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In its judgement, fulfillment of the order would involve violation of the copyright law. Author: Rosenkampff, Arthur Henry Title: Bookkeeping, theory and practice Place: New York Date: 1920 MASTER NEGATIVE # COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD Business 420 R722 Rosenkampff, Arthur Henry, 1884- Bookkeeping, theory and practice, by Arthur H. Eosen- kampff ... New York, The New York university press, 1920. xi, 230 p, forms. 23i"". (Half -title: New York university. School of commerce, accounts, and finance. Accounting series) 1. Bookkeeping. Library of Congress Copy 2. f) HF5635.R76 1920 [2, 24-14596 RESTRICTIONS ON USE: TECHNICAL MICROFORM DATA FILM SIZE: TBmvr] REDUCTION RATIO: Jai IMAGE PLACEMENT: lA /IIA) IB IIB DATE FILMED: ^'\'5-^^ TRACKING # : INITIALS: MSHOmi^ FILMED BY PRESERVATION RESOURCES, BETHLEHEM, PA. > CD O O O O O (f) X ■< M 01 3 3 > o m CD O cC/5 X < N M *>.^ ^^y^ %y^ a? • '^. ■/^. ^.J'^4^. 2.5 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 V <^ cr fo ^fp f^ m o Tj m "o OL,"0 3D7-L > C Cd I ^ -1 0(/) 5 m o m ■^ '^. ^-'^/^. '^,^^^. % -?p 1— » ro CJl _ 3 3 0) cr ABC cdef zS IS FGH jklm HIJKLMIM nnopqrst IJKLMN nopqrst |5 OPQR uvwxy >< JO Mc 1^ (/) r^5 a»x coz? OOM ox OOM VO O Coltimiita Winibtviitp tntfieCitpof^bi^orb LIBRARY fixjbool of 9uiiint%M of in n. / ,X ^' ^'^■'^' lll'%#fiypplv ) («'i7J-,ti7 tff^i^^^^ ^^4<»^ . ' / / / A' •/ 7 . ^ » 2. 3 (?. ^ '^ z e>o ■ ^^ I 7. y 9* 12, Mdse. sold H (f M « (( (I $500 200 300 100 SO He has reduced the amount which he owes us as follows: 19— Jan. 10, Cash rec'd on acct. $400 I4» Cash rec'd on balance 27, Cash rec'd 100 200 This summary of the transactions of John Doe with us is by far a more convenient and efficient arrangement than that shown m Illustration No. i. We are now in a position to tell quickly the amount which John Doe owes us, the amount of his purchases during any given period of time, the total amount of cash received from him the mvoices which remain unpaid, as well as the time taken by him m paying his bills ; all of which information is of interest to the proprietor. Ledger account in standard fomi.-If we supply the necessary ruling to the above account (Illustration 2), we have a ledger account in standard form. See Illustration 3, opposite Columns A and B are used for recording the date, column A for the month, column B for the number of the day The number of the year is written in the month column. Column C is used as an explanation column. Column D is commonly called the "Posting Reference" col- umn. Its purpose is to indicate briefly the book and folio on which the transaction was originally recorded. Columns E and F are money columns, E being used for dollars, and F for cents. The standard form of ledger account is divided into two sides : the left-hand side is known as the debit side ; and the nght-hand side is known as the credit side of the account. The ledger is the book in which accounts are kept, hence the term ledger account." Accounts are kept for the purpose of collecting all related debits and credits under proper titles INTENTIONAL SECOND EXPOSURE i^ It I LECTURE I Illustration No. 2 Account in Account Form JOHN DOE He owes us for merchandise sold him as follows: 19 — Jan. 2, & % 12, ap, Mdse. sold M U t€ U $500 200 300 100 50 He has reduced the amount which he owes us as follows: 19 — Jan. 10, Cash rec'd acct. 14, Cash rec'd balance 27, Cash rec'd on on $400 100 200 This summary of the transactions of John Doe with us is by far a more convenient and efficient arrangement than that shown in Illustration No. i. We are now in a position to tell quickly the amount which John Doe owes us, the amount of his purchases during any given period of time, the total amount of cash received from him the invoices which remain unpaid, as well as the time taken by him in paying his bills ; all of which information is of interest to the proprietor. Ledger account in standard form—If we supply the necessary ruling to the above account (Illustration 2), we have a ledger account in standard form. See Illustration 3, opposite Columns A and B are used for recording the date, column A tor the month, column B for the number of the day The number of the year is written in the month column. Column C is used as an explanation column. Column D is commonly called the "Posting Reference" col- umn. Its purpose is to indicate briefly the book and folio on which the transaction was originally recorded. Columns E and F are money columns, E being used for dollars, and F for cents. The standard form of ledger account is divided into two sides : the left-hand side is known as the debit side ; and the nght-hand side is known as the credit side of the account. The ledger is the book in which accounts are kept, hence the term ledger account." Accounts are kept for the purpose of collecting all related debits and credits under proper titles ^paat BOOKKEEPING, THEORY AND PRACTICE n |l! THEORY OF DEBIT AND CREDIT AS APPLIED TO PERSONAL ACCOUNTS Personal accounts defined.— By "personal accounts'^ is meant ledger accounts with persons such as customers, creditors, and the proprietor. Debtor defined.— A debtor is one who is in debt. Commer- cially the word "debtor" means one from whom a debt is due. Debit is a Latin word meaning, "He owes." It is used inter- changeably in business with Charge. Dr. is the abbreviation used for either debtor or debit. Debiting customers' accounts,— Thus, when we sold John Doe on Jan. 2, 5, and 9, merchandise in amount $500, $200, and $300, respectively, he became indebted to us, and we recorded the transactions on the left, or debit side of the account. The reason for using the left-hand side is that custom has sanctioned the use of the left-hand side as the debit side, and the right- hand side as the credit side. Illustration No. 4 Debtor. One who is in debt, or one from whom a debt is due. Debit. He owes. Dr. JOHN DOE $500.00 200.00 300.00 The account at this point reads : John Doe owes us, or is indebted to us on whose books this account appears, to the extent of $1000. Creditor defined.— A creditor is one who has trusted another. Commercially, "creditor" means one to whom a debt is due. Credit means, "He trusts." Cr. is the abbreviation used for either creditor or credit. Crediting creditors' accounts.— When we purchase $500 worth of merchandise from James Smith on time, he becomes a cred- itor of ours because he has trusted us to the extent of $500. Hence, his account must be credited. V LECTURE I Illustration No. 3 Creditor. One who has trusted us, or one to whom a debt is due: Credit. He trusts, or we owe. JAMES SMITH Cr. $500.00 The account at this point reads, James Smith has trusted us to the extent of $500, or we owe him $500. Crediting customers' accounts.-When John Doe on Jan. 10, ante t?l ^7""'"' '" "'' '^' ""^^""^ ^«^ ^^« recorded on the right-hand, or credit side, of the account. Illustration No. 6 Debtor. One who is in debt; one from whom a debt is due. Debit. He owes. Dr. JOHN DOE Cr. $500.00 200.00 300.00 $400.0Q The item of $400 on the right-hand side does not represent a debt due to John Doe nor was the entry made beZse he trusted us to the extent of $400. The reZon for credhW tL account >s that John Doe has decreased his indebtedness"' Z total $1000 which he owes us (as was done in Illustration No i) we record the item on the opposite side. The recording o" the' The debit side now exceeds the credit side by $600 An a count m th,s condition is called a debit halancl a^Treai^ John Doe, he owes us $600." ' I 8 BOOKKEEPING, THEORY AND PRACTICE Debit balance defined. — An account the total debits of which exceed the total credits is said to show a debit balance. Debiting creditors' accounts. — Let us assume that we pay James Smith $200 on account of our indebtedness of $500. Illustration No. 7 Creditor. One who has trusted us, or one to whom a debt is due. Credit. He trusts, or we owe. Dr. JAMES SMITH Cr. $200.00 $500.00 Smith's account is debited not because he owes us $200, but by virtue of the fact that we have reduced our indebtedness to him by $200. The credit side now exceeds the debit side by $300. An ac- count in this condition is called a credit balance and reads, "We are indebted to John Smith in the amount of $300." Credit balance defined. — An account, the total credits of which exceed the total debits, is said to show a credit balance. We may now formulate (from what we have done) rules for debiting and crediting customers* accounts and creditors' ac- counts. Rules for debiting and crediting customers' accounts: Debit for merchandise sold (see Illustration No. 4). Credit for cash received (see Illustration No. 6). Rules for crediting and debiting creditors' accounts: Credit for merchandise received (see Illustration No. 5.) Debit for cash paid (see Illustration No. 7). The proprietor's account — We have now disposed of two classes of personal accounts, viz., Customers' Accounts and Creditors' Accounts. A third class of personal accounts is that known as Proprietorship, or Capital Accounts. Rules for debiting and crediting the proprietor's account fol- low: The proprietor's account is credited with the amount of his investment. It is credited whenever additional investments of LECTURE I 9 capital are made to the business. It is debited for withdrawals of capital. Assuming that Arthur Reid starts in business January 2, 19 — , investing $10,000 in cash, his account would be credited as follows: Illustration No. 8 ARTHUR REID, PROPRIETOR $10,000 The proprietor's account is credited in order to show the amount which the business owes to the Proprietor, considering the Proprietor apart from the business. In order to distinguish between debts of the business to outsiders, and to the owner, the owner's account is usually headed "Capital," or "Proprietor." The Proprietor's Account does not represent a debt of the business to him, but shows his ownership in the business. Hence, in modern bookkeeping, the Proprietor's Account represents ownership and not a debt. This point will be explained more clearly in a subsequent chapter. Theory of the ledger account. — Arithmetically a ledger ac- count is a tabulation of additions and subtractions, or increases and decreases. The conclusion sought in the case of a customer's account is, '''How much the customer owes us." We have learned that custom has sanctioned the use of the left-hand side as the debit side and that "debit" means "he owes." Therefore all records of amounts which John Doe owed us were made on the debit side; and, since his payments reduced his indebtedness to us, they had to be subtracted in some way from the same side. In bookkeeping, when we ivish to subtract from any one side of an account, we record the item on the opposite side. Hence, all payments made to us by John Doe were recorded on the (opposite) credit side because they represented amounts to be subtracted from the debit side. lO BOOKKEEPING, THEORY AND PRACTICE Therefore, in the case of a customer's account, the debit side represents the additive or increase side, and the credit side the subtractive or decrease side. The conclusion sought in the case of a creditor's account is, "How much we owe him." Custom has sanctioned the use of the right-hand side of the accotmt as the credit side ; and, as we said, credit means "we owe." Therefore, a record of the amount which we owed James Smith was made on the credit side of the account; and, since our payment to him reduced our indebted- ness, it had to be subtracted from that side. But instead of subtracting the payment made to James Smith from the credit side, it was recorded on the (opposite) debit siide, an entry which brought about the same result. Illustration No. g Showing the additive or increase, and the subtractive or decrease sides of Customers* and Creditors' Accounts Additive or Subtractive or Subtractive or Additive or Increase Side Decrease Side Decrease Side Increase Side JOHN DOE JAMES SMITH Dr. (Customer) Cr. Dr. (Creditor) Cr. Mdse. sold $500 Cash rec'd $400 Cash paid $200 Mdse. Pur. $500 200 Entry was made Entry was made " 300 on this side be- on this side be- cause it repre- cause it repre- sents an amount sents an amount to be subtracted to be subtracted from the oppo- from the oppo- site side site side The terms "debit" and "credit" had their origin with personal accounts ; and, for that reason, personal accounts have been used in this instance to illustrate the use of these terms. In subsequent chapters, we shall explain the use of the terms "debit" and "credit" as applied to accounts other than personal accounts. ) LECTURE I II REVIEW QUESTIONS 1. Define bookkeeping. 2. Into how many sides is the standard ledger account divided ? Give the name of each side. 3. Why is the left-hand side and not the right-hand side used as the debit side? 4. A savings bank book reads : H. BANK IN ACCOUNT WITH A. B. Dr. Cr. 19— 19— Jan. I $100.00 Feb. 20 $20.00 March 15 50.00 Set up the account of A. B. on the books of the bank. 5. The account of John Doe is as follows : JOHN DOE 19— Feb. 10, Mdse. $500 Mar. II, Cash $500 20, Mar. 5, ID, « « u 200 800 1000 Apr. 25, May 10, n It 200 300 Apr. 16, u 500 19, u 700 (a) How much has he purchased to date? (b) How much has he paid to date? (c) How much does he still owe? (d) How does he pay his bills which are due in 30 days? (e) What invoices remain unpaid? 6. Set up ledger accounts for the following transactions: Jan. 2, 19— John Walker starts in business investing cash $15,000 3, " Purchased on acct. from L. Stem, merchandise.. 5,000 4, " Purchased on acct. from H. Cann. mdse 4,000 5, " Sold on acct. to J. Smith, mdse 4,000 10, " Sold on acct. to Bell & Co., mdse 2,000 V 12 12, 14, 16, 17, 20, 24, 25, « « (< BOOKKEEPING, THEORY AND PRACTICE J. Smith returns defective merchandise j qoo J. Smith pays by check on account j 'qoo Paid L. Stern on account 2^00 Returned to H. Cann defective mdse. ..^^........ 1I500 Paid L. Stem balance of account /qqq Purchased on account from L. Stem, merchandise 2*000 Received from J. Smith balance of account a'ooo LECTURES II-III DOUBLE ENTRY BOOKKEEPING Introductory. — ^We have learned that a business transaction is an exchange of value for value. Hence, every business trans- action has a twofold effect: something is received in exchange for something which is given or which is to be given, and vice versa. The system of bookkeeping whereby this twofold effect is recorded is known as the double entry system. Double entry bookkeeping defined.— Double entry bookkeep- ing is the system whereby the twofold effect of each business transaction is recorded. It is based on the principle of equi- librium or balance, i.e., on equal debits and equal credits in amount. By equal debits and equal credits in amount is meant that the total debit or debits made for each transaction must be equal in amount to the total credit or credits made. Hence, it is not a matter of the number of accounts debited or credited for each transaction, but rather a matter of amounts. The rule is that the amount of the debits and credits made for each transaction must always be equal. To illustrate: On Jan. 3, 19—, (see exercise No. i), we pur- chased from Bell & Co. on account, merchandise in amount $5000. From what we have learned, we know that Bell & Com- pany's account on our books must be credited to the extent of $50CX), because we are indebted to them for that amount. And, inasmuch as we wish to record the twofold effect, it follows that what was received must also be recorded. Hence, mer- chandise must be debited (because merchandise was received) with the same amount, $5000. Our entry, therefore, would be a debit to merchandise of $5000 (because merchandise was received), and a credit to Bell & Co. of $5000 (because we owe them that amount). 13 If i 14 BOOKKEEPING, THEORY AND PRACTICE Expressed in account form, the twofold effect is as follows : Illustration No. 10 Merchandise Bell & Co. $5,000.00 $5,000.00 Merchandise defined. — Merchandise is the name given to com- modities bought to be sold again for the purpose of making a profit. In the case of the proprietor who invested on Jan. i, 19 — , (see exercise No. i), $10,000 in cash, the twofold effect is as fol- lows: Illustration No. 11 Cash A. Reid, Prop. $10,000 $10,000 Cash must be debited with $10,000 because the business re- ceived cash, while the proprietor's account must be credited with the same amount to show the indebtedness of the business to the proprietor. Cash defined. — Cash is money or its equivalent (such as checks or money orders) generally accepted in payment of debts. In the case of Cann & Co. (our customer), to whom we sold on Jan. 4, 19 — , (see exercise No. i), merchandise in amount $2000, the twofold effect is as follows : Illustration No. is Merchandise Cann & Co. $2,000 $2,000 We must debit or charge Cann & Company's account with $2,000 because they owe us that amount, and we must credit merchandise with the same amoimt because we gave or parted with merchandise. In the case of Bell & Co., our creditor, to whom we paid on LECTURES II-III IS Jan. 12, 19 — . (see exercise No. i). cash on account in amount $1,500, the twofold effect is as follows: Illustration No. 13 Cash Bell & Co. $1,500 $1,500 We must debit, or charge. Bell & Company's account because we have reduced our indebtedness to them, and we must credit cash because we gave or parted with cash. If we consolidate the transactions shown in illustrations numbers 10 to 13 inclusive, the accounts would appear as fol- lows : Illustration No. 14 Merchandise Bell & Co. (r) $5,000 $2,000 (3) (4) $1,500 $5,000 (i) Cash (2) $10,000 $1,500 (4) Cann & Co. A. Reid, Proprietor (3) $2,000 $10,000 (2) Note that the numbers in parentheses indicate the double entry made. It will be observed (from illustration No. 14) that the mer- chandise and cash accounts, like customers' accounts, have the debit side as the additive side and the credit side as the sub- tractive side. Hence, the rules for debiting and crediting mer- chandise and cash accounts are the same as the rules for debit- ing and crediting customers' accounts. i6 BOOKKEEPING, THEORY AND PRACTICE Illustration No. 15 Rules for debiting and crediting merchandise and cash ac- counts : Merchandise (Debit) When received or increased. (Credit) When given or decreased. Cash (Debit) When received or increased. (Credit) When given or decreased. The same rules apply to all property accounts. Examples of property accounts commonly kept by most concerns are: furni- ture and fixtures, cash, and, in the case of a manufacturing concern, machinery, tools, land, and buildings, etc. We now have illustrated the double entry to be made for transactions involving a purchase and a sale of merchandise "on account." On account (on a/c) signifies that some person's account should be debited or credited. Such transactions are commonly called time transactions, signifying that payment is to be made at some designated time in the future. Thus, when we purchase merchandise without paying at the time of pur- chase, the transaction is said to be "on time," or on a/c, which means that the person or concern from whom we made the purchase is to be credited. Simple rules for debiting and crediting transactions "on a/c" are: Debit the customer or creditor. Credit what is given. See Illustration No. 12 and No. 13. Credit the customer or creditor. Debit what is received. See Illustration No. 10. If we pay for merchandise or other goods at the time of purchase, the transaction is said to be for cash. It is not cus- tomary in business to keep accounts with persons or concerns from whom we purchase or to whom we sell for cash. LECTURES II-III 17 To illustrate: If we purchase $1,000 worth of merchandise for cash, the twofold effect is as follows : Illustration No. 16 Merchandise Cash $1,000.00 $1,000.00 Merchandise must be debited because merchandise was re- ceived, and cash must be credited because cash was given. In the case of a sale of $500 worth of merchandise for cash, the twofold effect is as follows : Illustration No. 17 Merchandise Cash $500.00 $500.00 Cash must be debited because cash was received, and mer- chandise must be credited because merchandise was given. These are known as cash transactions. Simple rules for debiting and crediting cash transactions are: Debit what is received. Credit what is given. EXPENSE ACCOUNT What constitutes an item of expense.— We must distinguish between properties acquired by a business and expenses incurred by a business. A business acquires property when it receives, either for cash or on account, something which the business can again convert into cash. A business incurs expenses when it receives either for cash or on account, services, or goods to be consumed by the business itself. Double entry to be made covering items of expense.— When- ever the business receives services or purchases goods to be consumed, an appropriate expense account must be debited. Usually, separate expense accounts are kept to record the differ- ent services and goods received. For the time being, however, we shall use but one expense account, to which will be charged i8 BOOKKEEPING, THEORY AND PRACTICE f all services received, and goods purchased to be consumed by the business itself. For the purpose of illustration, let us consider the following transactions : * Jan. 2, ig— . Paid Jay Realty Co., $200, rent for the month. 4» l^— • Purchased on account from J. Slater, printed matter in amount $30. S> 19 — • Paid salaries for the week, $45. 6, 19 — , Purchased for cash, postage stamps in amount $ro. Before we can determine the accounts affected, it is necessary for us to decide whether we received property, services, or goods to be consumed by the business. In the transaction of: Jan. 2, We received services (use of premises) for which we paid $200 rent in cash. 4, We received goods to be consumed by the business (printed matter). And, as the purchase was made on account, we owe J. Slater $30. 5, We received services for which we paid our employees $45 sala- ries in cash. 6, We received goods to be consumed by the business (postage stamps), for which we paid $10 in cash. In each case, services or goods to be consumed by the business were received; therefore expense account must be debited. The double entry for each of the foregoing transactions ex- pressed in account form is as follows : Illustration No. 18 Expense Cash (i) Rent $200 (2) Station- ery and printing 30 (3) Salaries 45 (4) Postage 10 • J. Slater Station- ery and printing $30 (2) Rent $200 (i) Salaries 45 (3) Postage ID (4) LECTURES II-III 19 Note that the numbers in parentheses indicate the double entry made. It will be noticed that the "Expense Account," like the cus- tomers', merchandise, and cash accounts, has the debit side as the additive or increase side and the credit side a« the sub- tractive or decrease side. The rules for debiting and crediting Expense Account are as follows : Illustration No. ig Expense Account (Debit) When services or goods to be consumed are received or increased. (Credit) When goods to be con- sumed are returned or decreased; or when serv- ices originally charged to this account are de- creased. BOOKS OF ACCOUNT Books of account defined.— Books used for recording business transactions in terms of debit and credit are called books of account. Books of account may be divided into two classes, viz., books of original entry (technically called journals), and books of final entry (technically called ledgers). Books of original entry.— Journals are called books of original entry because the first or original record of every business transaction in books of account is made in a journal. Books of final entry.- Ledgers are called books of final entry because the final record of every business transaction is made m accounts kept in the ledger. Reasons for keeping books.-There are^hree main reasons tor keeping books, as follows : (1) To enable the proprietor to have a permanent record ot his business transactions for future reference ; (2) To enable him to tell what his financiaUondition is at any given time ; and . (3) To enable him to tell what his profit or loss has been for any given period of time. 20 BOOKKEEPING, THEORY AND PRACTICE I f This information may be secured by recording every business transaction in chronological order in a book of original entry, and then by classifying these transactions in accounts kept in the ledger. THE JOURNAL Introductory. — The making of a complete bookkeeping record requires the use of at least two books, viz., one book of original entry (a journal) and one book of final entry (a ledger). Trans- actions must be entered in a journal first before they can be recorded in accounts in the ledger. The need of two books. — Accounts, as we have learned, are kept for the purpose of collecting all related debits and credits under proper titles. In Illustration No. 3, we collected all the debits and credits relating to John Doe under the title John Doe, so as to be in a position to tell how much he owed us. It is possible to record transactions directly in accounts in the ledger. It is not. however, good practice to do so, for the following reasons : first, there is the need of another record of business transactions arranged in chronological order, so that we may refer to them by date of occurrence ; secondly, if we were to make entries directly in accounts in the ledger without first making a complete record of them in some other book, we should experience great difficulty in finding errors. For example, if we sold, let us say, $500 worth of merchandise to John Doe, and then debited the account of John Doe in the ledger with $500, but failed to credit the merchandise account with the same amount, we should experience great diffi- culty in checking back to find the error unless a record of the transaction had been made in some other book. Hence the need of at least two books. The functions of journals. — The functions of journals are to record business transactions in chronological order so as to provide a permanent record of business transactions and, at the same time, to classify business transactions in the terms of debit and credit so as to facilitate the transferring of these items to their respective accounts in the ledger. One or more books of original entry are used for recording business trans- actions. The book known as "The Journal" was at one time the only book of original entry used. In it were entered all the business transactions classified as to accounts and amounts to be debited and credited in the ledger. I Illustration No. 20 l:2' f%<%^<^LfU^ Vi6»^<^w*,».*»y X, t*i - ■f •••■i ! '<&-A.*-^ '^ ^^"YZf^JL^ ^i-«-tu«L*/>i ^. \- ^ ^>i^A4.<,4,«x/ ^ '^ M I rst: t'^:. 1 v/o ! ■/*« ^« • 1 -7* r-f *|T< A*. a^A A t tJL- Ot0*a ^0 • • O^- /».•. ^4 /:>«e. 'nt~i"r1-^T tl rr^ ^^4444+11 -t-i — LECTURES II-III 21 Technique of recording business transactions in the journal. For the purpose of illustrating the technique of recording busi- ness transactions in the journal, let us consider the first seven transactions in January. (Illustration No. 20). Column "a" is the posting reference column. In it is recorded the folio of the account in the ledger to which the item is trans- ferred. Column "b" is the classification and explanation column. In it, the accounts to be debited and credited are classified, and each entry is supported with a suitable explanation. Column "c" is the debit money column. In it are written the amounts to be debited to accounts in the ledger. Column "d" is the credit money column. In it are written the amounts to be credited to accounts in the ledger. Observe : (i) That the month and year are written but once at the top of each page ; (2) That the number of the day is written on a line by itself in the middle of the explanation column. (3) That the account to be debited is written close to the first line in the explanation column; the amount is written in the debit (first money) column. (4) That the account to be credited always follows the ac- count to be debited; that it begins about one inch to right of the debit entry; that it is introduced by the word "to"; and that the amount is written in the credit (second money) column. (5) That each entry is supported with a suitable explana- tion. The word "To" which is used to separate the debits from the credits may be eliminated from journal entries. It is used in expressing transactions orally without the use of the terms debit and credit. Thus the expression "Cash $10,000, to A. Reid, Proprietor," means the account first mentioned (cash) is to be debited, and the account followed by the wprd "to" is to be credited. In other words, the word "to" separates the accounts to be debited from the accounts to be credited. The process of recording transactions in books of original entry is called entering. The process of expressing transactions in journal style is called journalizing. The process of transferring items from books of original entry to their respective accounts in "The Udger" is called posting. r IINTENTIONAL SECOND EXPOSURE ^IIMVWIOip Illustration No. 20 LECTURES II-III /• 21 1 , I Technique of recording business transactions in the journal.