfoil check books, and vouchers must be examined. If the posting is to an impersonal account, the invoice should be attached to the receipt, as otherwise the former may have been also passed through the purchase journal and paid for previously. Goods Bought. The invoice price may have been inflated either by alteration or through collusion with some person in the seller's office. The invoice should have been "passed" by the person receiving the goods, and if this has not been done, or there has been any alteration in the date, a satisfactory explanation must be obtained. Statements should be 77 Ace. American Business and Accounting Encyclopedia 110-11^ 111 American Business and Accounting Encyclopedia Acc. produced for all unpaid accounts, as any discrepancies will in this way be at once revealed; in fact, if receipts for payments have been forged, there is no other method by which the fraud can be discovered. Concealment of Certain Books and Consequent Sources of In- come, A list should be obtained of all books in use, and a sharp lookout kept for transfers. Deficiency in Cash Balance or Misappropriation of Securities. An examination will reveal any discrepancies in this direction. Stock Over-Stated, or Over-Valued, or Alteration of Ledger Balances Already Checked. These methods are usually adopted .o cover up defalcations, in the first case to show a sufficient profit, and in the latter to make the books balance. Theft of Stock. This is always difficult to trace. The first step is to thoroughly examine the trading account, and by ascertaining the gross profit which should have been earned, taking into consideration the cost of the material sold, the approximate amount of the suspected deficiency can be gauged. If the discrepancy be confined to one department, and the goods sold are capable of identification, stock accounts can be constructed, but if such he not the case, the investigation will be confined to the examination of mvoices for goods purchased with the goods inward book and duplicate orders, and of the copy sale invoices or sales journal with the goods ut- ward book and order book. An investigation of this description usually, however, demands some technical knowledge, and therefore the assistance of one of the staff is very desirable. In nearly every business some form of rough stock book or weekly return is in use, and these must be obtained and compared with the other books. Manipualtion of Commission Accounts, Part of Overcharge Being Repaid by the Agent. The commission accounts should be examined and the calculations checked, the rate being ascertained from the original correspondence or agreement with the agent. — Exchange. (Ill) ACCOUNTANTS AND SUBSEQUENT INFORMATION. Query. In auditing a set of books for one year ending December 31st, and commencing the work in the subsequent March, is it correct practice for the accountant to take advantage of such information on the books as at date of audit w^hich affects values indicated on the books December 31st? Take bad and doubtful debts, for example. Solutions. The accountant being employed to audit the books up to a certain date, cannot take cognizance of any subsequent happenings in his statements and reports, but he should undoubtedly make them the subject of a subsidiary report For instance, after his certificate, he should say, "It is very important and proper for me to state that since 78 the end of the period covered by the foregoing audit, certain accounts then considered good, have become of doubtful value, if not entirely worthless, •as per the appended schedule, etc." An accountant is a man who is supposed to possess tact, caution, firmness, fairness, good temper, courage, integrity, discretion, industry, judgment, patience, clear-headedness, and reliability. The answer to this query can be Yes, and it can be No. The answer all depending a great deal for whom the audit was made and why it was made. If it was made for a client who intended to invest money in the concern, the accountant to have the interest of his client at heart, and who wishes to uphold the dignity of his profession, would undoubtedly include any subsequent facts learned in his report. It would not be necessary for him to include it in his report proper for the period up to December 31, but simply add it as a sort of foot-note, or P. S. But, if it is for a person who just wants to know how the company stood at the end of the year and whether the books are correct and show the true facts up to December 31, then it would not be necessary for him to mention that some accounts have become doubtful and bad since that time, as he would have no means of finding it out unless told so by a member of the firm, or going over the work subsequent to December 31, and this he is not asked to do. But an accountant who possesses all of the above qualifications, whether his client asked him to or not, should report to his client the exact condition in which he knows the company to be. Take this case: On December 31, a firm writes to you and asks you what you know of a certain young man who resides in your town, and who has made application for a position with the inquirer. For some reason the mail is delayed for several weeks, and when you get the letter, you look up the young man's conduct. You find that up to the time that you should have received the letter, the young man had an apparently flawless reputation, but you find that since that time he has become un- reliable; would you give this information to the firm with whom he made application for a responsible position ? I think you would. Then why not the accountant give the same information to a client who intends to invest probably a large sum of money in the business? The accountant should include in his report and statement, the fact that certain accounts have become bad or doubtful since the end of the previous year, for the reason that the majority of accounts which subse- quently become doubtful do not reach this condition in a month or two, rather is it a process extending over many months, perhaps years; in other words, if an account has to be considered bad on March 1st, it is more than likely that the unhealthy condition of this particular business ^was in evidence on Dec. 31st, and just because the creditor is unaware of this, on Dec. 31st, is no reason for not including it in a statement of the business up to this time, although made out at a later period. 79 ■ n^i f t Ace. American Business and Accounting Encyclopedia 111-112 Even should an account prove to be an exception to the above and a solvent house become insolvent in the remarkably short space of two months or less, would not common business sense suggest providing for the loss in the same year in which the profit would be ordinarily recorded, and would not prudence lead the accountant to provide for the depreciation just as soon as possible ; that is, in the preceding year's business, seeing the books and statement are not finally completed and there is yet time instead of waiting for the end of the next fiscal period? (112) ACCOUNTING, HISTORY OF. A great deal has been written in regard to the methods used by ancient trading peoples for the purpose of recording their commercial transactions. A very interesting historical sketch will be found in the little book entitled : •The Antiquity of Book-keeping," by John William Heaps. Mr. Heaps de- scribes discoveries in this direction in connection with Phoenicia, Arabia, Chaldea and China. The development of the Science of Accounts, as we know it, has been gradual and slow, but like many another science it may have been discovered, lost and rediscovered many times since the world began. It is certain that mankind has always traded and that trading necessitates the keeping of records, and as accounting is so closely allied to mathe- matics there is every reason to suppose it is of most ancient origin. One of the earliest actual traces of a record of receipts and payments appears to be found in the Assyrian tablets discovered by Sir Henry Raw- linson, and supposed by him to be ''personal expense" books. Even so, these tablets would indicate a great familiarity with the subject of accounts, for if a strict account were kept of personal expenses there would doubtless be more elaborate and thorough methods of dealing with commercial transactions. The first record of a sale in exchange for money appears to be the sale of the field and cave of Machpelah to Abraham for four hundred pieces of silver, but therei s no doubt that all the great ancient trading nations from Babylon to Rome had more or less elaborate systems of book-keeping or accounting. That the Babylonians kept books of account is certain, as some of their ledgers are now deposited in the British Museum, London. They consist of tablets, each set being deposited in a separate jar, probably so that they could be "balanced separately" and any "errors easily located." Here may, perhaps, be traced the origin of the card system. Part of the business carried on was in the real estate line, the rent of a moderate size house being one-third of a shekel of silver per year. As a shekel of silver is valued at about sixty cents, we can appre- ciate what we miss by living in the twentieth century of the Christian era. The first treatise on book-keeping is said to have been a translation from an Arabian original, but no copy is in existence. The first actually 80 112-113 American Business and Accounting Encyclopedia Acc. known work on double entry is supposed to have been written by Lucas de Burge, an Italian friar, and was published in Venice, A. D. 1495. The first treatise on the subject in the English language was published in London by John Gowghe in 1543. It was afterwards republished in 1588, by John Mellis. The system taught thereby required the use of three books, named the memorial, journal and ledger. We suppose the memorial to be another name for "dav book." The treatise of Stevinus, published in 1605, applied the double entry system to the accounts of public or government offices. The work of Mr. E. T. Jones, of Bristol, published in 1796, is spoken of very highly as being a long step in the direction of our present practice, which appears to be almost, if not quite, the perfection of analytical and mathematical science as applied to accounting. Dr. Kelly's "Elements of Book-keeping" may also be mentioned, which appeared in 1801. This work contains a short history of the literature of book-keeping, and is perhaps the most comprehensive account of the subject to be found in any work on book-keeping. This work is considered as the first attempt to introduce the practice of the counting-house, or office, into schools, by a person who derived his information on the subject merely from the hints of merchants, with- out having actual practice. The work is arranged according to the methods in use in some counting-houses, but no attempt has been made to improve or remedy any defect in practice. Following Dr. Kelly is Mr. James Morrison, a Glasgow accountant, who publishes his complete system on merchant accounts and modern principles of book-keeping in 1808 ; this work ran through several editions, and was adapted for school use. Mr. Morrison is spoken of as being in his later editions one of the best authorities on the subject, as his work was doubtless at the time of. its publication the most comprehensive work upon the duties required of a merchant's book-keper, treating of the vari- ous documents required in commercial transactions, as well as in book- keeping, by several methods. (113) ACCOUNTING SYSTEMS. Practically, there are but two systems of accounting in use in the com- mercial world, viz., single entry and double entry. These two systems will be described hereafter under their respective titles. The difference in the requirements of manufacturing, trading, and non-trading enterprises is so great, however, that the system of account- ing required varies greatly both in scope and detail, so that it might with propriety be said of many businesses that their accounts were arranged on a special system. It would be utterly impossible to attempt to set down the diflferences to be found by a 'comparison of such systems, for obvious reasons, but so far as possible a number of such systems will be described in detail as this Encyclopedia proceeds. The accountant 81 il! Aca American Business and Accounting Encyclopedia 113-115 will bear in mind that the object of all systems of accounts is to exhibit the result of the transactions of the business during specified periods, arranged in such a manner as to inform the proprietors of the business of the amount of revenues and how they have been produced, the amount of expenditures and their details, and the net income remaining". The best system of accounting, therefore, is the one which will furnish these particulars in the clearest possible manner, with the smallest expenditure of time and labor. (114) ACCOUNTS, SCIENCE OF. The recording of the transactions of a business or industry of any nature. The ability to converge all transactions of a business to a focus, which shall embrace the whole and permit of their proper comprehension and classification. The faculty of so systematizing accounting methods that the best results shall be attained with the least labor, expense, or pos- sibility of error or fraud. Among the many excellent definitions of accountancy may be quoted the following: "Accountancy thinks out, and thus finds out, with logical and mathematical accuracy, the condition of affairs of any business enter- prise." Accountancy gives account, not only of its employer's affairs, but of its own accounts; so that a manager or proprietor, whether nation, muni- cipality, company, body of voters, or individual, may know how matters stand; may render in turn the same intelligent account to any third inter- ested or disinterested party; and may keep a complete surveillance over all the accountable agents of the enterprise. Accountancy as a profession is brought into very close touch and relationship with other important departments of business activity, and the distinction between it and one and another of these is not always clear to popular apprehension. The accountant's confidential relation is with the administrator or proprietor, and it is only as the representative or as the helper or advisor, of his client, that he has to do with the functions of others. He is not, for instance, the book-keeper of the concern; nor does the expression "expert book-keeper" describe his attitude or relation either to that functionary or to any other corps of book-keepers, however large and important, much less to the establishment or enterprise in its entirety. He is, however, a book-keeper in the sense that he thoroughly understands the ins and outs of that art; and as the representative, for the time, of the business, he critically examines the accounts as recorded in the books in order that he may give to his employer a scientific showing of the financial condition of the enterprise. (115) ACCRUED. Increased by effluxion of time; something added. In accounting, generally applied to amounts earned, but not received or entered on the 115-120 American Business and Accounting Encyclopedia Act. books (such as rent, wages, interest, etc.), at any given date on which the balance sheet is compiled. (116) ACTIVE PARTNER. One who has a direct interest in a business through investment, be- ing proportionately responsible for the liabilities, and sharing proportion- ately in the profits of the business, and who takes part in the daily man- agement of such business, (117) ACTUARY. An official who calculates and tabulates for insurance companies the average risks on which all insurance premiums are based. (118) ADEQUATION. The act of equalizing. (119) ADDITIONS AND BETTERMENTS. A term sometimes used to describe expenditures which increase the value of equipment, and are not merely replacements or renewals. (120) ADDITION. The uniting of two or more numbers in one sum. A recent work on Higher Arithmetic says: "In computing, book- keepers whose business leads to rapid addition, omit much that would seem necessary to the ordinary student, and not infrequently add two columns at once, a power gained only by practice in their profession." It is un- doubtedly the aim of every book-keeper and office man to attain a high rate of speed in addition, coupled with accuracy, and various methods have been devised to facilitate both speed and accuracy. While methods for effecting accuracy will be considered under the head of "check figure," etc., those which relate to attaining speed in addition may appropriately be con- sidered here. The most common method used and recommended by experts in this lin^ is the learning of combinations of figures, so that 9-|-8-|-7, for instance, will be read as 24 by one operation of the mind. Thus, in reading, we do not say O-fN-j-E equals ONE ; neither should we say 9+8+7 equals 24. Numerous tables have been prepared to aid the student in making himself thoroughly familiar with the various combinations of numbers, and some text books furnish extensive drill tables which should be found of great assistance. Drill tables are also constructed on cards, each card bear- ing a combination of two or more figures. By shuffling and reshuffling these cards the drill exercises are constantly varied, which is certainly an advan- tage over printed tables where the relative position of the combinations never changes. The dropping of tens is also frequently used by experts who keep account of the tens dropped in a column with the fingers of the left hand. It requires considerable practice to become efficient with this device, and at 83 Ill 'i Adj, American Business and Accounting Encyclopedia 120-123 W first the freqiTcHt- miscalculation of the number of tens dropped will be apt to discourage the student. Another method of dropping tens which will perhaps be better for beginners to use is to place a dot against the figure where the ten is dropped. Thus: 4 5. 6 Another method in considerable favor is the grouping cf figures above 10 and under 20. By this method 8+7 becomes 10+5. While this particu- lar principle does not appear to be entitled to much credit in single column addition, there is no doubt of its usefulness in double column addition. In the appended example the operator adds both columns by the following process : 46 sa 27 34 76 266 46+80+3+20+7+30+4+70+6 which he reads : 46, 126, 129, 149, 156, 186, 190, 260, 266. Proficiency in this method will soon enable the student to add double columns without separating each number as above shown, the mental process becoming practically instantaneous. Under the heading of Amusing Arithmetic will be found a description of some of the tricks which have been used to mystify the public. (121) ADJUST. To regulate ; to bring to a proper relative position. (122) ADJUSTING BOOKS. Preparing statements based upon data obtained from books of account which shall indicate and settle the different interests of a business, and to which statements the books must be made to conform. i (123) ADJUSTING ENTRIES. Entries necessary for the adjustment of the respective interests of a business. A cross entry made in the journal to correct an error, or rec- tify an overcharge, etc. 84 124-125 American Business and Accounting Encyclopedia Adj. (124) ADJUSTING FIRE LOSSES. See fire insurance. (125) ADJUSTMENTS—ACCOUNTING. The following examples of ordinary business adjustments may be- found of interest. They are quoted from subscribers to The Book-Keepe. As accountant for a certain railroad in Nevada, I was caused to do "some tall thinking," which was as follows: A certain old bridge, which was, however, in good condition, was removed and a steel one placed. The original bridge was included in cost of road. In my distribution I first charged the new one and incidental expenses to construction, but on thinking the matter over I decided to charge the "cost of road" account, for the following reasons : This was not an addition to property as it replaced something of value which change was not actually needed. It did not enhance the value of the road to the extent of its full cost, for a railroad's construction account means an addition to property. It was not an operating expense nor was it a repair of any sort. So after some thought I adjusted my original entry and charged the same to cost of road. That account means the cost of original construction, the additions, etc., going into the construction account and others. The most interesting case with which I've had to deal was in settling up the work for a firm of three members. There was a disagreement ; all were to separate and engage in some line of business; each desired the original stand and firm name ; so stock, fixtures, lease and firm name were put up to be bid on by the partners. The lease and firm name up to the disagreement was an unbooked value. As soon as a price was established it was charged to the successful bidder in a special adjusting account opened to him and credited to a firm name and lease account. It then became an asset in settling up the old firm's business. All other items such as paid for advertisement, stationery, rent, interest, etc., for all amounts extending beyond date of settlement were charged likewise to this adjusting account aud credited to their respective accounts. I had a very interesting example of adjustment a short time ago. We had a boiler explosion at one of our plants last fall which destroyed two large boilers, demolished the boiler-room and destroyed several machines, but fortunately no one was seriously hurt. We carried $10,000 insurance on the boilers. New boilers, engine, and machinery were bought to replace that which was destroyed and new engine house built. My first move was to get the value of everything destroyed by the explosion from old inven- tory book, then the following journal entry was made: 85 Adm. American Business and Accounting Encyclopedia 125-12i? Boiler Explosion Account, Dr., Mill Plant and Machinery, Cr. For value of property destroyed. This transferred these items as they stood on our books before explo- sion, to the boiler insurance account. Then when insurance was paid this account was credited with the amount and cash charged. Explosion account was also charged and wages credited for labor of men cleaning up debris. The balance of this account then showed the net loss on explosion. (No account was taken of loss of business while plant was idle as the owners did not care to take this into account. As new machinery was bought and engine house rebuilt, these items were charged to plant and machinery, so that when all had been rebuilt and new and improved machinery installed, the latter stood on inventory at cost and the old charged ofT to explosion. The net loss on explosion was $3,500 and as it was a pretty large amount to be charged off in one year, we decided to charge one-fifth of the amount to profit and loss each year until the account is closed. We therefore charged oflF $700 and held $2,800 as a suspense account or passive asset on our books. The insurance covered old boilers and machines and as the new boilers, engine, and machinery were all of the latest and best pattern, it seemed to the writer that it was best to handle it as he did. Insurance account was also credited with old iron and machinery sold for junk. A short story publication set aside $50,000 to pay for accepted manu- scripts during the year. Each month this account is charged with pay- ments for any accepted stories, the balance being brought down as an asset. (126) ADMINISTRATORS' ACCOUNTS. See executors' accounts. (127) AD VALOREM. A term used to denote a duty or charge upon goods at a certain rate per centum upon the cost or value as specified in the invoice, as opposed to a specific sum upon a given quantity or number. (128) ADVERTISING AGENCIES—ACCOUNTING METHOD FOR (Article No. 1). — Of all the many and varied lines of business carried on in the world, I think that to the majority of people, an advertising agency is X — the unknown. And yet, any intelligent person picking up a magazine or newspaper, finding it consists more or less of advertisements, must often ask the question, "How in the world is this mess of advertising placed here?" Of course, a good deal of it is placed direct by the adver- tiser, but this constitutes only a small fraction of the total advertising done. The medium by which the remainder of the. advertising is placed is known to the business world as an "advertising agency." These concerns 86 128 American Business and Accounting Encyclopedia Adv. receive from the newspapers and magazines they insert their client's adver- tisements in certain commissions. An advertising agency charges a commission for its services in hand- ling the advertising, and for this commission makes up the "copy," sends the orders to the paper or magazine, sees that the ads are run regularly and properly, and pays the paper's bills. Drawings, printing and such like extras are charged at cost. The commission consists of a percentage on the amount of advertis- ing paid for to the paper. Of late years, this percentage has steadily de- clined, owing to the great cojnpetition in this .nost profitable field. A few years ago agencies were so few and far between that they could charge their clients almost anything they pleased without fear of losing their business. Twenty and twenty-five per cent was about the average com- mission charged, but there were advertisers, I should say adventurers, like the old Louisiana lottery, etc., whose profits were so large that they did not object to paying as high as 50 and 100 per cent. That sounds exag- gerated, but it is a fact, nevertheless, and in spite of it, they got rich and prospered till they were driven out by the government. To compete with its rivals today, an advertising agency must know what the lowest com- mission is which it can safely charge its customers and still make money ; but to do this, it is necessary that its expenses be kept on the lowest pos- sible level, and that its books and records show the condition of the busi- ness. By keeping down its expenses, I do not necessarily mean that it should go out into the streets and lanes looking for the cheapest help it can get. The success of an agency depends in a very large measure on the efficiency and intelligence of its staff, and to keep a lot of incompetent persons on the pay roll, to the detriment of the others who are the life- blood of the concern, is to court disaster, for good men want good wages, or they go to other agencies who are willing to pay for, and are always on the lookout for, the best they can get. In regard to the book-keeping in an agency, it is useless to state how iilmportant it is that this should be accurate, and it is a fact that the majority of agencies are complete as it is possible to make it, but very slip-shod in their accounting methods. There are, and must be, excep- tions; but those who have a good system are loth to describe their meth- ods to their less fortunate brethren. The system I am about to describe is, as far as I know, original, but is in every way satisfactory and can be carried on without any hardship, and will give the firm all the information it is in need of to enable it to compete with its rivals. Many agencies use the monthly magazine exclusively, in which case the handling of their accounts is as simple as it is profitable ; but when a firm has clients who use every newspaper in the country to the extent of about $25,000 a month, the accounting assumes more alarming propor- tions, the checking up of the papers auditing the newspapers' bills and 87 Adv. Americax Business and Accounting Encyclopedia 138 making out the customers' bills every month being an enormous contract to undertake. This accounting scheme involves: 1. Keeping a record of insertions. 2. Keeping the accounts with the papers. 3. Keeping the accounts with the customers. 4. Keeping the general office accounts. The salesmen of an advertising agency are known as solicitors. They should in all cases ascertain the rating of their prospective customers, both for their own and the firm's protection. They should also be well enough acquainted with the business to be able to make the rates for their clients and show them where their advertisements should be placed in order to bring results. Having closed a contract, the solicitor goes ahead and has the "copy" drawn up. This, together with all the information connected with the running of the "copy," is sent to all the papers his client wishes to use. If the paper accepts the contract at the price stipulated, they do so on a form attached to the original one sent. This is then filed away for future reference. Each solicitor and every member of the firm who is empowered to make advertising contracts, is given a book ruled as shown, in which he enters all the particulars of the contracts as denoted by the headings on the debit side of this book. The orders are sent to the newspapers on order forms, which are made in duplicate and punched for a binder. Order for Insertion. — The original is pink and is sent to the news- paper, and the duplicate is yellow and goes to the checking department. Or\<^\r)o\ o ^^ Jot?9 Jopfs AdvfrTi^ipq Aqf^ify .Adi ikOt- IXU- A/<^»rTn>r ArticU Inu O Plnt>rr(4«r kills Short time orders are sent to the auditing department as soon as completed and time orders are sent out every month end. 88 128 American Business and Accounting Encyclopedia Adv bj)|)llCer S. c Lecntiof Pricf OffrM l\at» qq^ Ai*r ■ 1 1 1 __ Folio C^I^ ?