— For the purpose of illustrating the technique of recording busi- ness transactions in the journal, let us consider the ifirst seven transactions in January. (Illustration No. 20). Column "a" is the posting reference column. In it is recorded the folio of the account in the ledger to which the item is trans- ferred. Column "b" is the classification and explanation column In It, the accounts to be debited and credited are classified, and each entry is supported with a suitable explanation. Column "c" is the debit money column. In it are written the amounts to be debited to accounts in the ledger. Column "d" is the credit money column. In it are written the amounts to be credited to accounts in the ledger. Observe : (i) That the month and year are written but once at the top of each page ; (2) That the number of the day is written on a line by Itself m the middle of the explanation column. (3) That the account to be debited is written close to the first Ime m the explanation column; the amount is written in the debit (first money) column. (4) That the account to be credited always follows the ac- count to be debited; that it begins about one inch to right of the debit entry; that it is introduced by the word "to"- and that the amount is written in the credit (second money) column (5) That each entry is supported with a suitable explana- tion. ^ The word "To" which is used to separate the debits from the credits may be eliminated from journal entries. It is used in expressing transactions orally without the use of the terms debit and credit. Thus the expression "Cash $10,000, to A. Reid, Proprietor, means the account first mentioned (cash) IS to be debited, and the account followed by the v^ord "to" is to be credited. In other words, the word "to" separates the accounts to be debited from the accounts to be credited ent^v'tn^'T'' "^ ''^^'^^^^'^^^ items from books of original 22 BOOKKEEPING, THEORY AND PRACTICE BUSINESS CUSTOMS AND METHODS Introductory.— We are now familiar with the manner in which business transactions are recorded in the journal, but we have yet to learn the sources of information from which entries are made in this book. Transactions are recorded in the journal and other books of original entry from memoranda known as business papers and forms. Illustrations of several forms and papers used in business will be found in Part III of this book. Recording purchase transactions.— Invoices received from creditors covering services received or goods purchased are known as purchase invoices. Purchase invoices are not entered in the books until the invoices have been approved as to quantity, quality, prices, extensions, and totals. A rubber stamp is usually used for the purpose of approving invoices. See Part III. The treatment of purchase transactions in the books of ac- count depends upon whether the transaction is for cash or on account, i.e., whether payment is to be made immediately or at some future time. As a rule, accounts are kept in the ledger for such creditors only from whom we purchase on account, i.e., it is not cus- tomary to keep in the ledger accounts for creditors whose in- voices are paid immediately when received. If payment is to be made immediately, as is usually the case with invoices covering rent, lighting, and telephone service, only one double entry is made. The procedure in this case is as follows: after the invoice is properly approved, a check is drawn; the payment is then recorded in a book of original entry ; and the invoice is placed in a "Paid Invoice" file. The record in the book of original entry is made from the check stub. It is customary when an entry is made from the check stub, to indicate by some symbol that the payment has been entered in a book of account. This is usually done by making a check mark ( V ) to the right of the amount on the check stub. If payment is to be made at some future time, i.e., if the transaction is on a/c, two double entries are made. The pro- cedure in this case is as follows : after the invoice is properly approved, it is recorded in a book of original entry and placed in an "Unpaid Invoice" file; when payment is to be made, a check is drawn and the payment is recorded in a book of orig- inal entry. The source of information from which the first r i LECTURES IMII 23 entry is made is the invoice received from the creditor; the source of information from which the second entry is made is the check stub. Let us assume for the purpose of illustration that we pur- chase merchandise in the amount of $50 from J. Smith for cash. In this case, only one double entry is necessary. Ex- pressed in account form, the double entry is as follows: Illustration No. 21 Merchandise Cash $50 $50 If, however, the purchase is on account, two double entries are necessary. The first entry is made on receipt of the in- voice; the second entry is made on paying the invoice. Ex- pressed in account form, the double entries are as follows : Illustration No. 22 Merchandise Cash (I) $50 $50 (2) J. Smith (2) $50 $50 (I) Note that the numbers indicate the double entries made. Recording sales transactions.- When goods are shipped to a customer on a/c, it is customary for the shipping department to issue a memorandum known as a "Shipping Ticket" or "Charge Ticket." Among other things, the Shipping Ticket shows the quantity, units, and description of goods shipped; the name and address of the consignee ; and how the shipment was routed. The Shipping Ticket is the source of information from which the sales invoice is written and the entry is made in the books. When a check is received from a customer, an entry is first made in the journal or cash journal ; it is then recorded on the deposit side of the check stub, endorsed, listed on a deposit Il 4i 24 BOOKKEEPING. THEORY AND PRACTICE II II slip, and deposited at the bank. For the form of the deposit slip and the endorsements, see Part III. QUESTIONS (i) Define double entry bookkeeping. (2) Does double entry mean that the same number of ac- counts must be debited and credited for each transaction? Ex- plain. (3) When is the "Merchandise Account" debited? When is it credited ? (4) When is the "Cash Account" debited? When is it credited ? (5) What is the nature of the items charged to the "Ex- pense Account" ? (6) Which of the following transactions should be charged to the "Expense Account"? Why? (a) Received invoice from Dean & Co., in amount $30, cover- ing purchase of an electric fan. (b) Paid by check, J. D. Full for repairs to desk, $10. (c) Paid by check, A. L. Dunn for ice, $5. (d) Paid by check. Crystal Co. for spring water, $10. (e) Paid by check. Burroughs Adding Machine Co., for adding machine, $150. (f) Paid by check, Collins & Co., for filing cabinet, $50. (7) Should we violate a principle of bookkeeping, if we were to record transactions as they occur, directly in accounts in the ledger? (8) In what order, as to accounts to be debited and credited in the ledger, do we record transactions in "The Journal" ? (9) What do the following expressions indicate, as to (a) accounts to be debited and credited in the ledger, (b) as to the nature of the transaction : (a) Cash $500, to John Doe. (b) Expense $10, to Cash. (c) Merchandise $2,000, to Field & Co. (d) Cash, $1,960, Expense $40, (Discount) to John Doe, $2,000. (e) Field & Co., $1,000, to Cash $980, Interest and Discount Earned, $20. (f) Cain & Co., $1,000, to Merchandise. (g) Furniture and Fixtures, $25, to Cash, (h) Furniture and Fixtures, $200, to O. Bliss. LECTURES II-III 2S (10) What is the source of information from which entries are made in the books of account for each of the following transactions : (a) A purchase on account. (b) Payments made. (c) A sale on account. (d) Payments received. I ( I LECTURE IV THE LEDGER Introductory. — In Lecture I, we explained that accounts are kept so that all related debits and credits may be collected under proper titles. The ledger is the book in which accounts are kept. Ledger defined. — The ledger is a book of account in which provision is made for the summation and the classification of all the debits and credits recorded in the books of the original entry. The ledger is known as a book of final entry because it is an established rule of bookkeeping that all entries in the ledger must be "posted," i.e., transferred from a journal and never made direct. Function of the ledger.— The function of the books that we call ledgers is to summarize in accounts all transactions recorded in the journals, so that the profit or loss and financial condition of the business may be ascertained. We are now familiar with the technique of recording trans- actions in the book known as "The Journal." We also under- stand that all transactions recorded in books of original entry such as "The Journal" must be transferred to their proper accounts in the ledger. We are now to learn how this is done. Posting defined. — Posting is the process of transferring items from journals to their proper accounts in the ledger. Items recorded as debits in books of original entry (journals) must be transferred to the debit side of accounts in the ledger; items recorded as credits must be transferred to the credit side of accounts in the ledger. Technique of posting.— For the purpose of illustrating the technique of posting, let us consider the first journal entry made in the practice set. See Illustration No. 23. The condi- tion of the accounts affected after posting this journal entry is also shown in Illustration No. 23. Note that the numbers in parentheses indicate the folios of the accounts in the ledger. 26 Illustration No. 23 ■y^*MrV«r*A y^ ^"'ftV/ ''./g- 4? A-tU. i_-S^ir^^^is i^-iLiLti . ijC t^ja -fo-o^-^JL- 7^ -. — 1 -( -|- — 1 1 .. . "*■ 1 f- 1 — I— ) — _— -|+ J - -H — -^- U --f— — — , — — - - _|_|_-_ ..L - >.... i J M^,gL i^-^7^^^:^ 'V r - z « « • « 4 ^ ^ • P 11 P^ c^ ■7^ o • hiL-Cvi''W<.. \^^L^^^_ Cfn^f-jLj,uCf^ /^ '^.A.aX ; (// / /4 €>A< pL^ JZ tf tf -./ JaA.^0 X I- t: •To* - 7» « • ^0 o - # « • • 1 Illustration No. 24 B ttx*^ ft Li •i. 4 f - ■■ t ■ ■ ' ^ < « fc^i^ '^•- >^t-r»-*l6^4-4-r aS.^ f a l!*L vS'j j':LJ:4jLf hh, ■>-i.ai.-wh)MiiilWB.„;^.l.|l | i ^ I WK II J M I I I Jmln ±.UlJ !tw!/'!^l*/. F LL ! J ! I I ■ It ^ Ci.M«> I ^» I '. ty «,t. ;• /« /* —t. A.- J I A^.4 ■7* • . i-^ / (i'f» ) ■ I 1/ M Illustration No. 24 c f — t JLuj^..:^ ^.. -d^.*^, fw H m^fitic. F v^o.o i( '' ^tfv^c xjj:^ ^ '6't«W»vw ;5^c^ ^^: ■3r j irfa fin ^ €.^ 2k ;a ^. -6>^ c . Ha i // /- - - \P^~ v; -c , r 1 — ' ■ ! \ \ ( i „, J, )trtu^sy ^.Ck^^^^ -G*^ Ux** l^ ^4> T^r ! i I tt i Illustration No. 24 D ^ CJ7A } ^ ^/).^6.. (, ^^nS: '^ <^^r#i ^cftJLjt, 'TS. ^ ^. .^^M^<^ /^. (^7; r T f ^^^V^-^^-^^y ..,.. y'-^^^^^ilw. /- I I I !l 4 o « 2 I LECTURE IV 27 Ik.... I Observe : (i) That the account title is written in the center of the page. ^ (2) That the date of entry as recorded in "The Journal^' IS written in the date column in the ledger. The number of the year is written in the month column but not on a separate line. (3) That the complementary account is written in the ex- planation column. (4) That the initial and folio of the book from which the Item is transferred is written in the posting reference column. (5) That the amount is written in the money column. (6) That, when an item is transferred to its account in the ledger, we so mdicate in "The Journal" by writing the ledger folio in the column originally intended for the number of the day. The procedure is first to make the entry in the ledger and then to mdicate in "The Journal," in the manner just described that the item has been transferred. * In Illustration No. 24, A, B, C, D, is shown the condition of accounts in the ledger after posting the January transac- tions. Complementary account defined.— A complementary account IS an account that is debited at the time another account is credited and vice versa. Theoreticafly a ledger account is incomplete if the explana- . tion columns do not contain the complementary accounts. Thus If postings are made to the debit side of any account, the ex- planation column of that account should contain the names of the complementary accounts that were credited. When the double entry consists of, say, one debit and four credits, the word sundry" is written in the explanation column of the account debited, indicating that several accounts were credited The advantage in writing the complementary account in the explanation column when posting to the ledger, is that the double entry made for any transaction can be determined with- out reference to the books of original entry. In spite of this advantage, the tendency is to ignore the explanations Practical suggestion.-Let us consider the account presented in Illustration No. 25. Observe, that as a result of writing the name of the complementary account of each transaction in the explanation column when posting, we are in a position to tell which double entry was made for each transaction |] »ll J INTENTIONAL SECOND EXPOSURE / O Q li i LECTURE IV 27 Observe : (i) That the account title is written in the center of the page. ^ (2) That the date of entry as recorded in "The Journal" is written in the date column in the ledger. The number of the year is written in the month column but not on a separate line. (3) That the complementary account is written in the ex- planation column. (4) That the initial and folio of the book from which the item is transferred is written in the posting reference column. (5) That the amount is written in the money column. (6) That, when ^ an item is transferred to its account in the ledger, we so mdicate in "The Journal" by writing the ledger folio in the column originally intended for the number of the day. The procedure is first to make the entry in the ledger and then to mdicate in "The Journal," in the manner just described, that the item has been transferred. In Illustration No. 24, A, B, C, D, is shown the condition of accounts in the ledger after posting the January transac- tions. Complementary account defined.-A complementary account IS an account that is debited at the time another account is credited and vice versa. Theoreticafly a ledger account is incomplete if the explana- tion columns do not contain the complementary accounts Thus If postings are made to the debit side of any account, the ex- planation column of that account should contain the names of the complementary accounts that were credited. When the double entry consists of, say, one debit and four credits, the word sundry" is written in the explanation column of the account debited, indicating that several accounts were credited The advantage in writing the complementary account in the explanation column when posting to the ledger, is that the double entry made for any transaction can be determined with- out reference to the books of original entry. In spite of this advantage, the tendency is to ignore the explanations. Practical suggestion.-Let us consider the account presented in Illustration No. 25. Observe, that as a result of writing the name of the complementary account of each transaction in the explanation column when posting, we are in a position to tell which double entry was made for each transaction I' I BOOKKEEPING, THEORY AND PRACTICE I I Let it be assumed that the cash received on Jan. lo and 15, was in payment of invoice of Jan. 5 ; that the cash received on Jan. 22, was in payment of invoice of Jan. 12 ; and that the cash received on Jan. 28, was in payment of invoice of Jan. 18. We must mark each payment as it is received, either by let- ter as was done above or by some other symbol, so that we may know against what invoice the payment applies. Unless we do so mark each payment received and the invoices paid, we shall experience difficulty in calling our customer's attention to the unpaid invoices. Note that, as a result of marking the payments received and the invoices paid, we are in a position to tell not only what invoices remain unpaid but also what invoices have been paid and when they have been paid. Transferring and Ruling Accounts. — The technique of trans- ferring accounts from one section or page to another and of ruling accounts is illustrated in Illustration No. 51. Footing Ledger Accounts. — Both sides of each ledger ac- count are footed at intervals or, at least, at the end of each month. The footings on each side are written in small, pen- cilled figures beneath the last amount — but not on the next line. See illustration No. 25. The ledger accounts are footed at the end of each month pre- paratory to taking a trial balance of the ledger. TRIAL BALANCE Trial balance defined. — ^''A trial balance is a statement of the ledger accounts prepared after the books of a concern have been posted up, but before the closing entries are made. It shows in two parallel money columns either the total of the debit side and the total of the credit side of each ledger account, or the differences between the debit side and the credit side of each ledger account." (Lisle.) Method used in practice. — In practice, however, it is the cus- tom in preparing a trial balance to take the difference between the debit side and the credit side of each ledger accotmt and then to total these differences. The object in taking a trial balance. — The object in taking a trial balance is to prove the mathematical accuracy of the ledger; i.e., to prove whether the total debit balances of ac- counts open in the ledger, are equal to the total credit balances. LECTURE IV 29 The procedure in taking a trial balance.— The procedure in taking a trial balance is as follows : (i) Put a heading on the trial balance sheet, which may consist either of sheets of standard, ruled journal or ledger paper, or of specially ruled sheets or books. (2) Foot both sides of each ledger account, writing the totals in small, pencilled figures beneath the last amount— but not on the next line. The balance of each account should be written in small, pencilled figures in the explanation column. The debit balances are written on the debit side; the credit balances on the credit side. This operation, and the one which follows, should be performed in the order here given. (3) On the trial balance sheet, list every account that has a balance, writing the folio, title of the account, and the amount on the same line. The amount of a debit balance is written in the debit column; that of a credit balance is written in the credit column. (4) Ignore accounts that are in balance. An account is in balance when the total of the debit side equals the total of the credit side. (5) Foot the columns on the trial balance sheet. If the total of the debit column is equal to the total of the credit column, the ledger is said to be in balance and it is then as- sumed that all postings have been correctly made. If the totals of the trial balance are not in agreement, it is apparent that one or more errors have been made which' must be found. Finding errors.— There are a few short-cut methods for find- ing errors in a trial balance. These methods, however, cannot be applied when more than one error has been made. When the difference between the trial-balance totals is not an apparent error in addition or subtraction, it may be due to the failure to post one amount, in which case the "error may be quickly found by going over the books of original entry and looking for the amount of the difference. If the amount of the difference is divisible by 2, the error may be the result of having posted an item to the debit side of an account instead of to the credit side, or vice versa. Such errors may be quickly found by going over the books of orig- inal entry and looking for an amount equal to half the amount of the difference. The operations explained in this and in the precedmg paragraph should be done at the same time ^\ P JO BOOKKEEPING, THEORY AND PRACTICE If the amount of the difference is divisible by 9, the error may be due to a transposition of figures. Such errors, how- ever, are more quickly found by checking back the postings. If the difference is, say, $100, or any decimal thereof, the error is m all probability one of addition or subtraction Such errors are frequently made in footing books of original entry ledger accounts, trial balances, and in extracting ledger balances! Therefore, before any attempt is made to apply short-cut methods, the ledger accounts should be gone over carefully and all amounts on the trial-balance sheet, including the totals, should be checked. The short-cut methods should then be applied- and, If the error is not then found, postings should be checked' Before changing the trial-balance figures, care should be taken to make m the ledger the necessary corrections of errors found. Some errors which a trial-balance wiU not reveal.— A ledger may be m balance and yet be incorrect because of errors which might have been made and which are not revealed by the trial- balance. Examples of such errors are : (1) The incorrect designation in the books of original entrv of the account to be debited or credited. (2) The incorrect statement in the books of original entrv of the amounts to be debited and credited. (3) The failure to record a transaction in the books of onginal entry. (4) The failure to post an entire transaction. (5) The posting of an item to the wrong account. (6) The reversing of the items when posting. (7) An error in footing the debit side of one account offset by a similar error of the same amount in footing the credit side ot the same or another account. A trial balance of the ledger as shown in Illustration No 24 is given in Illustration No. 26. ' CI) (2) (3) U) chant : QUESTIONS Define Ledger. Define Account. What is meant by "posting"? The following account appears in the ledger of a mer- Illustration No. 26 ^/, /f « i INTENTIONAL SECOND EXPOSURE I JO BOOKKEEPING, THEORY AND PRACTICE If the amount of the difference is divisible by 9 the error may be due to a transposition of figures. Such er'rors, how- ever, are more quickly found by checking back the postings. If the difference is, say, $100, or any decimal thereof, the error is m all probability one of addition or subtraction Such errors are frequently made in footing books of original entry ledger accounts, trial balances, and in extracting ledger balances' Therefore, before any attempt is made to apply short-cut methods, the ledger accounts should be gone over carefully and all amounts on the trial-balance sheet, including the totals, should be checked. The short-cut methods should then be applied- and, if the error is not then found, postings should be checked' Before changing the trial-balance figures, care should be taken to make m the ledger the necessary corrections of errors found Some errors which a trial-balance wiU not reveaL— A ledger may be m balance and yet be incorrect because of errors which might have been made and which are not revealed by the trial- balance. Examples of such errors are : (1) The incorrect designation in the books of original entry of the account to be debited or credited. (2) The incorrect statement in the books of original entry ot the amounts to be debited and credited. (3) The failure to record a transaction in the books of original entry. (4) The failure to post an entire transaction. (5) The posting of an item to the wrong account. (6) The reversing of the items when posting. (7) An error in footing the debit side of one account offset by a similar error of the same amount in footing the credit side ot the same or another account. A trial balance of the ledger as shown in Illustration No. 24 is given in Illustration No. 26. CO (2) (3) chant : QUESTIONS Define Ledger. Define Account. What is meant by "posting"? The following account appears in the ledger of a mer- Illustration No. 26 v>yL<«l*.«^ /.^i^u^ ^lU^Wi^fc* "^^ai -uV «^'S ^^^ .>7 ,15 X9.— ^^ /J .eU^ 4 \ LECTURE IV 31 JAMES CARROLL 19— Jan. 2 Mdse. J.ia 3 « J.ia 8 « J.3b 10 « J-3 $1,000 500 1500 800 19— Jan. 12 Cash C.2a 20 Mdse. J.5b 25 Cash C.4b on ac. 28 Cash C.4b $1500 200 500 800 (a) What is the balance of the account? What does it represent ? (b) How many books of original entry were used according to this account? (c) What was the nature of each transaction? And, what was the complementary entry made for each amount debited and credited to this account? (d) Against what invoice does each payment received apply ? (5) (a) (b) (c) (d) (e) What is a trial balance? When is a trial balance usually compiled? What does it prove? Name two short-cut methods for finding errors. Can short-cut methods be applied if more than one error has been made? (f) Name five errors which are not revealed by the trial balance. LECTURE V I CASH JOURNAL Cash journal defined. — A cash journal is a book of original entry in which are recorded cash receipts and cash payments. Form of the cash joumaL — The cash journal is divided into two sides ; viz., the receipt side and the payment side. The left- hand side of each double page is used for recording cash re- ceipts, and the right-hand side is used for recording cash pay- ments. Provision is usually made on each side of the cash journal for the following: date, account, explanation, post- ing reference, and several money columns. The nimiber of money columns varies to meet the individual needs. Hence, in practice, we very seldom find two cash books that are exactly alike. Methods of recording cash receipts and pa3mients. — Although the forms of cash books vary, yet, as to the method of record- ing receipts and payments, they are all alike, in that cash receipts are always recorded on the left-hand side and cash payments are always recorded on the right-hand side, except when separate journals are used, one for cash receipts, and one for cash payments. When a special journal, such as the "Cash Journal," is intro- duced, cash receipts and cash payments are no longer recorded in "The Journal," but instead are recorded in the "Cash Jour- nal" from which they are posted to accounts in the ledger. We have already learned that "The Journal" was at one time the only book of original entry used. But, when business began to be conducted on a larger scale and transactions became more numerous, thus making it impossible for one man to record all the transactions, it was found necessary to introduce special journals, such as the "Cash Journal." Advantages of the cash journal. — The introduction of a special journal, such as the "Cash Journal," has the advantage of enabling more than one man to work on the books at the same time. While one is engaged in recording cash receipts and cash payments in the "Cash Journal," the other may be engaged in recording sales and purchases in "The Journal," or in post- ing to the ledger. I 32 o 2 t t • 1 i !.M M I N 4—~*^~i- .-i— X=. 1 --l -4..--i=-=i i c • • V ' * * • H W H •» • ^ V V ^ • *♦ •'^ ff «K ¥ • "viM Wv, ■ i 1 1 ill l^ >. #1 ! Ml inj W \ ^ M 113 1 11 ^' .J • > ^ ^< .^ 1 > <« ■> J ^ VS" ^^ M ^ 1 ^ ^ ^ 5 ' ^1 \ J ) *■" LECTURE V 33 Furthermore, with the introduction of special journals, the amount of mechanical labor theretofore necessary in posting was greatly reduced. This reduction is due to the fact that, by recording all cash receipts and cash payments in a separate book, we no longer post the individual cash receipts and pay- ments to the cash account in the ledger, as was done in January. Instead, we make at the end of each month but one posting to the debit side of the cash account in the ledger of the total cash received, and one posting to the credit side of the cash account in the ledger of the total cash paid. The technique of recording cash receipts and pa5mients.— In order to illustrate the technique of recording transactions in the cash journal and posting to accounts in the ledger, Feb- ruary transactions, i.e., cash receipts and payments have been used (Illustration No. 2y). Observe on the receipt side of the cash journal: (i) That the actual amount of cash received is entered in the net cash column. (2) That the amount df discount deducted by customers is entered in the interest and discount column. (3) That the gross amount of the invoice is entered in the general column for posting to the credit of the customers' ac- count in the general ledger. (4) That the total of the net cash, and interest and discount columns is equal to the total of the general column, thus prov« mg that a double entry was made for each transaction. (5) That, at the end of the month, the net cash column is posted in total to the debit of Cash Account in the ledger. (6) That, at the end of the month, the interest and discount column is posted in total to the debit of Expense Account in the ledger. (7) That postings from the general column are made in detail to the credit of accounts in the ledger. In practice, ^hese postings are made daily. Observe on the payment side of the cash journal : (i) That the actual amount of cash paid is entered in the net cash column. (2) That the amount of discount deducted by us is entered in the interest and discount column. (3) That the gross amount of the invoice is entered in the general column for posting to the debit of the creditors' ac- counts in the general ledger. 7 '-1 1 1 INTENTIONAL SECOND EXPOSURE I o ««) 1 LECTURE V 33 Furthermore, with the introduction of special journals, the amount of mechanical labor theretofore necessary in posting was greatly reduced. This reduction is due to the fact that, by recording all cash receipts and cash payments in a separate book, we no longer post the individual cash receipts and pay- ments to the cash account in the ledger, as was done in January. Instead, we make at the end of each month but one posting to the debit side of the cash account in the ledger of the total cash received, and one posting to the credit side of the cash account m the ledger of the total cash paid. The technique of recording cash receipts and payments.— In order to illustrate the technique of recording transactions in the cash journal and posting to accounts in the ledger, Feb- ruary transactions, i.e., cash receipts and payments have been used (Illustration No. 2y). Observe on the receipt side of the cash journal : (1) That the actual amount of cash received is entered in the net cash column. (2) That the amount of discount deducted by customers is entered m the interest and discount column. (3) That the gross amount of the invoice is entered in the general column for posting to the credit of the customers' ac- count m the general ledger. (4) That the total of the net cash, and interest and discount columns is equal to the total of the general column, thus prov^ mg that a double entry was made for each transaction (5) That, at the end of the month, the net cash column is posted in total to the debit of Cash Account in the ledger (6) That, at the end of the month, the interest and discount t'heTd Z ^ '" '""^^^ '"^ '^^ "^"^^^ ""^ ^''P'"'^ "^"^^""^ ''' (7) That postings from the general column are made in detail to the credit of accounts in the ledger. In practice,^ these postings are made daily. Observe on the payment side of the cash journal : (1) That the actual amount of cash paid is entered in the net cash column. (2) That the amount of discount deducted by us is entered in the interest and discount column. (3) That the gross amount of the invoice is entered in the general column for posting to the debit of the creditors' ac- counts in the general ledger. 8 34 BOOKKEEPING. THEORY AND PRACTICE f (4) That the total of the net cash, and interest and discount columns is equal to the total of the general column, thus prov- ing that a double entry was made for each transaction. (5) That, at the end of the month, the net cash column is posted in total to the credit of Cash Account in the ledger. (6) That, at the end of the month, the interest and discount column is posted in total to the credit of Interest & Discount Earned Account in the ledger. (7) That postings from the general column are made in detail to the debit of accounts in the ledger. In practice, these postings are usually made daily. Balancing the cash book.— The cash book should be balanced periodically, but at least once a month. It is usually balanced at the end of each month by adding in the net cash column, to the total cash receipts for the month, the cash balance at the beginning of the month, and adding in the net cash column, to the total payments for the month, the cash balance at the end of the month. The balances are usually written in red ink to indicate that the amounts were inserted to make both sides equal, i.e., balance. Sometimes the cash balance is brought forward in the net cash column on the receipt side of cash, at the beginning of the month instead of at the end of the month. It is sometimes brought forward at the beginning of the month in both the net cash and general columns or in the general column only. If the cash balance is brought forward in the net cash column at the beginning of the month, the total of that column at the end of the month cannot be posted to the Cash Account in the ledger, since it does not represent the total cash receipts for the month. Thus the total cash receipts must be ascertained at the end of the month before the cash account can be debited. This is done by preparing a statement on the receipt side of the cash book at the end of the month. PETTY CASH JOURNAL Introductory.— It has become the practice in business to make all payments by check whenever possible. Payment for some transactions, however, can be made in currency only. Examples of such transactions are payments for : postage, carfare, ferry- mg auto, etc. Cash set aside for such purposes is called "petty cash." The book used for recording petty cash receipts and payments is called the "Petty Cash Journal." LECTURE V 35 Form of the petty cash joumaL— The form of the "Petty Cash Journal" varies to meet individual needs. It may consist of a simple book of standard journal ruling in which receipts are recorded on the left-hand side, and payments on the right- hand side of each double page ; or, it may take the form of a columnar ruled book in which provision is made for the amount received, date, explanation, posting reference, amount paid, and numerous distribution columns. The use of the petty cash journal.- The Petty Cash Journal may be used as an auxiliary book or as a book of account. It IS used as an auxiliary book if no postings are made from It to accounts in the ledger. It is used as a book of account if postmgs are made from it to accounts in the ledger. The use of the petty cash journal as an auxiliary book.— Petty cash is sometimes treated as part of the general cash It IS so treated when no distinction is made on the books of account between cash on deposit in the bank and petty cash In this case, only one account is kept in the ledger, viz., "Cash Account"; and all cash received, whether deposited 'in the bank or retamed as petty cash, and all cash paid out, whether by check or from petty cash, is recorded in the "Cash Journal " from which postings are made to accounts in the ledger The Petty Cash Journal in such cases is merely used as an auxihary book: Moneys received which are not deposited in the bank but are retained as petty cash, must be entered in the "Petty Cash Journar; as well as in the "Cash Journal." Checks drawn by the business itself to provide petty cash, are not treated as disbursements, since such checks represent merely a transfer of money from the bank to the cash till and therefore do not decrease the amount of the cash balance. Hence, when such checks are drawn no entry is made on the payment side of the Cash Journal." The amount received when the^check is cashed IS recorded on the receipt side of the Petty Cash Journal AH payments made from petty cash are recorded on the pav- ment side of the "Petty Cash Journal" and are periodically (commonly at the end of each month) entered in the "Cash Journal from which they are posted to accounts in the ledger The Petty Cash Journal will be used as an auxiliary book m recording the February transactions. Thereafter it will be used as a book of account. Ill 36 BOOKKEEPING, THEORY AND PRACTICE Tlie use of tlie petty cash journal as a book of account. — In every properly systematized business, all cash received, whether in the form of currency, checks, or money orders, is deposited daily at the bank, and, whenever possible, all payments are made by check. Separate accounts are also kept in the ledger for "Cash" and for "Petty Cash." When separate accounts are kept in the ledger, the "Cash Account" is the same as a record of our dealings with the bank. Whenever a check is drawn for petty disbursements, therefore, an entry must be made on the payment side of the cash journal, debiting "Petty Cash Account" and crediting "Cash Account," so as to record the increase of cash in the cash till and the decrease of cash on deposit with the bank. After the check is cashed at the bank and the currency is received, an entry is made on the receipt side of the petty cash journal. In this case no posting is made from the receipt side of the petty cash journal to accounts in the ledger, since all receipts of petty cash are limited to checks drawn for that pur- pose by the business itself and since the necessary entry is made on the payment side of the cash journal by debiting "Petty Cash" and crediting "Cash" at the time the check is drawn. Payments made out of petty cash are recorded on the pay- ment side of the petty cash journal, from which book they are posted to the debit side of accounts in the ledger. The total petty cash payments are posted periodically to the credit of the Petty Cash Account in the ledger. Balancing the petty cash book. — The petty cash book, like the cash book, should be balanced at least once a month. It is balanced by adding (in red ink), to the payment side, the amount of the balance at the end of the period. The balance of petty cash at the end of the period is determined by sub- tracting the total payments from the total receipts. DISCOUNTS Discotint defined. — A discount is deduction from the amount of a list price, an invoice, or a note. Therefore, discounts may be divided into three classes; viz., trade discotmt, cash discount, and bank discount. Trade discount defined. — ^A trade discount is a deduction from the list price of an article. LECTURE V 37 Some manufacturers, and almost all mail-order houses, issue expensive catalogues containing descriptions, in some cases illustrations, and prices of their products. Because of the in- expediency of issuing new catalogues whenever prices are changed, the prices quoted in the catalogues are purely nominal. The catalogue price is known as the list price. The actual price is determined by deducting from the list price the discounts quoted to the customer, usually on application. The trade discount may consist of but one discount, as 60% ; or, it may consist of a series of discounts, as 60, 10, and 5%, usually written 60/10/5. Trade discounts are never recorded in the books of account. We must learn to distinguish between a trade discount and a cash discount. Cash discounts should always be recorded in the books of account. Cash discount defined. — A cash discount is a deduction of a certain percentage from the face amount of an invoice if paid within a specified time. When goods are sold on account, the terms of credit usually provide for the cash discount to be allowed if payment is made within a specified time. The terms vary with the different lines of business. The most common terms are 2%, 10 days; net, 30 days. These terms mean that the customer has the option of paying the full amount of the invoice in 30 days or paying the invoice in ten days and deducting 2% from the face amount. These terms are usually expressed as follows, 2/10, n/30; and are read, two, ten, net thirty. Thus, an invoice covering the sale of merchandise on Jan. i, in amount $2000, under terms of 2/10, n/30, is payable in full on Feb. i, or, if paid on Jan. 11, is subject to a deduction of $40, which is 2% cash discount on $2000. Discounts are not allowed in all lines of business; for in- stance, rubber is sold, net 10 days; i.e., the full amount of the invoice is payable in 10 days. Nor is the time of discount limited to 10 days. Furniture is sold by some manufacturers on terms of 3/30, n/90. Dating. — Furthermore, the textile industries have established the practice of dating all invoices ahead. By dating invoices ahead is meant that the terms of discount do not begin to oper- ate until the expiration of the period of dating. Thus, in the business here exemplified, viz., woolen goods I # BOOKKEEPING, THEORY AND PRACTICE business, the regular terms are 9/10 and 60, which means that an invoice, let us say, dated Mar. i, is given 60 days dating after which the discount period of 10 days begins. To illus- trate: an invoice dated Mar. i, in amount $2000, under these terms would be subject to a deduction of $180 (cash discount of 9%) if paid within 10 days after May i. If the customer pays the invoice on or before Mar. 11, he is entitled to an additional discount of 1% (which represents 60 days interest at 6%), thus making the total cash discount, 10%. If the invoice is paid during the period beginning Mar. 11 and ending May i, the customer is entitled, in addition to the cash discount of 9%, to interest at the rate of 6% on the net amount of the invoice, (i. e., after the discount is deducted) from the date of payment to the date of maturity. Let us assume, for illustration, that an invoice dated Mar. i, in amount $2000, under terms of 9/10 and 60, is paid on April 5. In this case the amount paid would be as follows : Invoice Mar. i $2,000.00 Less 9% discount 180.00 Interest from April 5, time of payment, to May II, due date of invoice, (36 days on $i8ao at 6%) $1,820.00 T0.92 The net amount to be paid $1,809.08 Entries to be made. — For the purpose of illustrating the double entry to be made in our books of account when cash discount is deducted by a customer in paying a sales invoice, let it be assumed that John Doe owes us for merchandise sold him, $1000, and that he pays $980, having deducted the 2% cash discount ($20) to which he is entitled. The twofold effect expressed in account form is as follows : Illustration No. 28 Showing Indebtedness of John Doe John Doe Balance $1000 Illustration No. 2g Showing double entry made on receipt of payment. ^^^^ Expense John Doe (I) $980 (i) $20 Bal. $1000 $1000 (i> LECTURE V 39 "John Doe's Account" must be credited with $1000 because he has paid his indebtedness ; "Cash Account" must be debited with the actual amount of cash received, which in this case is $980; and since cash discount deducted by customers is an expense of the business — in that the customer is rendering the business a service by paying his invoice before it is due — it follows that "Expense Account" must be debited. To illustrate the entries to be made in our books when we deduct cash discount in paying a purchase invoice, let us assume that we owe James Smith $1000, and that in paying we deduct the 2% cash discount ($20) to which we are entitled, making the amount of our check $980. Illustration No. 30 Showing our indebtedness to James Smith James Smith Balance Illustration No. 31 Showing double entry made when paying James Smith $1000 James Smith Cash Interest & Discount Earned (i) $1000 Bal. $1000 $980 (r) $20 (i) "James Smith's Account" must be debited with $1000 because we have paid our indebtedness; "Cash Account" must be cred- ited with $980, the actual amount of cash paid; and since the cash discount deducted by us is an income of the business in that we rendered a service to our creditor by paying his invoice before it was due — it follows that an income account must be credited. Therefore, "Interest and Discount Earned Account'' must be credited. Because of the frequency with which cash discount deduc- tions occur, a special column known as the "Discount" column is usually provided on each side of the Cash Journal, in which are recorded all discounts deducted. These columns are posted in total at the end of each month. Bank discount will be discussed in a subsequent lecture. >«l I f 40 BOOKKEEPING, THEORY AND PRACTICE RECONCILIATION OF BANK BALANCE Introductory. — It is the custom in business, periodically, (usu- ally at the end of each month), to leave the pass-book with the bank to be balanced. Such is not the case, however, when the bank follows the practice of sending monthly statements to its depositors. In either case, the bank shows the individual amounts as well as the total amounts credited or charged to the depositor's account, and the amount of the balance. It returns to the de- positor checks drawn by him which have been paid and can- celled; and, usually, supports all other charges made by it to the depositor's account with vouchers. Why the balance of cash on deposit at the bank, is usually greater than the balance as shown by the cash account. — The balance of cash on deposit at the bank, as shown on the monthly statement or pass-book, is usually, but not always, greater than the balance as shown by the cash account. This condition is caused by the fact that checks are seldom paid on the same day on which they are drawn. This is especially true of checks payable to creditors. Such checks as a rule pass through the hands of two or more persons, thus causing a lapse of several days before they are finally paid by the bank. Let us assume, for the purpose of illustrating why several days usually elapse before a check is paid, that on March 31, we send a check of the same date payable through the New York Clearing House to a creditor whose place of business is in Paterson, N. J. The check would be received by the creditor on April i ; and, since it is customary to deposit daily with the bank all checks received during banking hours (10 A. M. to 3 P. M.), the check would be deposited on April ist with the bank which we shall assume to be the Paterson National Bank. The Paterson National Bank would send the check on the same day (April i) to its correspondent bank in New York City (i.e., the bank through which it transacts business in New York City). The correspondent bank would receive the check on April 2, and would (if received up to a certain time) present it on the same day to the Clearing House, where it would be paid by the bank on which we have drawn the check. Since some of the checks drawn by us on the last day or two of the month, are not paid, and therefore are not charged to our account on the books of the bank, until the following month, it follows that the amount of the balance of our account LECTURE V 41 on the books of the bank will thus be greater than that shown to be on deposit by the cash account. Accounting for the difference.— The difference caused by checks outstanding is accounted for by preparing on the check book or elsewhere a reconciliation statement in which the total amount of checks outstanding either is added to the cash ac- count balance or is subtracted from the amount of the balance as shown on the bank's statement. Let us assume, for illustration, that the cash account balance Sept. 30, is $2,000 ; that the balance shown on the bank's state- ment dated Sept. 30, is $3,400 ; and, that checks numbered 134, 135. 136 and 137, in amount $300, $500, $200, and $400, are outstanding. Illustration No. 32 Method I Sept. 30 Balance per cash account and check book $2,000 Reconciliation Statement Balance per check book $2,000 Add — Checks Outstanding : #134— $300 ^ZS— 500 136— 200 ^^7— 400 Total checks outstanding Bank's balance $1,400 $3400 By this method, we bring the balance per cash account and check book into agreement with the balance as shown on the bank's statement. Illustration No. 32a Method 2 Sept. 30 Balance per cash account and check book Reconciliation Statement Balance per bank's statement Deduct — Checks Outstanding : #134- 135— 136— 137— Total checks outstanding $300 500 200 400 $2,000 $3,400 $1400 Balance per cash account and check book $2,000 h 1 '1^ 42 BOOKKEEPING, THEORY AND PRACTICE By this method we bring the balance as shown on the bank's statement into agreement with the balance as shown by the cash account and the check book. Note that in either case the bal- ance per check book is carried forward; and, if adjustment of the check book balance is necessary, it is made during the fol- lowing period. However, the difference between the amount of our balance and that shown on the bank's statement may not be due only to checks outstanding. It may be due to interest allowed by the bank or to charges for collection or exchange. Trust Com- panies usually allow interest at the rate of 2% per annum on the average daily balance, and, at the end of each month, credit the depositor's account with the amount of the interest. If exchange or collection on out-of-town checks is not paid to the bank when the deposit is made, such items are charged to the depositor's account. Such transactions require adjustment of our own books in order to bring the balance as shown by our cash account and check book into agreement with that as shown on the bank's statement. The adjustment between the two balances is made by entering in the check book, as a deposit, interest allowed by the bank, and entering as a withdrawal, charges made by the bank for exchange or collections. The cash account is ad- justed by making proper entries on the receipt and payment side of the "Cash Journal" to cover these items. Such entries are made after the statement is received. QUESTIONS (i) What is the purpose of the "Cash Journal"? (2) What is the difference between a trade discount, and a cash discount? (3) Are trade discounts ever recorded in the books of ac- count ? (4) What do the following terms mean: 2/10, n/30; 9/10 and 60 ; net 30 ? (5) An invoice dated Mar. i, in amount $2,000, under terms of 9/10 and 60, is paid on Mar. xj. What is the amount of the check ? LECTURE V 43 (6) Journalize the following transactions : Jan. 15. Received from J. Clark, check in amount $735, in pay- ment of invoice dated Jan. 5, $750, less 2%. 17. Paid by check L. Cohn, $1,960, invoice Jan. 7, in amount $2,000, less 2%. (7) Reconcile the following bank balance bringing the check book balance into agreement with that of the bank. Balance per check book, $972.13. Balance per pass-book, $1,986.24. The amounts of the checks outstanding were as follows : $324.89, $63.14, $263.84, $73.28, $276.88. The items not entered in the check book were as follows: interest on bank balance $14.23;. exchange on out-of-town checks charged by the bank $2.15. LECTURE VI THE BASIC PRINCIPLES OF DOUBLE ENTRY BOOKKEEPING Double entry bookkeeping compared to a balancing scale. — We have already learned that double entry bookkeeping is based on the principle of equal debits and equal credits in amount: therefore double entry bookkeeping can be compared to a balancing scale, the two sides of which must be kept in balance at all times. The elements to be balanced in bookkeeping are the assets of a business against its liabilities and capital. Expressed in the form of a scale we have : Illustration I^o. JJ LECTURE V Assets Liabilities and Capital Debits equal Credits Expressed in the form of an equation we have : Assets equal Liabilities plus Capital Assets defined. — "The assets of a business consist of all the property and rights belonging to the business which have a money value." (Lisle.) Anything which the business owns that can be converted into cash, is an asset. Liabilities defined. — The liabilities of a business consist of the debts of the business to outsiders. Proprietorship defined. — The proprietorship of a business consists of the owner's equity in the assets of the business. The proprietorship or capital of a business is the difference between the assets and the liabilities of a business. Referring to the January transactions, it will be found that 44 45 the first double entry made when A. Reid began business, ex- pressed in account form is as follows: Illustration No. 34 Cash A. Reid, Proprietor $10,000 $10,000 The elements balanced here, expressed in the form of an equation, are: Assets ($10,000) equal Capital or Proprietorship ($10,000) "Cash Account" was debited because the business acquired an asset (cash) ; and the "Proprietor's Account" was credited, not because the business owed A. Reid, the proprietor, $10,000, but because it was necessary to record the ownership of the pro- prietor in the assets of the business. It will be remembered that we said at the start that the "Proprietor's Account" is credited to show the amount which the business owes the proprietor, considering the proprietor apart from the business. We stated the mattter thus merely for pedagogical reasons. Now, however, we must begin look- ing upon the "Proprietor's Account," or "Capital Account" as it is frequently called, as representing not an indebtedness of the business to the proprietor, but the ownership of the pro- prietor in the assets of the business. If we now add to the above transaction that of Jan. 4, in which we purchased on account from Sellew & Co., shelves and partitions in amount $700, the two double entries, expressed in account form, will be as follows: Cash Illustration No. 35 % A. Reid, Proprietor $10,000 Furniture & Fixtures $10,000 Sellew & Co. $700 $700 46 BOOKKEEPING. THEORY AND PRACTICE Expressed in the form of a balancing scale we have fllustration No. 36 Assets Cash Fum. & Fix. $10,000 700 Liabilities and Capital Sellew & Co. $700 A. Reid, Prop. 10,000 Debits equal Credits To give expression to the same facts in bookkeeping style, we prepare what is commercially called a financial statement and technically known as a "Balance Sheet": Illustration No. 37 A. Reid Balance Sheet, Date — Cash Furniture & Fixtures $10,000 700 Liability (Sellew & Co.) A. Reid, Proprietor Total Liab. & Cap. $700 10,000 Total Assets $10,700 $10,700 Balance Sheet defined. — A balance sheet is a concise state- ment compiled from the books of a concern, which have been kept by double entry, showing on the left-hand side all the assets, and on the right-hand side all the liabilities as well as proprietorship at a particular time. An interpretation of this financial statement reads that the business has total assets, in amount $10,700; and has liabilities (debts) of $700, making the ownership of the proprietor in the assets of the business, $10,000. Bookkeeping concerns itself with recording the changes in these three elements and expressing them in terms of debit and credit. As a result of business operations, the amounts of these ele- ments are constantly changing. The assets, the liabilities, and the proprietorship either increase or decrease. Seldom if ever in the course of operations do the amounts of LECTURE VI 47 these elements remain the same. In order that there may be no change in the amounts of these elements, the net result of operations must show neither a gain nor a loss. The rules for recording the increases and decreases in assets, liabilities, and proprietorship are as follows: We make a debit entry to record: An increase in assets ; A decrease in liabilities ; A decrease in proprietorship, or capital. (Expenses decrease proprietorship.) We make a credit entry to record : A decrease in assets ; An increase in liabilities; An increase in proprietorship or capital. (Income increases proprietorship.) Application of these rules. — Let us consider, for the purpose of illustrating the application of these rules, that John Smith begins business with $10,000 capital consisting of $10,000 in cash, and with $5,000 in merchandise; and that he owes $5,000 to A. Brown for the merchandise purchased. From what we have learned thus far, we understand that the asset accounts must be debited and the liability and capital accounts credited. Thus the opening entries expressed in ac- count form would be as follows : Illustration No. 38 Cash A. Brown $ro,ooo Merchandise $5,000 J. Smith, Capital $5,000 $r 0,000 (i) If J. Smith should purchase $1,000 worth of merchandise for cash, the twofold effect would be an increase in the asset merchandise, and a corresponding decrease in the asset cash. «MHk BOOKKEEPING, THEORY AND PRACTICE The increase in the asset merchandise would be recorded by debiting the merchandise account ; the decrease in the asset cash would be recorded by crediting the cash account, as shown in the following illustration : Illustration No. sg Cash A. Brown Bal. $10,000 $1,000 (l) Merchandise Bal. J. Smith, Capital $5,000 Bal. (I) $5,000 1,000 Bal. $10,000 (2) If J. Smith should purchase $2,000 worth of merchandise on account from A. Brown, the twofold effect would be an in- crease of $2,000 in the asset, merchandise, and a corresponding increase in the liability to A. Brown. The increase in the asset merchandise would be recorded by debiting the merchandise account; the increase in the liability to A. Brown would be recorded by crediting the account of A. Brown, as shown in the following illustration: Illustration No. 40 Cash A. Brown Bal. $10,000 $1,000 (I) Bal. $5,000 2,000 (2) Merchandise J. Smith, Capital Bal. (I) (2) $5,000 1,000 2,000 Bal. $10,000 (3) If J. Smith should pay A. Brown $3,000 in cash on account, the twofold effect would be a decrease in the liability to A. Brown and a corresponding decrease in the asset cash. The decrease in the liability to A. Brown would be recorded by debiting the account of A. Brown; the decrease in the asset cash would be recorded by crediting the cash account, as shown in the following illustration: LECTURE VI 49 Illustration No. 41 Cash A. Brown Bal. $10,000 $1,000 (i) (3) 3,000 (3) $3,000 Bal. $5,000 2,000 (2) Merchandise J. Smith, Capital Bal. (I) (2) $5,000 1,000 2,000 Bal $10,000 (4) Thus far we have considered transactions which result in an increase or decrease in assets and liabilities only. Let us now consider transactions that effect capital. If J. Smith should pay $400 in cash for rent, the twofold effect would be a decrease in the asset cash and a correspond- ing decrease in capital. The decrease in cash is recorded by crediting the cash account; the decrease in capital is recorded by debiting the capital account, as shown in the following illus- tration : Illustration No. 42 Cash A. Brown Bal $10,000 $1,000 (i) 3,000 (3) 400 (4) Merchandise (3) $3,000 J. Smith Bal $5,000 2,000 (2) , Capital Bal (I) (2) $5,000 1,000 2,000 (4) $400 Bal. $10,000 (5) If J. Smith should receive $5 in cash for interest on his bank balance, the twofold effect would be an increase in the asset cash and a corresponding increase in capital. The increase in cash is recorded by debiting the cash account; the increase in capital is recorded by crediting the capital account, as shown in the following illustration : 50 BOOKKEEPING, THEORY AND PRACTICE Illustration No. 43 Cash A. Bi rown Bal. $10,000 $1,000 (l) (3) $3,000 Bal. $5,000 (5) 5 3.000 (3) 400 (4) 2,000 (2) Merchandise J. Smith, Capital Bal $5,000 (4) $400 Bal. $10,000 (I) 1,000 5 (5) (2) 2,000 It is not the practice in business to record increases and decreases in capital directly in the capital account. Instead, tem- porary accounts, known as expense and income accounts, are used for recording the expenses and income of the business, as shown in the following illustration : Illustration No. 44 Cash A. Brown Bal. (5) $10,000 5 $1,000 3,000 400 (I) (3) (4) (3) $3,000 Bal. $5,000 2,000 (2) Merchandise J. Smith, Capital Bal. (I) (2) $5,000 1,000 2,000 Bal. $10,000 Expense Interest Discount Earned (4) $400 $5 (5) It will be remembered that one of the reasons for keeping books is to enable the proprietor to tell what his profit or loss is for any given period of time. The expense and income II' 11 LECTURE VI 51 accounts furnish this information. Another reason for keep- ing books is to enable the proprietor to tell what his financial condition is at any given time. The asset, liability, and capital accounts furnish this information. Division of accounts.