- c r> 1 1 flCfftii A m^ Urt A IT C B L Cfi T])tsForPv.is(\ulfs by Prov/idip^ ^ 5!)orTLfnf 89 Adv. American Business and Accounting Encyclopedia 128 to the checking room. The total insertions and space, as shown by the columns on the right-hand side of the checking card, are then put in the order books under each contract. The amount earned by the paper for the month is then computed, and extended out into the columns provided on the credit side of the order books. It will be noticed that these columns are in blocks of six to a month. The column headed "General" is used for extending the amount billed to the customer. The columns headed "A," *'B," "C," "D," "E," respectively, correspond with the letters used for nam- ing each newspaper ledger. As I said before, if only magazines are used, the book-keeping is greatly simplified and one ledger would be ample to accommodate all the accounts. But where there are between 5,000 and Npws|)fl[)er L«»<)<^f r hoU htlnh Kiytu^T ncffiW ■• Aqt Mc An AH An Jui)P Ant Ju ly Anf Aud Ani Sf|.T Ant 10,000 accounts opened with newspapers it becomes necessary to have several ledgers (in this case five is the amount used), and they are sec- tionaliezd according to states, each section denoted by a letter of the alpha- bet, Newspaper Ledger. — The balance due the paper at the end of each month is brought forward into the next month's column. The amounts posted into these columns are the same as are extended in the order book ! I Ledger A Co^trollii^i^ ActOUpT botf LfTflils Fo. / At^oui)! hfltr 1 bftnils Fo y Af^oui)T \\(\'^ w lo^Hyilfr\pi)tflry Jourr^nl Jni) 3illoy Orflprl^fiflrC^ ' CnsK l^aoK .SujikpmfJnry ilonrrvi bisfounh 11'"' ' ' Jfljirn/il ■ ■ 1 QdLii>(.f ' \i!\a\ of iiulit/iiual • .... .. 1 1 7—1 — T ■ 1 90 128 American Business and Accounting Encyclopedia- Adv. columns for the corresponding month, therefore the footing of the order book columns should equal the total footings of these ledger columns, less the balance brought forward. It is obviously impossible every month, however, to draw off all these balances into a trial balance, so we open an account in the general ledger, with each of these newspaper ledgers, to which at the end of each month we post the totals of the individual debits and credits as shown by the footings of the columns provided in all the books. We will take the order books for example. We will presume that all the earnings of the news- papers are extended out for January. This total represents the amount we are liable for to the newspapers, although they may not bill us for it for several months. Their accounts have received credit in the ledgers so were we to foot up the total credits in the ledgers for January, that would be our liability for that month. As these credits in the ledger, however, are each and every one the same as the amounts in the January column in the order books, therefore, we take the order books and make a journal entry as follows : Advertising account, * To Ledger A. For amounts credited to papers on advertising earned month of January as per footing of order books. No. 1 2 3 4 etc. Same way with the other ledgers. This advertising account is our tradmg account, and these monthly debits represent our purchases. The next form in order here is the cash book. All bills are paid by check for convenience, with the exception of amounts less than $1, for which provision is made by the cashier carrying a petty cash account. ' All cash received is turned over to the book-keeper in charge of the cash book. I C^xsf; l3ooK 91 Adv. American Business and Accounting Encyclopedia 128 C iA«i#l- L I .X^^r Fol Jft^y Jrtp»< A.S T^it S^oc* kriew kravi4«»^KNf<]>utf^ ^i\/fyTo(^iiJoqfrs Af^oui^T bntf Jfli^^ bftoil! Fol • loy.S»t> l>lfi^ff;>1^ry iloiirpfl hisfoni^ts recpivd \lQiirpfll rnr\p^isstQi^s ' C}r<\er I^QoKs Al^OUI^t than those recharged to customers, are expense, and consist mainly of salaries, rent, telegraph and telephone service, postage and expressage, printing and stationery, including typewriter supplies, traveling expenses, and sundries such as laundering towels, soap, ice, etc. For all these charges I recommend a distribution journal ruled as shown. Distribution Journal. As it is not necessary, in my opinion, to open accounts with everyone from whom we purchase, but to carry, as I men- bislribuTioi;) uovr^a\ bnlf No • Tolol Ke^T PojTfl^ Ejt^TfUIJf rnvfllif^ Svfirifk Fiir()f»rf FuNrti 1 1 _ tioned before, an account known as sundry accounts payable. Doing this, we would dispose of the entries in the above journal as follows : the amount of business being done by each solicitor is carried in the ledger. To this is debited the amount of the footings in the order book, and is credited with the total cash received during the month as shown by each column in the cash book. The balances of these accounts show how much is owing by each solicitor's clients, and the total of these should agree with the total accounts receivable. These solicitors' accounts are carried for con- venience only, not as any essential of the advertising accounting. At the 96 128 American Business and Accounting Encyclopedia Adv. end of each month the discount deducted column is footed and disposed of by posting it to the debit of advertising account. On the debit side of the journal we have a column headed "advertising account." Its use need not be explained— suffice to say that its total at the end of the month is debited to the account it represents. The miscel- laneous columns— debit and credit— in the journal need not be explained either. They, however, are posted in detail, not in total. The credit column headed "commission" is used for the percentage charged the customer. For instance, we charge Smith ten per cent on the paper's net. Make the journal entry: Smith, To Commission account. So on all through the month. The total of this column is credited to advertising account. The credit column in the journal headed "purchase accounts payable" is also posted in total. All sundry purchases charged to customers, such as electrotypes, printing, etc., are entered in this column, but as we pay these sundry bills every month, it is unnecessary to open an account with each person from whom we buy the goods. We carry an account in the ledger known as sundry accounts payable, crediting it with the total purchases as shown by the column in the journal, and charging it with the total paid, as shown by the column in the cash book provided for that purpose. Sundries, To Sundry Accounts Payable. For purchases during month as per Distribution Journal, Rent, Telephone and Telegraph, Postage, Etc. This monthly posting would materially minimize the book-keeper's work, allowing him more time on more important details. Cash accounts can be kept in the ledger if desired, crediting it with total cash paid out during month and debiting it with total received, the balance, cash on hand, being included in the trial balance. It is not necessary for me to illustrate the trial balance, as everyone knows this is merely a summary of the debit and credit balances in the ledger, the total of each side being equal if all postings have been correctly made. At the end of the year a profit and loss statement is made up. This would be something as follows: 97 Adv. American Business and Accounting Encyclopedia 128 Cr. By gross profit from Advertising account. By gross profit from Subscription account. LIABILITIES. Accounts Payable, Notes Payable, Capital Stock, Surplus. PROFIT AND LOSS. Dr. To Salaries, Rent, Telegraph, Postage, Express, Printing, Stationery, Traveling, Sundries, Bad Debts, Etc., Balance=Net Profit. Then the balance sheet is made up: ASSETS. Cash, Accounts Receivable, Notes Receivable, Accounts in Attorney's Hands, Furniture and Fixtures. The surplus can be disposed of in any way the partners desire. — G. Farrar. ) ARTICLE NO. 2. The advertising agent is a middleman. He places his client's adver- tising with publishers. Publishers charge the space to the agent. The agent collects from the advertiser and pays the publishers. The agent, therefore, has need for a special system of accounting. This article deals only with that part of the system that has to do with the ordering of space, the checking of insertions and the rendering of space bills. A more elaborate scheme than the one here described will be found necessary in the case of large agencies, but this has been found equal to the needs of small agencies, and it has the merit of simplicity. Courts of law regard books of original entry as the best evidence because of the long-recognized fact that the more an account is copied of transferred the greater is the likelihood of error. Consequently, when fixing on this plan for handling space records and accounts, it was the aim to promote accuracy and save time by reducing copying and trans- . ferring to a minimum. Fig. 1 shows the original order sheet, consisting of three parts per- forated so that they may be separated easily. The top part is the original order and is a little deeper than the others so as to give room for the printing of the agency name and address. When an order is to be sent to a publisher, memoranda is given the stenographer, who folds the order sheet twice, drops in two small sheets of carbon and makes the three copies with one writing. If the original copy IS correct the order clerk may know that the others are. 98 128 American Business and Accounting Encyclopedia Adv. PUBLISHER'S FILE To Date. Please enter our order (or advertising of Ordbr No. Space iNSERTtONS Position Gross Price Copy Memo. Key Commission Cuts Discount Net 1 2 S 4 5 tf 7 8 9 10 11 12 1? 14 15 16 17 18 19 20 21 22 2S 24 25 2fl 27 28 29 30 31 32 33 34 85 88 37 38 39 40 41 42 43 44 4S 46 47 48 "5" 50 m" W Fig. 1 ^^■^^ ' Fig. 2 shows the printed side of the middle portion of the order sheet. This part of the order sheet shows blank in Fig. 1 because there the printing is on the reverse side. The original (top part of Fig. 1) is mailed to the publisher. The ADVERTISER'S FILE Date, Nov. 21. 1905. To Jones' Magazine 55 5th Avenue, New York» Please enter our order for advertising of Order No. Space Quarter -page Position Right hand page Gross Price $200 Insertions February, March, April, Kay. June and July, Key 122 Conunission 130 Discount (10 #I5Q Copy herewith Cuts express tonight Charge Advertiser Memo. Pass out to Collier's. Fig 2 memoranda is complete and ordinarily there is no need for an accom- panying letter. One of the duplicates is filed, as indicated by the heading, as a charge 99 Adv. American Business and Accounting Encyclopedia 138 memoranda against the advertiser, and the other is filed as a credit slip and also as a check against the service of the publisher. Either a large card case or a loose leaf binder may be used for the filing of these slips. In either case, all of the charge slips against each advertiser should be kept together, and all the duplicates of orders to one publisher should be kept together. This system saves much journalizing. At the end of the month, a!l the space charges against one advertiser are together, and a typewritten bill may be made up from them. A carbon of this typewritten bill may be made to be kept as a "tickler" until the bill is paid, and the total of the space bill for the month may be entered as one item in the ledger. If the book-keeper keeps a "space" account, he will, of course, credit "space" at the same time he debits the advertiser. It will be observed that there is no "net" on the duplicate for the advertiser's file. (See Fig. 2.) It is the custom of most advertising agents to regard net cost as the proper basis for calculations and to add the commission to the net cost. Therefore, to avoid chance for error, the word "net" is omitted on the advertiser's slip, so that the book-keeper is reminded to add the regular commission and to total the proper charge directly opposite "charge advertiser." "Commission" and "discount," being given separately, facilitate the work of posting these separately to the fictitious accounts. Turning attention to the publisher's file (see Fig. 1), we find that the duplicate filed there avoids the necessity for keeping a separate check- ing system. All the particulars of the original order are on the face of this duplicate, and when the publisher sends marked copies of the issue containing the ordered advertising, it is easy to see whether or not insertion has been given in accordance with instructions. All the duplicates for one publisher being together in the file, if the agent has advertisements for five or six clients in one number of a publication, they may all be checked at one time. The spaces at the extreme bottom of the form enable the clerk to check any number of insertions from one to 52; thus a year's advertising in a weekly paper may be ordered and checked by a single order. Agencies having systems of this kind use a series of symbols that they write in these spaces, one symbol meaning that the insertion was given exactly as ordered, another that the position was wrong, another that the amount of space was incorrect, another that the advertisements were omitted, and so on. The symbols save much writing. Errors are so frequent among publishers that it is essential for every agent to keep such a checking system as is here described in order that he may make proper deductions before paying publishers' bill or be able to make just claims afterward if bills are paid before the checking is done. If a "space" account is kept, the book-keeper will, of course, debit "space" for the amounts shown by these publishers' slips, while giving corresponding credit to the publishers. 128-129 American Business and Accounting Encyclopedia Adv. This system of keeping space records and accounts has been tried faithfully, found accurate and time-saving and satisfactory generally. — (S. R. Hall.) (129) ADVERTISING CLIPPINGS. (Filing). The clippings which will be made from magazines, newspapers, other advertisers' advertising, booklets, pamphlets, etc., should be placed in envelopes, each envelope carefully labeled with the particular lines of matter, and filed in a cabinet with the drawers sufficiently large to take the envelopes standing on their side. In small indexes, where the subjects are not so numerous, it is sometimes unnecesary to have an alphabetical mdex of the line of subjects, because the envelopes being arranged accord- ing to the alphabet with alphabetical guides afford that index themselves, and then there is nothing required in the way of a card index, as mentioned above. LeTtei 5^bjecr 5oi)rc€ i)(nTe Clipped Ren\c\rKS>. When a large amount of matter is held (as in wholesale lines) it is sometimes advisable, instead of the envelopes arranged in drawers, to employ a system of catalog filing, so that entire catalogs may be preserved. The writer strongly advises against the use of scrap books in connection with advertising clippings, for the very simple reason that an advertising manager can handle a clipping better than he can handle a scrap-book on his desk, and he can often paste a clipping in the copy he is preparing, thereby preventing either a lot of unnecessary dictating, or typewriting, or a tiresome job of handwriting. Vertical files with the ordinary folder system are not entirely satis- |i ^ 100 101 Adv. American Business and Accounting Encyclopedia 129-130 factory, for the reason the clippings are easily lost out the open ends. Vertical files may be used, however, by substituting large envelopes for the regulation folders. (130) ADVERTISING DIRECT. The term direct advertising is used to describe all forms of advertis- ing passing directly from the advertiser to the prospective customer as distinguished from advertising in magazines, newspapers, street cars, on bill boards, etc., which is intended to create a demand and indirectly in- fluence the sale. As usually understood in advertising circles the most common vehicles for direct advertising are catalogs, booklets, circulars, letters (personal or form) and similar direct appeals for business. This form of advertising may be mailed in response to inquiries received as a result of other forms of advertising, or it may be mailed djrect to list of names, either with a view to creating interests and thereby influencing inquiries, or for the purpose of making immediate sales. Form Letters. A form letter, as soon as it has passed muster, should be placed in a scrap-book, preferably a loose leaf scrap-book. At the top of the letter should be written the precise condition under which the letter has been sent out; memorandum of the enclosure sent with each letter, and a number should be given the letter; this number should not be dupli- cated. At the same time the number is given a letter, a card should be made out for it. The face of this card shows the number of letters sent out each day, and is ruled to accommodate the record for the entire year. The reverse of the card is ruled, as shown, and is intended for a record of sales credited to this letter. When this card is made out, a card index is made out so as to show the results from form letters in a certain month in order to compare them with months previous, and with the same month of a previous year. If it is desirable, as it may be in a large business, to keep 1,rack of the ' amount of work done in each department, it would be well to make out an additional card called a "department card." This card is used to show the amount of work done in the form letter section for any particular department of the business. Methods of Keying Results. It often happens, in handling form letters, that the practice of giving some small article in order to get re- turns, will result in getting the order for the small article without any additional compensation. The bargain, or small article mentioned, will be offered at a distinct loss, the intention being to use it as a bait, much as bargains are offered in the department stores, to catch purchasers for profitable articles. It is important, therefore, that these returns should stipulate what the order was, and where the orders are pro forma, i. e., all for the same thin^, they can all be checked off on the tally sheet, shown later. 102 130 American Business and Accounting Encyclopedia Adv. SALES bou No Arvou^T DflTe No r\i^^j(jT bote No. Ap^oyi ^■t bore No At^ourjt « n , 1 — ^or•l^ L etr«. r No. Wr itf» ij l?»y Subject No.ir^S»r'.** M. n.UJ 1 2 3|4 5 6 rs 1 lo 1 III2II3 1415 16 l7|l81l')C2dl tI22!23b4l25tl^7l2aMvl? 1 Totol Jorj. Feb. Mcb. A|5.- Moy Ji7rj. Joly Ao^ Set, Oct Nov. D*c ^_ 1 1 1 1 ll — M09lT)ljy 5tcikr\Ci)tojrorrvLeircrRelDorrs. ^"^^ No of Letter ToTolScf)t No. Orie rs AiT>p v t)T ToTcilCo^r Cot perOder Rer\nrWs t)ctte_ JDetDort- No Fillccl tr)^.Q<) 3e(jToijT E^cloiDrti PoiTjot Ref^nr-Ki 103 Adv. American Business and Accounting Encyclopedia 130-131 In order to ascertain what a form letter produces, there are several methods of keying a letter : First — Keying it by the character of the goods offered, that is to say: If you have offered a particular line of goods in no other form except through a particular letter, it is reasonable to suppose that all orders for that goods coming in after the distribution of the letter calling attention to them should be credited to the letter. Second — There is a method of keying the address ; this should be used only in case where form letters are of such a character that you can key them by the nature of the order that would be received through them. For instance, where you send a form letter in response to a request for a catalog, even then it is a good idea to offer some special thing to be sent free with an order. Third— Keying by departments is another method, but in the case of a large line of departments, it leads to endless confusion because you may send form letter Department No. 35 one week, Department No. 4 next week. Department No. 11 the week after, and so on; Department No. 11 letter may get mixed up in the mind of the recipient with Department No. 35 and will lead to no true reflection of the pulling power of the letters. Fourth— Keying by the name of the writer. A great many business houses object to this method for the reason that the United States statutes make it a penal offense for a person even to open "by mistake" the letters of another. This is often done in business houses, but they require a signed permission given those who have anything to do with the correspondence of the house, by which the manager or any other employe is permitted to open mail personally addressed. The writer confesses to a certain leaning to this method of handling the mail order proposition. The average mail order customer objects, in a negative sort of way, to dealing with an unknown person. When the first person singular, together with a man's name attached to it, is used in a letter, the mail order customer feels a greater degree of confidence. It is one of the psvchological facts of business that a man feels more impressed, and is more likely to act upon his impressions, when he feels the personal touch of a particular person, rather than dealing with the indeterminate personality of a company, partnership or corporation. ( 131 ) ADVERTISING IN THE MAGAZINES. Growth and development of advertising during the past few years has been one of the most interesting events in the business history of the country. This growth, although rapid, has not been of the mushroom variety, for it has been steady, and today advertising is no longer a hit or miss proposition, but, as a profession, ranks high in the list, as any work requiring originality, initiative, and brains must rank. To understand what advertising means today in relation to business, 104 131 American Business and Accounting Encyclopedia Adv. pick up the current number of any magazine, or newspaper, look about you on the streets, in the street cars, at the calendars you see in offices, at your theater programs ; you cannot escape it anywhere. Take any periodical and compare it with one of a few years ago, and three things will strike you instantly, first, the improvement in appearance ; second, the decrease in price; and third, the increased amount of adver- tising. The natural question of how a magazine can be sold at such a low price is answered when you look at the amount of advertising carried. The sub- scription price of the average magazine of today would hardly pay for the paper used in its makeup, the advertising is what pays. The advertising section is as attractive and widely read as the magazine section, and abounds in real art, literature and human interest. Advertising is studied today, just as any other profession is studied, but at the same time there is a certain amount of truth in the statement that an advertising man, like a journalist, must be born, not made. A man must have that indefinable something which we might call "ad sense," just as a newspaper man must have "news sense," if he would be a success. To some extent advertising might be called a form of salesmanship, but with a difference. The salesman has the advantage of coming into per- sonal contact with his man. studying his mood, able to note what pleases or displeases him, adding the magnetism of his voice, an inflectioji there, carefully chosen words here, and the sale is made. The advertising man, on the other hand, can not vary his words, his voice, or his inflection. He has to strike his millions of readers with exactly the same message, the same illustrations, and create a desire for the goods he wants to sell ; convince the prospective buyer that his particu- lar brand of goods, and no other, is necessary to the buyer's peace and happiness of mind ; he must impress the name and quality of his goods so firmly on that unknown reader's mind, that he will never forget it, and never be content with anything else! Of course this means that he must never let the public lose sight of his subject for a moment. Take Ivory Soap, Sapolio, Pearline, or a dozen other well advertised goods, and the public will cry for them, as a baby does for Castoria, long after all that is mortal of the men who originated the advertising and made these names famous, have gone, and been forgotten. Why? Because the public has been educated, has been impressed with the fact that these goods are the best in their particular lines, and h^s never been allowed to forget it. The public is fickle — if allowed to be — but the point is, these advertisers never allow the public to forget. Importance of Advertising. — ^The immense amount of money spent every year shows conclusively that manufacturers everywhere realize the importance of advertising, and the value of publicity. Whether or not advertising pays is no longer a problem. That it pays, and pays well, is evidenced by such advertisers as Cream of Wheat, Ivory Soap. Suisine 106 Adv. American Business and Accounting Encyclopedia 131 Silk, and a host of others, and the number following in the trail blazed by the pioneer advertisers in the time when it was a question, proves that the problem was solved. Today the manufacturer figures in the cost of pro- duction the cost of advertising, just as he figures the cost of labor, or the cost of material. With this knowledge of general advertising, and its relation to busi- ness, it is interesting to watch the advertising campaign of the manufac- turer who is seling his goods direct to the consumer. The inside practical details of his campaign can not fail to be of interest. Most large houses employ, in addition to their regular advertising department an advertising agency, to co-operate with the advertising man- ager, and to attend to the details of placing, buying the magazine space, etc., going on the theory that two heads are better than one, and that men who are experts, and keep their fingers on the pulse of the advertising situation, just as they themselves know the pulse of the commercial end, can give better service. First of all comes the question of the advertising appropriation, which includes the salary of the advertising manager, and his corps of assistants, space in the mediums, together with the incidental cost of drawings, plates, postage, express, etc. The selection of a reliable advertising agency to assist the advertising manager, to advise with him and to arrange the details of the campaign is usually the next step. This being settled, the question of mediums is the important one, in other words, the selection of the magazines and papers to be used in letting the public know where, and at what price his goods may be purchased, and to create a demand for this special line. The questions of whether other mediums, such as bill posters, street car cards, or other publicity methods are to be used to reinforce the magazine advertising. In the selection of magazines to be used, there are several important considerations; the class of people most likely to be interested in the proposition, and to become purchasers, the section of the country where these people live, and the seasonableness of the goods advertised. Ivory Soap, for instance would appeal to everyone, everywhere, while a fur manufacturer has a line which appeals only to a limited number of people living south of the Mason and Dixon line; appeals, generally speaking, only to the middle or moneyed classes, and appeals to them only during certain months in the year. Furs, as a line, appeal to men and women alike, so in addition ta the exclusive, high-class women's magazines, he can use the general and men's periodicals. Naturally he chooses the magazines having the largest circulation in the fur-wearing regions, and plans to advertise in these during the autumn, just as people are beginning to plan on the colder weather. 