— Accounts are usually divided into two classes, viz.. Real Accounts and Nominal Accounts. Real Accounts are those which reflect the financial condition of the business. Asset, liability, and capital accounts are real accounts. The real accounts furnish the information from which the balance sheet is prepared. Nominal Accounts are those which reflect changes in the financial condition of the business. The expense and income accounts are nominal accounts. They furnish the information from which the statement of gains and losses is prepared. What each account on the trial balance represents.— Since the decreases and increases in proprietorship, due to losses and gams, are always recorded in separate accounts, viz., expense and mcome accounts, it follows that the accounts shown on a trial balance before the books are closed must represent either assets, liabilities, or capital; or, losses or gains; i.e., expenses or mcome. The following illustration in the form of a balandng scale IS intended to show what each account, with a debit or credit balance shown on the trial balance, represents. Illustration No. 45 r Accounts with a debit balance represent either: | An asset or an expense. Accounts with a credit balance represent either: A liability, capital, or income. Debits equal Credits Distinguishing between assets and expenses.— Knowing that every account with a debit balance represents either an asset or an expense, it remains for us to learn how to distinguish between assets and expenses. We have learned from our defi- nition that an asset is anything which the business owns that 52 BOOKKEEPING, THEORY AND PRACTICE I can be converted into cash. Therefore if at any time we are in doubt as to whether an account with a debit balance repre- sents an asset or an expense, we can easily determine whether it is an asset by asking ourselves the question, "Does this account represent something which we can convert into cash?" If so, it is an asset ; if not, it is an expense. Distinguishing between liabilities, capital, and income. — Knowing that every account with a credit balance represents either capital, a liability, or income, it remains for us to dis- tinguish between liabilities and income. The capital account is easily distinguished from liability and income accounts, in that it is indicated by the word "capital" or "proprietor." We have learned from our definition that a liability is a debt due to an outsider. Therefore, if at any time we are in doubt as to whether an account with a credit balance represents a lia- bility or income, we can easily determine whether it represents a liability by asking ourselves the question, "Does this account represent a debt which we shall have to pay?" If so, it is a liability ; if not, it is income. Exceptions to the rule. — There are exceptions to the rule that every account with a debit balance represents either an asset or an expense, and that every account with a credit balance represents either capital, a liability, or income. The merchan- dise accoimt is one of the exceptions to the rule. THE MERCHANDISE ACCOUNT What the balance of merchandise account represents. — If you were asked what the debit balance in the "Merchandise Ac- count," as shown on the trial balance of Feb. 28, represents, you no doubt would answer that it represents the amount of merchandise now on hand; and that, therefore, it is an asset. A moment's consideration, however, would reveal the fact that the "Merchandise Account" was debited at cost for merchan- dise purchased, and credited at the selling price for merchan- dise sold. Moreover, we know that the amount of merchandise on hand on Feb. 28 (according to the inventory) is $19,650. We also know that the balance of the account ($14442.50) cannot represent a loss, because every sale of merchandise was made above cost. What, then, does the balance of this account represent? The answer is, "Nothing." Not until the inventory at the end of II- 11 ii « LECTURE VI 53 the period is recorded on the credit side of the account, does the merchandise account mean anything. How the gain or loss on merchandise is determined.— In order to determine the gain or loss on merchandise, it is necessary to take a physical inventory of merchandise in stock and to credit the "Merchandise Account" with the amount of the in- ventory. The account will then represent, if a debit balance the loss on merchandise; if a credit balance, the gain on mer' chandise. Why the merchandise account must be credited with the inventory.-For the purpose of explaining why the merchan- dise account must be credited with the inventory at the end of the period, let us consider the following problem : A merchant purchased 100 hats at $2, total $200; he sold y^ hats at $5, realizing $375 ; he had in stock at the end of the period 25 hats at (cost) $2, total $50. What was the profit^ Arithmetical Solution The merchant received for the hats sold Cost of hats sold: Purchases ^^ Deduct — Inventory 25 hats at (cost) $2 ' ^q $375 Cost of hats sold Profit 150 $225 Let us now record these facts in the merchandise account: Illustration No. 46 Merchandise Purchases $200 Sales $375 rh Ji^ "7''^"^'^^ /«»""* is debited for merchandise pur- chased, and credited for merchandise sold. Observe that the account shows a credit balance of $17.; • recor^on'th ^'^V^.r'^ '^ ^^^S- Therefore, if we were' o record on he credit s.de of the account, the inventory of $50 the account would then show a credit balance of $225 which represents the profit on merchandise sold 54 BOOKKEEPING, THEORY AND PRACTICE Illustration No. 4T Merdiandise LECTURE VI 55 Purchases B2C0 Sales Inventory $375 50 If we now compare this account with the arithmetical solu- tion, we shall find that, in solving the problem arithmetically, we deducted the inventory at the end of the period from the purchases. And it will be remembered that we said, "In book- keeping, when we wish to subtract from any one side of an account, we record the item on the opposite side— which has the same effect." Therefore, by recording the inventory on the credit side of the merchandise account, we are in effect subtracting it from the purchases on the debit side. Hence, the inventory is re- corded on the credit side of merchandise account because it represents an amount to be subtracted from an item on the debit side of the same account. But, if we credit "Merchandise Account" with $50, it follows that we must make a debit entry for the same amount. It is evident that the merchant will begin the new period with $50 worth of merchandise in stock. Therefore a "Merchandise Account" is opened for the new period, to which the inventory is debited as of the next day, i.e., the day on which the new period begins. The double entry made in recording the inven- tory in the merchandise account, expressed in account form, is as follows: Illustration No. 48 (A and B) (A) Merchandise (Old Account) Note that the numbers in parentheses indicate the double entry made in recording the inventory at the end of the period. Purchases $200 Sales Inventory $375 SO (I) 1 1 (B) Merchandise 1 (New Account) (l) Inventory $50 if The credit balance in the "Old Account" represents a gain, and the account is closed by transferring the balance to "Profit and Loss Account." The debit balance in the "New Account" represents an asset, and appears on the balance sheet. The merchandise account is a mixed account — The "Mer- chandise Account" is in a class by itself, and is known as a mixed account. It is a mixed account because it is neither a pure asset nor a loss nor a gain account. It is a pure asset account at the beginning of each period when only the merchandise inventory appears in the account. See Illustration No. 48B. It becomes a mixed account immediately on the resumption of business when purchases and sales are debited and credited to the account. See Illustration No. 46. It becomes a loss or gain account only after the inventory at the end of the period is recorded on the credit side. See Illustration No. 47. CLOSING THE BOOKS Introductory.— By the term "Closing the Books" is meant recording the close of the financial period. This is done by closing all the nominal (i.e., expense and income) accounts and balancing all the real (i.e., asset, liability, and capital) accounts. The nominal accounts are closed by transferring the balances of these accounts to Profit and Loss account. Profit and loss account— The "Profit and Loss Account" is a summary account to which are transferred all losses and gains. The balance of the account after all losses and gains have been transferred to it, represents, if a debit balance, the net loss; if a credit balance, the net gain for the period. The net gain or loss is then transferred to the "Proprietor's Ac- count." Expense and income accounts.— We have learned that expense and income accounts are the loss and gain accounts; and that they are in fact used in place of the "Proprietor's A«count." Therefore the expense and income accoimts are temporary accounts. They remain open on the books only until such time as the proprietor wishes to arrive at the gain or loss for the period. Then they are closed out to "Profit and Loss Account," which in turn is closed out to the "Proprietor's Account." 56 BOOKKEEPING. THEORY AND PRACTICE Illustration No. 4g 4 ? \ I IV It will be remembered that we said that "one of the reasons for keeping books is to enable the proprietor to tell what his gain or loss has been for a given period of time." This informa- tion he is able to get from the "Profit and Loss Account" after the books have been closed. Asset, liability, and capital accounts. — The asset, liability, and capital accounts are the permanent accounts on the books of a business. Each asset account represents something of value which the business owns, and is not closed until that which is represented by the account is disposed of. For instance, cash is an asset; therefore the "Cash Account" can only be closed if every cent of cash which the business has is disposed of. Each liability account represents something which the business owes to an outsider, and is not closed until the account is paid. And since the "Proprietor's Account" represents the ownership of the proprietor in the assets of the business, it follows that his account is not finally closed until he withdraws from the business. Procedure to be followed in closing the books: (i) Take a trial balance. (The ledger should always be in balance before the books are closed.) (2) Take an inventory at cost or market value, whichever is the lower. A separate physical inventory of merchandise and goods to be constmied by the business is always taken at the time of closing, even though a book inventory has been kept. The same holds true of raw materials in the case of a manu- facturing concern. (3) Journalize the inventories. After the total merchandise and other inventories are obtained, they must be journalized and recorded in the accounts before the books can be closed. (4) Post the inventories. (5) Close all nominal accounts into "Profit and Loss Ac- count." (6) Close the "Profit and Loss Account" into the "Pro- prietor's Account." (7) Rule all nominal accounts. (8) Balance all real accounts. (9) Prepare a balance sheet. (a) To show the financial condition. (b) To prove the gain or loss. f INTENTIONAL SECOND EXPOSURE 56 BOOKKEEPING, THEORY AND PRACTICE It will be remembered that we said that "one of the reasons for keeping books is to enable the proprietor to tell what his gain or loss has been for a given period of time." This informa- tion he is able to get from the "Profit and Loss Account" after the books have been closed. Asset, liability, and capital accounts. — The asset, liability, and capital accounts are the permanent accounts on the books of a business. Each asset account represents something of value which the business owns, and is not closed until that which is represented by the account is disposed of. For instance, cash is an asset; therefore the "Cash Account" can only be closed if every cent of cash which the business has is disposed of. Each liability account represents something which the business owes to an outsider, and is not closed until the account is paid. And since the "Proprietor's Account" represents the ownership of the proprietor in the assets of the business, it follows that his account is not finally closed until he withdraws from the business. Procedure to be followed in closing the books: (i) Take a trial balance. (The ledger should always be in balance before the books are closed.) (2) Take an inventory at cost or market value, whichever is the lower. A separate physical inventory of merchandise and goods to be consumed by the business is always taken at the time of closing, even though a book inventory has been kept. The same holds true of raw materials in the case of a manu- facturing concern. (3) Journalize the inventories. After the total merchandise and other inventories are obtained, they must be journalized and recorded in the accounts before the books can be closed. (4) Post the inventories. (5) Close all nominal accounts into "Profit and Loss Ac- count." (6) Close the "Profit and Loss Account" into the "Pro- prietor's Account." (7) Rule all nominal accounts. (8) Balance all real accounts. (9) Prepare a balance sheet. (a) To show the financial condition. (b) To prove the gain or loss. Jllustration No. 4g J. v/. O/i-.—^.JC' ' ^Cn.,^^ jU. If £.'«-<.«^ 0.yL^.^^ ' Xla-«^ / f^o r-^o i. t ^ u^tiL A4a] \ 1-i I •••(4- . { . I T f- --( — +~ i^ixpmil t— » H ■T t if \ » ) LECTURE VI 57 Journal entries necessary to close the books at February 28, 19—. — The journal entries necessary to close the books at Feb. 2%, 19—, appear in Illustration No. 49. The words "New" and "Old" in the adjusting journal entry indicate that the new period, i.e., the period beginning March i, 19 — , is to be debited and that the old period, i.e., the period ending Feb. 28, 19 — , is to be credited. It will be remembered that we said that the merchandise account must be credited with the inventory at the end of the period in order to determine the gain or loss on merchandise; and that, if we credit mer- chandise account, some account must be debited in order to keep the books in balance; and, since we begin the next period with a certain amoimt of merchandise on hand, this fact must be recorded on the books. * Therefore, Merchandise Account, new period, i.e., period beginning March i, 19 — , is debited with the amount of the inventory to record the fact that we begin the new period with that amoimt of merchandise on hand. Since the object in closing books is to determine the gain or loss and at the same time to record the close of the account- ing period, and since the merchandise account must be credited with the inventory at the end of the period in order to deter- mine the gain or loss on merchandise, it follows that, in post- ing the adjusting journal entry, the credit to merchandise (old) account must be posted first. After this posting is made, the balance of the account represents the gain or loss on merchan- dise sold. If the account, after the inventory has been applied to the credit side, shows a debit balance, it represents a loss; if a credit balance, it represents a gain. The balance of the merchandise account is then closed by journal entry into Profit and Loss Account. After this entry has been posted, the merchandise account is in balance. It is ruledi and the debit to "Merchandise New" in the adjusting entry is then posted to the debit side of Merchandise Account as of the following day, i.e., the entry is dated the beginning of the next period— in this case, March i, 19 — . In order to show the condition of the Merchandise Account after the adjusting and closing journal entries effecting this account have been posted, an exact copy of the account as it appears in the ledger is produced here in Illustration No. 50. The remaining journal entries require no explanation, since 58 BOOKKEEPING, THEORY AND PRACTICE they merely record the transfer of certain ledger balances from one account to another. For example, the entry Profit & Loss To Expense merely effects the transfer of the balance in the Expense Ac- count to the Profit & Loss Account. Similarly the entry Interest and Discount Earned To Profit & Loss merely eifects the transfer of the balance in the Interest & Discount Earned Account to the Profit & L^ss Account. After the balance of all expense and income accounts have been transferred to Profit & Loss, the balance in the Profit & Loss Account will represent the net gain or loss for the period. If the account shows a debit balance, it represents the net loss; if a credit balance, the net gain. Since all losses are assumed by the proprietor, it follows that gains accrue to the proprietor. Therefore, after the net gain or loss is determined, the balance of the Profit & Loss Account is transferred to the proprietor's account. In order to show the condition of the Expense, Interest & Discount Earned, Profit & Loss, and A. Reid's Account after the closing journal entries have been posted, an exact copy of these accounts as they appear in the ledger is reproduced here (Illustrations Nos. 51, 52, 53, and 54). Observe how the ledger accounts are ruled. Balancing real accounts.— We are now familiar with the tech- nique of closing the nominal accounts. It will be remembered that we said the real accounts are balanced at the end of the fiscal period. Therefore, we shall now illustrate the technique of balancing real accounts. Let us consider, for the purpose of illustration, the following accounts as they appear in the ledger at Feb. 28, 19 — : Furniture & Fixtures; Tower Mfg. Co.; A. Reid, Proprietor ; and L. Crane. The condition of these accounts after they have been balanced is shown in Illustration No. 55. Observe : (i) That real accounts with debit balances (such as the Furniture & Fixtures account) are balanced by writing the amount of the balance on the credit side of the account. Illustration No. 51 f^-^^^ t. ^^MfS-t-CC****^ a. J ^«* '^Ck*^ V / 6 4 t/o "TV* SL I' 1 It J * tf-*-*-+ r^/p ■ 'Tyb Lf > -ttpF INTENTIONAL SECOND EXPOSURE 58 BOOKKEEPING, THEORY AND PRACTICE they merely record the transfer of certain ledger balances from one account to another. For example, the entry Profit & Loss To Expense merely effects the transfer of the balance in the Expense Ac- count to the Profit & Loss Account. Similarly the entry Interest and Discount Earned To Profit & Loss merely effects the transfer of the balance in the Interest & Discount Earned Account to the Profit & Loss Account. After the balance of all expense and income accounts have been transferred to Profit & Loss, the balance in the Profit & Loss Account will represent the net gain or loss for the period. If the account shows a debit balance, it represents the net loss; if a credit balance, the net gain. Since all losses are assumed by the proprietor, it follows that gains accrue to the proprietor. Therefore, after the net gain or loss is determined, the balance of the Profit & Loss Account is transferred to the proprietor's account. In order to show the condition of the Expense, Interest & Discount Earned, Profit & Loss, and A. Reid's Account after the closing journal entries have been posted, an exact copy of these accounts as they appear in the ledger is reproduced here (Illustrations Nos. 51, 52, 53, and 54). Observe how the ledger accounts are ruled. Balancing real accounts.— We are now familiar with the tech- nique of closing the nominal accounts. It will be remembered that we said the real accounts are balanced at the end of the fiscal period. Therefore, we shall now illustrate the technique of balancing real accounts. Let us consider, for the purpose of illustration, the following accounts as they appear in the ledger at Feb. 28, 19—: Furniture & Fixtures; Tower Mfg. Co.; A. Reid, Proprietor ; and L. Crane. The condition of these accounts after they have been balanced is shown in Illustration No. 55. Observe : (i) That real accounts with debit balances (such as the Furniture & Fixtures account) are balanced by writing the amount of the balance on the credit side of the account. Illustration No. 5/ t^ /^^^-t-uc-«jtX« \) \ Illustration No. 52 Illustration No. 53 ^ £fc fX >i\>U^. $9, ^zo7 Illustration No. 54 r r • ■ T r |: I i I i I i 1 _ I- 1 1 '• ( Illustration No. 55 jJt^^ .»IXU.<» 4^ ^^^v^^**.'* <'C<^ ^>«rf /4. I I I AA^ I ! ill* .*i^ /J «//J| //^ o4 ■a-ft- «4 o6 ( f Ulustralion No. 56 B /♦ -f /2ijuL-t,. y* Too - ~f- ^ ^ z.« 7 '^^ : -Oi ^-— ^ ^ 9 /> y-i'-* "7 "*"**' W^;^-^*- y^ iVo - I .,....;4-. 1 .-. -*■ i, ^ ^ - \ U i . ""] 1 I ^ '" I !; . % ■ • 'I ♦ • I , —jI — i-i ■ • I i \ Illustration No. 56 C Gfctfc/^y ^A^l %i' 4>A*JL CI ,-/ -^^L.^ Juk^^j . --. iv . 4 A^iX --^40' -d J V^^t^i. t(^IC4>j V/ 4a*^ -i^-t^.t^J >t 4,.*,j ^*.*m*,JLf 'j^.^U ^t«**>to i**A.rm^JL t\r^l, *r« -4TV. o v/ iiiiiifiijiili ■ I t t i r-r 1 ^ . i , " 1 1 1 ,, . r i ■ IJ F, ■i fj 'I » u LECTURE VI 59 (2) That real accounts with credit balances (such as Tower Mfg. Co. and A. Reid Proprietor) are balanced by writing the amount of the balance on the debit side of the account. (3) That, in either case, the balance in the old period is written in red ink. This is done to indicate that the amount was inserted to bring both sides of the account into agreement. (4) That the totals are written on the same line. (5) That, in either case, the balance is brought down on the opposite side as of the following day, i.e., the entry is dated the beginning of the next period — in this case, March i, 19 — . (6) That real accounts which are in balance (such as the account of L. Crane) are ruled. The condition of the accounts in the ledger, at Feb. 28, 19 — , after closing the nominal accounts and balancing the real ac- counts is shown in Illustration No. 56, A-H. Trial balance after closing. — Since, in closing the books at the end of an accounting period, all expense and income ac- counts are closed into profit and loss account, and the balance in the latter account is closed into the proprietor's account, it follows that a trial balance taken from the ledger after closing will contain only real accounts, i.e., asset, liability, and capital accounts; the expense and income accounts having been closed, are in balance. At the time of closing the books, it is customary to prepare what is commercially known as a financial statement and tech- nically known as a balance sheet. Since real accounts reflect the financial condition of a busi- ness, i.e., furnish the information from which the financial state- ment or balance sheet is prepared, and since a trial balance after closing contains only real accounts, it follows that a balance sheet is merely a concise, classified statement of accounts appear- ing on a trial balance after the books have been closed. The following is a trial balance taken from the ledger of A. Reid after closing (See Illustration No. 55). \ mi\ INTENTIONAL SECOND EXPOSURE Illustration No. 56 C ^?3i^***-v* til .4>au. O fX iT* ¥^.2^ -fi^ cAit ^ >^ t# <7^ — t- 1 ■ L.i i: T~-'- * tt Ui T,V« i / ii i I-' \\ \ S<\ LECTURE VI 59 (2) That real accounts with credit balances (such as Tower Mfg. Co. and A. Reid Proprietor) are balanced by writing the amount of the balance on the debit side of the account. (3) That, in either case, the balance in the old period is written in red ink. This is done to indicate that the amount was inserted to bring both sides of the account into agreement. (4) That the totals are written on the same line. (5) That, in either case, the balance is brought down on the opposite side as of the following day, i.e., the entry is dated the beginning of the next period — in this case, March i, 19 — . (6) That real accounts which are in balance (such as the account of L. Crane) are ruled. The condition of the accounts in the ledger, at Feb. 28, 19 — , after closing the nominal accounts and balancing the real ac- counts is shown in Illustration No. 56, A-H. Trial balance after closing. — Since, in closing the books at the end of an accounting period, all expense and income ac- counts are closed into profit and loss account, and the balance in the latter account is closed into the proprietor's account, it follows that a trial balance taken from the ledger after closing will contain only real accounts, i.e., asset, liability, and capital accounts; the expense and income accounts having been closed, are in balance. At the time of closing the books, it is customary to prepare what is conmiercially known as a financial statement and tech- nically known as a balance sheet. Since real accounts reflect the financial condition of a busi- ness, i.e., furnish the information from which the financial state- ment or balance sheet is prepared, and since a trial balance after closing contains only real accounts, it follows that a balance sheet is merely a concise, classified statement of accounts appear- ing on a trial balance after the books have been closed. The following is a trial balance taken from the ledger of A. Reid after closing (See Illustration No. 55). 1 I I i 60 BOOKKEEPING, THEORY AND PRACTICE Illustration No. 57 A. Reid Trial Balance March i, 19— or A. Reid Trial Balance Feb. 28, 19--, After Qosing ^^^^ $6,782.56 Furniture & Fixtures 835.00 A Reid, Proprietor .' .* ' $13,483.06 Merchandise 19,650.00 Cann & Co ^qq.oo ' l'}^'^ 437.50 W. Hall 1^.00 Miller & Co i^qoo.oo J. T. Ludlow 90000 T. Wilson & Co 1,30000 Tompkins & Co .*. l^y^^^ W. Bradhurst 1,000.00 Tower Mfg Co ,^00 N. Y. DeskCo ^ooo ^^"^.^-•••- 37^:^ Baldwm Mfg^Co 5^00.00 Reynolds & Co ^,800.00 Taylor Mfg. Co 9,^00.00 $38,855.06 $38,855.06 The following is a balance sheet prepared from the trial bal- ance of A. Reid, Feb. 28, 19—, after closing. Illustration No. 58 A. Reid, Balance Sheet, Feb. 28, 19— ^ , ^^^^^^ Liabilities & Capital ^^^^ $6,782.56 Liabilities Merchandise Inventory 19,650.00 Accounts Payable $2^^7200 Accounts Receivable 11,587.50 Capital ^5,372.oo Furniture & Fixtures 835.00 A. Reid, Proprietor 13,483.06 $38,855.06 $38,855.06 Observe : 1. That the total amount due from Customers on open ac- counts is shown in the balance sheet and is termed "Accounts Receivable." 2. That the total amount due to creditors on open account / ^f\ ' ' I i s I I o • o « c ^ ^ to > Ho* «l «9 •» ^ o I ^ A % «» s • V % 8S883SSS 11 ■C Oil I t A. 00 ^ ^ > I* :i s « « ^ Q O • « ^ 9 A S 1 i 9 v9 ^ o ^ • I . . • ^ S « « o o ^ *» N o o o ^ > ^ *«a o O. «) "> h > ^ ^ 3 -J b ^ O 5 ■3 I I ^ ."^ ^ I J^ SI In s i a :& a z J I ^ -i ^ > « I 6 ■S ^ * J I » e •- <>• t« Q ^^ ^% ^^ ^l fj #^ I*! ^ z I li 3 a i6 !a t t 4 ] i •-••sssssassssaaaaaasK n ^ LECTURE VI 6i is shown in the balance sheet and is termed "Accounts Pay- able." . 3. That the Balance Sheet is dated Feb. 28, 19 — , (the close of the old period), and not March i, 19 — , (the beginning of the new period). THE SIX COLUMN STATEMENT Introductory. — The six column statement is a statement of accounts open in the ledger. It consists of six (money) col- umns the items of which will ultimately appear in three state- ments, viz., the trial balance, profit and loss account, and bal- ance sheet. The six column statement is not a practical statement. It is, however, a convenient form for classifying the accounts shown in a trial balance as to nominal accounts (i.e., expense and income accounts) and real accounts (i.e., asset, liability, and capital accounts) and at the same time classifying accounts with debit balances as to expenses or assets, and accounts with credit balances as to income, liabilities, or capital, in order to ascertain the gain or loss for the period. Let us consider for the purpose of illustration the trial bal- ance of A. Reid at Feb. 28, 19—, before closing. With the exception of the closing inventory, this trial balance contains all the information necessary to ascertain the gain or loss for the period ended Feb. 28, 19—. Thus, without closing the books, we can make use of the amounts shown in the trial bal- ance and the closing inventory of $19,650, and ascertain the gain or loss and the financial condition of the business by pre- paring a six column statement as shown in Illustration No. 59A. In Illustration 59A, observe : (i) That, with the exception of the merchandise balance of $14,442.50, each amount shown in the debit trial balance column is extended either in the expense or in the asset column. (2) That each amount shown in the credit trial balance col- umn is extended either in the income or in the liability and cap- ital column. (3) That the amount of the closing inventory ($19,650.) is written on a line with merchandise in the asset column, and that the difference between the amount of the closing inventory and the balance of the merchandise account as shown in the debit trial balance column, is written in the income column. € \< llNTENTIONAL SECOND EXPOSURE V f t t ! t •* ! 1 r ! ! I I t t f^ f I » ^ o « • « o ^ ^ «. > 1 !j vo o» 2 o o « ^ pm 0m m» m* m4 ^ mm ssassas* SiK •( Q « O • « >. >* ,0 * h ^ * ^1 'j •} >• 0» *^ ^ o O O *9 "^ t^ « o o ^ ^6 sa sx:;asxs ssssssssssaaatsiia i i li i i I I i LECTURE VI 6i is shown in the balance sheet and is termed "Accounts Pay- able." . 3. That the Balance Sheet is dated Feb. 28, 19 — , (the close of the old period), and not March i, 19 — , (the beginning of the new period). THE SIX COLUMN STATEMENT Introductory. — The six column statement is a statement of accounts open in the ledger. It consists of six (money) col- umns the items of which will ultimately appear in three state- ments, viz., the trial balance, profit and loss account, and bal- ance sheet. The six column statement is not a practical statement. It is, however, a convenient form for classifying the accounts shown in a trial balance as to nominal accounts (i.e., expense and income accounts) and real accounts (i.e., asset, liability, and capital accounts) and at the same time classifying accounts with debit balances as to expenses or assets, and accounts with credit balances as to income, liabilities, or capital, in order to ascertain the gain or loss for the period. Let us consider for the purpose of illustration the trial bal- ance of A. Reid at Feb. 28, 19—, before closing. With the exception of the closing inventory, this trial balance contains all the information necessary to ascertain the gain or loss for the period ended Feb. 28, 19—. Thus, without closing the books, we can make use of the amounts shown in the trial bal- ance and the closing inventory of $19,650, and ascertain the gain or loss and the financial condition of the business by pre- paring a six column statement as shown in Illustration No. 59A. In Illustration 59A, observe : (i) That, with the exception of the merchandise balance of $14,442.50, each amount shown in the debit trial balance column is extended either in the expense or in the asset column. (2) That each amount shown in the credit trial balance col- umn is extended either in the income or in the liability and cap- ital column. (3) That the amount of the closing inventory ($19,650.) IS written on a line with merchandise in the asset column, and that the difference between the amount of the closing inventory and the balance of the merchandise account as shown in the debit trial balance column, is written in the income column. I 62 BOOKKEEPING, THEORY AND PRACTICE sent! then., '^l^"^"^'' °f '"^"'"^ over expenses which repre- and caprtal. thus proving the mathematical accuracy of the foot- ings. an^L'^K V *' T ''*' ^'^ '°'"'""' ^^'^- *« P™fit and loss, and the balance sheet columns) are balanced by writing the "coir '-'''' ■■" ''' ^^-"- -' - *eUilitief and The following is a Profit & Ix)ss Account and Balance Sheet prepared from the foregoing Six Column Statements. A. Reid _^__ Profit and Loss Account 19 — Feb. 28 Expense 28 Net Profit $1,740.21 3,48306 $5,223.27 19 — Feb. 28 Mdse. 28 Int. & Dis. Earned $5,207.50 15.77 ^5*223,27 Assets Cash Merchandise Inventory Accounts Receivable Furniture & Fixtures A. Reid Balance Sheet Feb. 28, 19— $6,782.56 19,650.00 11,587.50 835.00 I Total Liabilities and Capital Liabilities Accounts Payable $25,372.00 Capital Jan. i, 19—, $10,000.00 Profit for the two months ended Feb. 28, 19-, $3483.06 $13483.06 $38,855.06 Total $38,855.06 neJshn^''' ^""Sr ^'''''"'"' "^"^ "^^^ ^' P^^P^^^^ in the man- ner shown in Illustration 59B. ..7JT^)l T^'^"^" ""^ '^' '"""'"^^"^ ^^ ^' merchandise bal- k tL 1 ?r^ r'"'"^"^' '^'' ^'^'^"^^"t (Illustration 59B) IS the same as that shown in Illustration No. 59A accoun!".^!?^''''''^ ^' '^' ^'^^' ^^^^"^^ ^^ ^^^ merchandise account as shown m the trial balance is here treated as an ex- pense. It IS so treated on the theory that, if there were no o bo ti ) I J INTENTIONAL SECOND EXPOSURE 6)2 BOOKKEEPING, THEORY AND PRACTICE ^^\u '^^^^ *^ ^''"'^ "^ '°^°'"« "^e-- expenses which reore- and capital, thus provmg the mathematical accuracy of the foot- an^L'^lI'f "*"' T ''",°^ '"'"""^ (^'^- t''^ P™fit and loss, and the balance sheet columns) are balanced by writing the cT^rcoir ^^°'^ '" ''' -''-' -' - theUilitief 1^ The following is a Profit & Loss Account and Balance Sheet prepared from the foregoing Six Column Statements. A. Reid «__ Profit and Loss Account 19 — Feb. 28 Expense 28 Net Profit $1,740.21 3,48306 19— Feb. 28 28 Mdse. Int. & Dis. Earned $5,223.27 $5,207.50 15.77 $5,223.27 Assets Cash Merchandise Inventory Accounts Receivable Furniture & Fixtures Total A. Reid Balance Sheet Feb. 28, 19— j Liabilities and Capital Liabilities Accounts Payable $25,372.00 Capital Jan. i, 19—, $10,000.00 Profit for the two months ended Feb. 28, 19-, $3,483.06 $13483.06 $6,782.56 19,650.00 11,587.50 835.00 $38,855.06 Total $38,855.06 neJ^.tn''' ^""111™ ^''''"''"' "'"^ "^^^ ^' P^^P^^^^ i" the man- ner shown m Illustration 59B. With the exception of the treatment of the merchandise bal- ance and the closmg inventory, this statement (Illustration sqB) IS the same as that shown in Illustration No. 59A. Jl^'!^ ^'/^^'''^.'^ !^"' '^' ^'^^' balance of the merchandise account as shown m the trial balance is here treated as an ex- pense. It is so treated on the theory that, if there were no I ««j8iBjtte8ssssesssss » •Jaw^MMM SSi8gSigSSSSl!?SSS c •* a » ih- > K -- • «. *. ' ^ » > t i .4 «. .< < > •V -4 «" • • • 9 a rr n .,^._ I t i i, 1— Ci •a to 1] » LECTURE VI 63 merchandise in stock at the close of the period, the balance in this account would then represent the loss on merchandise sold. The closing inventory, which does not appear in the books, is here treated as an addendum to the trial balance; and the amount is written in both the Income and Assets columns. The amount is written in the Income column as an offset to the merchandise expense item shown in the trial balance; it is writ- ten in the asset column because it represents an asset which does not appear in the books. In preparing a profit and loss account from this statement, the merchandise expense item should be deducted from the merchandise income item and the net amount ($5207.50) shown in the Profit and Loss Account as follows : A. Reid Profit and Loss Account 19— Feb. 28 Expense 28 Net Profit $1,740.21 3,483.06 $5,223.27 19— Feb. 28 Mdse. 28 Int. & Dis. Earned $5,207.50 15-77 $5,223.27 Let us first consider the accounts with debit balances. It will be remembered that we said accounts with debit balances rep- resent either an asset or an expense. It should be borne in mind, however, that we also said there are exceptions to this rule. Therefore, barring exceptions to the rule, every item which appears in the debit column of the trial balance must be written either in the asset column or in the expense column. Cash is an asset; therefore, the amount shown in the trial balance is written in the asset column. Furniture & Fixtures is an asset. Let us disregard the merchandise account until we have dis- posed of all the other items in the trial balance. Expense requires no explanation. The title of the account indicates the nature of the item, viz., an expense. Therefore, the amount shown in the trial balance is written in the Expense column. 64 BOOKKEEPING, THEORY AND PRACTICE LECTURE VI 6S Cann & Co. is a personal account. Personal accounts may show either debit or credit balances. Personal accounts with debit balances are asset accounts because they represent amounts owed to the business. Since Cann & Co.*s account shows a debit balance, it represents the amount of the debt due from them and therefore is an asset. The same is true of the following personal accounts shown in the trial balance : J. Link I. Hughes W. Hall Miller & Co. J. T. Ludlow T. Wilson & Co. Tompkins & Co. W. Bradhurst Let us now consider the accounts with credit balances. It will be remembered that we said accounts with credit balances represent either capital, a liability, or income. Therefore, bar- ring exceptions to the rule, every item which appears in the credit column of the trial balance must be written either in the Liability & Capital column or in the Income column. A. Reid, Proprietor, represents the Capital invested by the proprietor at the beginning of the period. The amount shown in the trial balance is written in the Liabilities and Capital column. Interest and Discount Earned as the title of the account indi- cates represents income. Therefore, the amount shown in the trial balance is written in the Income Column. Tower Mfg. Co. is a personal account. Since personal ac- counts with credit balances (except the capital accounts) rep- resent debts due by the business to outsiders, such accounts are liability accounts. Tower Mfg. Co.'s account shows a credit balance. Therefore, it represents a liability, and the amount shown in the trial balance is written in the Liability and Capital column. The same is true of the following per- sonal accounts shown in the trial balance : N. Y. Desk Co. Bell & Co. Baldwin Mfg. Co. Reynolds & Co. Taylor Mfg. Co. The "Merchandise" account, is an exception to the rule that every account with a debit balance represents either an asset or an expense. It will be remembered that we said, the balance in the merchandise account is meaningless until we record the amount of the inventory at the end of the period on the credit side of the account. Then the balance in the merchandise ac- count represents, if a debit balance, the loss on merchandise sold; if a credit balance, the gain on merchandise sold. Let us now consider the effect of recording the inventory at the end of the period in the merchandise account. Expressed in account form the effect is as follows: Merchandise Old Balance $1,442.50 Inventory $19,650 Merchandise New Inventory $19,650 The effect of crediting the "Old" merchandise account with the inventory at the end of the period is to clear the account of its real element. The effect of debiting the new merchandise account is to record the real element, i.e., the asset element, in a separate account. Thus the credit balance of $5,207.50 in the "old" account represents the gain on merchandise sold, and is written in the "Income" column. The debit balance of $19,650 in the "New" account represents the inventory, and is written in the asset column. QUESTIONS (i) Define assets, liabilities, proprietorship. (2) State the rules for debiting and crediting accotmts by double entry. (3) Do all accounts with debit balances represent either an expense or an asset? Explain. (4) What does a credit balance in the merchandise account represent ? Explain. (5) What does a debit balance in the merchandise account represent? Explain. (6) What is meant by closing the books? 66 BOOKKEEPING, THEORY AND PRACTICE (7) State the procedure to be followed in closing a set of books kept by double entry. (8) How are accounts classified? (9) Define real account. Define nominal account. (10) What is the difference between a trial balance before closing and after closing? p LECTURES VII-VIII MERCHANDISE ACCOUNT, CONTINUED Note: Students should read again the section on Merchan- dise Account under Lecture VI. Introductory.— The merchandise account with which we are now familiar is often referred to as the "old-fashioned" mer- chandise account. It is so called because it has gradually fallen into disuse. Objection to the old-fashioned merchandise account The objection to the "Merchandise" account is, that it contains sev- eral elements of different character, and that, without analysis, the account gives no information of value. Sales, returned sales, purchases, returned purchases, and merchandise inventory are all recorded in one account, with the result that transactions valued on different bases are recorded in a single account. For example, the "Merchandise" account is debited for: Inventory at cost or market value. Purchases at cost. Sales returns at selling price; it is credited for: Sales at selling price. Purchase returns at cost. Inventory at the end of the period at cost or market value. Thus it will be seen that both the debit and credit sides of the merchandise account contain values on different bases, viz., cost and selling price. The component parts of the '^Merchandise" account— The component parts of the "Merchandise" account are inventory, purchases, and sales. To overcome the objections to the old-fashioned "Merchan- dise" account, it is the practice now to keep in the ledger an account for each of its component parts, viz.. Inventory, Pur- chases, and Sales. 67 w ^ ' ^t I I t& 68 BOOKKEEPING, THEORY AND PRACTICE Inventory This account is debited at the beginning of each period with the amount of merchandise on hand. It is credited at the end of each period with the amount of mer- chandise on hand. Purchases This account is debited with the amount 6i merchandise purchased. It is credited with the amount of purchases returned. Sales This account is debited with the amount of sales returned. It is credited with the amount of merchandise sold. Note : The treatment of these accounts at the time of closing the books will be discussed in a subsequent chapter. SUBDIVISION OF THE EXPENSE ACCOUNT Wliat is meant by an appropriate expense account. — In intro- ducing items of expense, we said, "Whenever the business receives services or goods to be consumed, an appropriate ex- pense account must be debited." An appropriate expense ac- cotmt may consist of a single expense account of a general character kept in the ledger under the title of "Expense" or "General Expense," or it may consist of numerous expense ac- cotmts each of a particular character kept in the ledger imder titles which designate the nature of the item of expense.' Let us asstmie for illustration that the following expenses are paid in cash : Mar. I Paid Quick Delivery Co., $ioo for carting. I Jay Realty Co., $200 for rent. 9 Consolidated Gas Co., $10.50 for gas service. 9 N. Y. Telephone Co., $14 for telephone service. 10 N. Y. Supply Co., $2.50 for towel service. « <( « u LECTURES VII-VIII 69 All these items may be charged in the ledger to a single ex- pense account of a general character, as follows : Illustration No. 60 Illustrating the Use of a Single Expense Account Expense or General Expense Cash Mar. I. Cart. $100.00 I Rent 200.00 9 Light ro.50 9 Telep. 14.00 10 Towel •SO I Mar. I. Cart. $100.00 I Rent 200.00 9 Light ro.50 9 Telep. 14.00 10 Towel 50 Or separate expense accounts may be kept in the ledger for the different classes of expense. Each item of expense must then be charged to its appropriate account. Illustration No. 61 Illustrating the Use of Expense Accounts of a Particular Character Cartage Cash Mar. I Cash $100.00 Rent Mar. r. Cash $200.00 Mar. I Cart. $100,00 I Rent 200.00 9 Light ro.50 9 Telep. 14.00 10 Towel .50 Light Mar. 9 Cash $10.50 Telephone Mar. 10 Cash $ . 50 11 TO BOOKKEEPING, THEORY AND PRACTICE The account entitled "Expense" is here used as a general expense account. To it are charged only such items of expense as cannot properly be charged to any of the particular expense accounts. Such accounts as cartage, rent, light, telephone, etc., are merely subdivisions of a single expense account. Therefore, at the time of closing the books, they are treated in the same manner in which the "Expense Account" was treated in closing the books at February 28, 19 — , i.e., the balance of each account is closed into profit and loss account. THE SALES JOURNAL Sales Journal defined. — The Sales Journal is a book of orig- inal entry in which are recorded all charges against customers. When a special journal is used for sales transactions, such transactions are no longer recorded in "The Journal," but are recorded instead in the Sales Journal, and, from this book, are posted to accounts in the ledger. Form of Sales Journal. — Sales Journals have no special form. With the use of mechanical devices, such as the billing machine, it is possible to make in one operation several impressions, such as the invoice, the carbon copy, and the sales sheet record. The modem Sales Journal, or "Sales Book" as it is usually called, is therefore merely a binder containing the sales sheets or a binder containing the invoice carbons. Postings are made daily to the debit side of customers' accounts (or in accounts treated as customers' accounts, such as C. O. D. Account) in the ledger, from either the sales sheet or invoice carbon. The total sales is posted periodically, but usually at the end of each month, to the credit side of the Sales Account in the ledger. In the following illustration showing the manner in which transactions are recorded in the Sales Journal, March trans- actions have been used. (Illustration No. 62.) Note that the first money column is used for extension of items, and that the second money column is used for the amount to be carried to the debit side of the account in the ledger. In the illustration shown opposite, it will be noticed that the individual items were posted to the debit side of their respective accounts as indicated in the ledger folio column. In actual practice, these items are posted daily. The total sales for the month was posted to the credit side of the Sales Account. Illustration No. 62 INTENTIONAL SECOND EXPOSURE 70 BOOKKEEPING, THEORY AND PRACTICE >'. The account entitled "Expense" is here used as a general expense account. To it are charged only such items of expense as cannot properly be charged to any of the particular expense accounts. Such accounts as cartage, rent, light, telephone, etc., are merely subdivisions of a single expense account. Therefore, at the time of closing the books, they are treated in the same manner in which the "Expense Account" was treated in closing the books at February 28, 19—, i.e., the balance of each account is closed into profit and loss account. THE SALES JOURNAL Sales Journal defined.— The Sales Journal is a book of orig- inal entry in which are recorded all charges against customers. When a special journal is used for sales transactions, such transactions are no longer recorded in "The Journal," but are recorded instead in the Sales Journal, and, from this book, are posted to accounts in the ledger. Form of Sales Journal. — Sales Journals have no special form. With the use of mechanical devices, such as the billing machine, it is possible to make in one operation several impressions, such as the invoice, the carbon copy, and the sales sheet record. The modern Sales Journal, or "Sales Book" as it is usually called, is therefore merely a binder containing the sales sheets or a binder containing the invoice carbons. Postings are made daily to the debit side of customers' accounts (or in accounts treated as customers' accounts, such as C. O. D. Account) in the ledger, from either the sales sheet or invoice carbon. The total sales is posted periodically, but usually at the end of each month, to the credit side of the Sales Account in the ledger. In the following illustration showing the manner in which transactions are recorded in the Sales Journal, March trans- actions have been used. (Illustration No. 62.) Note that the first money column is used for extension of items, and that the second money column is used for the amount to be carried to the debit side of the account in the ledger. In the illustration shown opposite, it will be noticed that the individual items were posted to the debit side of their respective accounts as indicated in the ledger folio column. In actual practice, these items are posted daily. The total sales for the month was posted to the credit side of the Sales Account. Illustration No. 62 t I I LECTURES VII-VIII 71 Form of Abstract Sales JoumaL — In addition to this sales book, there is frequently used in business an Abstract Sales Journal for the purpose of classifying sales as to classes of merchandise, geographical sales, territories, agency sales, etc. The Abstract Sales Journal is a columnar ruled book in which provision is made for date, invoice number, name of customer, amount, and numerous distribution columns. The number of distribution columns varies to meet individual needs. Method of recording transactions in the Abstract Sales Jour- nal. — In the recording of transactions in the Abstract Sales Journal, details are omitted. A single line is usually used for each transaction. The date of the invoice, the invoice number, the name of the customer or account to be debited, and the amount of the invoice are written in their respective coltunns. The amount or amounts to be credited are written in the dis- tribution columns. Use of the Abstract JoumaL — The Abstract Sales Journal may be used as a book of account or as a memorandum book. It is used as a book of account if postings are made from it to accounts in the ledger. Such is usually the case when more than one account is to be credited at the end of the month. The individual items are usually posted from the Sales Journal to the debit side of accounts in the ledger. Totals are posted at the end of the month from the Abstract Sales Journal to the credit side of accounts in the ledger. The Abstract Sales Journal is used as a memorandum book if no postings are made from it to accounts in the ledger. Such is the case when sales are classified for some reason or other, and only one account is to be credited at the end of the month. All the individual items as well as the total sales are then posted from the Sales Journal. THE PURCHASE JOURNAL Purchase Journal defined. — ^A Purchase Journal is a book of original entry in which are recorded all incoming invoices re- ceived from creditors that are not immediately paid. When a separate book is introduced for the recording of pur- chases, invoices received from creditors covering transactions on account are no longer recorded in the book known as "The Journal,'* but, instead, are recorded in the Purchase Journal, from which book postings are made to accounts in the ledger. Ii iiai^A^^ 72 BOOKKEEPING, THEORY AND PRACTICE Form of Purchase JoumaL — The Purchase Journal usually takes the form of a columnar ruled book in which provision is made for date, invoice number, name of creditor, ledger folio, amount, and numerous money columns known as distribution columns. The number of distribution columns vary to meet individual needs. A sufficient number of distribution columns, however, should be provided for at least such accounts as are frequently used. A column headed "Other Accounts," sup- ported by a money column, is used for accounts to be debited, for which no special or individual column has been provided. Method of recording transactions on the Purchase Journal. — In recording transactions on the Purchase Journal, details are omitted. A single line is commonly used for each transaction. The date of entry, the name of the creditor, and the amount to be credited to the creditor's account are written in their respective columns. The amount or amounts to be debited are written in the proper distribution columns. In Illustration No. 63, showing the manner in which transactions are recorded on the Purchase Journal, March transactions have been used. Posting from the Purchase Journal. — Each item in the amount column is posted to the credit of the individual creditor's account. In actual practice these postings are made daily. The remain- ing columns are posted in total at the end of each month to the debit side of their respective accounts in the Ledger. Before posting totals at the end of the month, it is advisable to test the equilibrium of the Purchase Journal; i.e., to see whether or not the sum of the debits is equal to the sum of the credits. In the illustration shown above, it will be noticed that the items in the amount column have been posted to the credit of the individual creditors* accounts as indicated in the ledger folio colimm. Thus, postings to the extent of $10,510 were made to the credit of accounts in the Ledger. The items in the other coliunns were posted in total to the debit of their respective accounts in the Ledger at the end of the month; and, as a result, debit entries amounting to $10,510 have been made. A summary journal entry is sometimes made in the Purchase