106 131 American Business and Accounting Encyclopedia Adv. In selecting his magazines, and deciding on the amount of space to use in each, he is governed by his experience of the preceding year. The magazines which made good are, naturally, first on the list, and are given as much space as the previous year's experience would warrant, usually increased. The clever advertising man studies the different classes of magazine readers, and if possible, has a little different story for each. If two magazines of the same general class seem to have about the same circulation in the same class of people, it is usually a sign that there is something unique and characteristic in each, and it behooves the advertising man to find this difference, and cater to it. When the matter of space is decided, the real hard work of the cam- paign is begun, namely preparing "copy" and illustrations. Of course it goes without saying that "copy" is the great and impor- tant thing in the advertising campaign. It must be as strong as can be written, with the object in view of making the man or woman who reads the magazines know that here, in the factory, is the very fur garment he or she wants ; strong, convincing copy, copy that sells the goods, that is what the advertising man must write if he is to make good. And in this day, illustrations, border designs and that sort of thing must be of the highest class to attract attention, and therefore the adver- tising man must see that this end of the work is high class. One of the attractive features of a recent fur advertisement, was the border design formed of traps, chains, and snow shoes, all appropriate to the subject, and adding to the appearance of the advertising. The illustrations should never be such as would detract from the central idea of fur garments, although this is a mistake which is frequently made. You will notice by the schedule (Form 1) that he has 21 quarter pages, six half pages, twenty 28-line ads, etc., to write all of which has to be planned and written and illustrated so as to make the best use possible of the space. Copy and plates disposed of, the detail of keying the magazines is attended to. Keying is a comparatively new method of insuring to each magazine credit for the inquiries and sales made through its advertising. The ideal key is one that is part of the address, so that the person answer- ing the ad thinks that unless this number is on, the letter will not reach the proper place, as for instance the ad in one magazine says 109 E. Sixth Street, while the Delineator has 110 East Sixth Street, Harper's 112, and so on. Department numbers, suite numbers, post office boxes, stations, etc., are used in this way and it has been found to answer much better than the old method of saying "please mention this magazine," which only a limited number of people remember to do. Giving the catalog a different number in each magazine is another method which answers very well. For example, when Mrs. John Jones writes in for catalog No. 10, her inquiry is immediately credited to the Woman's Home Companion, while Mr. Smith asking for catalog No. 8, is credited to The Book-Keepee. 107 1' HI Adv. American Business and Accounting Encyclopedia 131 SCHEDULE FOR ADVERTISING— SEASON 1907. Ladies' Home Journal— September. ^ page $1,000.00 gross. Butterick Trio — M page $ 954-75 Harper's Bazar — 1 page r $ 224.00 Woman's Home Companion — J4 page % 450.00 October. Ladies' Home Journal — 14 page $1,000.00 Butterick Tria- ls page % 954.00 Harper's Bazar — 1 page $ 224.00 Woman's Home Companion — Y, page $ 90000 Munsey's — ^ page % 125.00 The Book-Keeper— 1 page % 132.00 Collier's — 28 lines 4 Weeks $ 280.00 Life— 28 lines 4 weeks • $ ^'''•20 November. (Same as October) $3,675.20 December. Ladies' Home Journal — i^ page $2,000.00 Butterick Trio — y^ page $1,809.00 Harper's Bazar — 1 page % 224.00 McClure's — 1/2 page % 250.00 The Book-Keeper— 1 page % 132.00 Collier's — 28 lines, 4 issues $ 280.00 Life— 54 page, 4 times $ 250.00 Miscellaneous papers for Xmas ^1,000.00 $15,532.15 Additional for incidentals 2,000.00 $17,582.15 The details of rates, discounts, and the advertisements as they appear, are checked in the advertising department before the bills are sent in to 108 131 American Business and Accounting Encyclopedia Adv. 'he accounting department. Frequently these details are handled entirely oy the advertising agency, who places the firm's advertising. When inquiries begin to come in, follow-up cards (Form 2), are made out for every inquiry, indicating which periodical receives credit, giving dates when follow-up letters are to be mailed, etc. For example, Mrs. Jones writes in for catalog Xo. 7, which is imme- diately mailed her, with a letter and order blanks, with directions for measurements, etc., and her card is made out, showing that Everybody's is to receive ere lit for the inquiry, and the date of mailing catalog is noted. A week passes, Mrs. Jones has not written, and a second letter is mailed her. In the course of a few days a letter is received from Mrs. TOvv^< Col um bus 5tatc Oft 'C NAME M ft J'ohn tlone-t Bu»iNESS f? ATif>(& RrMAWKS \^anti T?tjsstan^ OuOTEo Terms f^ony Coat Y Muff 9j 9J- C ^sA^ \OM.-r* m/mote Li re^A Tu^t f*e^.>^.s P/3 / 07 C ai al oAue rdared Coat "* /^tiff^ P/ /» / 7 L etter /o/s/a- - CarJL. 9//9/»V . lt/^/07 Ach. ord^r Skt tatter's fecet 9t /»/ 7y*.7 SA if^ed. C ^ /6/>7/»7 S ( Form 2. Jones, who wants to know if a certain change can be made in a model given in the catalog, and what the change will cost. A letter is immediately dispatched to her advising her that the change can be made as suggested, and the coat will then cost ^S, instead of S>75. Another week and an order is received, and Everybody's receives credit for the sale. After the goods are shipped, and an express receipt is received, Mrs. Jones' card reads like Form 3. Mrs. Blank, of Ohio, wants catalog Xo. 10, which is sent to her, with the usual letter. Xo reply. The second and third follow-up letters are sent, with the same result. For the remainder of the season all adver- tising matter is sent to her, as her first inquiry showed some interest and perhaps at the January sale she purchases a set of furs. H'er card shows these details. Of course there are a number of people who never go any farther than writing for the catalog, and while the number who write in reduce the cost per inquiry for the magazine which they read, they make no reduction on the cost per sale. Of course, in the case of this fur manufacturer, a large number of women do buy, sending measures, money, etc., knowing that the house is a thoroughly reliable one. This is another of the important points in the advertising campaign of today; every first-class, high-grade periodical 109 Adv. American Business and Accounting Encyclopedia 131 P2>BUCAT10N. AD0RE56 PAID PAPER Af\pVrif 1 V.c Z76 (,o DE.5CRIPTI ON 2-6 \lrjf& every iaay» »5&))E n Weekly )7 u/eek» GR0S6 ATfr A taao^*' GRATE 2-^^" LINE - IN. 56^ DME OF FIRST iN5fRTiQhJ Y^/oj URATLJJih KE Y 7o CASH PL'S J-% REMARKS. CR. ADVERTiaCR Airyptfnf MONTHS 1 Z 3 <♦ S (, 7 6 9 lo II li 11^ 1^ 15 16 17 I& n 2j> ',1 22 25 2+ 25 li. 27 2S 29 3o 51 TOTAL. Se»+. 2& 2& 2« 2£ 112- OcV. 2A Nov. Dec. _ _ _j _ _ c ^^. .^__ Form 3. protects the possible purchaser to the fullest extent by being extremely- particular in regard to the class of advertising carried, and absolutely refuses to take advertising from any concern who fail to do as they agree, upon positive knowledge of that failure, consequently every purchaser knows that in addition to the reliability of the firm advertising, he may rely on the responsibility of the magazine. At the end of the month, or the season, the cost of advertising is figured up, the cost per inquiry and the cost per sale, and a summary is made up and filed as a guide for future advertising. This summary (Form 4) shows that certain periodicals pay better than others, that the cost per inquiry was lower on some, and the cost of sales lower on others; that some papers brought in no inquiries; also that there are a scattering few which can not be traced exactly. This tabulated result of the season's advertising gives a small idea of the amount of money, and work, involved, the system, and detail work which enters into modern advertising. There is such keen competition, so many in the field there is no room for theory, nothing counts but results, and in making out the list for next year, the mediums which do not show results are cut out, and the merry war goes on, advertising, the right kind, with the right mediums, being the power that delivers the goods— results.— (R. McBride.) 110 131-133 American Business and Accounting Encyclopedia Adv, U^iLyKcconD or Rt^Lir* rnoM Anvf pxiama rno Moiy-r« or &^p"t?i^b*.» i^aj MAME Of PAPtR ^Ey 1 I 5 * S 7» 6 7 s s : :} \i 15 11 3 14 17 18 n 2o 11 rt 2JM :? Z4 n u » 3o I Jl Tiftl Co»t S«l<« Mo-** Horp»r4 40 1< it VI* n. I' V 'n SI II '""' Ll 7. »l 11 1* 2« 81 4o n 16 ^ 8'>-t IX**1 ir* UA>e-i HomfZtryt bi I* lo br|" 41 71 fc« ♦z z. Ze 2.*l 41 Zs >» IT i» » ia lo u ^\^ &eo lo»o<* /JC srao"*" [>l000 Less — $2,500 for 6 mos. = 15,000 $99,000 -T- 12 = $8,250 McDonald's average investment $ 7,750 Smith's average investment 8,250 Total $16,000 4800 X 100 . — • = 30 per cent. 16000 Hence, $7,750 x 30% = $2,325 = McDonald's profits 8,250 X 30% = 2,475 = Smith's profits $4,800 SOLUTION NO. 2. Gains divided according to average capital : 7750 4800 McDonald x =2325 16000 1 8250 4800 Smith X =2475 16000 1 4800 SOLUTION NO. 3. By proportion: 93 99 192 93 4800 McDonald x =2325 192 1 ♦ 99 4800 Smith X -—2475 192 1 4800 SOLUTION NO. 4. By ratios: 7750 X 4=31 8250 X 4=33 64 140 137 137 American Business and Accounting Excvclopedia Acc. McDonald 31 4S00 — X =2325 64 1 Smith 33 4S00 — X =2475 64 1 4800 New York C. P. A. Examination, June, 1903. Bowling, Green & Co., of New York, consign goods to A. & B. in Hanava, Cuba, rendering with each shipment a pro forma invoice in which the goods are charged at prices in excess of the cost, the cost of freight, insurance, etc., being added. Ac- counts sales are received from time to time, the net proceeds being remitted bv drafts. Show how the following transactions would appear in Bowling, Green & Co.'s ledger: (a) Shipment of goods Jan. 1, 1902, and invoice rendered to A. & B. of Havana, for $9,850, as follows : Merchandise $9 000 Freight 700 Insurance j5q ^<^*^' $9,850 The cost of these goods was $8,700. (b) Account sales received March 15, 1902, for part of the consign- ment, showed gross proceeds $5,400, less dock and other expenses, includ- ing commission $150. This account was accompanied by a 60-day draft for $5,250. (c) Account sales received June 16, 1902, for balance of the consign- ment, showed gross proceeds, $5,660, less dock and other expenses, in- cluding commission, $175, and was accompanied by a 90-day draft for $5,485. SOLUTION. CX)NSIGNMENT ACCOUNT. A. & B., HAVANA, CUB.\. 1902. 1902. Nov. 15. Jan. 1. A. & B., Sales $5,400 Merchandise $8,700 June 16. Freight 700 A. & B., Sales 5.660 Insurance 150 Nov. 15. Commission 150 June 16. Commission 175 Profits 1,183 $11,060 $11,060 141 11 Ace. American Business and Accounting Encyclopedia 137 1902. July. CONSIGNMENT SALES ACCOUNT. 1902. March 15. A. & B., HAVANA, CUBA. Commission $ 150 1902. Bills receivable 5,250 March 15. June 16. Consignment account, sale3 $5,400 Commission 175 June 16. Bills receivable 5,485 Consignment sales ; 5,660 $11,060 $11,060 BIIXS RECEIVABLE. CASH ACCOUNT, 1902. 1902. March 15. Jan. 1. A. & B $5,250 Consignment account $700 June 16. Consignment account 150 A. & B 5,485 • $850 $10,735 TRIAL BALANCE. Bills receivable $10,735Consignment sales account $8,700 Cash 850 $10,735Profits 1,135 $10,735 The principle involved is simply this: increases in assets, and de- creases in Iiabilities=decreases in assets and increases in liabilities. Illinois C. P. A. Examination, November, 1903. A gas company presents a statement at the close of its fiscal year of cost of putting gas in holders and whole cost of gas per thousand cubic feet. Their statement is given in detail and is made up of the following: ITEMS OF COST. Cost of gas in holders $28,178.92 Generator fuel $ 1,063.68 Gas coal 13,086.66 Boiler fuel 679.51 Bench fuel 3,433.72 Manufacturing labor 6,838.17 Manufacturing supplies 214.13 Oil 2,054.57 Purification labor 168.72 Purification supplies 89.82 Bench repairs 29.58 Gas house machinery repairs 520.86 Distribution 1,887.39 Distribution labor 578.57 Distribution supplies 60.72 Street lamp operating 216.04 Repairs and renewals of meters 102.65 Repairs and renewals of services 129.80 Repairs and renewals of mains 799.61 142 137 American Business and Accounting Encyclopedia Ace. General expense 9,267.72 Salaries of officers 3,300.00 Accounting department 3,501.66 General office sundries 435.21 Canvassing 669.00 Rentals 752.67 Stationery, printing, postage 454.64 Legal 154.54 Discount on consumers' bills 10,693.44 Insurance 1,618.89 Taxes 1,129.99 Interest 2,466.68 The company obtained in the process of putting gas in holders certain by-products the whole of which sold for $6,783.26. There was manufac- tured, i. e., put into the gas holders 50,000,000 cubic feet of gas ; the meters registered and there was charged to consumers 46,000,000 cubic feet of gas. The gas remaining in the holders at the beginning and ending of the period being the same in cubic feet. On the books of the Gas Co. the plant and distributing system is stated in the following accounts : Gas works (including land valued at $25,000) $250,000.00 Mains 100,000.00 Services 31,000.00 Meters 12,000.00 Tools 327.00 Furniture and fixtures 1,850.00 In addition to which the company's books show storeroom supplies $9,341 and accounts receivable $12,605.57. Assuming the correctness of all the charges above, do the items set up in the company's statement represent the elements of cost? Prepare a detailed cost statement that you would consider correct, giving the cost per thousand cubic feet of gas in the holders, and whole cost of manufacturing gas per thousand cubic feet. Where you consider it necessary, act arbitrarily in building your statement. SOLUTION. Gas manufactured, cu. ft 50,000,000 Gas sold, cu. ft 46,000,000 Loss in transmission being 8 per cent of product 4,000,000 COST PER 1,000 cu. FT. Amount. Manfd. Cost of manufacture $ 28,179.42 .563588 Generator fuel $ 1,063.68 Gas coal 13,086.66 Boiler fuel 679.51 Bench fuel 3,433.72 Manufacturing labor 6,838.17 I 143 1,387.39 .037748 Acc. American Business and Accounting Encyclopedia Manufacturing supplies 214.13 Oil 2,054.57 Purification labor 168.72 Purification supplies 89.82 Bench repairs 29.58 Gas house machinery repairs 520.86 Cost of distribution Distribution labor 578.57 Distribution supplies 60.72 Street lamp operation 216.04 Repairs and renewals — Meters 102.65 Services 129.80 Mains 799.61 Cost of administration Salaries, officers $ 3,300.00 Accounting department 3,501.66 Office sundries 435.21 Canvassing 669.00 Rentals 752.67 Stationery, printing, etc 454.64 Law expenses 154.54 Bad debts 378.17 87 written off oh $12,605.57 185.00 Depreciation 10% on fixtures General expenses Discounts on consumers' bills $10,693.44 Insurance 1,618.89 Taxes 1,139.99 Interest 2,466.68 137 137 American Business and Accounting Encyclopedia Acc $30,066.81 9,830.89 .601336 .196618 25,355.75 .507115 $15,909.00 Depreciations — Gas works. $250,000 Less — Value of land, $25,000. 2J/^ per cent $225,000 $ 5,625.00 Mains. 3 per cent $100.000 3,000.00 Services, 2 per cent $31,000 620.00 Meters, 1 per cent $12,000 120.00 Tools, 25 per cent $327 81.75 Gross cost $ 9,446.75 $65,253.45 1.305069 Lege residuals 6,783.26 .135665 $58,470.19 1.169404 144 Add for loss in^ Transmission 5,084.36 .101687 Total net cost $63,554.55 1.271091 Cost per 1.000 cu. ft. of gas in holders .563588 Cost per 1,000 cu. ft. of product 58470.19 63554.55 = 1.271091 or 46000 50000 Comments. Cost in holders, I take it, means "Prime Cost" of gross product. But net cost should be based on product actualh' reaching the consumer. This I have effected by the item "loss in transmission." There are two other items not necessary to the problem, but which might be mentioned to show careful consideration of the subject. 1. Amount of gas used in office and at works for which an arbitrary amount could be supposed. 2. Gas paid for in advance by the "slot machines" which gas com- panies now furnish. New York C. P. A. Examination, June, 1904. Smith and Jones are partners, drawing equal amounts for services, and sharing profits according to capital invested, after allowing five per cent on capital. They require additional capital and arrange to admit the manager to the firm, he to acquire a one-quarter interest in the business. According to the balance sheet Smith has $12,000 and Jones $6,000 invested, and good will is valued at $6,000. What sum must the manager contribute? How will the partnership accounts appear after payment into the firm of the new capital? How will profits be divided in the future Show accounts in skeleton form. SOLUTION. Good Will $6,000 His Yz of Capital Gain to Smith $4,000 His V3 of Capital Gain to Jones 2,000 manager's interest. Smith, capital $16,000 Jones, capital 8,000 $24,000-^( 100— 25) =75=32000 equals total capital of new partnership; the manager's share 54 =$8,000, or $24,000X25 =$8,000=manager's H interest. 75 smith's capital. jones' capital Investment $12,000 Investment $6,000 ^ Good Will 4,000 Vi Good Will 2,000 $16,00(J $8,000 145 Ace. American Business and Accounting Encyclopedia 137 manager's capital. division of profits. Cash $8,000 Smith H Jones J4 Manager 54 Illinois C. P. A. Examination, May, 1904. The general ledger of a county comptroller at the close of the fiscal year shows the following outstanding balances : Debit Balances: ^ General Fund $3,600,000.00 To Balance Bond Liability 4,000,000.00 Cash 950,000.00 Due from Fee Offices 250,000.00 Appropriation Expenditures 3,500,000.00 Credit Balances : Appropriation 3,600,000.00 Bonds, Series A 500,000.00 Bonds, Series B 750,000.00 Bonds, Series C 600,000.00 Bonds, Series D 1,500,000.00 Bonds, Series E 650,000.00 Bonds and Coupons due and unpaid 30,000.00 Warrants Outstanding 559,000.00 Tavern License Fund 5,000.00 Laboratory Fund 6,000.00 General Tax Income 2,000,000.00 Fee Office Income 1,600,000.00 Surplus 500,000.00 Prepare journal entries closing operations for the year and classified balance sheet as at the close of the year. SOLUTION. Dr. General appropriation account $3,500,000 To appropriation expenditures $3,500,000 2. Dr. Appropriation account $3,600,000 To general appropriation account $3,600,000 3. Dr. General appropriation account $ 100,000 To contingencies $ 100,000 Expenditures appropriated but not expended. 4. Dr. Bond Commissioners $4,000,000 To Bond Liability $4,000,000 "Commissioners" are assumed, but possibly these bonds were issued for property held in fee by the municipality. Dr. General tax income $2,000,000 Fee offices : . . . 1,600,000 'i o general fund $3,600,000 146 137 American Business and Accounting Encyclopedia Acc. Cash Fee offices Bond Commissioners . 250,000 . 4,000,000 $5,200,000 balance sheet. .$ 950,000 Bonds and coupons due and unpaid , $ 30,000 Warrants outstanding 559,000 Tavern license fund 5,000 Laboratory fund 6,000 Contingencies 100,000 Surplus 500,000 4.000,000 Bonds — Series A $ 500,000 Series B 750,000 Series C 600,000 Series D 1,500,000 Series E 650,000 $5,200,0Ci $4,000,000 Municipal book-keeping differs only in form and detail from the ordinary mercantile methods of double entry. Illinois C. P. A. Examination, November, 1904. The books of a manufacturing corporation at the close of its first year's business show sales $241,863.50; returns and allowances $18,416.38; merchandise cash discounts $13,943.87; merchandise debit balance $69,346.92; labor $52,- 815.33; fuel $16,219.46; shop expense $9,247.50; salaries $16,214.30; general expenses $8,342.35; advertising $52,371.39; traveling expenses $4,364.28; insurance and taxes $6,250. The inventory figures up a total of $13,896.12.' and before the books are closed, a sufficient sum for depreciation, namely $5,000, is written off. The company claims that conservatively stated its net profit for the year is $18,142.10. Arrange the amounts in the form of an income account, and explain fully how the company could arrive at such net profit, and give reasons therefor. SOLUTION. INCOME ACCOUNT. Purchases, net $ 69,346.92 Labor 52,815.33 Fuel 16,219.46 Shop expenses 9,247.50 Insurance and taxes 6,250,00 Depreciation 5,000.00 Sales $241,863.50 Less 32,360.25 Returns and al- lowances $18,416.38 Discounts 13,943.87 $158,879.21 Less inventory 13,896.12 $32,360.25 Cost of merchandise sold. . 144,983.09 Gross Profits 64,520.16 $209,503.25 $209,503.25 147 Ace. American Business and Accounting Encyclopedia 137 Salaries $ 16,214.30 Expenses 8,342.35 Traveling expenses 4,364.28 Advertising 17,457.13 H oi amount expended. Net profits 18,142.10 Balance down $64,520.16 $ 64,520.16 $ 64,520.16 Comments. It is only fair and in harmony with prudent management that the first year's advertising expenditures should be apportioned over a number of years, in this instance, three years, for this reason, the corpora- tion finds it absolutely necessary to introduce its articles in the market through the medium of extensive advertising. The whole burden of the first year's advertising should, however, not be loaded on the first year's operating expenses, because the subsequent years draw the benefits of this first year's outlay and should, therefore, stand their portion of the total initial outlay. In fact, the entire advertising expenses for the first year might be considered the good will of the business, and subsequently written down over a number of years, or, the business being very prosperous from the results of prudent advertising, the first year's outlay may remain intact on the books in the form of a valuable asset, e. g., good will. The company's estimate of the first year's profits was very conserva- tive, indeed. Illinois C. P. A. Examination, May, 1906. A branch office busi- ness was started the first of the year, the head office advancing $5,000 cash. During the first year merchandise was shipped to branch, invoiced at $75,000. An auditor, checking up the business at the close of the year, finds the following: Merchandise sales were $60,000, with selling price of goods 20 per cent advance on invoice. Proper vouchers were on file duly receipted for following payments: Rebates and allowances on damaged goods $1,500.00 Salaries and other expenses 4,500.00 Freights J,500.00 Remittances to head office $35,000.00 Uncollected accounts 15,000.00 The balance of the sales having been realized in cash, less rebates and allowances as noted. The cash on hand and inventory of unsold goods, together with the foregoing records, properly account for everything. Prepare statement, such as an auditor would make in reporting to the head office, balancing the business of the branch house. 148 137 American Business and Accounting Encyclopedia SOLUTION. 1905. Dr. Dec. 31 — Cash : $5,000 (Advanced by home office). Sales during the year $60,000 Less rebates and allowances 1,500 $58,500 $58,500 Less uncollected accounts 15,000 $43,500 Cash receipts from sales $43,500 Accounts receivable 15,000 Stock in trade 35,000 $88,500 1905. Cr. Dec. 31. — Cash, freight $ 2,500 Cash, salaries and expenses 4,500 Cash, remittances to home office 35,000 Home office account 46,500 Merchandise $75,000 Cash 5,000 $80,000 Less remittances 35,000 $45,000 Net profits 1,500 $46,500 $88,500 1905. Dec 31 — Home office $ 5,000 Sales 43,500 $48,500 Dec. 31.— On hand $ 6,500 1905. Dec. 31. — Salaries and expenses $ 4,500 Freight 2,500 Home office 35,000 Remittances 6,500 Balance $48,500 Cash on hand $ 6,500 Accounts receivable 15,000 149 Acc Ace. American Business and Accounting Encyclopedia 137 Stock in trade ...^ 25,000 $46,500 Home office account $46,500 Balance .$45,000 Profits 1,500 $46,500 PROFIT AND LOSS ACCOUNT — SHOWING PERCENTAGES. EXPENDITURES — PER CENT OF SALES. Cost of goods sold 85.47% $50,000 Freight 4.27% 2,500 Gross profits 10.26% 6,000 100.00% $58,500 Salaries and expenses 7.70% 4,500 Net profits 2.56% 1,500 10.26% $6,000 INCOME. m Per Cent of Sales Salaries $60,000 100.00% $58,500 Less rebates 1,500 Gross profits 10.26% 6,000 Balance down 10.26% 6,000 New York C. P. A. Examination, January, 1903. One of the early experiences of the firm of Gardner & Kestin, Certified Public Accountants, was to make an investigation of the books and accounts of Evans, Smart & By ford (which firm had become involved in business difficulties and was compelled to stop payment) and to prepare from the following data a statement of aflfairs, accompanied by a deficiency account: Unsecured creditors, A $35,000. B $27,500, C $26,000, D $24,500, E $17,500, F $15,000, and G $2,000; creditors for rent, salaries, etc., $1,250, of which $750 was preferential; debtors, $42,500. of which $37,500 was good, $1,825 doubtful (estimated to produce $625), and $3,125 bad; bills receivable, H $3,000, J $4,250, K $2,500 and L $1,500; land and buildings, $25,000, plant and machinery $8,500, stock on hand $5,000, furniture and fixtures $1,500, cash on hand $15,000, sundry profits $37,500, sundry losses $30,000, trading expenses $17,500. Evans' capital account was $5,000, Smart $3,750, Byford's $3,750; Evans' drawings were $10,000, Smart's $15,000, Byford's $17,500. Show how you would have prepared the statements required had you been employed to do the work. SOLUTIONS. STATEMENT OF AFFAIRS, EVANS, SMART & BYFOBD. As at October 27. 1903. Form A. Expected Liabilities, as stated and estimated by debtors. to rank. Unsecured creditors $147,500 150 ^1 137 American Business and Accounting Encyclopedia A $35,000 B 27,500 C 26,000 ^ 24,500 E 17,500 E 15,000 G - 2,000 Rent Preferred creditors , 750 Contra. ACC 500 $148,000 Estimated Assets, as stated and estimated by debtors. to produce Debtors, good $37,500 Debtors, doubtful 625 $ 38,125 Debtors, doubtful 1,250 Debtors, bad 3,125 $ 4.375 Bills receivable 11,250 H $ 3,000 J 4,250 K : 2,500 L 1,500 Land and buildings 25,000 Plant and machinery 8,500 Stock on hand 5,000 Furniture and fixtures 1,500 Cash 15,000 $104,375 Less preferred creditors 750 $103,625 Deficiency 44,375 $148,000 Balance from statement of affairs 44,375 DEFICIENCY ACCX)UNT. Capital accounts 12,500 Evans $ 5,000 Smart 3,750 Byford 3,750 Profits 37,500 I $ 94,375 Drawings 42,500 151 Ace. American Business and Accounting Encyclopedia Evans $10,000 Smart 15,000 Byford 17,500 Losses 30,000 Trading expenses 17,500 Debtors 4,375 $ 94,375 • ^ Form B. Descriptions — Assets. Liabilities. Debtors $ 38,125 Good $37,500 Doubtful 625 Bills receivable 11,250 H $ 3,000 J 4,250 K 2,500 L 1,500 Land and buildings 25,000 Plant and machinery 8,500 Stock on hand 5,000 Furniture and fixtures 1,500 Cash 15,000 Creditors unsecured $147,500 A $35,000 ■ B 27,500 C 26,000 D 24,500 E 17,500 F 15,000 G 2,000 Preferred creditors 750 Rent 500 $104,375 $148,750 Deficit 44,375 $148,750 $148,750 Capital Items — Dr. Cr. Evan's capital $ 5,000 Smart's capital 3,750 Byford's capital 3,750 Partners' drawings — Evans $ 10,000 Smart • 15,000 Byford 17,500 $ 42,500 $ 12,500 Balance, deficit 30,000 $ 42,500 $ 42,500 1S2 137 137 American Business and Accounting Encyclopedia Profit and Loss-items — Sundry profits $ 37,500 Sundry losses $ 30,000 Trading expenses • • 1 7,500 Debtors 4,375 $ 51,875 $ 37,500 Balance to deficit account 14,375 $ 51,875 $ 51,875 DEFICIENCY ACCOUNT. Balance of Capital items $ 30,000 Balance of Profit and Loss items • • 14,375 $ 44,375 Excess of liabilities over assets • • 44.375 Acc. The statement of aflfairs and its appendix, the deficiency account, is presented in two forms, A and B. Form A is ordinarily used in Great Britain, the English colonies and this country, whereas Form B is mostly in vogue in continental Europe. New York C. P. A. Examination, June, 1905. You are asked to pre- pare an account showing the profit earned by a concern for a certain period. The books have been kept by single entry and you gather from them the following : Capital $19,360 Cash 2,600 Accounts receivable ■ • 1 5,600 Merchandise 10,400 Fixtures 1,650 Accounts payable 3,850 Bills payable 5,000 Merchandise used by proprietor 800 The capital above set out is the balance of the account after $1,500 withdrawn during the period and $1,20 for salary have been charged up against it. Set up profit and loss account. SOLUTION. ASSETS. Cash $ 2,600 Accounts receivable 15,600 Merchandise 10,400 Fixtures 1,650 Total assets $30,250 153 Ace American Business and Accounting Encyclopedia UABIUTIES. Accounts payable $ 3,850 Bills payable 5,000 Capital 19,760 137 28,610 Profits $ 1,640 ANALYSIS OF CAPITAL ACCOUNT. Balance at end of period ." $19,360 Before closing add salary account 1,200 Deduct proprietor's merchandise $20,560 800 Capital at closing $19,760 Illinois C. P. A. Examination, May. 1904. At the close of its fiscal year, December 31st, 1902, a manufacturing corporation had a working capital of $86,451.78, consisting of, — cash in bank $5,200, accounts and notes receivable $79,516.80; stock on hand $30,48320; less unpaid labor and accounts payable $28,748.22. During the year 1903 the management erected an addition to its main factory building costing $18,210.19 and in- stalled therein machinery and equipment costing $16,30927, with additional hand tools costing $3,298.50. After inventorying stock and closing the books to December 31st, 1903, a dividend of $45,000 was declared out of net profits for the year amounting to $54,817.96. The company was obliged to borrow the money to pay the dividend. Give any reasons which occur to you as to why the loan was necessary and the propriety, or otherwise, of making it. SOLUTION. BALANCE SHEET. Dec. 31, 1902. Cash $ 5,200.00 Unpaid labor and accounts Accounts and notes receiv- payable $28,748.22 able 79,516.80 Capital and surplus 86,451.78 Stock on hand 30,483.20 $115,200.00 $115,200.00 The problem requires answers to two questions: 1. The reason why the loan was necessary ; 2. The propriety or otherwise of making the loan. To the first the answer is very simple. The company had made during the year extraordinary capital expenditures in the form of per- manent improvements. While its net profits appear to have been over $54,000, nearly $38,000 was thus expended, so that, unless there had been an extraordinary realization on its general assets during the year, there would not be a sufficient amount of cash to pay $45,000 out in dividends. The answer to the second question requires a, careful consideration of all the facts. 164 137 American Business and Accounting Encyclopedia Ace. Here we have a company doing a very considerable busi"ness, as shown by the year's profits of $54,817.96, while its working capital con- sists mostly of accounts and notes receivable and stock on hand, with a small proportion of cash. The liabilities, while not large, include unpaid labor, which indicates (if it was more than the usual current sum due on the pay roll for such fractional part of a week, made necessary by the date of the closing) a shortage of ready money. It is clearly the part of prudence to strengthen the company in this respect before declaring a dividend of any kind. However, we must look a little closer. The directors justify their action by saying that the company has clearly earned the dividend, and that they are entitled to reimburse the company for capital expenditures; that the stockholders are entitled to a fair return on their money, etc. We also know from history that while a loan to pay a dividend is seldom justifiable, it may sometimes be warranted and often has been practiced by conservative financiers. That if directors had not in the past capitalized improvements, few of the railroads in the country would ever have paid a dividend. This is all probably true, yet it requires at the very outset a consideration of the sort of loan proposed, the rate of cost, etc. If it is to be in the form of bonds to run considerable time, at a moderate rate of interest, the proceeds, thus used, being really to attract capital and thus extend the business, the policy may perhaps be admissible. Before admitting this, however, as an accountant, I would want to examine more carefully the conditions. The problem does not state, whether outside of this "working capital" of $86,451.78 there are any other assets; whether the plant, etc., is owned or leased. Let us assume that it is owned. Then I should want to inquire how this net gain of $54,817.96 was arrived at — whether repairs and maintenance had been properly charged to expense; whether adequate sums had been written oflF or set aside for depreciation ; whether reserves were maintained for losses on bad debts, etc. ; also whether the considerable amount of accounts and notes receivable indicated slow collections. A most rigid treatment of these points would be required. Further, as it is proposed to capitalize these improvements, let us examine what they are. The $18,210.19 spent for addition to factory building would probably stand as good and proper, if carefully and economically spent. Deprecia- tion, however, should be provided for in the future. As to the $16,309.27 spent for machinery, the propriety of capitalizing the whole sum would depend on the nature of the machinery, its duration of life in ordinary use, its liability to be superseded by improved ma- chinery, etc. A liberal reserve should be set aside to replace and renew it. As to the $3,298.50, spent for hand tools, I should doubt the propriety of calling this or much of it a capital expenditure. The loss from wear 155 Ace. American Business and Accounting Encyclopedia 139 ind tear, breakage, being lost or carried away by workingmen, etc., would probably be great. I would charge the greater part of this item, if not all, at once to expense. This question should all be considered in relation to the nature of the business carried on. What might be a proper treatment of these matters for one sort of business, might be clearly improper for another, and it is a pity the problem did not enlighten us on this matter. We can only draw general conclusions from a consideration of the above matters. In general, a loan to pay dividends is imprudent and improvident and can only be justified by extraordinary circumstances, and if such circum- stances seem to exist, a most rigid and careful examination of the things suggested above should be insisted on. In this particular case I should consider the dividend too large, and the making of a loan to pay it exceedingly unwise. Illinois C. P. A. Examination, November, 1903. Brown and Jones begin a partnership business Jan. 1, 1902; at the time of closing the books, Dec. 31st, 1902, an examination of the account revealed the following: January 1st Brown paid in $9,000.00 May 1st Brown paid in 2,400.00 June 1st Brown drew out 1,800.00 September 1st Brown drew out 2,000.00 October 1st, Brown paid in 800.00 January 1st Jones paid in 3,000.00 March 1st Jones drew out 1,600.00 May 1st Jones drew out 1,200.00 June 1st Jones paid in 1,500.00 October 1st Jones paid in 3,000.00 Their merchandise account was Dr. $32,000, Cr. $27,000. Balance of merchandise on hand per inventory $10,500. Cash on hand $4,900. Bills receivable $12,400. Chas. Green owes on account $2.50; F. Draper owes $700; Wm. Clark owes $650; F. Hart owes $850. They owe on their notes $1,890. They owe A. Reed on account $240; owe C. Smith $500; owe A. Clark $100. Their profit and loss account shows before closing entries Dr. $866, Cr. $1,520; expense accotmt is Dr. $2,520. Commission account is Cr. $2,760. Interest is Dr. $480, Cr. $950. The gain or loss is to be divided in proportion to each partners capital, and in proportion to the time it was invested. Prepare (1) Asset and liability statement. (2) Merchandise account closed. (3) Profit and loss account closed. (4) Each partner's account closed. (5) Balance sheet. SOLUTION. A. Dec. 31, 1902. ASSET AND LIABILITY STATEMENT. Cash on hand $ 4,900 Open creditors $ 840 Accounts receivable .... 2,450 Bills payable 1,890 156 137 American Business and Accounting Encyclofedia Bills receivable 12,400 Suspense account 7,556 Stock in trade 10,500 ' Total $10,286 $30,250 CAPITAL. Jones $4,700 Brown 8,400 13,100 Undivided profits 6,864 $30,250 MERCHANDISE ACCOUNT. Purchases $32,000 Sales $27,000 Less stock in trade 10,500 Acc. Cost of merchandise sold $21,500 Gross profits 5,500 . K $27,000 $27,000 PROFIT AND LOSS ACCOUNT. Section I. ^^P«"ses $2,520 Balance from Merchandise ac- Balance down 5,740 count $5,500 (Being ordinary business Commissions 2,760 profits.) "I $3,260 $8,260 Section II. interest $ 480 Balance $5,740 Net profits 6,864 Interest 950 firown $5,386.44 Old balance .' 654 Jones 1,477.56 $7,344 $7,344 BALANCE SHEET. DEC 31, 1902. Assets. Liabilities. C^sh $ 4,900 Bills payable $ 1,890.00 Merchandise 10,500 Accounts payable 840.00 Bills receivable 12,400 Suspense account 7,556.00 Accounts receivable 2,450 $10,286.00 Proprietorship : Brown 13,786.44 $30,250 Tones 6.177.56 $30,250.00 CAPITAL ACCOUNT. Brown. June 1, 1902 $1,800.00 Jan. 1, 1902 $ 9,000.00 ^^P^- 1 2,000.00 May 1 2,400.00 ^a^ance 13,786.44 Oct. 1 SOO.OO Dec. 31, net gain 5,386.44 $17,586.44 $17,586.44 Balance $13,786.44 157 Ace American Business and Accounting Encyclopedia 137-W Jones. March 1, 1902 $ 1,600.00 May 1 1,200.00 Dec. 31, balance 6,177.56 $ 8,977.56 Jan. 1, 1902 $3,000.00 June 1 1,500.00 Oct. 1 , 3,000.00 Dec. 31, net gain 1,477.56 $ 8,977.56 Balance $ 6.177.56 DIVISION OF PROFITS. Brown. Jan. 1, $9,000 for 12 mos., = May 1, 2,400 for 8 mos., = Oct. 1, 800 for 3 mos., = .$108,000 . 19,200 2,400 -$129,600 Less drawings — June 1, $1,800 for 7 mos $12,600 Sept. 1, 2,000 for 4 mos 8,000 Balance - 20,600 $109,000 Jones. Jan. 1, $3,000 for 12 mos., = June 1, 1,500 for 7 mos., = Oct. 1, 3,000 for 3 mos., = .$36,000 . 10,500 . 9,000 55,500 May Less drawings — Mar. 1. $1,600 for 10 mos : $16,000 1, 1,200 for 8 mos 9,600 Balance Total 25,600 29,900 $133,900 (138) AGENDA BOOK. A title given to a memorandum book kept by the secretary of a corporation for the purpose of entering therein notes of meetings of stockholders or board of directors. This agenda book may also be found useful for the purpose of entering memoranda of such matters as may be considered desirable from time to time to bring to the attention of directors or stockholders at a subse- quent meeting. (139) AGENT. A person employed to represent a business for the sale of its goods, or to obtain contracts, or dispose of or acquire those commodities or rights, etc., in which the business represented may trade or deal. Such agents may be described as traveling agents ; agents who under- take as a side line, the sale of commodities belpnging to the concern by whom they are appointed, who may have the sole agency, or that for a 139-140 American Business and Accounting Encyclopedia Ac city or district, may be remunerated by commission only, or by salary, and commission ; or may be charged with the goods supplied at a certain agreed rate, receiving as remuneration the difference between the price charged and the amount at which the sale is effected ; agents for insurance companies who receive as a remuneration a certain proportion of premium receipts in their territory and who may in turn appoint sub-agents. (140) AGENTS' ACCOUNTS. The consideration of the accounts of agents for insurance companies will be taken up under the head of Insurance. The accounts of an agent for a general business, such as mentioned above, frequently present a great many complications and require a considerable amount of book-keeping, especially where the accounts of the agents with customers, for instance are collected by the head office. In such cases the agent is usually required to forward a daily report of sales in his territory, which report is frequently transcribed into a journal before posting the items to the ledger. A special form of report can, however, easily be devised from which posting can be made direct without the interposition of another book of entry, and these reports can be kept in a binder which can be labeled "Cleveland Agent's Sales Journal." Where the agent receives a certain percentage on grosb sales, it is a very simple matter to keep track of his business, charging commission account and crediting the agent with the percentage earned either daily, weekly or monthly, as found convenient. Where the goods are charged to the agent at, say 10 per cent above cost, it will be seen that the 10 per cent above cost enters into account both in the gross sales charged in customers and the credit to merchandise when th egoods are charged to the agent. The plan used by many houses which make arrangements of this kind with agents is as follows: Agents Sales RecoRo Date or Shipment Description QuAM'n PhicE Amt Datc or Rtron DzscatrTRK or Sale QUAN TITY PRiCtlAM tF*^ Cr. When goods are shipped to the agent for sale, a list of the shipments is prepared, providing a column in which to enter the amounts at which the goods are charged to the agent, and another column in which to enter the amounts at which the agent makes his sales. This list we will hereafter refer to as "Agent's Inventory." Open an account with the agent and charge him with the goods at cost and 10 per cent added, crediting an account to be opened, entitled "Agent's Sales Account." As the agent's 158 159 Ag. American Business and Accounting Encyclopedia 140 account sales come in, charge the customers in the usual way, and credit the regular sales account, entering on the agent's inventory the amount realized by the agent from the sales. The footing of the two columns on the agent's inventory will then show the excess over profits at which the goods were billed to him. Having ascertained this amount, charge agent's sales account with the sales made at the prices billed to the agent and credit the agent's account. Credit the agent with the difference between the totals of the two columns on the agent's inventory and charge commission account with the amount. When the customer pays the bill, credit him, the charge being to cash. When the settlement is made with the agent, charge his account with the amount paid him, the credit being to cash. In order to make this quite clear, we append the following journal entries : Dr. Cr. $770.00 Agent— bill of goods with 10% added to cost. Agent's Sales $770.00 125.00 John Smith & Co. (Agent's report, 1-6-99) Sales 125.00 110.00 Agent's Sales. Agent (Sales 1-6-99) 110.00 15.00 Commission. Agent's profits on Sales for 1-6-99 15.00 125.00 *Cash. John Smith Co 125.00 ♦In this and other illustrations in the American Business and Account- ants' Encyclopaedia cash is included in journal entries simply to accomplish lucidity of explanation. It will be found desirable to credit agent's profits to a separate account, for the reason that if they are credited to the agent's account, they will prevent that account from showing exactly the inventory of goods he has on hand remaining unsold. Inasmuch, however, as the agent's sales account will exhibit precisely the same statistics it may be considered that this is all that is necessary, in which case the agent's account can be credited with the profits, each credit being distinguished from other credits when posted, so that at any time they can be extracted for the purpose of checking up the agent's claim for the amounts due him. According to the above journal entries, the accounts affected would stand thus after postings had been made: Dr. Balances. _ Cr. Balances. $660.00 Agent. Agent's Sales :|)660.00 15.00 Commission. Agent's Profits 15.00 125.00 Cash. Sales Account (regular) 125.00 It will be seen that the agent's account shows that of the goods 160 140 American Business and Accounting Encyclopedia Ag. furnished him he has disposed of $110 worth and has $660 worth on hand. The agent's profits on sales effected — ^$15 — have been credited to him and charged to commission account as a selling expense; the customer has paid his account, while the sales account has been credited with the gross amount of sales — $125. Accounts with traveling salesmen are kept in a variety of ways, and we think it would be of interest, as well as instructive, to reproduce here the methods used in four large business houses for keeping track of debits and credits to their traveling salesmen. No. 1. It is not always convenient to keep the cash accounts with the traveling salesman in the general ledger. If there are many travelers they will occupy a large amount of space in this book, besides, these accounts can be more readily referred to and much easier kept track of, by means of a small cash ledger used only for this purpose. The book we use is about five and one-half inches wide and eight inches long, and is ruled like form shown herewith : William Simpson — Trip from Jonesville to Bloomington. Date. 1896. Dec 1 " 7 " 7 " 10 " 12 " 12 " 12 Particulars. Dr. Cr. Dr. or Cr. Bal. Cash $50.00 (Wages paid to date.) Expenses for week J. B. Dalton 17.80 Cash to family 10.00 Expenses for the week By two weeks' wages Cash to balance 1.95 Dr. $23.75 Dr. Dr. Dr. 22.00 Dr. 34.00 Cr. $30.00 26.25 44.05 54.05 32.05 1.93 $79.75 $79.75 This book lies in the cash drawer, and when counting the cash every night the amount charged in this book to each traveler is counted as cash. A book of this size, with about two hundred pages, will record the transactions of five or six travelers for about two years, and when filled it can be laid away and easily and readily referred to. A certain number of pages are allowed to each man, so that when the book is completed, the transactions of each account follow in regular order. On account of its easy reference, we find it works very satisfactory, as the date of any previous trip can be quickly turned to. When a man starts out on a trip he is given a certain amount of money which is entered only in this book. At the end of the week he sends to the house an itemized account of his expenses for that week, which is credited to him in this book, and this amount is charged to general expenses in the cash book. If he collects any money on the road, the fact is reported at once, and he is charged with the amount, while the customer is credited with it in the general cash book. IGl Ag. American Business and Accounting Encyclopedia 140 If his family get any money during his absence, this fact is recorded, and the amount charged to him. When he comes home his account is balanced by crediting him with his wages for time absent and paying the balance due him. No. 2. The method hereunder outlined has been put to practical use, and while simple in detail, has been found to be very comprehensive and satisfactory. Two accounts are opened for each salesman, — "Personal" and "Sample." To the personal account is posted only such items as remit- tances from the house and such collections as the salesman may make on his trip, wherein the proceeds are retained by him for his use as previously arranged, for the debtor side ; and for the credit side salary and expenses covering railroad fare, hotels and other legitimate items, as shown by w^^ekl: reports. This account should i)e balanced at convenient times, but parliculaily upoa co npletion of each trip, when the account can be checked with the salesman if necessary. We now come to the sample account, which takes for its first entry a charge from the sales journal, covering the aggregate selling value of all goods taken by the salesman when starting on his trip. As each sale or delivery of goods is made by the salesman, whether for cash or on time, he should immediately report the transaction on the regular form of order blank when the charge in the home books would be in the event of a cash sale: John Hustle (salesman), Personal. To John Hustle, Sample. •entering the description of goods in detail, or merely referring to reported date of sale. When the goods are delivered, or sold on time, an invoice must be made and mailed to the customer, and the proper entry for the home books would be: Marshall, Meadow & Co., (Customer). To John Hustle, Sample Account. These entries involving transactions by the salesmen should be made in the sundries journal, as the goods have already entered into the sales record through the original charge to salesman. Immediately upon return of the salesman to the home plant his samples and stock of goods remaining on hand should be checked up and credited through the sales journal, when, with all items posted, his sample account should be in balance. No. 3. Our attention having been called to the question of dealing with the accounts of traveling salesmen, particularly with the method outlined in No. 2, we have carefully examined same and note the claim that the system has been put to practical use, is simple in detail, very comprehensive and satisfactory. 162 140 American Business and Accounting Encyclopedia Aa As far as the knowledge and desire of those who use it are concerned, this may all be true; but as viewed from another standpoint, it appears to be open to criticism. It recommends that two accounts be kept with each salesman; one a "Personal" and one a "Sample" account. It then explains that to the "Personal" account should be posted among other things "such collections as the salesman may make on his trip, wherein the proceeds are retained by him for his use," etc. As long as the salesmen are strictly honest, the simplicity of the plan proposed is sufficient to recommend it ; but simplicity is not the only featui e that should be considered, and while it would be wrong to cast an unjust reflection on any man's honesty, it is, nevertheless, a fact that one object in keeping accounts is to avoid, as far as may be, all possibility of loss, and it would be well before inaugurating or continuing such a system to consider the possible contingencies. Let us suppose, that under such a system, one of the salesmen has retained a number of his collections for personal use, and they have been simply charged to such a "Personal" account kept with him as an indivi- dual, together with other miscellaneous items. Let us further suppose that settlement is requested of him when the fact is brought to light that he has appropriated funds far beyond the business needs and is "short"; or that he has taken what money he could collect and disappeared, after having reported said collections and authorized a charge to his account of the amount, in accordance with previous plans. Under such conditions the only chance to secure a settlement would be to rely on such laws as relate to the collection of ordinary debts. He has had unlimited authority to collect what he could, with privilege of having it charged to him personally as a principal and not as an agent. A much bettei way to handle such matters is to require the salesmen to remit promptly for each and every collection made, and when received, credit the accounts on which the payments are made. In other words, never allow a collection to pass through an employe's personal account. If a salesman requires money for expenses or other purposes, remit or pay it to him on receipt of proper vouchers showing that he has expended the amount. If it becomes necessary to advance money for similar purposes, charge it to him as "Agent," "Custodian," or in a fiduciary account, with particulars plainly indicated by the entries made, and such vouchers as should be required of him ; or the same transactions may be handled in various other ways that will comply with existing conditions and, at the same time, like the plan herein explained, place a case of retention of funds subject to the laws regarding embezzlements, when the salesman's person may be attached for the unpaid balance. His "Personal** account should be a record of settlements promptly made, and not one of unsettled balances. Another feature of the advice given in No. 2 is worthy of attention. It proposes to charge the salesman's sample accounts with such goods 163 Ac American Business and Accounting Encyclopedia 140 as may be shipped to them, subject to sale and regarding the entries for subsequent sales made by them, stating they should be made in the sundries journal, "as the goods have already entered into the sales record through the original charge to salesmen." While in such cases the manner of handling sales totals may be so adjusted as to produce correct results, the plan proposed, without further proper treatment, would certainly pro- duce an incorrect total of gross profits in a monthly statement, unless all of such goods have been sold and charged to final purchasers at that time. If such goods are charged to the salesman at cost, the profits, when actual sales are made, would be omitted from the original sales record, and if charged to salesmen at a profit, a monthly statement of totals shown would represent an incorrect profit total, by having thus considered the profits on such goods as had not been finally disposed of. Again, when final sales were made from such stock, unless they were at the same prices at which they had been charged to salesmen, an adjusting entry would become necessary for the diflference, which, under some systems, would then be difficult to incorporate in the original sales record. The conditions in question might be systematically and correctly recorded in the following manner, viz. : Open accounts with each salesman in the style of "John Johnson, custodian:" or "John Johnson, sample account," or any similar title that will briefly indicate the facts. Then open one other account as "merchan- dise in transit," or "salesmen's samples," or such title as may be decided on. Now, presuming that a special book is kept for sales, and a journal for all other entries that are not cash, the method of handling such matters would be as follows: For shipment to salesmen, if charged at cost, debit "John Johnson, custodian." credit "salesmen's samples," and at the same time charge the goods to the purchaser in the regular manner through the sales book. If goods are charged to salesmen at a profit, the entries would be the same ; but in either case great care would have to be exercised in making the second entries exactly the same prices at which the goods were origin- ally charged to the salesmen's accounts. By this plan the salesmen's sample accounts will represent at all times the value of goods that remain in the charge of each, while the "merchan- dise in transit" account will represent, by its credit balance, the total value of goods held by all the salesmen, unsold. This latter account is in the nature of a memoranda only, and while It shows a credit balance, it simply requires the proper treatment in any business statement that may be made, in order to show correct results. By this plan the profits are in no case overestimated, and require no special adjusting entries; neither do the sales book tptals contain any except actual sales. 164 140 American Business and Accounting Encyclopedia Aa No. 4. The keeping of a close line on the accounts with our salesmen has been the cause of much trouble in our office. We have at last gotten on the right track, and while there are some points in our system that may not be adapted to the uses of some other lines of business, this is just what we have needed: First: The accounts with the various salesmen are on a purely com- mission basis — one-half of the commission being paid when the order is accepted and the balance when the account is paid. It will be readily seen that there will always be a balance large enough to protect the house against the charge back commissions arising from goods being returned and other causes. Second: The goods arc mostly sold on thirty days* trial, and this tends to lengthen the term of credit considerably. Third : The goods are special fittings, or machines, and if an agent makes a wrong measurement for the fittings, there arises express charges and other costs which must be kept track of in such a manner as to allow ready reference when any question arises concerning an order when making a settlement with the salesman. Fourth : It is very desirable to have a complete record of each order in such shape that the record can be used as a basis for future quotations and correspondence. Our plan is virtually as follows: When an order comes in from a salesman, we first take a card and fill out the name, address, rating, etc.; then the salesman order number and our order number; the date of the order, amount of the order, the symbols showing kind of goods ; then fol- lows the amount of the salesman's commissions, with one-half carried in short for ready reference ; the one-half commission is then credited to the salesman's account in the ledger ready for settlement. Should the ship- ment be prepaid at the expense of the agent, the express is charged on the card, but not in the ledger at this time, this item appears on the card under date of shipment ; the date of shipment also appears under the heading "Amount of Order." When the account is paid by the customer, the card is taken from the case, and the amounts to be charged back to the salesman are entered against his account in the ledger and credit given for the one-half commis- sion unpaid. On the card the cash diflference is shown. Each week the salesman receives an itemized statement of the orders received with the commissions thereon ; the accounts paid, with a list of charge back items and unpaid commissions due. This enables the salesman to have a check on the house, and at the same time any diflFerences in the accounts are at once detected. After the card has become a "paid account card," it is transferred to the transfer case, a rtcord card first being made for the cus- tomer's record case for use in correspondence, quotations, advertising mat- ! 