Journal, at the end of each month, from which postings are made. To illustrate : Summary Purchases $10,250.00 Stationery & Printing 20.00 Insurance 240.00 To Sundry Creditors (Posted) $10,510.00 Illustration No. 63 PURCHASES INTENTIONAL SECOND EXPOSURE 72 BOOKKEEPING, THEORY AND PRACTICE fH Form of Purchase Journal. — The Purchase Journal usually takes the form of a columnar ruled book in which provision is made for date, invoice number, name of creditor, ledger folio, amount, and numerous money columns known as distribution columns. The number of distribution columns vary to meet individual needs. A sufficient number of distribution columns, however, should be provided for at least such accounts as are frequently used. A column headed "Other Accounts," sup- ported by a money column, is used for accounts to be debited, for which no special or individual column has been provided. Method of recording transactions on the Purchase Journal. — In recording transactions on the Purchase Journal, details are omitted. A single line is commonly used for each transaction. The date of entry, the name of the creditor, and the amount to be credited to the creditor's account are written in their respective columns. The amount or amounts to be debited are written in the proper distribution columns. In Illustration No. 63, showing the manner in which transactions are recorded on the Purchase Journal, March transactions have been used. Posting from the Purchase Journal. — Each item in the amount column is posted to the credit of the individual creditor's account. In actual practice these postings are made daily. The remain- ing columns are posted in total at the end of each month to the debit side of their respective accounts in the Ledger. Before posting totals at the end of the month, it is advisable to test the equilibrium of the Purchase Journal; i.e., to see whether or not the sum of the debits is equal to the sum of the credits. In the illustration shown above, it will be noticed that the items in the amount column have been posted to the credit of the individual creditors* accounts as indicated in the ledger folio column. Thus, postings to the extent of $10,510 were made to the credit of accounts in the Ledger. The items in the other columns were posted in total to the debit of their respective accounts in the Ledger at the end of the month; and, as a result, debit entries amounting to $10,510 have been made. A summary journal entry is sometimes made in the Purchase Journal, at the end of each month, from which postings are made. To illustrate : Summary Purchases Stationery & Printing Insurance To Sundry Creditors (Posted) $10,250.00 20.00 240.00 $10,510.00 Illustration No. 63 PURCHASES (1 Ji LECTURES VII-VIII PROMISSORY NOTES 73 Definition. — "A promissory note is an unconditional promise in writing made by one person and signed by him, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to the order of another person or to bearer." (Huffcut.) The parties to a note are legally known as the "maker" and the "payee." The party who makes the note and whose promise is contained therein is known as the "maker" or "payor." The party to whom the promise is made is known as the "payee." Notes are usually made payable a certain number of days, months, or years after date, at the office of the maker or at his bank, and, if payable with interest, the words "with interest" are written on the face of the note. Why notes are accepted in settlement of accounts. — It often happens that invoices and accounts when due cannot be paid because the necessary cash is not available, in which case settle- ment of accounts is frequently made by notes. Merchants in such cases usually prefer to take a debtor's note rather than to carry the amount due on open account. All amounts due on open account only represent implied promises on the part of the debtors to pay, whereas notes are written promises to pay, and have a greater value in a suit at law because they are considered conclusive evidence of a debt owed by the maker, a condition which is not true of open ac- counts. Moreover, notes can be converted into cash more read- ily and under more favorable conditions than open accounts, for banks will discount notes but not open accounts^ Because of these facts, it is customary, whenever notes are received by us from customers or given by us to creditors, to treat the customers' and creditors' accounts as having been paid and to record in separate accounts the amounts of the notes received and the amounts of the notes given. The account used for recording the amounts of the notes received is known as the "Notes Receivable Account." The account used for recording the amounts of the notes given is known as the "Notes Payable Account." Notes Receivable. — For the purpose of illustrating the entries to be made on receipt of notes from customers, let us assume that John Doe owes us $500 on open account, and gives us in settlement his non-interest bearing note, due in 60 days. I ' i 1 f I /I e 74 BOOKKEEPING, THEORY AND PRACTICE If John Doe had paid us in cash, our entry expressed in ac- count form would have been as follows : Illustration No. 64 John Doe Cash Balance $500 $500 (i) (i) $500 Substituting for "cash" that which was received, viz., a note, the double entry expressed in account form is as follows: Illustration No. 65 John Doc Notes Receivable Balance $500 $500 (I) (i) $500 By debiting "Notes Receivable Account," and crediting "John Doe's Account," we have merely recorded a change in the assets of the business. Instead of having $500 due on open account, the business now has $500 due on a note which it holds. The entry to be made when the note is paid, expressed in account form, is as follows: Illustration No. 66 Notes Receivable Cash Balance $500 $500 (i) (i) $500 Cash must be debited with $500, because the asset "Cash" has been increased; and "Notes Receivable" must be credited because the asset "Notes Receivable" has been decreased. Notes are always recorded on the hooks at their face amount. Therefore, if John Doe were to give us his note for $500 pay- able in 60 days Tvith interest at 6%, the entry would be the same as in the case of a non-interest bearing note, viz., "Notes Receiv- able" $500 to John Doe. The entry to be made when the note is paid, expressed in account form, is as follows : LECTURES VII-VIII 75 Illustration No. 67 Notes Receivable Balance $500 Cash $500 (r) Interest & Discount Earned (O $505 $5 (I) "Cash" must be debited with $505, because that amount of cash was actually received. "Notes Receivable" must be cred- ited with $500, because the business parts with an asset recorded on the books at that amount; and since the difference ($5) be- tween the face amount of the note and the cash received repre- sents interest earned, a "gain" account such as "Interest & Discount Earned" must be credited. The note is sometimes made with interest included in the face amount of the note, instead of being made payable "with inter- est," in which case the amount of the interest is recorded on the books when the note is received. To illustrate. Let us assume that John Doe gives us his note for $505 payable in 60 days, in settlement of his account, in amount $500. The entry to be made on receipt of the note,, expressed in account form, is as follows : Illustration No. 68 John Doe Balance $500 Notes Receivable $500 (i) Interest & Discount Earned (i) $505 $5 (I) "Notes Receivable Account" must be debited with $505, be- cause a note for that amount was received; "John Doe's Ac- count" must be credited with $5CX), because the amount owing by him on open account has been decreased to that extent; and "Interest and Discount Earned Account" must be credited with the difference ($5), which represents interest for 60 days on the amount of the indebtedness, $500. I, ^^1 76 BOOKKEEPING, THEORY AND PRACTICE The entry to be made when the note is paid is as follows : Illustration No. dp^ Notes Receivable Cash Balance $505 $505 (i) (I) $505 Notes payable.— For the purpose of illustrating the entry to be made when a note is given by us, let us assume that we owe James Smith $1,000 on open account and that we give him, in settlement, our non-interest bearing note, due in 60 days. If we were to pay James Smith $i/xx> in cash, the double entry expressed in account form would be as follows : Illustration No. 70 James Smith Cash (i) $1,000 Balance $r,ooo $1,000 (i) If we now substitute for cash that which was given, viz., a note, the double entry expressed in account form is as follows : Illustration No. 71 James Smith Notes Payable (i) $1,000 Balance $r,ooo $1,000 (i) By debiting "James Smith's Account" and crediting "Notes Payable Account," we have merely recorded a change in the Habilities of the business. Instead of owing James Smith $1,000 on open account, we now owe $1,000 on a note which we have given. The entry to be made when the note is finally paid is as fol- lows: Illustration No. 72 Notes Payable Cash (i) $r,ooo Balance $1,000 $1,000 (i) LECTURES VII-VIII 77 "Notes Payable Account" must be debited, because a liability in the form of a note has been paid; and "Cash Account" must be credited, because cash was given. If we were to give James Smith our note for $1,000 payable in 60 days with interest at 6%, the entry would be the same as in the case of the non-interest bearing note, viz., James Smith $1,000 to "Notes Payable," because notes are always recorded on the books at their face amount. The entry to be made when the note is paid, expressed in account form, is as follows : Illustration No. 73 Notes Payable (1) $1,000 Interest & Discount Expense Balance $1,000 Cash (i) $10 $1,010 (i) "Notes Payable Account" must be debited with $1,000, because a note recorded on the books at that amoimt has been paid; and an expense account such as "Interest and Discount Expense" must be debited with $10, because interest paid by the business is an expense. "Cash Account" must be credited with $1,010, because that amount of cash was actually paid. If we were to give James Smith our note for $1,010 due in 60 days in payment of his account, $1,000 and interest $10, the entry to be made, at the time the note is given, expressed in account form is as follows: II (i "I Illustration No. 74 James Smith (i) $1,000 Balance $1,000 V Interest & Discount Expense (i) $10 Notes Payable $1,010 (i) a 78 BOOKKEEPING, THEORY AND PRACTICE LECTURES VII-VIII 79 The entry to be made when the note is finally paid is as fol- lows: Illustration No. 75 Notes Payable Cash (i) $r,oio Balance |i,oio $1,010 (i) Procedure in recording notes.— Notes received or given are usually recorded in the journal except when they are received or given in large numbers, in which case a separate book of original entry is used known as the "Notes Receivable and Notes Payable Book." The "Notes Receivable and Notes Payable Book" is divided into two parts: in one part of the book, notes receivable are recorded; in another part, notes payable. In some instances, a separate book is kept for each kind. The "Notes Receivable and Notes Payable Book" may be used as a memorandum book or as a book of original entry. It is used as a memorandum book when, in the journal, notes received and given are recorded, from which book they are posted to the Ledger and in addition thereto are recorded as a memorandum in the "Notes Receivable and Notes Payable Book." It is used as a book of original entry when notes re- ceived and given are recorded only in the "Notes Receivable and Notes Payable Book," from which they are posted to the Ledger. Notes received from customers are usually held in the safe until a short time before they fall due, (allowance is made for out-of-town notes), and are then endorsed and sent to the bank for collection. No entry is made by us when a note is sent 'to the bank for collection, because the bank is merely acting as our agent. When the note is paid by the maker, the bank will record the amount of the proceeds in the Bank Pass Book; and the entry covering the payment of the note is then made on our books. If the note is not paid, it will be returned to us by the bank, at which time we make an entry reversing the entry originally made on receipt of the note. Notes given by us may be made payable either at our office or at our bank. As a rule, notes are made payable at the bank. If payable at our office, the note, when presented, will be paid by check; if payable at our bank, it is presented by the holder to our bank where it is paid (if we have the necessary funds on deposit). How interest on notes is calculated. — Interest on notes is always calculated on the commercial basis, which considers the year as having 360 days divided into 12 months of 30 days each. Although all banks use the commercial basis in calculating interest on notes left with them for collection, yet they differ in the manner in which they arrive at the number of days on which interest is to be calculated. To illustrate. Let us assume that notes dated Feb. i, each in the amount of $500 and payable in 3 months with interest at 6%, were left with different banks for collection; it would be found that some banks would collect 90 days' interest whereas other banks would collect only 89 days' interest. Most country banks and some city banks make it a rule, in calculating interest on notes left with them for collection, to charge only for the actual number of days between the date of the note and payment thereof. Thus a note dated Feb. i, due in 3 months is payable on May i or 89 days after date. Therefore, they charge only 89 days' interest. Whereas other banks are governed in charging interest by the time specified in the instrument, which in this case is 3 months, or 90 days. But in discounting notes, all banks use the same method for arriving at the nimiber of days on which interest is to be cal- culated; viz., they take the number of days between the date of discount and the date of payment. Additional interest is also charged in all cases on notes falling due on a Saturday or Sunday, because notes falling due on either of those two days will not be paid until the following Monday. Methods used for calculating commercial interest — ^The fol- lowing formulae will be of assistance in calculating commercial interest : (a) 60-day Method Principal equals interest for 12 mos. or 360 days at 1%, or 100 a 6 « it 180 tt ** 2%, or M u 4 (( (f 120 tt " 3%, or « *{ 3 it K go tt " 4%. or « tt 2 it tt 60 tt " 6%, or M M I u *i 30 u " 12% il (J I I 8o BOOKKEEPING, THEORY AND PRACTICE. LECTURES VII-VIII 8l Problem: What is the interest on $200 for 3 months at 6%? Solution : $200- divided by 100 equals $2 interest for 2 months. $2 (the interest for 2 months) divided by 2 (number of mos.) equals $1 interest for i month. Therefore, $3 is the int. for 3 mos. (b) 36% Method Principal X (times) number of days equals interest at 36%. 1000 Interest at 36% equals interest at 6%. 'o. Problem: What is the interest on $200 for 90 days at Solution : Principal, $200, X number of days (90) equals $18,000. $18,000 divided by 1000 equals $18.00 (interest at 36%). $18 (interest at 36%) divided by 6 equals $3 (interest at 6%). (f) Interest for one day by 6% Method Principal 1000 equals interest for one day at oyo. Problem: What is the interest on $200 for 90 days at 6%? Solution : $200 divided by 1000 equals 20 cents. $ .20 " " 6 " -03333 1-3 cents interest for one day. •03333 1-3 (interest for one day) times 90 days equals $3.00, interest on $200 for 90 days at 6%. DISCOUNTING NOTES What is meant by discounting notes. — ^When a merchant whose credit is good is in need of ready cash with which to conduct his business, he usually looks to the bank to advance credit on his own note, or on notes which he has received from his customers. The bank is said to discount a note when it credits the mer- chant's account with the "proceeds" of a note. By "proceeds" is meant the amount, at maturity, of a note or draft less the interest at a certain percent from the date of discount to the date of payment. Thus the bank advances its credit to a merchant in con- sideration of simple interest for the period of time the loan or advance is to run. If the interest is deducted by the bank when it makes the advance it is called "discount" instead of interest," and the advance is called in the parlance of bankers, a discount." If the interest is payable at maturity, the ad- vance is called "a loan." « (f How bank discount is calculated.— We have already learned that bank discount is simple interest paid or received in advance. Banks usually charge interest on the commercial (360 day) basis for the exact number of days from the date on which the note is discounted to the date on which the note will be paid, regardless of whether the note is made payable in a certain number of days or months after date. To illustrate. Let us assume that a note, in amount $500, dated Feb. i, paySkble three months after date, is discounted at the bank on Feb. 15. The note is due on May i. Therefore the bank would charge interest or discount as it is called from Feb. 15 to May i (the time during which it advances its credit) which is 75 days. If the note in question were made payable in 90 days instead of 3 months, it would be payable on May 2, instead of on May i. Therefore, the bank would charge interest from Feb. 15 to May 2 which is 76 days. It should be borne in mind that an additional day's interest is charged on discounted notes which fall due on a legal holiday or on Sunday. In the states in which Saturday afternoon is a legal holiday, notes which fall due on Saturday are not pre- sented for payment until the following Monday. In this case, two days' additional interest is charged. The bank charges interest or discount, as it is called, on the amount which it will collect at maturity of the note. In the case of an interest-bearing note, the bank will collect at matur- ity not only the amount shown on the face of the note, but also the interest on the note. Procedure in discounting notes. — When we discount our own paper, we make a non-interest bearing note, payable to the bank at which it is to be discounted, and then take it to the bank. When we discount a note received from a customer, we en- dorse the note and take it to the bank for discount. (Notes or drafts left with the bank for discount must not be confused with notes or drafts left with the bank for collection.) We have already learned that no entry is made on our books of account when we leave a note or draft with the bank for collection, because the bank, in making collection, merely acts as our agent, and therefore does not credit our account until it receives payment on the note or draft. Hence, not until the note or draft is paid is an entry made on our books; whereas when we discount a note at the bank, the bank immediately advances the proceeds of the note in the form of a credit to W 82 BOOKKEEPING, THEORY AND PRACTICE our account. Therefore, an entry on our books must be made immediately on discounting a note. The sources of information from which the entry covering the discounting of a note is made on our books, is the state- ment received from the bank which shows the amount at matur- ity of the note, the amount of the discount deducted by the bank, and the amount (proceeds) credited to our account. Entries to be made when we discount our own note. — Let us assume for the purpose of illustration that we discount, at the bank on April i, our own note dated April i, in amount $5,000, payable in three months; and that the rate of discount is 6%. In this case, the double entry expressed in account form is as follows : Cash (i) $4,929.17 Illustration No. 76 Interest & Discount Expense (I) $75.83 Notes Payable $5,000 (I) Note that $75.83 is the discount on $5,000 for 91 days (April i to July i) at 6%. Since we created a liability of $5,000 and acquired an asset of only $4,924.17, it follows that we incurred an expense of $75.83. Therefore "Cash Account" must be debited for the amount of cash received, "Interest and Discount Expense Ac- count" must be debited for the amount of the discount expense, and "Notes Payable Account" must be credited for the amount of the note given. By debiting "Cash Account," we are record- ing an increase in assets; by debiting "Interest and Discount Expense Account," we are recording a decrease in proprietor- ship; by crediting "Notes Payable Account," we are recording an increase in liabilities. The entry to be made when the note is paid by us on July i is as follows: Notes Payable Illustration No. 77 Cash (I) $5,000 Balance $5,000 $5,000 (I) LECTURES VII-VIII 83 "Notes Payable Account" must be debited, because a debt in the form of a note payable is paid; and "Cash Account" must be credited, because cash is given. By debiting "Notes Payable Account," we are recording a decrease in liabilities; and by crediting "Cash Account," we are recording a decrease in assets. Entries to be made when we discount a customer's note.— Let us assume, for the purpose of illustration, that we discount at the bank on April 15, a non-interest bearing note dated April i, in amount $1,200, due in 60 days, received from a customer,' and that the rate of discount is 6%. In this case, the double entry expressed in account form is as follows : Illustration No. 78 Notes Receivable Balance $1,200 Interest & Discount Expense (i) $9.20 $r,2oo (i) Cash (i) $1,190.80 (i Note that $9.20 is the discount on $1,200 for 46 days ( April i<; to May 31) at 6%. J ^ f :> Since we part with a note recorded on our books at $1 200 m exchange for $1,190.80 in cash, it follows that we incur an expense of $9.20. Therefore, "Cash Account" must be debited because cash was received; "Interest and Discount Expense Account" must be debited, because an expense has been in- curred; and "Notes Receivable Account" must be credited, be- cause a note received from a customer was given. By debiting "Cash Account," we are recording an increase in assets; by debitmg "Interest and Discount Expense Account," we are recording a decrease in proprietorship ; and by crediting "Notes Receivable Account," we are recording a decrease in assets. Now let us assume that the above note bore interest at the rate of 6% per annum. In this case the bank would calculate the discount as follows : 1^1 \1 84 BOOKKEEPING, THEORY AND PRACTICE. Illustration No. 79 Principal $1,200. Add interest for 60 days at 6% 12. Amount at maturity of the note $1,212. Deduct discount at 6% for 46 days (April 15 to May 31) $9 29 Proceeds $1,20271 I I ^ i'l I II Although we discount the note at the bank, it will be noticed that we receive more than the face amount of the note. This is due to the fact that we have earned the interest on the note from the date thereof to the date of discount (April i -April 15). The entry to be made, expressed in account form, is as fol- lows: Illustration No. 80 Notes Receivable Balance $1,200 Cash $1,200 (i) Interest & Discount Earned (i) $1,202.71 $271 (i) Since we part with a note recorded on the books at $1,200 and receive in exchange $1,202.71 in cash, it follows that we have earned $2.71. Therefore, "Cash Account" must be deb- ited, because cash was received; "Notes Receivable Account" must be credited, because a note received from a customer was given; and "Interest and Discount Earned Account" must be credited, because we made a gain. By debiting "Cash," we are recording an increase in assets; by crediting "Notes Re- ceivable," we are recording a decrease in assets; and by credit- ing "Interest and Discount Earned," we are recording an in- crease in proprietorship. "C.O.D." ACCOUNT Introductory. — "C.O.D." is the commercial abbreviation for "collect on delivery." LECTURES VII-VIII 85 Almost every trading and manufacturing business, at times, receives orders from customers whose credit is doubtful. In such cases, arrangements are made to ship the goods C.O.D.; i.e., pa)rment to be made on delivery of goods. In some instances, no entry is made on the books of account when the goods are shipped. On receipt of the cash, an entry is made charging cash accoimt and crediting sales account. The transaction is thus treated as a cash sale. The better method, however, is to keep a "C.O.D" account in the ledger. This account, which is in the nature of a cus- tomer's account, is charged whenever goods are shipped C.O.D., and is credited when payment is received. A control over such items is thus established. In the illustration which follows, it will be observed that two of the four C.O.D. shipments remain unpaid. C.O.D. 19— Nov. 6 8 8 9 Higgin & Co. I. Cohen Broad St. Co. The Arcade S. $100 S. 200 S. 300 S. 400 19— Nov. 8 9 I. Cohen The Arcade C. $200 C 400 QUESTIONS (i) State your objections, if any, to the "Merchandise" accoimt. Describe a different method of recording the trans- actions shown by that account. (2) State the fimctions of (a) the sales journal; (b) the purchase journal. (3) Rule the form of a purchase journal providing for 10 distribution columns. In each distribution column write what you would consider an appropriate heading. (4) Rule the form of a purchase journal providing for 5 distribution columns. Record six transactions in the purchase journal using the five distribution columns. Using skeleton (T) ledger accounts, post from the purchase journal. (5) Name ten expense accounts which you think should be kept in the ledger of every trading concern. (6) A. Reid gives Taylor Mfg. Co. his note for $3,000 dated Jan. 30, due in one month, payable with interest at 6% at the Wall Street Trust Co. >e 86 w BOOKKEEPING. THEORY AND PRACTICE (a) Write the note. (b) Assuming that the note is paid at maturity, express: m journal form all the entries on the books of A. Reid. (c) Express in journal form all the entries on the books of Taylor Mfg. Co. (7) On Mar. 5, A. Reid receives a note in amount $i,ocx), payable in two months with interest at 6%, from Townsend & Co. On Mar. 12, he discounts the note at his bank. The discount rate is 6%. Make all the necessary entries on the books of A. Reid. (8) On Mar. 12, A. Reid discounts at the Wall Street Trust Co. his note in amount $2,000, due in 60 days. Assuming that the note is paid at maturity, make all the necessary entries. i f^ /I k w LECTURE IX CONTROLLING ACCOUNTS AND SUBSIDIARY LEDGERS Introductory.— At one time, a single ledger was the only book of final entry used for recording business transactions. As a matter of convenience, this ledger was usually divided into three sections. One section was devoted to all accounts of the business other than customers' and creditors' accounts; the second section was devoted to customers' accounts; and the third section to creditors' accounts. Such a system was found to be adequate when customers and creditors were compara- tively few in number. But when customers and creditors began to increase in number, accounts with them could no longer be conveniently kept in one ledger. As an illustration, let us consider the case of a concern that has several thousand customers' accounts and several hundred creditors' accounts. If all the accounts of the business were kept in a single ledger, certain disadvantages would obtain. For example, only one man could be engaged in posting at any given time; the ledger would become crowded with ac- counts, and eventually it would become impossible to provide a single ledger that could be conveniently handled to hold all the accounts of the business ; the task of taking a trial balance would become exceedingly difficult, since, the more accounts there are in a ledger, the more items there will be in the trial balance and hence the greater will be the chance of making errors; and, should information be desired regarding the total amount due from customers or the total amount due to creditors, such information could be had only by extracting the balance ojf every customer's and every creditor's account and preparing a statement showing the total. It is therefore obvious that the use of a single ledger is limited to a concern having compara- tively few customers' and creditors' accounts. The modem practice.