165 Ag. American Business and Accounting Encyclopedia 140-143 ter, etc. This is done for the reason that the salesmen do not work the same territory continuously, and the orders that drift in afterward are not those on which the salesman receives any commission. The relation of agent*s accounts to balance sheets, trading accounts and profit and loss accounts is easily understood where separate accounts are kept with agencies. The best method of incorporating the transactions of an agency is, by some accountants, considered to be by means of a grand balance sheet, including all the assets and liabilities of the main office and of the agencies, and a detailed balance sheet provided with separate columns for each agency, treating trading account and profit and loss ac- count in the same manner. In this way the gross and net profits, inven- tories and expenses of each agency will be exhibited contemporaneously with the statistics of the main office and the combined statistics of the whole business. The methods of keeping record of agency sales vary with the different requirements of diflferent lines of business. Thus, in breweries, where, as a rule, a large number of agents are employed, it is desirable to formulate a special record, which shall show at a glance each agent's sales and the total quantity sold of each size of package, such as cases or barrels. (141) ALLIGATION. ' A term used to describe the mixing of various ingredients, or combina- tions of different qualities or values, and the finding of the average value of such a combination. Thus, if a merchant desires to make a mixed quality of tea, composed of a mixture of different grades, alligation signifies the process of finding how much of each grade he can include in a given quantity of a mixture which is to sell at a given price. (142) ALIQUANT. A part of a number or quantity which, when dividing this number or quantity, leaves a remainder; thus 7 is an aliquant part of 20. (143) ALIQUOT. A part of a number or quantity which divides that number or quantity without leaving a remainder; thus 7 is an aliquot part of 21. Aliquot parts of numbers are largely used to shorten and simplify the operation of multiplication, especially in computations involving fractional prices or quantities. The aliquot parts of 10, 100 and 1,000 are hereunder given : 166 143-145 American Business and Accounting Encyclopedia. Au ALIQUOT PARTS. OF 10. 2 1-2=1-4 1 1 3=1-6 1 1-4=1-8 3 1-3=1-3 1 3-7=1-7 1 1-9=1-9 OF 100. 6 1-4=1-16 16 2-3=1-6 SO =1-2 8 1-3=1-12 25 =1-4 62 1-2=5-8 or 1-16 of 12 1-2=1-8 33 1-3=1-3 75 =3-4 14 2-7=1-7 37 1-2=3-8 87 1-2=7-8 18 3-4—3-16 31 1-4=5-16 OF 1000. 83 1-3=1-12 166 2-3=1-6 333 1-3=1-3 126 =1-8 250 =1-4 375 =3-8 625 —5-8 875 =7-8 833 1-3=5-6 Thus to compute 439 yards c^ muslin at 8 1-3 cents per yard multiply by 100 and divide by 12. The following tables of aliquot parts of a lineal foot, or one dozen, and tons, will be found useful: Aliquot Parts TABLE OF ALIQUOT PARTS. Of 1 foot or 1 dozen. One thirty-second is...^ of 1 in. One-sixteenth is 54 of 1 in. One-eighth is , IJ/^' in. One- fourth is 3 in. Three-eighths is 4J/^ in. One-half is 6 Five-eighths is 7^4 Three-fourths is Seven-eighths is One-twelfth is . . 9 lOH . 1 One-sixth (2-12) is 2 One-third (4-12) is 4 Five-twelfths is 5 Seven-twelfths is 5 Two-thirds (8-12) is 8 Five-sixths (10-12) is 10 Eleven-twelfths is 11 One-fortieth is 5-6 of 1 Aliquot Parts. Of 1 Ton of 2000 lbs. One thirty-second is 62 J^ One-sixteenth is 125 One-eighth is 250 One-fourth is 500 Three-eighths is 750 in. One-half is lOOO in. Five-eighths is 1250 in. Three-fourths is 15OO in. Seven-eighths is 1750 in. One-twelfth is 166 2-3 in. One-fifth is 400 in. One-sixth (2-12) is 333 in. One-third (4-12) is 666 in. Five-twelfths is S33 in. Seven-twelfths is 1166 ia Two-thirds (8-12) is 1333 in. Five-sixths (10-12) is 1666 in. Eleven-twelfths is vlSSS One-fortieth is 50 1-3 2-3 1-3 2-3 1-3 2-3 1-3 (144) ALLOTMENT. A share or portion ; that which is allotted. (145) ALLOTMENT OF SHARES. In large corporations, especially those whose stock is open to public subscription, it is necessary to keep a record of shares applied for and shares allotted, as it frequently happens that applications have to be passed upon and the most desirable ones selected. This is more especially true of very promising mining companies. 167 Al.-Am. American Business and Accounting Encyclopedia 145-147 In such a case, one of the authorities on corporation accounting recommends separate sheets being employed for each letter, and where subscriptions are invited for more than one class of share, the employment of separate application forms, printed on different colored paper, so that the applications and allotment sheets for each class of shares may be easily distinguished. When the allotment is complete the sheets can be bound Date of Appl'n Register of Share Applications and Allotments NO Name Address Occupation No Shakes App'o for Folio Deposit Sh/kres Allote > OS _ .Amount FOLIoi D„j either in the form of a book or a binder, in order to make a permanent record. Appended is an illustration of a record of applications and allotment. (146) ALLOWANCE. The amount credited to a debtor, or claimed by a purchaser, of overcharge, inferiority, damage, error, or discount. A good method of dealing with allowances to customers is consecutively numbered credit tickets (journal vouchers) for all other than cash deductions, each voucher to be O. K.'d by a official. In some establishments all credits of this description through the voucher record, in which case it is necessary to special accounts receivable column to receive the contra entry. on account to provide allowances responsible are passed provide a (147) AMALGAMATION. A term used to indicate tne combination of two or more concerns who previously have carried on business independently. (See also Consolida- tions.) The following illustrates the general accounting methods used in preparing the necessary data for recording the respective interests of the concerns proposing to amalgamate, and the adjustments consequent thereto. John Deal and Alex. Wood, cabinetmakers, enter into an agreement for the sale of their respective businesses to a limited company, as at 30th Sept., 1906. From the following data prepare — 168 147 American Business and Accounting Encyclopedia Am. (a) (b) $ 100.00 25,725.o6 27,525.00 45,000.00 2,500.00 37J.00 3,bU0.OO 11.600.00 85,000.00 18,000.00 3,750.00 Profit and loss adjustment account for each business (treating all necessary adjustments of the profit and loss account as falling into the last year), and calculate good will, based on two years* purchase of the average profits of the last three years, as adjusted by you. Balance sheet of Deal, Wood & Co., Lt'd., as 1st Oct., 1906, without distinguishing between the respective interests of the vendors. The figures submitted to you are as follows : John Deal. Alex. Wood. Cash balances $ 1,025.00 Debtors 21,625.00 Creditors (including bond of $100,00 on Wood's building) 13,750.00 Stocks 25,000.00 Bad debt reserves 500.00 Insurance premiums paid 225.00 Bills receivable on hand 2,250.00 Bills receivable discounted 2,500.00 Bills payable Leasehold premises 3,375.00 Ground and buildings Plant and tools 12,500.00 Bank overdraft Balance in bank 1,625.00 Profits- Year to 30th Sept., 1904 8,750.00 Year to 30th Sept., 1905 4,600.00 Year to 30th Sept., 1906 13,100.00 Ground and buildings are to be taken over at the above figure; plant and tools at a valuation which shows an appreciation of $500 in Deal's case, and depreciation of $1,000 in Wood's case. Assume that depreciation charged in the profit and loss accounts does not require alteration. It is further arranged between the parties to reduce the figure of Deal's stock by 13 per cent and Wood's by 15 per cent, to write $1,115 off the leasehold premises in view of nothmg having been written off during the last three years), and that Deal's bad debt reserve is unneces- sary. You also find that one-third of the insurance premiums has expired in each case, and that Deal's "cash balance" consists to the extent of $875 of his personal drawings. The price of the combined businesses is payable, one-third in deben- tures and two-thirds in ordinary shares; 2,500 preference shares of $10 each are issued, on which $1 per share has been paid to provide further working capital. The limited company assumes all liabiHties and lakes over the book debts and other assets. No interest is payable on the pur- chase price. 169 11,000.00 13.350.00 20,025.00 Am. American Business and Accounting Encyclopedia 147 SOLUTION. Before proceeding with the profit and loss adjustment accounts, I give paragraphs as stated in problem mentioning at which values assets and liabilities are to be taken over by .limited company, etc.: "Ground and buildings are to be taken over at the above figure ; plant and tools which show an appreciation of $500 in Deal's case, and depreciation of $1,000 in Wood's case. Assume that depreciation charged in the profit and loss accounts does not require alteration. It is further arranged between the parties to reduce the figure of Deal's stock by 13 per cent and Wood's PROFIT AND LOSS ADJUSTMENT ACCOUNT OF JOHN DEAL, AS AT SEPT. 30, 1906. (a) Cr. I>r. By Profit to year Sept. 30th, To Reduction on Stock. . . .$ 3,250.00 1906 (as shown) $13,100.00 To Amt. written off Lease- By Appreciation on Plant hold Premises 1,115.00 and Tools 500.00 To Expired Insurance Pre- By Bad Debts Reserve (be- miums 75.00 ing unnecessary) 500,00 To Personal Drawings (in- cluded in cash balance) . . 875.00 $5,315.00 Balance, being Net Profit for year ending Sept. 30, 1906 8,735.00 $14,100.00 $14,100.00 by 15 per cent, to write $1,115 off the leasehold premises (in view of noth- ing having been written off during the last three years), and that Deal's bad debt reserve is unnecessary. It is also found that one-third of the insurance premium has expired in each case, and that Deal's cash balance consists to the extent of $875 of his personal drawings." By Net Profit brought down $ 8,785.00 By Profit year ending Sept. 30, 1904 8,750.00 By Profit year ending Sept. 30, 1905 4,600.00 Total Profits for three years $22,135.00 In stating "reduction on stocks," etc., in above, I do not show what per cent has been written off, as this should be plainly stated on explana- tion in journal entries of these adjustments. Dr. PROFIT AND LOSS ADJUSTMENT ACCOUNT OF ALEX. WOOD AS AT SEPT. 30, 1906. (a) To Depreciation on Plant and Tools $ 1,000.00 To Reduction on Stock 6,750.00 To Expired Insurance Premium • 125.00 $7,875.00 Balance, being Net Profit, year ending Sept. 30, 1906 12,150.00 $20,025.00 170 147 American Business and Accounting Encyclopedia Am. By Profit for year ending Sept. 30, 1906, as shown $20,025.00 By Amount Net Profit brought down $12,150.00 By Profit for year ending Sept. 30, 1904, as shown 11,000.00 By Profit for year ending Sept. 30, 1905, as shown 13,350.00 Total Profit for 3 years $36,500.00 Good will based on two years^ purchase of the average profits of the last three years, as adjusted, will be as follows: Profits for three years, after adjustment $22,135.00 Average profit per year 7 378 34 Two years' average profits 14 756 68 which amount is to be allowed Deal for good will. Profits for three years, after adjustment $36,500.00 Average profit per year 12,160.66 Two years' average profits 24,333.32 which amount is to be allowed Wood for good will. Before rendering (b) the balance sheet of the limited company, I will give statements of assets and liabilities of Deal and Wood each, after adjustments have been made, which are to be carried over by the limited company, as follows: JOHN DEAL. ASSETS. • Balance in bank $ 1,625.00 Cash Balances ^50 qq Bills Receivable on hand 2 250 00 ^^^^OTs ■ 21,625.00 ^*°^^^ 21,750.00 Leasehold Premises 2 175 00 Insurance Premium paid 150 00 Plant and Tools 13,000.00 ^^^ will 14,756.68 $77,481.68 LIABILITIES. Creditors $13,750.00 Balance being net worth 63,731.68 $77,481.68 (Contingent Liability— Bills Receivable discounted $2,500.00.) ALEX. WOOD. ASSETS. Cash Balances $ iqqqq Debtors 25,725.00 Insurance Premiums paid 250.00 Stocks 38,250.00 Plant and Tools 17,000.00 Ground and Buildings 85,000.00 Good will 24,333.32 $190,658.32 171 Am. American Business and Accounting Encyclopedia 147 147 American Business and Accounting Encyclopedia Am, LIABILITIES. Creditors (including bond of $100,000 on building) $ 27,525.00 Bills Payable 11,600.00 Bank Over Drafts 3,750.00 Bad Debt Reserves 2,500.00 $ 45,375.00 Balance being net worth 145,283.32 $190,658.32 In addition to the above liabilities of Wood of $45,375, there is a contingent liability of $3,600, being amount of bills receivable which have been discounted. (I presume that the bills receivable are entirely good, but think it best to mention them as a contingent liability, as I have done; same for contingent liability of Deal.) "The price of the combined businesses is payable, one-third in deben- tures and two-thirds in ordinary shares; 2,500 preference shares of $10 each are issued, on which $1 per share has been paid to provide further working capital. The limited company assumes all liabilities and takes over the book debts and other assets. No interest is payable on the pur- chase price." For amount of price of combined businesses, I take Net Worth of Deal as shown above $ 63,731.68 Net Worth of Wood as shown above 145,283.32 Amount capital required by limited company to take over busi- nesses of Deal and Wood $209,015.00 which is payable one-third in debentures, which will be $69,671.67, and payable two-thirds in ordinary stock, which will be $139,343.33. Two thousand five hundred preference shares of $10 each are issued, on which $1 per share has been paid to provide further working capital, which would give $2,500 preference capital paid in, and $22,500 preference capital un- paid, which I presume is to be paid in as needed by the limited company. For (b) "balance sheet of Deal, Wood & Co., Limited, as at Oct. 1. 1906, without distinguishing between the respective interests of the ven- dors," I submit the following: BALANCE SHEET OF DEAL, WOOD & CO.^ LTD., AS AT OCT. 1, 1906, ASSETS. Cash Balances $ 2,750.00 Balances in Bank 1,625.00 Bills Receivable on hand 2,250.00 Debtors . . 47,350.00 Stocks 60,000.00 Insurance Premiums paid 400.00 LeasehoW Premises 2,175.00 Plant and Tools 30,000.00 Ground and Buildings 85,000.00 Good will 39,090.00 $270,640.00 172 LIABILITIES. Creditors (including bond of $100,000 on building) $ 4197500 Bills Payable .*.".".'.".'.".'." '" Bank Over Drafts Bad Debt Reserves Debentures Capital Stock: Ordinary $139,343.33 Preference 2,500.00 141,843.33 11,600.00 3,750.00 2,500.00 69,671.67 $270,640.00 (There is a contingent liability of $6,100, assumed, which is amount of bills receivable that vendors had discounted, but it is thought that the bills receivable are entirely good and will be promptly met by the makers of same at maturity.) As to the 2,500 shares of preference stock, I only show on balance sheet, above, amount of this stock that has been paid in ; and balance due on same, records should be kept on auxiliary books, and credited to capital stock as it is paid in. — (G. Brownlee.) New York C. P. A. Examination, January, 1902. The Smith Brew- ing Company, with $1,000,000 capital stock, the Young Brewing Company, with $500,000 capital stock, and the Star Brewing Company with $IOO,o6o capital stock, agree to consolidate as the Universal Brewing Corporation, the new company to buy all the prooerties of the old companies at a valuation to be fixed by appraisal, payment therefor to be made in full- paid stock of the new company, the old companies to pay off their own indebtedness. The appraised values of the old companies are as follows : 1 Real Estate AND Buildings o mit h Young Star 600,000 3 2 7. 000 '26.000 Plant f Cash Bills fomsEiVAttow |RECEnrABu|„^;;i;„ ssotooo '60,000 7/, 000 / 3,000 3,0 00 ',000 ' 0,000 g ♦, 000 6,000 3.000 I.SOO Orricc FURNITURI '.000 '. ooo soo 1,100.00a ^oo.ooa 2oo,ooc TotflJ cpprciisGd vciJue i.eoo^ooo J nnn ^" ^^'^ valuation the Universal Brewing Corporation issued $2,000- 000 of stock, shares $100 each, which was divided prorata among the old companies on the basis of their appraised value, no fractional shares of stock to be issued, odd amounts to be paid old companies in cash. Give journal entries necessary to set up property accounts and credit old companies with their prorata on the books of the new company. At the time of the consolidation the ledger accounts of the Star Brewing Company were as follows: 173 li Am. American Business and Accounting Encyclopedia 147 Real Estate and Buildings $250,000 Plant 247,000 Cash 1,000 Horses, Wagons and Harness 1,800 Office Furniture 1,200 $501,000 Capital Stock $400,000 Bills Payable 50,000 Accounts 51,000 $501,000 Make the proper journal entries to liquidate in stock of the new company the liabilities other than capital stock, to apportion the remain- ing stock and cash, and to close the books of the Star Brewing Company. SOLUTION. I. Find the prorata amounts due each company of the $2,000,000 new stock issued in excess of the total appraised value, $1,800,000. Smith. 11X200000 =$122,222.22+$22.22 To be paid Cash. 18 Young. 5X200000 = 55,555.56— $44.44 To be Paid Cash. 18 Star. 2X200000 = 22,222.22+$22.22 To be Paid Cash. 18 $200,000.00 Young pays Smith and Star each $22.22 cash, and the even amount ot stock of the consolidated company will stand: Smith $122,200+$1,100,000=$1,222,200 Young 55,600+ 500,000= 555,600 Star 22,200+ 200,000= 222,200 $200,000+$l,800,000=$2,000,000 Journal entries to open the books of the Universal Brewing Corpora- tion : ASSETS. » Real Estate and Buildings: Smith $680,000 Young 327,000 Star 126,000 Plant : Smith 390,000 Young 160,000 Star • 71,000 174 147 American Business and Accounting Encyclopedia Cash: Smith 15,000 Young 3,000 Star 1,000 Bills Receivable: Smith 10,000 Young 6,000 Horses, Wagons and Harness: Smith 4,000 Young 3,000 Star 1,500 Office Furniture: Smith 1,000 Young .... 1,000 Star 500 Bonus account 200,000 $2,000,000 To Smith Capital Stock $1,222,200 To Young Capital Stock 555,600 To Star Capital Stock 222,200 $2,000,000 STAR BREWING COMPANY. II. Consolidated Stock $222,200.00 Cash from Young oo oo $009 990 90 To Real Estate and Buildings $126,000.00 To Plant 71,000.00 To Cash 1,000.00 To Horses, Wagons and Harness 1,500.00 To Office Furniture 500.00 To Profit and Loss 22.222.22 Alt $900 099 OO Assets transferred to Universal Brewing Corporation in lieu of con- solidated stock, plus $22.22 cash. Balance profit. III. Profit and Loss Account $301,000 To Real Estate and Buildings $124,000 To Plant 176,000 To Horses, Wagons and Harness 300 "'. -) Office Furniture 700 $301,000 To close the property accounts, the losses being the difference be- tween the book values and the appraised values, i.e., $501,000— $200,000= $301,000. 175 \ (I Am. American Business and Accounting Encyclopedia 147-148 IV. To liquidate the liabilities, other than capital stock: Bills Payable $ 50,000 Accounts Payable 51,000 $101,000 To Universal Brewing Cor. Stock $101,000 1010 Shares, par value $100, transferred to creditors in full payment of all debts as per agreement. To close the books of the Star Brewing Company. Old Capital Stock $400,000.00 To Universal Brewing Cor. Stock $121,200.00 To Cash 22.22 To Profit and Loss 278,777.78 $400,000.00 $222,200— $101,000=$121,200. FINAL PROFIT AND LOSS ACCOUNT, STAR BREWING CO. VI. Consolidated Stock and Cash from Voung Co. .$ 22,222.22 Old Capital Stock to Close Assets $301,000.00 Books 278,777.78 Shrinkage in values Loss Sustained , $301,000.00 $301,000.00 CONSOLIDATED BALANCE SHEET. Consolidated Stock — Smith Co: $1,222,200 Assets $1,800,000 Young Co 555,600 Bonus 200,000 Star Co 222,200 $2,000,000 $2,000,000 ( 148) AMORTIZATION. A term usually applied to the purchase of bonds at a premium, the latter being extinguished by the surplus interest earned. Also used in connection with the extinction of debts by means of the establishment of sinking funds, or the gradual wiping out, on the books, of the purchase price of a lease. In the following example the interest and depreciation is termed the amortization rate. LEASE ACCOUNT. 1894. Dr. Cr. June 1 Purchase price $11,230.00 1895. May 31 5% interest 962.50 176 148 American Business and Accounting Encyclopedia Am. Depreciation $ 2,598.45 Balance 9,214.05 $11,812.50 $11,812.50 1896. May 31 Balance forward $ 9,214.05 5% interest 460.70 Depreciation $ 2,598.43 Balance 7,076.30 $ 9,674.75 $ 9,674.75 1897. May 31 Balance forward $7,076.30 5% interest 353.80 Depreciation $ 2,598.45 Balance 4,831.65 $ 7,430.10 $ 7,430.10 1898. May 31 Balance forward $4,831.65 5% interest 241.58 Depreciation $ 2,598.45 Balance 2,474.78 $ 5,073.23 $ 5,073.23 1899. May 31 Balance forward $2,474.78 5% interest 123.67 Depreciation $ 2,598.45 $ 2,598.45 $ 2,598.43 The state authorities of New York have recently required all savings banks under their supervision to carry bond investments at cost (prin- cipal and premium), and to reduce the premium by amortization so that at maturity the bonds will stand at par. The appended example shows a serial bond of $2,000 at 4J/ per cent repayable in four equal annual instalments. DATE PAR VALUE TRUE 1 NTERtar AMORTI- ZATION INVESTMENT VALUE lOOT Tti Iv /y 200Q 00 202S 4.0 I906 t Jc4ly 15 1 500 00 f-5 45 57 23 4 4. 45 77 20 re 15 14 97 SO 1909 Jat). July 15 IS / 000 00 3'4- 33 07 90 3 3 4S 60 / 51 /oo 7 77 11 /©lo Jap. Jcily 15 IS 9oo 00 £2 66 32 39 ( 004 So a as 4-6 1 911 Jo 9. IS II 1 1 ZZ 24 roi TOO 24. 177 Am.-An, American Business and Accounting Encyclopedia 149-152 (149) AMOUNT. The sum, total of two or more numbers or quantities; the aggregate, or value. Thus, the amount of 5 + 6, is 11. Gross amount is a term used to represent the aggregate without deduction ; net amount represents the aggregate less reduction. (150) ANALYSIS OF LEDGER. An expedient frequently used by accountants for the purpose of balancing ledgers where the books have been kept in a very slipshod or careless manner, and where the entries are difficult to decipher. Ruled sheets of paper are used for this purpose, separate columns being allotted to each account, the debits and credits to these accounts being entered in the proper columns from the books from which the postings have been made to the ledgers. The analysis thus becomes practically a transcript of the ledger, but obtained independently, and the accounts can then be compared with the accounts in the ledgers and all differences examined and corrected. Columns are also provided on the analysis sheets for each book from which the postings are made, such as sales book, purchase record, cash book, journal, etc., and each posting to a ledger account is counter- balanced by an entry in the column allotted to the book from which the entry is posted. At the completion of the analysis, the footings of the columns for sales book, cash book, etc., should agree with the totals of these books, while the total of each account should agree with the total of the amounts posted to the said account in the ledgers. A recapitulation sheet is also made of the totals of the analysis sheets, and the balances, thus obtained should agree with the trial balance taken from the ledgers. This is a very laborious and costly process, and is only resorted to where it is evident that the books of account are in a very unsatisfactory condition. In cases where arbitrary postings have been made to the ledger, this method of checking will locate such postings by comparison of the accounts. (151) ANNUAL STATEMENT. A statement prepared at the close of the fiscal, or business year, exhibiting the financial condition of the business and the result of its transactions during the period reviewed. (See Balance Sheets.) (152) ANNUITIES. By an annuity is meant a periodical payment, made annually, or at more frequent intervals, either for a fixed term of years, or during the continuance of a given life or a combination of lives, as will be more fully explained further on. In technical language an annuity is said to be payable for an assigned status, this being a" general word chosen in preference to such words as "time," "term," or "period," because it may include more readily either a term of years certain, or a life or a com- 17B 152 American Business and Accounting Encyclopedia AN. bination of lives. The magnitude of the, annuity is the sum to be paid (and received) in the course of each year. Thus if $100 is to be received each year by a person, he is said to have an annuity of $100. If the payments are made half yearly, it is sometimes said that he has "a half- yearly annuity of $100"; but to avoid ambiguity, it is more commonly said he has an annuity of $100, payable by half-yearly instalments. The former expression, if clearly understood, is preferable on account of its brevity. So we may have quarterly, monthly, weekly, dailv annuities, when the annuity is payable by quarterly, monthly, weekly, or daily instalments. An annuity is considered as accruing during each instant of the status for which it is enjoyed, although it is only payable at fixed intervals. If an annuity is payable for a term of years independent of any contin- gency, it is called an annuity certain ; if it is to continue forever, it is called a perpetuity ; and if in the latter case it is not to commence until after a term of years, it is called a deferred perpetuity. An annuity depending on the continuance of an assigned life, or lives, is sometimes called a life annuity; but more commonly the simple term "annuity" is understood to mean a life annuity, unless the contrary is stated. A life annuity, to cease in any event after a certain term of years, is called a temporary annuity. The holder of annuity is called an annuitant, and the person on whose life the annuity depends is called the nominee. If not otherwise stated, it is always understoood that an annuity is payable yearly, and that the annual payment (or rent, as it is sometimes called) is £1. Of late years, however, it has become customary to con- sider the annual payment to be, not £1, but simply 1, the reader supply- ing whatever monetary unit he pleases, whether pound, dollar, franc, thaler, etc. It is much to be desired that this course should be followed in any tables that may be published in the future. The annuity it will be observed, is the totality of the payments to be made (and received), and is so understood by all writers on the subject; but some have also used the word to denote an individual payment (for rent), speaking, for instance, if the first or second year's annuity— a practice which is cal- culated to introduce confusion, and should, therefore, be carefully avoided. The theory of annuities certain is a simple application of algebra to the fundamental idea of compound interest. According to this idea, any sum of money invested, or put out at interest, is increased at the end of a year by the addition to it of interest at a certain rate; and at the end of a second year, the interest of the first year, as well as the original sum, is increased in the same proportion, and so on to the end of the last year— the interest being, in technical language, converted into principal yearly. Thus, if the rate of interest is 5 per cent, $5 improved at interest will amount at the end of a year to $5.25, or in conformity with a previous remark, 1 will at the end of a year amount to 1.05. At the end of a second year this will be increased in the same ratio, and then amount to (1.05)2. 170 I* i-oifctfa An. American Business and Accounting Encyclopedia 152-133 • , I In the same way, at the end of a third year, it will amount to (1.05)3, and so on. We pass on now to the consideration of the theory of life annuities. This is based upon a knowledge of the rate of mortality among mankind in general, or among the particular class of persons on whose lives the annuities depend. If a simple mathematical law could be discovered which the mortality followed, then a mathematical formula could be given for the value of a life annuity, in the same way as we give above the formula for the value of an annuity certain. In the early stage of the science, Demoivre propounded the very simple law of mortality which bears his name, and which is to the eflfect, that out of 86 children born alive 1 will die every year until the last dies between the ages of 85 and 86. The mortality, as determined by this law, agreed sufficiently well at the middle ages of life with the mortality deduced from the best observations of his time; but, as observations became more exact, the approximation was found to be not sufficiently close. This was particularly the case when it was desired to obtain value of joint life, contingent, or other complicated benefits. Xo simple formula, however, has yet been discovered that will represent the rate of mortality with sufficient accuracy; and those which satisfy this condition are too complicated for general use. (153) ANNUITY CALCULATIONS. These calculations depend upon well defined methods of ascertaining the incremental value of a sum of money under varying conditions, and also at any time during the "life" of the annuity, that is, the number ol years or months or other periods in which a certain prescribed amount is payable by will or otherwise, so as, at the end of the payments, to amount to a given sum. These sums are granted "in fee" (to a person and his heirs forever), for life (made a charge on an estate which is to end with the life of the donee) or for a series of years. As the interest on any one of the pay- ments in the series thus created does not fall due till the end of the period, this incremental feature is not claimable nor payable until the second period has begun in any case, so that we thus reach the general law that the claimant is entitled to receive during any period that the annuity has been running as many times the principal as periods plus as many times the interest as there are periods less one, subject however to certain abatements founded on the rules of compound interest alluded to further along, and some "present worth" calculations which diminish this amount to a greater or less degree. But a yearly payment say of $500 at 6 per cent simple interest amounts in six years, not to 6 times 500 plus 6 times 30, that is to $3,180, but to the sum of $500, $530, $560, $590, $620, $650 or $3,450. As annuitants have many forms of choice as to how and when they shall take their payments from the estate, some twenty forms of calcula- 180 153 American Business and Accounting Encyclopedia Ax. tion have arisen in reaching varying values of such "holdings" under dif- ferent conditions, values of the "accrued terms," we might say. Let us take a case where, for example, a man has worked eighteen months for a farmer at $20 per month, the wages remaining unpaid till the end of the term of service, to find how much is due the workman, at 6 per cent simple interest. In this most simple form of annuity illustration, the figuring takes the form of an attempt to strike an average for two successive periods in the payment, and use that as a basis for working out the result of all the periods; that is, 20 plus 20 plus .10 times 17 (the interest at 6 per cent for one less than the real number of periods) divided by 2, gives $21.70 for the value of an "average" term, and multiplying this by the number of terms (18) we have $375.30 as the amount due. Or, we might put it in this way: 20 times the number of months (18) plus one-half of sum of the interest increment for the time, that is, 18 times $1.70 divided by 2, giving the same result. In the same way, to use another illustration, if we have annuity of $150 running for 5^^ years, payable quarterly at V/z per cent, we would employ the formula: (150 plus 150 plus $2.25 times 21) divided by 2 (to get the average as above) and times 22 for the entire number of periods (that is four times 5^), giving when worked out the sum of $3,819.75 as the result, as the amount of the annuity. Now, in this connection, there arises an interesting feature of reckon- ing where, instead of taking two periods, one of which is, the other not an interest-bearing (accumulative) period, we are compelled to employ two periods in the reckoning, both of which are incremental in character, as in the problem where we wish to find in what time an annual pension of $500 will amount to $3,450 at 6 per cent simple interest; and the reason for the choice of two interest-bearing periods which are easily found, is that the number of periods in this case is not known ; whence arises the formula : $3,450 divided by (530 plus $560 divided by 2) plus 30 equals $3,450 divided by 575 or 6 (years) for the answer. We might derive a general working rule then as follows: Divide the amount of the annuity at the given rate by the increment for one period plus the average time for two periods, to get the number of terms. Again, since we have here the first term of an arithmetical progres- sion (500) the common diflFerence (30) and the sum of the series $3,450 to obtain both the number of terms and the last term ; whence arises the working formula, which is perhaps as good as any that can be devised, and it is of universal application : **C" representing the sum of the series, "a" the first term, "b" the common difference to find "d" the number of terms and "e" the last term; then we have: C divided by the formula (a plus b plus a plus 2 b) divided by 2 plus b, equals d (that is 6) ; represented in figures by the expression $3,450 181 An. Amf:rican Business and Accounting Encvclopedia 153 I I divided by one-half of 530 plus 560, plus 30. The leading feature in this method is that two increment bearing terms are used instead of the principal, or the first term simply as in other solutions, and since in dividing by 2 to get the average we lose the use of one of the elements, namely the 30 that is the common difference in working out the result, we have to add it again after the reduction of the fraction 530 plus 560 divided by 2, to restore it to its place in the solution. After obtaining "d," "e" is readily found. And the formula is one of universal application in this class of problems. Taking another case to show its working, we have one where it is required to find the rate per cent at which an annuity of $6,000 will amount to $59,760 in eight years, simple interest. Now comes first the formula 6,000 plus 6,000 plus 8 times a (the unknown term) divided by 2 and the result multiplied by 8, the number of terms (which we have given), and in working it out we reach finally the appar- ent value of a as being 840, but restoring its real value by dividing by 2 (because the value was doubled when clearing the first equation of frac- tional form to aid in the solution) we have the real value of a as 420, whence 6,000 divided by 420 gives 7 per cent as the required answer. In other cases the finding of the "valuation" of a series is of great simplicity, as where it is required to ascertain the initial value of a per- petual lease of $250 per year at 6 per cent, which is merely $250 divided by .06 or $4,166.66; but this is where the annuity is payable yearly; and if we go a step further and take cases where the payments are made at lesser periods, the solution becomes more difficult; as to find for illus- tration the value of a perpetual leasehold of $2,500 a year payable first semi-annually, and second quarterly, when it becomes necessary to take into consideration the fact that interest accumulates upon the yearly pay- ment and makes necessary a larger sum to meet the required number of annuity payments than where the annuity is payable yearly; in other words, the value of the "perpetual lease" above referred to in case of quarterly payments is $2,575 divided by .06, or $42,916.66 2-3, and where payable semi-annually it is $2,537.50 divided by .06, or $42,291.66 2-3, which are the required amounts to sustain the yearly or rather the above period- ical payments, and at the same time maintain the interest rates demanded in settlement of the estate in this case. It will be noted that the value when paid annually is really the present worth of the amount paid semi-annually, as shown by dividing $42,916.66 2-3 by 1.03. To extend this principle in a slightly different direction to reach cases of a "deferred" annuity (perpetuity), and find for instance the present worth of a deferred (forborne, as the old accounts used to call it), annuity of $250 a year, deferred say 8 years at 6 per cent. After obtaining as above the present value $4,166.66 2-3 by dividing by .06, and then taking the present value as a representative of the compound interest of a certain sum which invested will produce that amount, and 182 153 American Business and Accounting Encyclopedia Ax. dividing the $4,166.66 2-3 by the compound interest of $1 for eight years at 6 per cent, i. e., 1.5938481, we have $2,614.22 as the present value of the perpetuity which has been deferred eight years. This means the amount claimable by the beneficiary, who has been deprived for a series of years of his annual income under the above circumstances. And so to extend the illustration of principle a little further, if it is asked to find the present value of a perpetuity of $160 a year to commence in 3 years 4 months at 7 per cent. Solution: 160 divided by .07 gives $2,285.71 ; then the Compound interest at $1 for 4 years at 7 per cent is 1.310796 Compound interest of $1 for 3 years at 7 per cent is 1.225000 3) .085796 .028598 Adding this to the compound interest for 3 years 1.225043 we have 1.253641 as a divisor of the $2,285.71 above obtained, yielding a result of $1,823.28 for the present value required. It should be noted in this connection that in the drawing up of wills neither the main part of the text nor the codicils provide for the maximum amount which shall be payable in annuities with any degree of exactness, that is to say, for illustration, if a man dying leaves bequest of an annual payment of $1,500 to someone, the interest accumulations are never cal- culated upon, the term of years is not often exactly specified that the sum is to be paid, nor any conditions attached to its deferment on account of the absence, etc., of the beneficiary, or other reasons, nor what arrange- ments shall be made if the donee elects to take what will be his due for a series of years in advance, commencing at the end of such series of years to receive the annual payment under ordinary conditions again, and so on. There are some classes of cases, to be sure, where the codicil may defer the beginning of the payment for a series of years as where, for instance, it is required to ascertain the present value of an annuity of $680 to commence in 7 years and to continue for 10 years at 5 per cent, we first find the present value of $680 deferred 7 years at 5 per cent to be $9,665.27, i. e., $680 divided by .05 equals 13600, divided by 1.407,100 equals $9,665.27*; present value $680 deferred 17 years at 5 per cent, $5,933.64; present value $680 deferred 7 years, and to run 10 years, $3,731.63. But we must prepare ourselves for dealing, too, with a class of some- what related problems, but differing in the fact that there is no provision made for the deferred "commencement" of the payment of the annuity, which is here immediate, and so necessitates a difference in the figuring; 183 An. American Business and .accounting Encyclopedia 153-151 as for illustration, where it is required to find the deferred value of an "immediate" annuity of $300 running 18 years at 5 per cent, we find as before the principal which produces the annual payment of $300 by divid- ing by .06; but instead of using the compound interest itself of $1 for the 18 years, we employ the interest less the principal ; that is 1.4066192 not 2.4066192, and then on the calculation that this actual interest, de- prived of its one dollar of principal, and representing really the accumu- lative features of the principal (one dollar), and using it as a means of determining what $6,000 would accumulate under the same conditions, we have for the required result the sum of $8,439.72 as the deferred value of the annuity named above. On the same principle in solving a class of problems to see what could have been saved in a given number of years under various conditions, if the savings had been permitted to accumulate annually under the compound interest principles as where, for illustration, A pays $25 yearly for tobacco, to see how much better off he would have been in 40 years had he invested the sum at 10 per cent per annum, whence the formula 45.2592556 (less $1 principal as above); that is 44.2592556 times $25, giving $11,064.81 as the answer. Annuity tables can be purchased which will save the accountant the greater part of the trouble of calculating same for himself, when required to check up expenditures under this head, or to establish sinking funds, etc. (154) ANNUAL PAYMENTS OF PRINCIPAL AND INTEREST, HOW TO COMPUTE EQUAL. To ascertain the amount of the necessary instalment to be paid at the end of each year for a given number of years to liquidate a specified principal, with interest at a stated rate: Rule. To one year's interest upon the total principal at the stated rate, add the quotient of one year's interest divided by the compound interest upon $1 compounded at the stated rate for the given number of years. The result is the amount of the annual instalment. Illustration. Ascertain the amount of each instalment necessary to liquidate a debt of $20,000 to be paid in 16 yearly instalments, including interest at six per cent per annum. One year's interest at 6 per cent upon $20,000 $1,200.00 Compound interest at 6 per cent upon $1.00 coOTpO"n a- -A! , MiijK Cap ^ - *54i s 'Yrl la JP HT> bft .^ M OLO^lfiyAO Otfcbtc/ %4 1 C»..^ Co^Y Pi IM ^ if> l7< — A special form of bill can be used in duplicate, the original being handed to the customer with the goods, and the duplicate being retained as a record. The bills can be so devised as to perform the functions of an approbation sales book as above mentioned; thus saving the labor of making entries in a bound volume. In most businesses these departments, and the records of same, are not as satisfactory as they might be, and the attention of those who are obliged to send out goods to their patrons in this way is particularly directed to the form here presented. Sales on approbation sometimes remain out quite a long time, and where monthly statements of business conditions are required this record will be appreciated as giving full information in the best possible way. Regular sales checks are used by the store clerks for this class of sales, but they are printed in a distinctive color and carry a distinctive series of numbers. 189 Ap.-Ar. American Business and Accounting Encyclopedia 161-163 In most establishments we suppose posting would be made direct to customers' accounts from the "on credit" column and the total of that column dissected into departments, and the departmental totals posted to the credit of the regular sales accounts at the end of the month. (162) APPROXIMATE INVENTORY. A method of calculating inventory on hand by averaging percentages of profits on sales. (See Inventory.) (163) ARCHITECTS, ACCOUNTING FOR. Architecture is defined as the art of building according to principles which are determined not merely by the end the edifice is to serve, but by considerations of beauty and harmony. Architecture thus necessitates the possession by the builder of gifts of imagination as well as technical skill, and in all works of architecture properly so-called these elements must exist and are harmoniously combined. Both in form and pretentiousness has man's dwelling changed just as have changed the other environments of his evolution. As the changes of time made it necessary for him to seek other abodes than the shelter of caves and huts in trees, he gradually but surely drifted from the humbler to the more pretentious house that was built above, and not below, the ground. The architecture of today, however, is not the work of a few short years. The ideas of symmetry and proportion which are afterwards em- bodied in material structures could not have been evolved until at least a moderate degree of civilization had been reached, while the efforts of primative man in the construction of dwellings must have first been determined solely by his physical wants. Some architectural monuments there seem to be for each particular age, and the Egyptian pyramids, obelisks and temples, the Roman temples, amphitheaters and theaters, the Grecian temples, the Gothic architecture of England and the mosques of the Saracen countries and Arabia, testify to the grand ideas of the imaginative architects of the centuries. In our own days we see the architectural forms of other ages imitated in our churches and public buildings. At the present time there exists no form of architecture peculiarly distinctive. But no age that has passed required of the architect a greater knowledge of the laws of building or engineering than the erection of our present sky-scraping edifices, and although they may sacrifice beauty to income production, they will at least be monuments of our strenuous days. With the tremendous increase in large buildings in this country has come an evolution in the work in the architect's office, and the one-man ofHce is steadily being succeeded by companies and partnerships, together 190 163 American Business and Accounting Encyclopedia Ak. with branches for the handling of engineering plans in constructive work. So the offices are divided into their several departments callmg for the drawing of plans, writing of specifications and superintending of construc- tion In addition, where expert work is to be done, and there is no such expert connected with the office, outsiders are hired and paid in propor- tion to the nature of the questions to be solved. I submit in connection with these remarks a number of forms and their descriptions, so that the work of the architect's office may be followed. Upon calling at the architect's office the prospective builder gives a general idea of what his project is, and this is entered on the card, Form A-1, which is a concise expression of just what Mr. Builder wants to Jgtmes HendersoTi-Owner Introduced by — __ — Property I^ot on S VN^ corner P. I «/2W Voi Chestnut ■» Oak 3T5 x /375 Project 7 Story re- enforced concrete . office build in Refuted Preliminary p/ons ond e^timci^es do. If the owner has no definite idea as to the number of rooms or style of building he generally leaves the general get-up to the architect, telling him the limit to the amount of money to be expended. An agree- ment also is reached as to compensation, but the usual fee charged is five per cent of the value of the work. Preliminary sketches are then drawn so that an estimate of the cost may be reached. This estimate, however is not binding in any way upon either of the parties, and is given so that the owner will know just about how far his money will build, or how much money he will require for a given number of flats, stories in com- mercial building, or whatever the nature of the project may be. Before rents are fixed the exact estimates must be on hand, as first estimates can be exceeded as high as one-third when the contractors finally get their bids in. This phase of the business is well illustrated at the present time in San Francisco, where, on account of the tremendous price of materials and both the scarcity and high price of labor, it is almost impossible for a contractor to do any work at all. All estimates, of whatever the char- acter of building, are being exceeded by the proportion above quoted and 191 II Ar. American Business and Accounting Encvcloi'edia 163 CKfl». C. \/ar^der ^e\]o>>/ CL.AS6 - X A' I A6t6 rj£A. -»- bMENT6 »or\i' (3ALANCC some are even doubled, so high are materials and labor at the present time. If the estimate is acceptable to the builder, the architect goes to work on the preliminary sketches and drawings, and all correspondence be- tween the two is filed away, together with the cards relating to the parti- cular job. By this time the job has been given its distinctive number and letter, such as A-1 or A-3 as the case may be, and all further drawings, correspondence or the cards for filing, take that letter and number. Forms A-2 and A-3 illustrate this part of the process, showing the dates of meeting, when drawings are to be completed and turned over to owner, and such other information of importance to show when and how the building is started. Name No Date or Visit Date to DKArTlNA Boom Date moM DnArriNo Room Da,te to Owner Remarks ScniEs No. da mes Anderson P ' V^%6 v^%. ^/'fo* 6/30/ ■Rush A 1 For the carrying out of the architect's ideas of building, it is neces- sary that detailed drawings be given the contractor for the various parts of the building. When a contractor, or the owner, takes a drawing from the architect's office he must sign a receipt for same on back of Card 1, the idea being to eliminate any dispute as to whether or not the con- tractor got a certain drawing from the architect for this or that part of the structure. 163 American Business and Accounting Encvcloi'edia Ar. Architects' Estimate for Office Building or Warehouse. For thi? the architect makes a rough sketch of floor plan or section through walls, taking ofl; the quantities necessary for construction of same. For example such would be the itemized account: Excavating, grading and concrete. Brick work. Carpenter work. Plumbing. Painting. Wrought iron and steel. Cast iron. Various sundries and minor details. When quantity is ascertained, same is figured at current prices with which the architect is supposed to be familiar, thus being able to arrive at almost an accurate cost estimate. If the owner then figures 10 per cent advance over this, he will be fully protected. In figuring estimate on flats, the cost per cubic foot is figured on similar building and the cubic feet in new building, multiplied by this cost per cubic foot in previous structure. In this case due allowance must be made by architect of any change in price of materials. A cross filing system for the cards, one for names of builders and the other for job numbers and series, is used to systematize the office work. The work in the larger offices is divided into three branches. The drafting room takes care of all the drawing of plans. The specifications department writes up the details of the building as planned, and the super- intending department does the overseeing work, taking the place of the personal supervision of the head of the firm in this respect. Accounts are kept through the cash book with each of these departments to segregate the cost of running the office. Various contractors are usually invited to put in bids, based on the specifications that are given them. The lowest bidder generally gets the job, but it is within the province of the owner to reject any or all bids and call for new ones. A record is kept by the architect of each contract and of each contractor working on the job. This is illustrated by Cards 2 and 3, Card 2 showing dates of commencing, completion and notice to owner, and Card 3 showing the dates of payment to the contractor. Card 4, together with Forms x-1 and x-2 gives the details of the notices to the various contractors. Payments are made to the latter according to the nature of the con- tract, but a written certificate from the architect to the effect that such payment is due is necessary before the owner will make such payment. The main features of the contract are: 1 — Parties signing. 2 — ^Time. 192 193 Ar. American Business and Accounting Encyclopedia 163 - O .to tr> » ^1 - r» z 1 ' c o r •1 J < • CO • u 03 1 o z F u. •1 1^ 5"^ i i-o < ^ c= 1^ 2 S 5 (J ■: « t 2 O XI • V" -5 si rr4i tfcif • V-I U U Z :; g _ » > -* u ^£ . ^-i^i t - .. ^ 4 rJ p 01 z o « 3 ■» i' 1 to o (S 1 1 .« $ "0 . J < e to » o r »^ "i " ttr p i *l 4 f u ;< t u Ifi .(f ^ < or :« ^1 »- • o }\ ^ t-' <- i ,. s < o: H z o u O il ii 1 •'-(^ S 1 :^ ' 1 ^ p o^ 4 1 i!^ 1 ■ at x^ r- J P g "■ * o- o «) 9 ' ITS 5 f 1- ' O C o «• If re • u «E V « S 5{ z . . 3 ' 1 s « 1 163 American Business and Accounting Encyclopedia Ar. 3— Furnishing of detail drawings and materials to be furnished in accordance therewith. A — Added time for unpreventable delays. 5 — Location of building. 6— Amount and time of payments. 7 — Delay in paying by owner. 8— Carrying out of work including changes in plans. 9 — Selection of umpire in case of disputes. 10 — Damages for delay on contractor's part. 11— Damages to building by act of God to be borne by owner to the extent of what has been paid. 12— Payments on account are not an acceptance of the work, but owner must exercise due diligence in looking for and reporting defective parts. 13 Where contractor refuses to supply proper workmen and material, owner may do so and deduct a reasonable amount from the con- tract price. Ti B**^ C ^v (*■ week Z.r\ dir»6 _ (^/x'^/oG 1 IK ^^^^ Tc.ro I Pc- SERIES NO. MON TUES. WED. THUR FRI. SAT 6UN. HoOrs t>» of Labot*| I^ 5^i>c.ficnt.e' ^Jfm ^ni — Form 15. original architect it is usual and customary to appoint consulting architects to whom the owner looks for the carrying out of his work in the proper and best manner. "Clerk of the Works." Where a large undertaking is under way, one that calls for the constant attendance of an overseer, a man is em- ployed by the owner to check the delivery of all materials and payments for labor. He is called the clerk of the works. The record that he is to keep should show the delivery of all material used for the construction of the edifice, how many men are employed and what they receive, and that the class of materials is just what the specifications call for. This protects 196 163 American Business and Accounting Encyclopedia Ar. the owner from the delivery of substituted articles of lower grades than those contracted for. The presence of a clerk of the works, however, does not absolve the architect from visiting the building and seeing that it is being erected according to the plans and specifications, and he has the power to order out any material that is not right. When the contractor consideis his work completed he notifies the architect in writing to that effect and that he is ready for acceptance. CERTIFICATE FORM FOR CONTRACTORS TO BE PRESENTED TO OWNER San Francisco, 1906. o To , owner. This is to certify that the sum $5,000. .. .00, 100 Five Thousand s and 00,00 Dollars is due con- tractor, being the payment for. to .4. 2 No... Co Series. To.... Received payment, , Architect ., Contractor Form 16. The date of this is recorded on Card 2. The architect and the contractor visit the building together, inspect it thoroughly, and if the work is satis- factory to the architect who is acting as the agent of the owner, he gives the contractor a certificate to be presented to the owner for payment, and also notifies the latter to file his notice of the completion of the work. Final payment is not made until the notice of completion is given. "The architect will maintain strict watch on the building materials and the workmanship on the buildings, and his visits will be of such frequency and duration as are necessary for accomplishing the purpose. But the architect's superintendence will not include any liability nor will he be responsible for any breach of contract by the contractor." As the contractor is under bonds the owner is protected in the event of the former not carrying out his work properly. The main accounts in the office work will be for salaries and office expenses and the receipt of fees. The debit side of the cash book showing such receipts also shows the number of the payment. The credit side is divided to show the expenses of the three departments the work is divided into. Supplies that are used in the office are given out only on a signed 197 Ar. American Business and Accounting Encyclopedia 163-165 requisition, each one of which shows the job the draftsman is working on. These are charged to that account, together with salaries. Each weekly time sheet shows the number of hours that a draftsman puts in on a job and also the time that the specifications or superintending departments devote to it. To offset these charges are the fees received, the idea being to show as closely as possible the cost and return on each job. General office or administrative expenses are approximated on the direct charges. — (L. Joseph.) (164) ARITHMETIC. The science of numbers; the art of computation by figures. The sign of addition is derived from the initial letter of the word "Plus." In making the capital letter, it was made more and more care- lessly, until the top part of the P was placed near the center, and hence the plus sign was finally reached. The sign of subtraction was derived from the word minus. The word was first contracted into "mns" with a horizontal line above to indicate the contraction; then the letters were omitted, which left the short horizontal line. The multiplication sign was obtained by changing the plus sign into the letter X. This was done because multiplication is a short method of addition. Division was formerly indicated by placing the dividend above a. horizontal line and the divisor below. In order to save space in printing the dividend was placed to the left and the divisor to the right, and a dot was written in the place of each. (165) ARITHMETIC (AMUSING). A term employed to signify devices in the combination of figures by which surprising results are apparently obtained without effort. These devices are, however, of no practical value in commerce or mathematics. We append some illustrations. Addition. In this case the operator asks for a line of figures and sets them down as per line of the example. Underneath this line the operator writes another, adding sufficient to the figures in the first line to make 9's of each pair of figures. (See second line.) The operator now asks for another line, which is set down under the first two lines, adding a fourth line to make pairs of 9's as before. The operator then obtains the fifth line of figures, which is called the key line. By subtracting 2 from the last figure on the right and placing a 2 in front of the first figure on the left, the total is obtained. For three pairs of lines deduct 3 from the last figure on the right- hand and prefix 3 to the first on the left, and so on, with four pairs of 9's, etc. 198 165 American Business and Accounting Encyclopedia Ak. FIRST EXAMPLE. 