— To overcome the disadvantages and limitations of the single ledger, the modem practice is to keep the customers' and creditors' accounts in subsidiary ledgers known respectively as the Customers' Ledger and the Creditors' 87 88 BOOKKEEPING, THEORY AND PRACTICE Ledger, and to establish controlling accounts in the General Ivedger; ..e., a separate ledger is kept for customers' accounts only, and a separate ledger is kept for creditors' accounts A controlling account known as the Customers' Controlling Ac- count IS established in the general ledger, which reflects in total the accounts appearing in detail in the subsidiary ledger A similar account known as the Creditors' Controlling Account .s estabhshed m the general ledger for creditors' accounts By this system, three ledgers are kept; viz., the General Ledger (the ledger from which the trial balance is taken), the Cus- tomers Ledger (also known as accounts receivable or sales ledger), and the creditors' ledger (also known as accounts pay- able or purchase ledger). Controlling account defined—A controlling account is a single account kept m the General Ledger which reflects, in total, the condition of two or more detail accounts of the same type as the controlling account. Examples of controlling accounts are': the Customers Controlling Account, and the Creditors' Con- trolling Account. The principle of a controlling account is based on the axiom that the whole is equal to the sum of all its parts." Thus the Customers' Controlling Account in the General Ledger repre- sents the whole. The individual customers' accounts 'in the Customers' Ledger represent the parts. Therefore, the balance of the Customers' Controlling Account, in the General Ledger should at all times be equal to the sum of all its parts, i.e., the mdividual customers' balances in the Customers' Ledger The ledgers in which the parts, i.e., the details, are kept, are called subsidiary ledgers. Subsidiary ledger defined.— A subsidiary ledger is a book of account which contains, in detail, accounts of the same type Examples of the most commonly used subsidiary ledgers are- The Customers', or Accounts Receivable, or Sales Ledger • the Creditors', or Accounts Payable, or Purchase Ledger How controlling accounts are established.-For the purpose of illustrating how controlling accounts are established, let us assume that the following accounts are open in the ledger of James Smith : ) LECTURE IX Illustration No. St General Ledger of J. Smith Cash J- Smith, Prop. 89 $2,000 Furniture & Fixtures $14,100 Notes Payable $1,000 Merchandise Inventory $1,000 J. Moore $8,000 Notes Receivable $400 D. Brown $3,000 $500 A. Duke L. James $500 O. Bliss $600 $600 L. Crane $700 E. Lee $800 Note that the ledger is in balance. Let us also assume that the customers' accounts, of which there are four (Duke, Bliss, Crane, and Lee), are to be trans- ferred to the Customers' Ledger, and a Customers' Controlling 90 BOOKKEEPING, THEORY AND PRACTICE « « (< Account is to be established in the General Ledger in their stead ; and that the creditors' accounts, of which there are three (Moore, Brown, and James), are to be transferred to the Cred- itors' Ledger, and a Creditors' Controlling Account is to be established in the General Ledger in their stead. The journal entry necessary to effect the transfer of the customers* accounts is as follows: Illustration No. 82 Customers' Controlling Account $2,600 To A. Duke O. Bliss L. Crane E. Lee To transfer the customers* accounts to the Customers' Ledger and to establish a controlling account. This entry effects the closing of the customers' accounts in the general ledger and the opening of the Customers' Control- ling Account in their stead. The customers' accounts thus closed in the general ledger must now be opened in the Cus- tomers' Ledger since the customers are still indebted to the concern. The journal entry necessary to effect the transfer of the creditors* accounts is as follows : Illustration No. 83 $500 600 700 800 J. Moore D. Brown L. James To Creditors' Controlling Account To transfer the creditors' accounts to the Creditors' Ledger and to establish a controlling account. $400 500 600 $1,500 This entry effects the closing of the creditors' accounts in the General Ledger and the opening of the Creditors' Controlling Account in their stead. The creditors' accounts thus closed in the General Ledger must now be opened in the Creditors' Ledger since the concern is still indebted to the creditors. / t \ LECTURE IX 91 LeSeV'ald C h! '''rr '" '"f ^"'^'^ ^^^^^^' Customers' Ledger, and Creditors' Ledger after the above journal entries have been posted is as follows : Illustration No. 84 General Ledger of James Smith ^^^ XSmith, Prop. $2,000 Furniture & Fixtures $1,000 Merchandise Inventory $8,000 Notes Receivable $3,000 A. Duke $500 Isoo O. Bliss $600 L. Crane $600 $700 E. Lee $700 P $800 $800 Customers' Controlling Ace. $14,100 Notes Payable $1,000 J. Moore $400 D. Brown $500 L. James $400 $500 $600 |6oo Creditors* Cont. Account $i,5oa $2,600 92 BOOKKEEPING, THEORY AND PRACTICE Illustration No. 8$ Customers' Ledger of James Smith A. Duke $500 O. Bliss $6oo L. Crane $700 E. Lee $8oo Illustration No. 86 Creditors' Ledger of James Smith J. Moore $400 D. Brown $500 L. James $6oo LECTURE IX 93 A trial balance prepared from the General Ledger at this point would be as follows : Illustration No. 87 General Ledger Trial Balance Debits Credits Cash $2,000 Furniture & Fixtures 1,000 Merchandise Inventory 8,000 Notes Receivable 3,000 Customers* Controlling A/c 2,600 Notes Payable $1,000 J. Smith, Proprietor 14,100 Creditors* Controlling Account 1,500 $16,600 $16,600 A statement of accounts open in the Customers' Ledger at this point would be as follows : Illustration No. 88 Schedule of Customers' Balances A. Duke O. Bliss L. Crane E. Lee $500 600 700 800 $2,600 A statement of accounts open in the Creditors' Ledger at this point would be as follows : Illustration No. 8g Schedule of Creditors' Balances J. Moore D. Brown L. James $400 500 600 $1,500 \ Operation of the customers' controlling account — It will be observed, from the foregoing illustrations, that the Controlling Accounts show in total what appears in detail in the subsidiary Ledgers. Thus the Customers' Controlling Account in the ^ 94 BOOKKEEPING. THEORY AND PRACTICE Ss toTlTe fh! .7"! "''"'"'"■ ^•'^ '*'="'^ -hich make up U»s total, ,.e., the details, appear in the Customers' Ledger PofteSTt m'T .T"'* ^"^^"""^^^ f- ^<^d^ -Id are posted m detail to the debit of customers' accounts in the Cus- troX 'f'^'^'r^' r r'- '° ''"^ 'J^"'' of Custome*' Con- custZrt' T *^ ^'""'' ^^^^'■•- Similarly, credits to the c«dt „r'T' ^°"' '"' '"'"'^^'^ ''' Po^t-d i" detail to the credit of customers' accounts in the Customers' Ledger and SeS utr'' °^ ^~-' ^--'""^ ^- "" "'e Let us assume, for the purpose of illustration, that the Sales Journal of James Smith shows the following transactions : Illustration No. go Sales Journal of James Smith (Page r) V A. Duke -j,^ V O. Bliss ^^ V L- Crane V E. Lee ^ 500 10 5 Customers' Controlling A/c To Sales $1,100 $1,100 $1,100 Jince customers' accounts are now carried in a subsidiary ledger it follows that A. Duke, O. Bliss. L. Crane, and E 72 must be debited in the Customers' Ledger with lio^, $200 $3^' and $soo, respectively. It should be borne in mind, ^t tS^' point, that the trial balance is taken from the General Ledger only^ Thus It will be seen that a double entry must be made in the General Ledger. The double entry to be made in the General Ledger, expressed in account form, is as follows : Customers' Controlling Account $1,100 Sales $1,100 Since the Customers' Controlling Account in the General Ledger takes the place of the individual customers' accounts, .t follows that Customers' Controlling Account must be debited LECTURE IX 95 Let us also assume that the Cash Journal of James Smith shows the following cash receipts : Illustration No. gi Cash Journal of James Smith ^^__^ Cash Receipts (Page 2) Explana- Cu. I>ate Account tion L. A. Duke On account V Notes Receivable Int. on Notes Receivable L. Crane E. Lee Dr. Cash Dr. Cash Dis- count on sales Cr. Customers' Cont. A/c Cr. (posted in detail) G. L. Net Int. Customers' Gen. Cash &Dis. Ledger Ledger II V V $300 3,030 686 784 $4,800 $300 $14 16 $3,000 JO 700 800 $30 $1,800 $3,030 Note that items checked indicate postings made in the Cus- tomers' Ledger. It will be observed that a special or individual Customers' Ledger column is used, in which are recorded only those amounts to be carried to the credit of accounts in the Cus- tomers' Ledger. With the use of this additional column it is possible to arrive at the total credits made in the Customers' Ledger and then post in total to the Customers' Controlling Account m the General Ledger. Each individual item in the Customers' Ledger column is posted to the credit of its respective account in the Customers' Ledger. In practice such postings are made daily. It should be borne m mmd at this point that the trial balance is taken from the General Ledger only. A double entry, therefore, must be made m the General Ledger from the receipt side of the Cash Journal. The double entry to be made, expressed in account form, IS as follows : Cash $4,800 Notes Receivable $3,000 96 BOOKKEEPING, THEORY AND PRACTICE Cash Discount on Sales Interest on Notes Receivable $30 $30 Customers' Cont. Ac. $1,800 It will be observed that postings in the General L,edger are made in detail from the General Ledger colirnm, and in total from the other three colunms. The status of the accounts in the General Ledger and in the Customers' Ledger after the foregoing sales and cash trans- actions have been recorded, is as follows : Page No. I Illustration No. 92 General Ledger of James Smith After posting Sales and Cash Receipts Cash Balance Total Receipts Page No. 2 Balance Page No. 3 Balance Page No. 4 Balance Page No. 5 Balance Total Sales $2,000 C2 4,800 Furniture and Fixtures 1,000 Merchandise Inventory 8,000 Notes Receivable 3,000 Cash Customers' Controlling Account 2,600 1,100 Total Cash C $3,000 1,800 LECTURE IX 97 Page No. 6 Total Page No. 7 Page No. 8 Page No. 9 Page No. 10 Page No. II Page No. I Balance Sales Page No. 2 Balance Sales Page No. 3 Balance Sales Cash Discount on Sales 30 James Smith, Proprietor Balance Notes Payable Balance Creditors' Controlling Account Balance Sales Totals Interest on Notes Receivable Cash Illustration No. gs Customers' Ledger of James Smith A. Duke $500 100 Cash O. Bliss 600 S 200 L. Crane 700 Cash 14,100 1,000 1,500 S 1,100 30 C $300 700 98 Page No. 4 BOOKKEEPING, THEORY AND PRACTICE E. Lee Balance Sales 800 500 Cash 800 A trial balance taken from the General Ledger at this point would be as follows : Illustration No. ^4 James Smith General Ledger Trial Balance Taken after Sales and Cash Receipts have been posted 3 5 6 7 8 9 10 II Cash Furniture and Fixtures Merchandise Inventory Customers' Controlling Account Cash Discount on Sales J. Smith, Proprietor Notes Payable Creditors' Controlling Account Sales Interest on Notes Receivable $6,800 1,000 8,000 1,900 30 $14,100 1,000 1,500 1,100 30 $17,730 $17,730 A statement of accounts open in the Customers' Ledger of James Smith would be as follows : Illustration No. 95 James Smith ^ Schedule of Customers' Balances 1 A. Duke 2 O. Bliss 3 L. Crane 4 E. Lee $300 800 300 500 $1,900 Operations of the creditors' controlling account— The Credi tors' Controlling Account is operated in the same manner as the Customers Controlling Account; i.e., credits to be made to creditors accounts for goods purchased are posted in detail in the Creditors Ledger and in total to the Creditors' Controlling I LECTURE IX 99 Account m the General Ledger. Similarly, debits to creditors for cash paid them are posted in detail to the debit of creditors' accounts in the Creditors' Ledger and in total to the Creditors' Controlling Account in the General Ledger. Let us assume, for the purpose of illustration, that the Pur- chase Journal of James Smith shows the following transactions : Illustration No. g6 Purchase Journal of James Smith (Page i) Date Name Cr. L.F. Station- Insur- Amount Purchases ery ance J. Murphy D. Dark L. James V y V $10 50 800 $10 $800 $50 $860 $800 %{^ $55 14 15 16 Note that items checked indicate postings made in the Cred- itors' Ledger. Since the creditors' accounts are now carried in the Creditors' Ledger, it follows that the items in the amount column must be posted to the credit of their respective accounts in the Creditors' Ledger; and since the trial balance is taken from the General Ledger only, it follows that a double entry must be made in the General Ledger. The double entry to be made in the Gen- eral Ledger, expressed in account form, is as follows : Purchases Creditors' Controlling Acxrount $800 Stationery $860 $10 Insurance $50 100 BOOKKEEPING, THEORY AND PRACTICE' Let us also assume that the Cash Journal of James Smith shows the following cash payments : Illustration No. g/ Cash Journal of James Smith Payment Side (Page 3) Date Account Explana- Cr. G. Net Int. & Creditors' Gen. tion L. L. Cash Disc. Ledger Ledger L. James J. Moore Notes Payable Int. on Notes Payable D. Clark Cr. Cash Cr. Cash Dis. on Purchases Dr. Creditors* Cont. Ac. Dr. (posted in detail) V V 8 12 $588 $12 392 8 1,010 $600 400 $1,000 10 49 z $21 50 I 3 $2,039 9 $1,050 $1,010 Note that items checked (V) indicate postings made in the Creditors' Ledger. It will be observed that a special or individual Creditors' Ledger column is used in which are recorded only amounts to be posted to the debit of accounts in the Creditors' Ledger. With the use of this additional column it is possible to arrive at the total of the debits made in the Creditors' Ledger and to post in total to the debit of the Creditors' Controlling Account in the General Ledger. Each individual item in the Creditors' Ledger column is posted to the debit of its respective account in the Creditors' Ledger. In practice such postings are made daily. It should be borne in mind at this point that the trial balance is taken from the General Ledger only. A double entry, therefore, must be made in the General Ledger from the payment side of the Cash Journal. The double entry to be made, expressed in ac- count form, is as follows : Notes Payable Cash $1,000 $2,039 LECTURE IX lOI Interest on Notes Payable Cash Discount on Purchases $10 Creditors' Controlling Account $21 $1,050 It will be observed that postings in the General Ledger are made in detail from the General Ledger column and in total from the other three columns. In order to illustrate now how notes received from customers and notes given to creditors are recorded in "The Journal" when controlling accounts are kept, let us assume that James Smith receives from his customer O. Bliss a 60-day note in amount $600, and gives to his creditor, D. Brown, his 60-day note in amount $500. Assuming that the standard two-column Journal is to be used, the entries would be as follows: Illustration No. g8 James Smith Journal (Page i) Date 4 Notes Receivable 5 To Customers' Controlling Ace. O. Bliss $600 His note dated due in 60 days. 9 Creditors' Controlling Account D. Brown $500 8 To Notes Payable Our note dated due in 30 days. $600 $600 $500 $500 $1,100 $1, 100 Note that items checked (V) indicate postings made in the Subsidiary Ledgers. Since the trial balance is taken from the General Ledger only, it follows that a double entry must be made in that Ledger i02 BOOKKEEPING, THEORY AND PRACTICE covering the receipt of the note. The double entry to be made, expressed in account form, is as follows : Notes Receivable Customers' Cont. Account $600 $600 And since O. Bliss, by giving us his note, has reduced the amount which he owes us on open account, it follows that his account must be credited in the Customers' Ledger. Similarly a double entry must be made in the General Ledger covering the note given. The double entry to be made, ex- pressed in accoimt form, is as follows : Creditors' Controlling Ace. Notes Payable $500 $500 And, since we have reduced the amount which we owe D. Brown on open account by giving him our note, it follows that his account must be debited in the Creditors' Ledger. It will be seen from the foregoing journal entries that, when- ever we debit or credit the Customers* Controlling Account, we must debit or credit some accoimt in the Customers' Ledger and vice versa; and whenever we debit or credit the Creditors' Controlling Account, we must debit or credit some account in the Creditors' Ledger. Our books of original entry, however, are usually arranged so as to enable us to post to the control- Hng accounts in total. Consequently, whenever the Journal is frequently used for making entries, it is the practice to provide a special six-column journal in which provision is made for a debit and credit column for each ledger; viz., Customers', Cred- itors', and General Ledger. The method of recording trans- actions in the six-column journal will be illustrated at the end of this chapter. i LECTURE IX 103 The status of the accounts in the General, Customers', and Creditors' Ledgers at this point is as follows : Illustration No. gg General Ledger of James Smith After posting from sales book, purchase book, cash book, and journal Page I Cash Balance Total Receipts $2,000 C2 4,800 Total Payments $2,039 Page 2 Furniture & Fixtures Balance 1,000 Page 3 Merchandis( J Inventory Balance 8,000 Page 4 Notes Receivable Balance 0. Bliss 3,000 Ji 600 Cash C2 3,000 Page 5 Customers' Controlling Account Balance Total Sales 2,600 1,100 Total Cash Notes Rec. C2 Ji 1,800 600 Page 6 Cash Discount on Sales Total C2 30 Page 7 James Smith, Proprietor Balance 14,100 I04 BOOKKEEPING, THEORY AND PRACTICE Page 8 Notes Payable Cash Page 9 C3 1,000 Balance D. Brown Creditors' Controlling Account Total Payments Note Pay. Page 10 Page II Page 12 Cash Page 13 Page 14 Total Page 15 Total Page 16 Total Page I Balance Sales C3 1,050 Ji 500 Balance Total Sales Total Interest on Notes Receivable Cash Interest on Notes Payable C3 10 Cash Discount on Purchases Total Purchases P.Ji 800 Stationery PJi to Insurance P.Ji ■SO Illustration No. joo Customers* Ledger of James Smith A. Duke Si $500 100 Cash Ji C2 C3 1,000 500 1,500 PJi 860 Si 1,100 30 21 €2 $300 f i^ Cash Page 4 Page 5 Cash LECTURE IX 105 Page 2 0. Bliss Balance Sales Si 600 200 Note Received Ji 600 Page 3 L. Crane Balance Sales Si 700 300 Cash C2 700 Page 4 E. Lee Balance Sales Si 800 500 Cash C?. 800 Illustration No. loi Creditors' Ledger of James Smith Page I J. Moore Cash C3 $400 Bal. transferred Ji $400 Page 2 D. Brown Note Pay. Jl 500 Bal. transferred Ji 500 Page 3 L. James C3 600 Bal. transferred Purchases J. Murphy Jl Jl Stationery PJl D. Clark C3 SO Insurance P.Ji 600 800 10 50 T I i f io6 BOOKKEEPING, THEORY AND PRACTICE f A statement of accounts open in the Customers' Ledger of James Smith at this point would be as follows : Illustration No. 102 James Smith Schedule of Customers' Balances A. Duke O. Bliss L. Crane E. Lee I 2 3 4 $300 200 300 500 $1,300 A statement of accounts open in the Creditors' Ledger of James Smith at this point would be as follows : Illustration No. 103 James Smith Schedule of Creditors' Balances 3 L. James $gQo 4 J. Murphy jq $810 A trial balance taken from the General Ledger of James Smith at this point would be as follows : Illustration No. 104 James Smith General Ledger Trial Balance After posting Sales, Purchases, Cash and Journal Entries 3 4 5 6 7 8 9 ID ir 12 13 14 IS 16 Cash Furniture & Fixtures Merchandise Inventory Notes Receivable Customers' Controlling Account Cash Discount on Sales James Smith, Proprietor Notes Payable Creditors' Controlling Account Sales Interest on Notes Receivable Interest on Notes Payable Cash Discount on Purchases Purchases Stationery Insurance $4,761 1,000 8,000 600 1,300 30 $14,100 500 810 1,100 30 10 21 800 10 SO $i6,56r $i6,s6i D \ LECTURE IX 107 The ease with which controlling accounts are operated in practice. — ^When controlling accounts are used, it is the practice to post all items recorded in the Sales Journal to the debit of accounts in the Customers' Ledger, and to post all items recorded in the Purchase Journal to the credit of accounts in the Cred- itors' Ledger. For example, if we buy from, and sell to, let us say, L Scott, we should have an account for him in the Cus- tomers' Ledger and an account in the Creditors* Ledger. We should not, for example, keep only one account, let us say, in the Creditors' Ledger, and debit that account from the Sales Journal when we sell merchandise to him. Thus, it will be seen that, by this system, the total of the Sales Journal represents the amount to be posted to the debit of Customers' Controlling Account in the General Ledger, since each item in the Sales Journal was posted to the debit of some account in the Customers' Ledger. Similarly the total of the amount column, in the Purchase Journal, represents the amount to be posted to the credit of Creditors' Controlling Account in the General Ledger. It is the practice among the larger con- cerns, when they buy from and sell to any one concern, to make payment for goods purchased, and to receive payment for goods sold, instead of deducting the amount of goods sold from the remittance covering goods purchased. Sometimes a concern has occasion to receive cash from a creditor and to pay cash to a customer. Such is the case when goods purchased or sold have been paid for and subsequently returned. For example, if we purchase $1000 worth of mer- chandise from John Doe, pay him, and subsequently have occa- sion to return part or all of the merchandise because of some defect, we should have occasion to receive a check from a cred- itor. If such transactions were niunerous, as is the case when goods are shipped in containers for which payment is made and credit received when returned, a special or individual "Cred- itor's Ledger" column is used on the receipt side of the Cash Journal. Similarly a special or individual "Customers' Ledger" column is used on the payment side of the Cash Journal when payments to customers are frequent. We have already explained the advantage of a six-column journal. We shall now illustrate the manner in which trans- actions are recorded in this journal. The six-column journal. — Let us assume, for the purpose of illustrating the manner in which transactions are recorded in I loS BOOKKEEPING, THEORY AND PRACTICE » the Six-Column Journal, that the customers' and creditors' accounts in the General Ledger of James Smith at the beginning of the period (see Illustration No. 99), are to be transferred to the Customers' and Creditors' Ledgers respectively and that controlling accounts are to be established in the General Ledger in their stead. Let us also assume that the note received from O. Bliss, in amount $6cx), and the note given to D. Brown, in amount $500 (see Illustration No. 98), are to be recorded in the Six-Column Journal. The entries to be made in the Six-Column Journal would be as follows: fi I LECTURE IX 109 Illustration No. 105 James Smith Journal Acc'ts Acc'ts Gen. V V Gen. Acc'ts Acc'ts Payable Rec'v'ble Ledger Ledger R'c'v'ble Pay'ble $500 V A. Duke • 600 V 0. Bliss 700 V L. Crane 800 V E. Lee To A. Duke 17 " 0. Bliss 18 " L. Crane 19 " E. Lee 20 To transfer the customers* ac- counts to the Customers* Ledger. $500 600 700 800 $400 21 J. Moore 500 22 D. Brown 600 23 L. James To J. Moore V " D. Brown V " L. James V To transfer the creditors* ac- counts to the Creditors* Ledger. Creditors' Cont. Ac. 9 5 Customers* Cont. Ac. $1,500 $400 500 600 $1,500 $2,600 $2,600 $4,100 $4,100 6qo 4 Notes Receivable ~ To 0. BHss V His 60-day note $600 $500 500 V D. Brown To Notes Pay- able 8 Our 30-day note 9 Creditors' 500 d»- $500 Cont. Ac. Customers' Cont. Ac. 5 600 $1,100 $600 $1,100 I I 1^ no BOOKKEEPING, THEORY AND PRACTICE Note that items checked indicate postings made in the Sub- sidiary Ledgers. The three columns to the left of the explanation space are debit columns; the columns to the right are credit columns. The first journal entry effects the closing of the customers' accounts in the General Ledger and the opening of these ac- counts in the Customers' or Accounts Receivable Ledger. For example, A. Duke's account is to be closed in the General Ledger and opened in the Customers' Ledger. A. Duke's account must therefore be debited in the Accounts Receivable or Customers' Ledger, and credited in the General Ledger. The Customers' Controlling Account is established in the General Ledger by footing the Accounts Receivable column and extending the total in the General Ledger column for posting to the controlling account. In a similar manner, the second entry effects the clos- ing of the creditors' accounts in the General Ledger, and the opening of these accounts in the Accounts Payable or Creditors' Ledger. The Creditors' Controlling Account in the General Ledger is established by footing the Accounts Payable column and extending the total in the General Ledger column for post- ing to the controlling account. It will be observed that a double entry has been made in the General Ledger, i.e., in the ledger from which the trial balance is taken. The third entry reads as follows: Debit "Notes Receivable" in the General Ledger $600; credit O. Bliss in the Accounts Receivable or Customers' Ledger $600. The fourth entry reads as follows: Debit D. Brown in the Accounts Payable or Creditors' Ledger $500; credit Notes Pay- able in the General Ledger $5Cxd. It will be observed from this illustration that totals of the Account Receivable and Account Payable columns are carried in the General Ledger column for posting to the controlling account. In spite of the fact that the Six-Column Journal is extremely practical, and is commonly used in business, in the practice set we shall use the two-column standard Journal because we wish to impress upon the student the fact that, whenever a debit or a credit to a customer's or creditor's account in the Subsidiary Ledger is made, a corresponding debit or credit must be made to the respective controlling account in the General Ledger and vice versa. Advantages of controlling accounts. — The chief advantages of controlling accounts are as follows: ,r ' LECTURE IX III records ^^^^ ""^^^ ^""'"'^^^ *^^ '^'^''''''' ""^ ^^^""^ '"^ ^^^^^"^ ^^^ (2) They make possible the localization of errors in posting to accounts in the ledgers and thus obviate the necessity of checkmg back all postings in the event of an error. officei ^^^^ ^'^^^^^sh a coptrol of the work by the accounting (4) They make possible the preparation of financial state- TnTtl^'/? ^""^' '^"'' ^^^ ^^^^^ ^"^^""t due from customers and the total amount due to creditors can be had from the con- trol hng accounts without first listing the individual customer's and creditor's balances. QUESTIONS I. 2. (a) What is meant by controlling accounts^ (b) Give two illustrations of the use of such accounts. (c) State the advantages of such an account. Describe the procedure you would follow in establishing a customers' controlling account. 3. What provisions, if any, should be made in books of original entry in order to establish and operate a customers' and creditors' controlling account ? LECTURE X "3 LECTURE X a CHECKS Introductory.-We are already familiar with the manner in which checks received and checks given are recordedTthe ^viL chT""' -^'r "''' •'°"^^*^' --« transactions in! ir^ ? u"T^^ '""^ '^^'^' ^^^" ^hich require ex- planation and which will be discussed at this point. Checte returned to us by our creditors—If, i„ payine an mvo.ce by check, we were to deduct cash dis ount Xr th^ exp.rat.on of the discount period, the creditor, in aH Iba! w Sold "*"™ *f ^^^'^ *° "^ -* the r;quest th^t rfull E'"?"'" *'* '"""" '^ *^"^ "^* ^«<1 *en remit m full. Checks, however, may be returned for other reasons The treatment of checks returned to us by our cred tors SfllrT "''*" "' "°* *^ ^•'^^'^^ •>-- bL recorded n the books of account. If the check has not been recorded in the books of account ceS" o^ ""';"''' -'^^ -t"™«^d, by writing the Id ■ W if the .h'f K "T" *' ^'"'^ °^ "'^ *«* and check stub. If the check has been entered in the cash book and posted r^L ,^^ . f""'^ '■'*"™^*' '"'8^*'* •'^ held until the invoice or the account from which the deduction was made, was due net, at which time an additional check would be dra^n for the Tcrlolld L't^r "f ''' ^~* °^ this TdduUa when r i J , '^ . '" ""' ""°""' °"8^"«"y -^--^dited when the deduction was made; or (2) it might be treated as a check received i.e., recorded on the receipt side of the ''Cash Book, endorsed, and deposited in the bank, and credited o the account originally debited when the check was S^ in ttrtir " '^'^ "f'"-" ^ ^"^^'^ ^^' *° ^ creditor^ lost "stopoe?' td t'T '"• P"^'"* °" '^' ^heck should be stopped and a duplicate or new check issued. Payment on the check IS stopped by instructing the bank not to^ay the check when presented. Such instructions are given in writing n which the date, the number, the amount, aid the pay Tf the check are given. A duplicate check is one which bea« t^e 112 same date and number as the original check, and is marked Duplicate." The check stub is not filled in if a duplicate check IS issued. No entry is made on the books of account when a duplicate check is issued, because the necessary entry was made when the original check was drawn. Two entries must be made when a new check is issued. A new check is one which bears a current number and the date of issue. The check stub is filled in whenever a new check is issued. An entry must be made on the receipt side of cash cancelling the entry made when the lost check was issued; and an entry must be made on the payment side of cash covering the new check issued. Checks dated ahead.