4 8 5 3 6 2 8 1 2 7 5 !• 4 6 3 7 1 8 7 2 7 2 1 2 s 6 5 8 3 4 2 7 8 7 1 3 4 1 6 5 8 2 4 3 1 1 7 5 6 — — — — — — 2 8 2 4 3 1 1 7 5 4 SECOND EXAMPLE. 4 8 5 3 6 2 8 1 2 7 , 5 1 4 6 3 7 1 8 7 2 7 2 1 2 8 6 5 8 3 4 2 7 8 7 1 3 4 1 6 5 8 2 4 3 1 1 7 5 6 1 7 5 6 8 8 9 2 4 3 7 2 1 8 2 6 3 5 8 4 3 7 2 1 8 2 6 3 5 8 1 THIRD example. 4 8 5 3 6 2 8 1 2 7 5 1 4 6 3 7 1 8 7 2 7 2 1 2 8 6 5 8 3 4 2 7 8 7 1 3 4 1 6 5 8 2 4 3 1 1 7 5 6 1 7 5 6 8 8 9 2 4 3 7 2 1 s 2 6 3 5 8 4 2 7 8 1 7 3 6 4 1 5 1 2 2 4 5 5 6 5 1 8 4 1 2 2 4 5 5 6 5 1 4 Or, the first line may be made the key line, pairing the lines of 9's underneath. Multiplication. Multiply the following example as directed: 72 78 5616 Multiply the upper right hand figure by the lower right hand figure, 2X8, and place the product 16, in the answer. Then add 1 to the lower left hand figure, and multiply the upper left hand figure, 7X8, and place the product, 56, in the answer, to the left of the other two figures making a total product of 5616. Apply this rule to the following examples: 88 92 85 44 87 46 74 77 55 64 98 85 82 83 44 76 46 73 Multiply the following example as directed: 36 76 2736 199 99 64 65 65 58 52 Ar. American Business and Accounting Encyclopedia 165 Multiply the upper right hand figure by the lower right hand figure, 6X6, and place the product, 36, in the answer. Then multiply the upper left hand figure by the lower left hand figure, 3X7, and add to this product the lower right hand figure, which equals 21-f6=27; place this product in the answer to the kft of the other two figures, making a total product of 2736. Apply this rule to the following examples: 37 73 56 49 37 64 87 44 66 56 69 S8 99 27 Multiply the following as directed: 27 56 9& 84 1814 67 4024 68 65 64 82 75 37 45 44 22 35 88 63 46 44 24 2412 r24 36 28 2484 4704 2772 1104 Multiply the right hand figures together, and place the product in the answer. Next, multiply the left hand figures together, and place the product to the left of the preceding. Then multiply the diagonal figures together, the upper left by the lower right, and the upper right by the lower left, and add these products together, and place them under the first line, with the right hand figure in the place of lO's. The sum thus obtained will be the correct answer. Apply this rule to the following examples: 27 56 74 47 63 29 26 46 41 71 95 92 84 98 63 44 47 43 24 28 97 27 In the first example the short cut is due to the fact that the diagonal figures multiply together and added as above give, in the example worked out. 72 X 78=5616, a sum of 700 (8 X 70 + 70 X 2), which is equal to 1 X 700, and this added to 70 X 70=4,900, is the equivalent of 7 X 700 _j- 1 X 700, or 80 X 70. The same explanation applies to the second class of examples under this head, 88 X 64, where the upper figures are the same and the lower are complements of each other. In the second example of the above, the first case, 36 X 76=2736, is of two numbers, having the right hand figures alike and the left hand figures complements of each other. In this case the multiplication and addition of the diagonal figures gives 6 X 30 -f 70 X 6=100 X 6 or 600, which is exactly what is done in following the process prescribed. In the class of examples shown by the second case, the upi^er figures being com- l)lements of each other and the lower figures alike, the result is the same, l)ut. if the multiplier and nmltiplicand change places the example will be brought under the first head. Neither first nor second examj^les can be applied to the examples under the third example. Another illustration of multiplication, where there are two figures in 200 165 American Business and Accounting Encyclopedia Ar both multiplicand and multiplier, or three figures in multiplicand and two in multiplier, is as follows: 72 ,78 5616 8 X 2=16, then 8 X second figure of the multiplicand, 7=56; then second figure of multiplier 7X2 first figure of multiplicand=14 X 56 + 1 carried from 16=71. We then take the two second figures of multipher and multiplicand and multiply 7 X 7=49 + 7 carried from 71=56. Answer, 5616. , ^ i j Take 36 X 76 and apply the same rule as in the first example and we have 2736. So with 27 X 92, 56 X 84, 63 X 44. When there are three figures in multiplicand and two in multiplier, the followmg rule should applv Example: 732 X 68=49776. Rule-Multiply first figure ot mul- tiplicand by first figure of multiplier and we have 16; put down o and carry 1 Then multiply first figure of multiplier by second hgure of multiplicand=24 added to product of second figure of multiplier times hrst figure of multiplicand (12) we have 36 + 1=37. Then multiply second figure of multiplier by second figure of multiplicand (18) plus the product of first figure of multiplier times third figure of multiplicand {d6) equals 74 + 3 carried from 37=77. Then multiply the second figure of multipher by third figure of multiplicand (42) and add 7 carried from 77 equals 49. Thus we have 49776 as the answer. This rule can never fail if correctly applied. , , , • i- u If there are three figures in both multiplicand and multiplier the following rule applies: 236 417 98412 Multiply the first figures of multiplier and multiplicand and we have 42. First figure (7) of multiplier times second figure of multiplicand (21) added to product of second figure of multiplicand times first figure of multiplicand (6) equals 27 + 4=31. Then add products of second figures of multiplier and multiplicand and (3) first figure of multiplier times third figure of multiplicand (14); third figure of multiplier times first figure of multiplicand (24) equals 3 + 14 + 24=41 + 3 carried from 31 =44. Then add products of second figure of multiplier times third figure of multiplicand (2) third figure of multiplier times second figure of mul- tiplicand (12) equals 14 X 4 carried from 44=18. Then multiply third figure of multiplier and multiplicand (8) plus 1 carried from 18 we have 9. Answer 98412. To multiply by aliquot parts of 100, add two ciphers and divide what- ever fraction of 100 the multiplier is. Thus 28 X 25 is J4 of 100. 4)2800 700 Ans. 201 Ar.-As. American Business and Accounting Encyclopedia 165-168 These rules are easy, and when once fixed in the mind are never lost. Attention has been called to the number 142857, which is odd in more senses than one. If we multiply it by any number, from 1 up to 6, we arrive at products expressed by exactly the same figures as the original. Not only so, but with the exception that a different figure leads off each time, the order of the figures is the same. 142,857 multiplied by 1 is the same 142,857 multiplied by 2 is 285,714 142,857 multiplied by 3 is 428,571 142,857 multiplied by 4 is 571,428 142,857 multiplied by 5 is 714,285 142,857 multiplied by 6 is 857,142 With this multiplying by 6, the strangeness stops, though the result of multiplying the number by 7 gives the rather odd number, 99,999. (166) ARRANGEMENT OF ACCOUNTS. (See Classification.) (167 ARREARS. An amount overdue and unpaid, as, arrears of rent ; arrears of salary, etc. (168) ASSEMBLING OF COSTS. The proper assembling of the costs of various operations of various departments is by no means of the least importance in devising an efficient system of cost recording as on this depends, to a considerable extent, the value of the records for subsequent reference or comparison. There cannot, of course, be any hard and fast rule laid down, because what would be necessary in one establishment would be waste of time and energy in another. In some cases it is found convenient to issue sub-orders to the fore- men of the different departments and to assemble all particulars on the main production order. In other cases the amount of detail is so large as to necessitate a specially arranged cost record. In other cases where the operations are very simple and few it is considered sufficient to enter the particulars from time and material cards direct to a cost summary, computing the percentages of shop expense at the time of entry. At this point we will endeavor to explode a very common fallacy with which we frequently come in contact. The unprogressive cost accotintant, as well as the unprogressive gen- eral accountant, has a way of taking the position that what we present may be all right for some people, but he has no personal interest in it because the information is not suitable to the requirements of the con- cern with which he is at the moment connected. If he is employed at a furniture factory he doesn't want to know any- 202 168 American Business and Accounting Encyclopedia As. thing about the operations of a foundry because the information is of no use to him, etc. And yet, tomorrow the furniture manufacturing company may, from one reason or another, go out of business and the unprogressive accountant is turned loose on the field of business with a good recommen- dation to anyone desiring assistance in that particular line of business. Just then a large foundry concern needs a competent cost accountant and will engage the man who can convince them of his general knowledge of progressive and up-to-date cost accounting principles. But our unpro- gressive example is unable to apply his knowledge to any other business than that in which he has been previously employed. One would scarcely think it necessary to publish any reasons why the accountant should acquire the greatest variety of information possible, but we frequently meet those whose vision is entirely limited to their environ- ment. One method of assembling costs is by the use of an item or speci- fication sheet which covers all the operations to be performed and gives quantities and kind of material to be used and machines that must be operated in the process of production, a separate column being provided for each machine so that the labor is conveniently sectionalized. Thus a form of this nature may contain columns for smithing, punch, lathe, planer, miller, drill, and also for work at bench and in the assembling or fitting room. At the foot of the form space will be provided in which to note when the article is to be ready for assembling— to be tested, and shipped. This item or specification sheet is made in duplicate, the latter being kept in the main office. As the particulars are entered on the original they are copied on the duplicate, thus furnishing the general manager information each day as to the exact progress of each job. Another form of assembly record is arranged with separate columns for departments of production such as Shop No. 1, Shop No. 2, etc., and contains a complete record of the general or overhead expense to be borne by each department, the items being assembled after the following order: DIFFUSED CHARGES. Unproductive labor. Power. Depreciation. Supplies. General expense. Heat. Light. A comparison is then made between the total charges and the stan- dard cost unit. Another form of assembly record is by parts, each part having a distinctive number. This iB, of course, in connection with machines manufactured in large quantities, the cost of each part being compared with the standard units established. 203 DIRECT CHARGES. Material. Direct labor. As. American Business and Accounting Encyclopedia 168-169 The same kind of record is also used in the boot and shoe manufac- turing business where each upper, for example, should cost just the same as any other upper, while the labor in connection with cutting, fitting, last- ing, trimming, finishing, etc., is also governed by established standard units. In some establishments a cost record is also arranged as to contain full details of material used and labor performed, while a space is pro- vided at the right hand of the form for a summary which will include all indirect expense. The assembly sheet for a silver mine is arranged on the basis of the number of tons of ore mined, milled, or concentrated and is quite a for- midable array of statistics, the totals of which, divided by the number of tons, must conform to the standard unit per ton. The number of different departments in the building and contracting business is quite surprising, consisting of: Excavating. Stair work. Mason work. Plastering. Cement work. Painting. Stone work. Roofing. Carpenter work. Heating. Lumber. Electric work. Mill work. Glazing. Hardware. Tile— Bathroom— Mosaic. Sheet Metal work. Structural Iron work. (169) ASSESSMENT. A specific sum levied or assessed; a levy on stockholders based on their holdings of stock, for the purpose of raising additional capital with which to carry on the business, make up deficiencies, cover losses, make improvements, etc. A valuation of property by which the amount of taxation is deter- mined ; called an assessment roll. The levying of assessments on stockholders is usually subject to cer- tain conditions embodied in the corporation laws of the different states, and the state law must therefore be consulted when an assessment is under consideration by the directors of a corporation. These legal pro- visions limit the amount of assessment which may be levied in different cases, but as a rule whenever the full amount of capital stock has not been paid up it is permissible to levy the full amount unpaid in case the cor- poration finds itself unable to discharge its liabilities. It sometimes occurs that corporations are organized with the understanding that the stock subscribed need not be paid until required by the necessities of the busi- ness. A notice of assessment should contain full particulars as to authority by which levied, amount, when and where payable, and to whom, with a Venalty for failure to comply therewith. 204 169-171 - American Business and Accounting Encyclopedia As. The following is an example of a form of assessment notice which may be used: NOTICE OF ASSESSMENT. The Company, a corporation — principal place of business County, Notice is hereby given that at a meeting of the Board of Directors of said Company, held on the day of , 1 , an assessment. No , of ,. . dollars and cents ( ) per share was levied upon the capital stock of the said corporation, payable to at Any stock upon which this assessment shall remain unpaid on 1 , will be delinquent and advertised for sale at public auction, and unless payment is made before, will be sold on 1 , at .... o'clock M., to pay the delinquent assessment, together with costs of adver- tising and expenses of sale. Secretar}'. Office Dated 190 (170) ASSESSMENT RECORD. Where assessments are levied b}- a corporation, a special record of same should be kept after the following form : So far as the accounting necessary on the general books in regard to an assessment is concerned, the best plan is to open an assessment account, to which the total amount of the assessment as shown by the assessment record will be charged, "capital stock" being credited with an assessment for unpaid stock, and "working capital" credited with an assessment levied to make good losses or to meet emergencies. As the assessments are paid cash will be charged, and assessment account credited. (171) ASSETS. Property, possessions, resources. A real account representing intrinsic value. All property — realizable or unrealizable, real or contingent, upon which a value can be placed. "An expenditure upon a remunerative object." Assets are credits of the concern owning them, and form the basis of the credit such concern receives from the commercial community. Assets are considered as debits on ledger and trial balance, but in making up balance sheets, it is best to ignore the debit and credit element, and to consider only assets in contradistinction to liabilities. Thus the make up of the balance sheet may be arranged to suit the convenience of the maker as follows: 205 As. American Business and Accounting Encyclopedia 171 Assets Liabilities. or Liabilities. Assets. or Assets. Liabilities. or Liabilities. Assets. Assets and Expenses. Assets may be represented by cash on hand, inventories, accounts receivable ; expenses by advertising, stationery, post- age. The difference between asset accounts and expense accounts is really one of degree. In purchasing merchandise, for instance, cash is exchanged for something of equal value which can in turn be exchanged for cash by the purchaser. In purchasing advertising, or circulars for distribution, cash is exchanged for something the results of which are generally indirect and uncertain. Stationery, stamps, etc., actually on hand at date of taking inventory, are assets; the amounts expended and used represent an expense which reduces the profits of the business. One writer, therefore, differentiates assets and expense as follows: An asset account is charged with something received, and represents property on hand, maintaining or increasing capital invested. An expense account is charged with something disbursed, and repre- sents expenditures which decrease or impair capital invested. Assets may be differentiated into: Fixed Assets. — Are those which form a permanent and essential part of the business carried on, and the returns on account of which are not direct, but are received through the manipulation of circulating assets. This is the reason for the distinction made in the Individual Home Study Course in Higher Accounting, by a division into two classes, viz. : a. The property of the merchant prepared to do business. b. Values obtained with original capital for purposes of re-sale. Fixed assets are capital investments. Examples: Poles. Wires. Furniture and Fixtures. Patterns. Engines. Boilers. Meters. Active or Floating Assets. Those which vary in amount from day to day from sale, realization, exchange, etc., commodities purchased for re-sale or business circulation. Active assets are trading investments. 206 Right of Way. Road Bed. Real Estate. Buildings. Equipment. Machinery. Cars. Construction. Sinking Funds. River Dam. Coke Ovens. Abattoirs. Car Ferries. Station Buildings. 171-17^ American Busikess and Accounting Encyclopedia As. Inventories of all kinds of Mdse. on hand for sale. Diamonds. Liquors. Stocks and Bonds. Boots and Shoes. Examples : Cash. Accounts Receivable. Notes Receivable. Grain. Ice. Coal. Raw Material. Wasting Assets. These are usually classified as fixed assets, but a distinction is made because the more, for example, a mine is worked, the less ore or coal remains, so that while the mine was, in the first place, a capital asset (on which the capitalization of the mining corporation was based) at the end of a certain period the mine will be exhausted and only the equipment, plus a hole in the ground, remains to represent the investment. The best method of dealing with wasting assets will be considered under the specific heading. Passive Assets. These possess no intrinsic or realizable value, and in many cases simply consist of prepaid charges, preliminary corporation organization expenses, etc. As this class of charge is usually incurred for the benefit of business operations, not for one year only, but for many future years, it is considered proper and equitable to spread the extinction over several years so that the burden will not fall with too great weight on the business of one year: Examples : License. Bonus. Copyright. Charter. Promotion. Deputation. Franchise. Legal Expense. Further examples are : Active Assets. Bolts of cloth in a tailor shop ready to be made up into suits. Fixed Assets. Shoe lasts in a shoe manufacturer's plant. Sample photographs in a photographer's etudio. Passive Assets. Futures: The amount invested in stock where market values fluctuate from day to day. Advertising devices, being amounts expended on signs advertising a certain article. Theater Privilege : Being an amount paid to a city by a company for the privilege of carrying on a place of amusement. (172) ASSIGNEES' ACCOUNTS. The accounts of assignees, receivers and trustees are similar in nature and arranged on the same general principles. An account has to be kept of the assignor's property, showing how realized, and an account must also be kept of receipts and expenditures of the assignee, who charges himself with all receipts and takes credit for all authorized expenditures and remuneration for his services. A record must also be kept of all claims 207 As. American Business and Accounting Encyclopedia 172-173 I ii against the assignor's estate, such claims being properly proved before being allowed to rank for dividend. This record is ruled so as to show — amount of claim; amount at which claim is admitted; amount disallowed; amount of dividends; when paid; creditors' receipts. (173) ASSIGNED ACCOUNTS. Accounts assigned to a bank or other party for the purpose of realizing on same before they become due. As this method of discounting accounts receivable is not very common, we will illustrate it as follows: We will assume that W. H. Hunt & Co. have $12,000 out in accounts receivable, distributed as follows: Smith & Co., $2,000; Jones & Co.. $4,000; Brown & Co., $6,000. Wishing to raise immediately say $8,000, they communicate with their bankers, and having obtained their consent Forty-two to the loan, copies of each bill (representing the $12,000) are made in duplicate, and on the back of each is indorsed the usual "for value received we do hereby transfer, set over, etc." A statement is attached to each firm's bills, making each account complete. All the firms whose accounts are being assigned are then notified by Hunt & Co. of the fact, and the bills assigned are specifically mentioned. The bills are then sent to the bank accompanied by addressed and stamped envelopes, in order that they may have as little trouble as possible in the matter. This completes the preliminaries. The bank then makes a demand note for the amount of the loan ($8,000), which embodies the collateral on which the loan is made, i. e.. Smith, Jones and Brown's accounts, it being understood that the bank does not loan on the accounts but on the note, which is signed by Hunt & Co., and their account is then credited by the bank and loan account charged. Hunt & Co., first making a journal entry crediting Smith, Jones and Brown and charging assigned accounts, which is really an account against the bank. The reason for this entry is very plain. The moment the assignment is made to the bank, that moment the accounts of the three customers are settled as fully as though they had mailed checks for the proper amounts, so far as they are concerned ; but as a matter of fact the amounts are still "accounts receivable," the only change being the source from which the payment is to be received. Cash is then charged with $8,000 and the item is credited to loan account. Some might prefer calling this account bills payable, which is perfectly proper; but it has been found more desirable to separate it from the trade notes. The accounts affected by the above entries then stand as follows : Nov. 20 Mdse Nov. 15. SMITH & CO. $2,000 Nov. 26. JONES & CO. Mdse $4,000 Nov. 26. 208 Asgmt $2,000 Asgmt $*,0CO 173-174 American Business and Accounting Encvclopedia As-.At. BROWN & CO. Nov. 15. Mdse $6,000 Nov. 26. Asgmt $6,000 ASSIGNED ACCOUNTS. Nov. 26. Smith & Co $2,000 Nov. 26. Brown & Co 6.000 Nov. 26. Jones & Co 4,000 LOAN ACCOUNT (FIRST NAT'L BANK). Nov. 26 $8,000 CASH. Nov. 26. Loan $8,000 The bank receives Smith & Co.'s check for $2,000. They pass it to the credit of Hunt & Co. exactly the same as a deposit made in the regular way. Then a subsequent entry is made, charging H. & Co., and crediting loan. Hunt & Co. do exactly the same thing, i. e., charge cash and credit the bank (assigned accounts) and then credit cash and charge loan account. These are the methods applied by the borrower and lender. When the $8,000 has been received by the bank, it closes out the loan and makes up interest charge, which is deducted from the regular deposit account of Hunt & Co., the papers relating to the assignment and the note are all returned, and subsequent payments from Smith, etc., are received by the bank and credited up as straight deposits, while Hunt & Co. credit such payments to assigned accounts until it is closed. (174) ATTORNEYS, ACCOUNTING FOR. The following forms with explanations will show a simple yet accurate system for keeping accounts in an attorney's office. By means of special column cash-journal and fee book the moneys earned will be separately shown, together with details of expense accounts for running the office. The ledger will be one of separate sheets for each and every case, of sufficient size to enter all the details of any case or suit so that reference need not be made to any other book. Law offices at best are poorly equipped for book-keeping so that simplicity and original entry must be the dominating features of a successful system. Together with the regular account system, there is added a combina- tion journal-ledger for keeping accounts with estates in course of settle- ment. The pages for this book are so ruled that the income and expendi- tures will be shown in original form, no other books being necessary for entries. The balance of the cash on hand is shown by the "bank balance'* column as all money is immediately deposited in bank and withdrawn by check only. No cash accounts with estates are therefore necessary in the general cash book except for the receipt of the fees. In connection with this book a small memorandum estate book is kept in which is entered all the details of the will together with the separate- pieces of property, real or personal, that are a source of income or expen- diture so that reference can be made to this book from the journal-ledger 209 At. American Business and Accounting Encyctopedia 174 pages, where it would be impracticable to spread all this detailed infor- mation. The operation and description of the office system is as follows: (1) Office blotter or slate for details of new matter coming up. (2) Card calendar for laying out daily work. (3) Cash-journal for receipts and expenditures; also money advanced to clients for costs of suits and money received from them in return. (4) Single sheet three column ledger to contain costs in detail in debit column, credit money paid, and balance column for amount due. (5) Fee book for charging fees. Made out with duplicate extension sheets from which entries are posted. Extension sheet with columns for the several kinds of fees charged so that the total may be ascertained at end of month for posting. (6) Journal-ledger designed for estates to be used in connection with the foregoing. Debit side has wide column for receipts from all sources, bank column and bank balance column. Credit side has wide column for all expenditures, bank check column and column for all fees allowed by court. Original entries will be made on office blotter, fee book, and calendar cards and posting made thence to cash-journal or ledger and credited or charged in ledger when affecting personal accounts. Totals only of repre- sentative accounts posted monthly. Office slate is used by the entire office force. Card calendar is kept up by clerk keeping the accounts from memoranda furnished by the office clerks. Cards are arranged by days and can be filed ahead for any day or month. Cash is to be paid out on receipts or vouchers only. Clerks receiving money to be used for payment of costs of any client's account must give personal receipt for sarne, this to be the book-keeper's authority until the regular receipt for which the money is paid is turned in. The petty cash (for which column is provided in the cash-journal) embraces such items as car fare, entertainment, etc., a check to be drawn each month for as much as the account is estimated and the adjustment to be made monthly from details gained from petty cash memorandum book. New ledger accounts are opened from the details as written on office slate. MoNbAY-Nov.iv-igov. Vij0t0fSN3»k« of" I^rfrviwftj Rtr.arK> Ei)rfr.a • Offitei/tlf. i5 'i f,lt ej>l>fraijit (aye fJJ»yn n J Qeyj Ctr drpti-f'tj J)r Cfftij r/)ert a/u^ (»>t f-lt traitf'.jtr t^d tbp—i fit (hty Wljilt *\ i(Will>i wrf f«"* "t^f'IH J T'mm\ftr fit Form 1. Form 2. 210 174 American Business and Accounting Excvclopedia At. Representative Accounts. Client's accounts, payments — debited for moneys advanced and credited when same are repaid, balance showing amount due for advanced moneys. Client's accounts, fees — same as above. Fee account — credited monthly with total as added in fee book. Office furniture and library account — the library in law offices is quite an important feature not alone on account of the value of the books, but because there is a constant expense attached to the maintenance of the current reports from all over the United States. To the account charges will be made for all new books added. Rebinding and depreciation to be charged to expense and loss accounts respectively. Administrative expense — as per form showing the details of expenses for running expenses. Cash account and proprietor's account will complete trial balance accounts. The office slate — in diary form, each day having a page. Designed especially for parties calling in event of new cases or consultation. In bdtc NOINC Ftti (SflpK 9»T«il)(r Trial • Joufifat Casif fboo <' hi- T<«il« bdk NO.V ^ ""'" Ac(n Off" AdrviO'sfra^*.* £»pc Cr '.,.- Form 3 — Right Hand Page. Form 3 — ^Left Hand Page, addition, every call affecting the office work should be entered. In the remark column should be entered any special information gained in the interview. The entered column is for the use of the clerk keeping the accounts and is checked as items are written off. Card calendar — used in connection with office slate; a great many entries being made immediately from slate to cards for the day required. In addition original entries are made on the cards and posted thence to ledger and cash-journal as indicated. The current day's card is carefully gone over by the clerk at end of day and if a memorandum is found for future work it is transferred to the card of that day. The used cards are kept in transfer boxes arranged monthly. Cash-journal — the debit column contains name of client, amount of money received in return for that advanced for costs, payment of fees charged and bank column. The fee column is divided into respective fees 211 At. American Business and Accounting Encyclopedia 174 1 fONSUL TIN^t/i4 ouf ^fom ort^iiM/ «fii r-oietl /»^ Amounr ant/ kin^ «//•• c^ar^ed. Form 5. so that data is always on hand showing how much of each kind of fees charged is being paid. Totals are credited to client's account in the ledger. The total of clients' payments is credited at end of month to that ledger account. Credit side shows name of client and column for moneys paid for costs with a number column which is the designation of the kind of cost, as follows: Have a printed schedule of all costs likely to be used in connection with all suits and cases so that when the detailed cost charge is entered in the ledger debit column all that it is necessary to enter in the cash book credit side is the number of the cost item and the amount. This saves duplication. The costs in civil and criminal cases are always the same as far as caption is concerned, so that the schedule can be easily used. Total costs advanced charged to debit of client's account payment, in ledger. Office furniture and library account charged for new material and subscriptions. Administrative expenses are for the carrying on of the office work and include rent, clerk hire and stenographers, printing and stationery, telephone, telegraph and postage, petty cash for incidentals. The bank column for checks drawn and column for sundries (including proprietor's personal account) completes the credit side. II, Probate Cou't Of r%f«>t-i*. Wf Rm ph f>e« !•• i;v.-ai)<< 1 'Km ft. hr- bolt P*»'»»')T» All AdOuMt ^C")f Rtpe-rTtb rr-l ^'tpfr^ >> Form 6. Form 6. Ledger — each case has a separate page. The account is headed with name of party, date of first visit (from office slate) with all details neces- sary to a ready grasp of the steps that have been taken in connection with the case. Costs as charges being entered in detail, the ledger page shows the account in such form that no reference is necessary to other books. 212 174 American Business and Accoi nting Encyclopedia At. Fee book — made in check book form with the under duplicating sheet extending out from the original and ruled with columns for entering the amount of fee charged so that same can be added at end of month and posted in total to ledger account. Used with carbon and entry made from carbon copy, original going to client as bill. Journal-ledger for estates with bank column is so ruled that all the details concerning the income and expenditure of an estate in course of settlement can be entered without the use of any other books. The receipts are entered in the bank column and immediately deposited making the debit charge to cash. All payments bemg made by check on bank and entered in bank column (Cr.) the bank balance column shows the amount of cash on hand so that no other cash entries are necessary. Estates usually take eight to ten months for settlement, the final entries being the amounts distributed to legatees and the fees allowed by the court for administering. In connection with this book keep a memorandum estate book that shows the details of the will governing the distribution of the estates with the value of the separate pieces of property, names of legatees, etc., manner of distribution, and such items as are necessary for a complete under- standing of the course to be pursued. The fees allowed by the court to the attorney (proprietor) will go through the regular office cash-journal as other fees do. Dale First V.'iit Nature of Cote C«im At>im(d to Court ABp^fd Te fir^dl ^iJ^iiTicn 1 bfltt ftocK rft^ C>)^dai)dCost>Pci:d /- fill 1- H * ' Juir •*. SubpJi rfiHtisn t TranlctihT of feir,iru,n, f- Reporten fee* K B "^r i"btiid f Form 4. The net earnings of the business will be shown by gross fees charged during year, less administrative expenses, expense of maintaining library and office, depreciation on books and furniture. Close this amount into attorney proprietor account and when his withdrawals are deducted it will give the present worth. There are some offices that do not make a practice of advancing costs for clients, making the clients pay the costs of the case as it progresses. This, of course, makes the book-keeping much simpler, but with the above system any sized office can be accommodated and it is simple yet accurate enough to show the earnings of the same. — (L. Joseph.) 213 Au. American Business and Accounting Encyclopedia 175-176 (175) AUDIT. The examination of books of account to determine their accuracy, and the honesty of those interested. The objects of an audit have been defined as follows: 1. The detection of technical errors. 2. The detection of errors of principle which do not affect the accuracy of the figures. 3. The detection of fraud. Another authority states that the principles which should govern an audit are: 1st. The obvious principle that the books should be thoroughly examined and found to be in balance and all payments correctly vouched. In my humble opinion, no partial audit of a company's affairs is satis- factory. 2nd. An exhaustive survey of the results from past standpoints (where there are any), and any serious discrepancy noted with a view to careful inquiry. 3rd. An intelligent and conscientious review of the assets (and upon these an auditor of any experience and ability to gather information ought to form some definite opinion), in order to ascertain to the best of his judgment the true financial position. It is clearly laid down that where the services of an outside and independent valuer are employed, the auditor cannot go behind his certificate, but I suggest that in his report he should set out the fact of an outside valuation. But it appears to me that the auditor is not wise to accept the certificate of anyone inside the company, without making such examination as is possible, within the bounds of his experience. (176) AUDITING. The method employed or work performed in accomplishing an audit. The Scope of an Audit. In considering this subject we have to take into account the fact that it has by no means been authoritatively defined as to exactly what an efficient audit should cover. There has been con- siderable diversity of opinion as to the extent of probing which the term "auditing" should embrace, some maintaining that an audit should trace every entry to its original source, while others consider the verification of the trial balance from the books to be sufficient. It is often very difficult to convince a merchant of the value of the work for which he will be called upon to pay, and in such cases what may be termed "a condensed method of auditing" may be used, which will of course be subject to modifications made to suit the special conditions encountered. Such a condensed method of auditing will be hereafter described in detail. Checking Postings to Ledger. A great many auditors consider it necessary to check in detail the postings to the individual accounts receivable and payable, but it is usual in this country to take the ground 214 176 American Business and Accounting Encyclopedia Au^^ that if the general or representative accounts are found correct, no manipu- lation of the individual or personal accounts could remain undetected. The auditor does not devote any time to satisfying himself that a bill of goods bought by John Jones has been charged in error to John Smith. When John Smith gets the bill he will promptly attend to the rectification of error. The postings to customers and purchase accounts, however, are checked in bulk. The auditor satisfies himself that the total amount of charges called for by the sales book has gone into the ledger, as also the total amount of credits called for by the cash book, etc. As the trading statement will show the gross and net sales and purchases, there is very little chance of falsifying the merchandise account so that the falsification will not be detected. Books to be Audited. — These will comprise customers ledgers, pur- chase ledger, general or private ledger, cash book, petty cash book, cross- entry journal, purchase journal, sales journal, credit journal, pay roll, bills receivable book, bills payable book, trial balance book and any other extra- ordinary book, or books of original entry, from which postings may be made to the ledger, or the totals of which may be transferred from the auxiliary books to a book from which postings are made to the ledger. The importance of paying attention to the last mentioned detail can be illustrated by an accountant's experience in an audit where it was only accidentally discovered that the book-keeper used an auxiliary or "blotter" cash book, from which he transferred each day the items to the regular cash book, from which they were posted to the ledger. This "blotter" being examined, a comparison with the regular cash book disclosed the fact that the book-keeper had changed the entries so that for years he had been putting in his pocket not less than $10 every day, making fictitious credits to conceal the defalcation in the ledger, said credits being duly entered in the journal. Statistical Reports and Exhibits. — From the books above men- tioned the auditor compiles the following statements and exhibits, which, as a rule, will cover all the desired information. Where investigations are made for a special purpose the whole trend of the audit will naturally be directed along the special line and special statements will, in all prob- ability, be required. 1. Trial balance at commencement of period covered by audit. 2. Trial balance at close of period covered by audit. 3. Trial balance after closing the books. 4. Balance sheet, or statement of assets and liabilities. 5. Trading statements. Departmentalize as much as possible. 6. Profit and loss account. 7. Analysis of expense account and comparative statement when possible. 8. Statement showing analysis of merchandise account as appearing on the ledger (where a merchandise account is carried). 215 Au. American Business and Accounting Encyclopedia 176 9. List of bad or suspense accounts. 10. Schedule of bills receivable. 11. Schedule of bills payable. 12. Schedule of missing vouchers. Check-Marks.— It is usual for the auditor to use a distinctive check- mark by which he can readily distinguish his completed work. Some accountants, however, state that they make a point of accomplishing their work without placing a mark of any kind upon the books audited. This seems, however, to be a very risky method and would not be advisable unless the books audited were in the sole charge of the auditor during the examination. Particularly is this true where books of account are subject to a partial audit which is supposed to keep the work as much as possible up to date until the accounts receive their final checking. In order to prevent alterations being made after the books have been checked in this way, some accountants adopt a special form of check-mark upon all figures upon which a correction may appear. They afterwards look back over their work for corrections, erasures or alterations in order to see that nothing of the kind appears without the special check-mark. This special check-mark should be as much like the regular check-mark as possible, so that the book-keeper may not recognize the distinction. Cash and Bank.— The first task of an auditor upon undertaking an audit is usually to check the cash account both on hand and at bank according to the balance shown in the cash book. If some time has elapsed since the books were closed, add to the cash balance on hand the footings of all disbursements since that date, deduct the footing of the receipts, and the balance should agree with the cash on hand at date of closing as shown by the cash book. It should be particularly noted that no check for currency has been drawn but not entered on the cash book for the purpose of making up the amount which should be on hand. An audit is much facilitated when all receipts are deposited in the bank, and in any case it is useful to compare deposits made in bank with the receipts as shown by the cash book for the purpose of locating any large differences which need investigation. It has often happened that dis- honest cashiers have deposited amounts in the bank, omitting to enter same on the books, thus enabling them to appropriate a similar amount from the receipts which are entered on the books. Purchase Accounts.— It has been indicated above that accounts with creditors are frequently checked in bulk and not in detail. It will, how- ever, be necessary for the auditor to take particular notice that there has been no opportunity to charge purchases for employes to merchandise or expense accounts. Vouchers. The auditor should call for vouchers, not only for every expenditure entered on the cash book, but also for credits and allowances entered on the journal, the latter being fruitful ground for entries made to cover defalcations. There should also be vouchers for deductions from the 216 176 American Business and Accounting Encyclopedia Au amounts of customers' bills for freight, discount, etc. In a well ordered office such deductions are always O. K.'d by a responsible person who guarantees their accuracy to the auditor. The vouchers should be turned over to the auditor in order of date, and it is best also that they should be in numerical order. This, however, comes under the head of improvements which an auditor can generally suggest in his report. Discount. Where the information can be readily ascertained the auditor will allow for the usual cash discounts on both sales and purchases in making up his statements. Trade discounts must always be deducted, but this class of accounts is usually posted to the ledger "net." Fraudulent Error. — The detection of irregularities forms a large part of an auditor's duty, and he must always be on the watch for "clues" which may lead to discoveries. Customers' Accounts. — In cases of suspected embezzlement of collec- tions, statements should be mailed to all customers with a request that they verify the balance shown as owing. Arbitrary Entries. — One of the most trying conditions encountered by the auditor is when transfers are made from one account to another without originating from any book of original entry or when simple post- ings are made in the same manner. Such entries must necessarily cause a large amount of trouble and the auditor will know how to deal with them in his report. The proprietor of a business should promptly deal with such matters, as it is he who pays the bill. Location of Errors. — The detection of irregularities in books of account forms a large part of the duties of the auditor and accountant, the auditor exclusively employed by a large corporation, or the independent public accountant. One of the peculiarities of accounting in the United States commercial houses is that they prefer to have their books made of a paper on which erasures can easily be made without detection. Any sign of erasures, there- for, should be considered with suspicion, and the entries carefully followed up and checked back. The transfer of footings from page to page should also be carefully watched, as this is a frequent hiding place for peculations. It is a very common trick with fraudulent book-keepers or cashiers to bring footing ^ forward accurately in the first place until the cash book has been scrutin- ized by the proprietor. After he has found everything all right, he is not likely to look at those particular entries or that particular page again, and the footings brought forward can, therefore, be safely reduced on the receipt side or increased on the payment side. Vouchers should be demanded for all payments entered in cash book or petty cash book, and also for all journal credits to customers, etc., such vouchers to be properly O. K.'d by some responsible official who at the time was cognizant of the transaction. Six months hence no person in the business will be able to recollect why certain payments were made if no 217 Au. American Business and Accounting Encyclopedia 176 receipts can be found for same, or no authorized vouchers. A system of vouchers for journal credits should always be instituted for the reason that receipts may be diverted into the book-keeper's pocket and entered in the journal as a credit for goods returned, or for all allowances, or something of that kind. An embezzlement is more frequently connected with a clever manipulation of merchandise account than with anything else. Deductions from remittances on account of freight, expressage or dis- count are frequently taken advantage of, the amounts of said deductions being increased and the amount of the remittance decreased. These petty frauds are extremely difficult to locate, and can only be checked up by filing remittance letters as vouchers in order of date, so that even if all such letters are not compared with the entries a judicious selection can be made which will probably determine the fact as to whether the entries are correct. Another favorable location for embezzlement is in the pay roll of a large manufacturing concern, unless proper precautions and safeguards are adopted. It will be found quite possible to overcharge the wages earned by workmen who are in collusion with the superintendent, to insert "dummy" names, or for the cashier himself to foot up the pay roll suffi- ciently incorrect to give him a "rake-off" when he enters the wages paid in the cash book. The proper method of preventing defalcations of this kind is to have a complete system of record from the time the workman enters the factory until he leaves ; an automatic machine to register his arrival ; a job record book in which a clerk will register the work he is engaged on ; a cost ticket on which the workman will enter time occupied and material used on each job; cost summary from which another clerk will make up the total labor from the cost cards and the amount due each workman ; a pay roll book to be kept by another clerk which shall bring the labor of the different jobs'together for each man, and will show the amount due him, the amount which may have been advanced him, and the balance due on pay day. A form of receipt should then be issued to each workman showing the amount he is to receive, and on his presenting this form, duly signed, at the cash- ier's desk, he will be paid. There may also be irregularities in making deposits in the bank, outside of such irregularities as taking a few hundred dollars in currency to deposit and taking the train for Canada instead. Cases have been known in which deposits have been short for quite a lengthy period of time, the amount in the bank pass-book being made to agree with the amount shown on the books of account by omitting one or two entries toward the close of the month when the balance is taken. The only way to detect such intentional mistakes is, of course, to carefully compare the payments as per cash book, or check stub, with the payments entered in the cash book and to check the balance of cash on hand and at bank as shown by the cash book with the actual cash on hand at unexpected intervals, afterward depositing the 218 176 American Business and Accounting Encyclopedia Au. whole amount on hand in the bank so that there will be an accurate basis for further investigation if found desirable. Another method of embezzlement often employed is by paying invoices of goods purchased twice. This can easily be prevented by a good voucher system by which the bills to be paid are all attached to the voucher, and each bill is stamped by the officer who O. K.'d them as he reviews them. These bills cannot then be brought before him again because of the indorse- ment upon them, and in case a duplicate bill should be presented it would be the officer's duty to carefully investigate the matter before sanctioning its payment. Every invoice, also, before being presented for O. K. to the treasurer, should bear the O. K. of the shipping clerk, as being received in good order; of the superintendent (if it is a factory) ; or of the department manager (if it is a business divided into departments) ; of the purchasing agent in regard to price ; and of the book-keeper so far as accuracy of computation is concerned. The misappropriation of cash sales occurs very frequently in business houses where strict and proper methods of precaution are not used. The salesman may pocket the cash sale when receiving the money from the customer, or the cashier may pocket it on receiving the money from the salesman. The best method of protecting the merchant from this class of fraud is to use triplicate cash sales tickets, and to advertise to every cus- tomer that a receipt is given for every sale. This practically compels the salesman to make out a ticket for the customer. The salesman retains one of the carbons and hands the other to the cashier with the money. In case of an investigation the salesman's tickets and the cashier's tickets are com- pared. Both sets of tickets should be numbered and filed away consecu- tively. The best method to prevent defalcations in the keeping of petty cash is to have that duty performed by an assistant cashier, providing him with a separate book with which to enter his transactions. A check should be drawn to his order, which he will enter in the petty cash book as a receipt. At certain intervals he will account for all moneys expended to someone appointed to receive his report, and on this account being O. K.'d he will receive a check for the amount of his expenditures which will make the amount of cash in his hand equal to the amount originally given him. In the general ledger an account will be opened with the petty cashier, charg- ing him with all checks for which he is responsible, and crediting him with the amount of his expenditures, the difference showing each month the balance he has on hand. There are, of course, a number of other methods of making intentional errors for the purpose of concealing fraud, but it is impossible to attempt to describe them all, and the foregoing may be considered interesting examples which may be useful reading to anyone whose duty it is to supervise or check up the work of others. 219 Au. American Business and Accounting Encvclopedia 176 The responsibility of the auditor for errors or defalcations unlocated has been a matter of considerable discussion, but the general conclusion appears to be that he is not bound to do more than exercise reasonable care and skill. He does not guarantee that the books correctly show the position of a company's affairs, but he does guarantee that his investigation has been perfect to the best of his abiltiy and that his findings have been arrived at in the most careful and bona fide manner possible. The Valuation of Assets on the Balance Sheet. — ^The responsi- l)ility of the auditor for the values set down in a statement of assets and liabilities has not yet been defined in this country, and the auditor will as a rule, take the values as he find them, incorporating in his report such criticism and recommendations in regard to same as he may think best. This refers exclusively to an audit performed for the purpose of verifying the accuracy of books of account. Where an examination is made for intending purchasers of a business all values must be analyzed in detail, and only what are considered to be actual current values accepted of assets known to exist as represented. Depreciation. — It is the auditor's duty to see that proper provision is made for the depreciation of fixed assets, and that bad debts are elimin- ated from the statement of assets. Whether he will establish a reserve for bad and doubtful debts will depend upon the general conditions of the case. Charges for repairs should be carefully watched ; as it is quite usual for merchants to treat them as capital expenditures instead of as a charge to revenue for maintaining present values. This subject will be considered at length under its proper heading. Verification of Profits. — ^There has been considerable discussion as to the scope of an accountant's work when engaged to verify the profits of a business, some maintaining that it does not include an examination as to the accuracy of the books of account from which the profits are deter- mined. The only way, however, to verify a statement of profits made is to de- termine the truth of the figures from which such a statement is compiled, i. e., those figures which affect the trading, and profit and loss accounts. With regard to this important subject, which hinges so much upon the value of certain supposed assets which go to make up the alleged surplus shown by the books, such as accounts receivable (either trade or loans), etc., it may be well to quote the following: "It is no part of an auditor's duty to give advice, either to directors or to shareholders, as to what they ought to do. An auditor has nothing to do with the prudence or imprudence of making loans with or without security. It is nothing to him whether the business of a company is being conducted prudently or imprudently, profitably or unprofitably. It is nothing to him whether dividends are properly or improperly declared, provided he discharges his own duty to the shareholders. His business is 220 176 American Business and Accounting Excvclopedia Ar. to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that. But then comes the question : How is he to ascertain that position? The answer is, by examining the books of the company. But he does not discharge his duty by doing this without inquiry and without taking any trouble to see that the books them- selves show the company's true position. He must take reasonable care to ascertain that they do so. Unless he does this, his audit is worse than an idle farce. Assuming the books to be so kept as to show the true position of the company, the auditor has to frame a balance sheet showing that position according to the books, and to certify that the balance sheet presented is correct in that sense. But his first duty is to examine the books, not merely for the purpose of ascertaining what they do show, but also for the purpose of satisfying himself that they show the true financial position of the company." Unearned Profits. — It is a part of the auditor's duty to see that no unearned profits on uncompleted work, or on sales booked for future delivery are included in the period covered by the audit. One method of treating uncompleted work is to include the credit for a completed contract — for instance — and to open an account entitled "reserve for unfinished contracts," and charge to this account the estimated cost to complete. This applies only to contracts in an advanced stage. Condensed Auditing System. — \'erify the cash balance at date of commencement of audit with balances found in ledgers. On suitably ruled paper open accounts with all general ledger accounts and adjustment accounts with customers and purchase ledgers. Post up these accounts from cash book and cross entry journal, and post totals from purchase sales and credit journals to their respective representative accounts. Where the books are well kept and separate columns used for the different ledgers and for heavy posting accounts (such as cash sales, cash purchases, ex- SUMMAfiY OF ABSTRACT LEDGER NAMES or ACCOUNTS Copito Accounts Poyabl* Bill« Payable C««h onNand 'tat -OanK AccouAt« Baccivablc &. Heirpi* Bi>l» A«aaivafcl« R«a I tst«s cs Totits| Total Journal . u 23 3 Its 04 PosTiNbi roR sno'J Debits 7 * 97 17 13 So Crcd.ii 24 Total Ca«h Ceedit& B A I. A NCC 3EPT. I" ie»o Oe b> t« S^S a| tUIojI 711 |a|7|o|oj| laj tI^I i I ' |ai' fS 39 S9 Crc