— A check is "dated ahead," so far as the payee is concerned, when it bears a date subsequent to that on which it is received. We have learned from our definitions that a check is payable on demand, (but it is not payable on demand if it is presented for payment on a date prior to date on the check). Therefore a check dated ahead should properly not be considered as' having an actual value until the date on the check is reached and should not be recorded on the books or deposited in the bank until that date. Such checks are usually held in the safe until the dates of the checks and are then recorded on the books. Checks deposited with the bank and returned unpaid.— Since a check IS payable on demand, it follows that payment must be made when the check is presented. If the check is not paid when presentation is made, the check is said to be dishonored Banks, in making collections, as a rule protest for legal reasons dishonored checks. Protest is an affidavit to the effect that proper presentation was made and that payment could not be had. ^ When a check of a customer, deposited by us with the bank IS dishonored, the bank will charge our account with the amount of the check together with the protest fees, and will return the dishonored check to us. Therefore, we must record in our check book as a withdrawal the amount charged to us by the bank; and make an entry on the payment side of cash, debiting the account of the customer from whom the check was received and crediting cash. ' Certified checks—Duties, and sometimes taxes, notes, and I 114 BOOKKEEPING. THEORY AND PRACTICE drafts, must be paid by certified checks; i.e., by checks the payment of which is assured by the bank. A certified check .s one which bears the certification of a bank in the form of the word certified" written or stamped across the face of the Check and signed by a person authorized to certify checks at that bank. The bank then becomes personally liable for the check which It has certified. Therefore, the holder of a certified check ,s assured of its payment unless the bank itself should become bankrupt. When a bank certifies a check, it immediately charges the depositor s account, and treats the check in so far as the de- positor IS concerned as having been paid. Therefore, if a check of ours IS certified, let us say toward the latter part of the month, and is not paid by the bank until the following month the amount of the check will appear as a charge against oui^ account on the statement issued by the bank when our pass book ,s balanced, but will not be supported by the cancelled Check. Checks cashed—Unless it is against the policy of the busi- ness to cash checks, it frequently happens that an employee or the proprietor, or an officer in the case of a corporation, has his personal checks cashed by the business. In cashing checks the business receives a check in exchange for the currency which It pays out of petty cash. Such a transaction results in a de- crease in cash in the till, and, after the check is deposited, an equal increase m cash in the bank. The method of recording such transactions depends upon If separate accounts are kept in the ledger for "Cash" and for Petty Cash," it follows that the increase in cash must be recorded in the "Cash Account" and that the decrease in petty cash must be recorded in the "Petty Cash Account." In this case, an entry is made on the payment side of the "Petty Cash Journal," debiting an account usually styled "Checks Cashed" and crediting "Petty Cash Account"; and when the check is deposited, an entry is made on the receipt side of the "Cash Joumal^^ debiting "Cash Account" and crediting "Checks Cashed. The amount of the check is also recorded on the deposit side of the check book. On the other hand, if the petty cash is treated as part of the general cash; i.e., if the "Cash Account" in the ledger includes LECTURE X 115 both petty cash and cash in bank, it follows that, when a check is cashed, the balance of the "Cash Account" remains unchanged, since, in cashing a check, we merely increase the amount of cash on deposit with the bank and decrease the amount of cash on hand. In this case, an entry is made on the payment side of the "Petty Cash Journal"; and the check, when deposited in the bank, is recorded on the deposit side of the check book. No postings are made from the "Petty Cash Journal," because, if no separate account is kept on the ledger for "Petty Cash," this journal is used merely as a memorandum book. Giving a check in exchange for currency.— Occasionally the business is called upon, usually by an employee, to issue its check in exchange for currency. As in the case of checks cashed, no entry is made on the books of account if no separate account is kept in the ledger for "Petty Cash." There are two methods of recording such transactions, de- pending upon whether the currency received is deposited in the bank or withheld as petty cash: Method I. If the currency received is deposited in the bank, no records other than those on the check book covering the deposit and the check drawn are made. Method 2. If the currency received is treated as petty cash, an entry is made on the receipt side of petty cash. There are also two methods of recording such transactions if a separate account is kept in the ledger for "Petty Cash" : Method I. If the currency received is deposited in the bank (as is usually the case when a separate account is kept in the ledger for "Petty Cash"), an entry may or may not be made in the books of account. If the currency received is deposited in the bank, no account is affected, since the amount deposited offsets the amount withdrawn. If, however, it is desired to record in the books of account the amount of cash received and the amount of the check drawn, an entry must be made on the receipt side of the "Cash Journal" debiting "Cash Ac- count" and crediting "Checks Cashed," and an entry must be made on the payment side of the "Cash Journal" debiting "Checks Cashed" and crediting "Cash Account." Method 2. If the currency received is withheld as petty cash, an entry must be made on the receipt side of the "Petty Cash Journal"; and, in the ledger, "Petty Cash Account" is debited and "Checks Cashed Account" is credited. An entry must I 116 BOOKKEEPING, THEORY AND PRACTICE also_be made on the payment side of the "Cash Journal"; and .n the edger, ''Checks Cashed Account" is debited and "cTsh Account IS credued. Method i is the better of the two methods. COMMERCIAL DRAFTS Introductory—Commercial drafts include negotiable instru- ments known as drafts, bills of exchange, and trade acceptances. Commercial draft defined.-A commercial draft is ''an un- cTI Tk t '" "^"''"^ ^^^'^^^^"^ ^y °"^ P*-"^"" to another, signed by the person giving it (called the drawer) requiring the person to whom it is addressed (called the drawee) to pay on demand or at a fixed or determinable future time a sum certam m money to the order of a designated person (called the payee) or to bearer." (HuflFcut.) Use of the draft-commercial drafts are used primarily to effect the settlement of debts without the risk or inconvenience ot remittmg money. They are used when merchandise is shipped C.O.D by freight; for the i^yment of creditors through customers;' for collection of past due accounts; and. in the past few years, they have been used extensively as a result of the fact that their acceptance by customers, has been made a part of the terms of sale to the customers. Classification of drafts-Drafts may be divided, according t.me drafts ^^^^'' '"*** ^^° ''^''*'' "'''' ''^^' '^'^^'' ^"^ Sight drafts are payable on presentation. T,me drafts are of two kinds; namely, those payable at a certam time after date of draft, and those payable at a certain time after sight; i.e.. a certain time after presentation for accept- ance has been made. ^ Treatment of sight drafts in the books of accotmt-(a) Otir sight drafts on debtors-When we draw on a debtor at sight through our bank for collection, no entry covering the draft is made m the books of account at the time the draft is left with Ae bank for collection, as the draft has no value until it has been accepted. Since a sight draft is payable when presented, .t follows that the only way the debtor can accept the draft is by paying it. If the draft is paid, the bank will credit our account. An ttn k! ^ "'^'^" °" °"'' ^^' ''"•'''■»? "^h and crediting the debtor (i.e.. customer). * LECTURE X "7 I ii8 ! BOOKKEEPING, THEORY AND PRACTICE If the draft is not paid, the bank will return the draft to us with a notation as to the reason for non-payment. Let us assume for the purpose of illustration that J. Link owes for our invoice of Feb. 26, 19—, the sum of $437.50, and that we decide to draw on him at sight through the Wall Street Trust Co. for collection for the above amount. In this case we should draw the draft shown in Illustration No. 106. (b) Creditors' sight drafts on us.— If a creditor draws on us at sight, we may either accept or refuse the acceptance of the draft. The only way we can accept a sight draft is by paying it. If we pay the draft, an entry is made on our books debiting the creditor's account and crediting cash. Treatment of time drafts in the books of account — (a) Our time draft on a debtor.— For the purpose of illustration, let us assume that on April 12, 19—, we ship to T. Wilson & Co., merchandise in amount $500, on terms of 2% subject to accept- ance of draft, payable 10 days after date. In this case we should draw the draft shown in Illustration No. 107. The draft is attached to the invoice and mailed to T. Wilson & Co. No entry covering the draft is made at the time the draft is mailed, as the draft has no value until accepted. Let us assume that T. Wilson & Co. accept the draft and return it to us. The draft is accepted by the drawee by writing across the face of the draft, as in Illustration No. 108, the words: Accepted April 13, 19— Payable at T. Wilson & Co. An accepted draft is known as "an acceptance.*' Acceptances have the status of promissory notes. Therefore, when we re- ceive the accepted draft from T. Wilson & Co., the treatment on the books of account is the same as if we had received their promissory note. The entry to be made on our books on receipt of the accepted draft from T. Wilson & Co., expressed in account form, is as follows : LECTURE X 119 Notes Receivable (0 $490 Int. & Die. Expense (t) $ro T. Wilson & Co. Bal. $500 $500 (i) Note that the numbers indicate the double entry made Subsequent treatment of the acceptance is exactly the same as a promissory note; i.e., we should leave the acceptance with the bank for collection or, if so desired, should discount it at the bank. (b) Time draft on us by a creditor.-For the purpose of Jlustrafon let us assume that, on April 2, we purchase from Eclipse Mills merchandise in amount $2,400, on terms of 2% subject to draft payable 10 days after sight, and that the draft ^accepted by us on April 4 and made payable by us at the Wall St. Trust Co. See Illustration No. 109. This draft would be mailed to us by the Eclipse Mills. On receipt of the draft, we should write our acceptance across the face of the draft and return it to them. See Illustration No. no Since this is a draft payable after sight, it is due 10 days after sight ; i.e., after the date of acceptance. Since an acceptance has the status of a promissory note, it follows that the entry to be made on our books of accomit is the same as if we had given Eclipse Mills our note dated April 4. 19-, due in 10 days. The entry to be made, expressed in account form, is as follows : Int. & Dis. Earned Notes Payable $48 (i) $2,352 (1) Eclipse Mills (i) $2,400 Balance $2,400 Note that the numbers in parentheses indicate the double made. entry I20 BOOKKEEPING, THEORY AND PRACTICE ■hbB'- * LECTURE X 121 122 BOOKKEEPING, THEORY AND PRACTICE LECTURE X 123 8^ ^NUN3S3«d adoiag ijo smi mv3i isaioad on 3 |i! 9NUN3S3tW 31IOJ38 JJO SIHl MV3i.lS310dd ON I 124 BOOKKEEPING, THEORY AND PRACTICE In generaL-(a) Sight draft with bill of lading attached.- An expedient for shipping goods C.O.D. via freight is to draw on the customer at sight, and attach to the draft the bill of lading covering the shipment. The procedure in this case is as follows: the packages or cases are consigned to "our order"; and the bill of lading is made out to "our order" as consignee. Thus we retain title to the goods. We then endorse the bill of lading in blank, and attach It to a draft reading as follows : "At sight— B/L at- tached. Pay to .. We then leave the draft with our bank for collection No entry is made covering the draft when it is left with the bank tor collection. If the draft is paid, the customer receives the B/L which enables him to receive the goods. If the draft is not paid it .s returned to us with the B/h attached, and we then have Ihe goods shipped back to us. No entry covering the draft is made on our books until notice IS received from the bank that the draft has been paid An entry is then made on our books of account debiting cash and crediting the customer's or C.O.D. account, depending upon which account was originaUy charged when the goods were snipped. .K^**^ /'f^ acceptances.-A "trade acceptance" is defined by the Federal Reserve Board in Regulation A. Series of 1917, ^ a draft or bill of exchange drawn by the seller on the pur- chaser of goods sold and accepted by such purchaser; and a bill of exchange, within the meaning of this regulation, is de- faned as an unconditional order in writing, addressed by one person to another, other than a banker, signed by the person giving It requiring the person to whom it is addressed to pay m the United States, at a fixed or determinable future time a sum certain in dollars to the order of a specified person." ' The trade acceptance system means the substitution of the trade acceptance for the system of open book accounts now generally employed in the United States. The use of trade acceptances has been greatly encouraged as JTf r. ''*. '^ *' ^"•^'■"' ^'''^' B°^^d whereby an acceptance that IS drawn by the seller on the purchaser of goods sold and that has a maturity at time of purchase or disS LECTURE X 125 of not more than 90 days, exclusive of days of grace, may be discounted at a Federal Reserve Bank. The form of Trade Acceptance is shown in Illustration No. no. LECTURE XI TREATMENT OF THE INVENTORY. PURCHASES AND SALES ACCOUNT AT THE TIME OF CLOSING THE BOOKS Introdurtwy.-In Lectures VII-VIII, we illustrated the treat- ment of the merchandise account at the time of closing the books. At that time, it will be remembered, we said that "in order to determine the gain or loss on merchandise sold, it is necessary to credit the merchandise account with the inventory at the end of the period; and, if the merchandise account is credited some account must be debited in order not to disturb the equihbnum of the ledger." We thereupon debited a new merchandise account to record the amount of merchandise on Hand at the beginning of the new period The same rule (i.e., that the inventory of merchandise at the end of the period must be recorded on the books before the ^m or loss on merchandise sold can be determined) applies If the merchandise account is subdivided into an inventory purchases, and sales account. The merchandise on hand at the end of the period is recorded m the Im-entory Account by debiting "Inventory New Account" and crediting Inventory Old Account." The balance in the Inventory Old Account" then represents the increase or de- crease m mventoor, and is closed into Profit & Loss Account. The balance m the "Purchases Account" represents the amount of merchandise purchased during the period, and is treated as an expense, offset by Sales Account, which represents the income derived from sales of merchandise and is treated as income For the purpose of illustrating why "Purchases Accouni" is treated as an expense account and why "Sales Account" is treated as an income account, let us first solve the following problem arithmetically : ""owing A merchant begins business with $10,000 worth of merchan- oise on hand. He purchases $30,000 worth of merchandise. His sales amount to $40,000. ffis inventory at the end of the period amounts to $5,000. What IS his profit ? vo,^^^. 126 LECTURE XI We may solve the problem in the following manner Illustration No. iii Method I Amount realized on sales of merchandise Cost of Sales Inventory at beginning Purchases 127 Total Deduct inventory at end of period $10,000 30,000 $40,000 5,000 Cost of Goods Sold •Gross Profit on Sales Or, we may solve the problem in this manner: Method 2 Amount realized on sales of merchandise Cost of Sales Purchases $30,000 .Add: Decrease in Inventory 5^000 Cost of Goods Sold Gross Profit on Sales $40,000 35,000 $5,000 $40,000 35,000 $5,000 Let us now record these facts in accounts and, to simplify our illustration, let us assume that the purchases and sales were made for cash. Illustration No. 1 12 Inventory (l) $10,000 Capital $10,000 ( I ) Cash (3) $40,000 $30,000 (2) Purchases Sales (2) $30,000 $40,000 (3) t 128 BOOKKEEPING, THEORY AND PRACTICE hfjl ii I Note that the numbers in parentheses indicate the double entries made. Illustration No. jjj Qosing the inventory, purchases, and sales accounts form, are as follows: Adjusting Entry Inventory New To Inventory Old This entry is made to record the inventory at the end of the period. $5,000 $5,ooa Note that, in posting this entry, the credit to the old account is posted first. The balance in the old account is then trans- ferred to Profit & Loss. The debit to the "Inventory New Account" is not posted until the balance of the old account has been closed and ruled. inv< mtory Balance $10,000 Inventory Profit & Loss $5,000 5,000 (I) (2) $10,000 $10,000 (i) Balance $5,000 Purchases Balance $30,000 P. & L $30,000 (3) Sales (4) P. & L. $40,000 Balance $40,000 Profit & Loss (2) Inventory (3) Purchases $5,000 30,000 Sales $40,000 (4) • The entries made to close thes e accounts. expres sed in iour nal LECTURE XI Profit & Loss To Inventory Old This entry is made to close the inventory account Profit & Loss To Purchases This entry is made to close the purchase account Sales To Profit & Loss This entry is made to dose the sales account $5,000 129 $5,000 $30,000 $30,000 $40,000 $40,000 If we now compare the Profit & Loss Account with the arith- medcal solution, Method 2, it will be found that the same amounts were used, to determine the profit on merchandise sold, in both the arithmetical solution and the Profit & Loss Account. The three factors used in the arithmetical solution to deter- mine the gain or loss on merchandise sold, are purchases, sales, and difference in inventory. By diflFerence in inventory is meant the increase or decrease in inventory. The same fac- tors are used in bookkeeping to determine the gain or loss on merchandise sold. The Purchases Account, since it shows a debit balance, is treated as an expense account, because the amount of purchases is a necessary factor in determining the gain or loss on mer- chandise sold. Similarly Sales Account, since it shows a credit balance, is treated as an income account. The difference in inventory, i.e., the decrease or increase in inventory, is treated as an expense or an income, depending upon the balance in the Inventory Account. If the Inventory Account, after the mer- chandise inventory at the end of the period has been credited to that account, shows a debit balance, it is treated as an expense or loss account; if it shows a credit balance, it is treated as a gain or income account. ACCOUNTS PARTLY REAL AND PARTLY NOMINAL Introductory.— In classifying accounts, we said that accounts may be divided into two classes, viz., real accounts and nominal accounts. There are some accounts which are usually classified as nominal accounts although they are mixed, i.e., partly real and partly nominal accounts, in that they contain a real ele- ment, that is, an asset or liability element, and a nominal, that is, a loss or gain element. Examples of such accounts kept in 130 BOOKKEEPING, THEORY AND PRACTICE I the practice set are Inventory, Stationery & Printing, and In- surance Account. Treatment of accounts partly real and partly nominal at the time of closing the books.-Accounts that are partly real and partly nominal require adjustment at the end of each account- ing period. They are adjusted by clearing the account of its real or nominal element. The account is cleared of its real element by crediting it with the amount of the inventory at the end of the period. In the preceding chapter, we illustrated the treatment of the "Inventory Account" (a mixed account) at the time of closing the books. We shall now illustrate the treatment of the Stationery & Printing and Insurance Accounts (also mixed accounts) at the time of closing the books. Treatment of the "Stationery & Printing Account"— For the purpose of illustration, let us consider the Stationery & Print- ing Account as it appears in the ledger of the practice set at April 30, 19—. The condition of the Stationery & Printing Account at April 30, 19—, is at follows : Stationery & Printing 19 — Mar. 31 April 30 $20. 12.50 The balance in the Stationery & Printing Account represents the amount of stationery and printing purchased during the period beginning Mar. i and ending April 30. If there is no mventory on hand at the end of this period, this account is treated as a nominal (expense) account at the time of closing the books. As a rule, however, there is an inventory of sta- tionery and printing on hand at the end of the period. There- fore, the balance in this account usually represents two elements, VIZ., an asset or real element represented by the amount of the inventory, and an expense or nominal element represented by the amount of stationery and printing consumed. The real element (i.e., the asset element) is ascertained by taking a physical inventory of stationery and printed matter at the time of closing the books. The nominal element (i.e., the expense element) is ascertained by crediting the Stationer)^ & Printing Account with the amount of the inventory at the end of the period. The balance in that account then represents the nominal element LECTURE XI 131 The adjusting journal entry necessary to record the stationery and printing inventory on the books is as follows: April 30, i(>— Stationery & Printing New To Stationery & Printing Old To record the inventory. lis $15 The credit to the Stationery & Printing Old Account is posted first. Stationery & Printing Mar. 31 April 30 $20. 12.50 19— April 30 Inventory $15 The balance then represents the amount of stationery and printing consumed, and is closed into Profit & Loss Account. The journal entry to effect the closing of this account is as follows : Profit & Loss To Stationery & Printing Old To close the stationery and printing account. $17.50 $17.50 The condition of the Stationery & Printing Account at this point is as follows: _^_^___ Stationery & Printing Mar. 31 April 30 $20. 12.50 19— April 30 Inventory 30 P. & L. $15. 17.50 The account is then ruled, and the debit to Stationery & Printing New Account is posted, as of the following day. Stationery & Printing 19— Mar. 31 April 30 $20. 12.50 $32.50 19— April 30 Inventory 30 P. & L. $15. 17.50 $32.50 May I Inv. $i:;.oo I I 1 f t ' 132 BOOKKEEPING, THEORY AND PRACTICE Treatment of the "Insurance Account" at the time of closing the books. — For the purpose of illustration, let us consider the Insurance Account as it appears in the ledger of the practice set at April 30, 19 — . The condition of the Insurance Account at April 30, 19 — , is as follows: Insurance 19— Mar. 31 $240 Insurance is usually prepaid ; i.e., the premiums usually cover insurance for an entire year or a longer period. For example, the amount in the Insurance Account here illustrated represents the premium paid Mar. i, for insurance for an entire year. The insurance expense per month is, therefore, $20. Thus it will be seen that the balance in the Insurance Account repre- sents two elements; viz., a real element, represented by the unexpired insurance, and a nominal or expense element, repre- sented by the expired portion of insurance. This account is adjusted at the end of the period by treating the prepaid insurance as an inventory. The amount of the prepaid insurance at April 30, 19 — , is $200. The adjusting journal entry necessary to record the insurance inventory on the books is as follows: Insurance New To Insurance Old To record the inventory. April 30, i^— $200 $200 The credit to the Insurance Old Account is posted first. Insurance 19— Mar. 31 ^2 40 19— April 30 Inv. $200 The balance then represents the expired portion of insurance (i.e., the expense portion), and is closed into Profit & Loss Account. The journal entry to effect the closing of this account is as follows : LECTURE XI Profit & Loss To Insurance Old To close the insurance account. $40 133 $40 The condition of the Insurance Account at this point is as follows : Insurance 19— Mar. 31 $240 19— April 30 Inv. P. & L. $200 40 The account is then ruled, and the debit to Insurance New Account is posted as of the following day. Insurance 19— Mar. 31 May I Inv. $240 $240 $200 19— April 30 Inv. $200 P. & L. 40 $240 In general, it might be said that all accounts that represent goods purchased to be consumed by the business itself and prepaid expense and prepaid income accounts require adjust- ment at the end of the period before the books can be closed Illustration No. 114 »i 3*' % f 1 1 LECTURE XII ADJUSTING AND CLOSING JOURNAL ENTRIES Introductory. — The Profit and Loss Account, after the books have been closed at the end of each period, should show the individual items of income and expense. Therefore, theoretically, each individual expense and income account should be transferred by separate journal entry to Profit and Loss Account. In practice, however, only one compound journal entry is usually made, transferring all nominal accounts with debit bal- ances to the Profit and Loss Account. The debit to the Profit and Loss Account is posted in detail. This has the same effect as making a separate journal entry for every expense account transferred. Similarly, one compound journal entry is usually made, transferring all nominal accounts with credit balances to the Profit and Loss Account. The credit to Profit and Loss Account is also posted in detail. The adjusting and closing journal entries at April 30, 19 — , are shown in Illustration No. 114. The condition of the Profit and Loss Account after the clos- ing journal entries have been posted, is shown in Illustration No. 115. Observe that the debit to Profit and Loss Account, in amount $23,929.48, in the closing journal entry, as well as the credit to Profit and Loss Account, in amount $27,811.85, have been posted in detail. THE BALANCE SHEET Introductory. — It will be remembered that, in Lecture I, we said that one of the purposes in keeping books was to enable the proprietor to know the amount of gain or loss for any given period. The Profit & Loss Account not only furnishes this information, but also supplies the proprietor with information as to the nature of expenses incurred and the sources of income received. Another purpose in keeping books is to enable the proprietor to know what his financial condition is. This information he 134 __ ■O-^'wJ^ c*-«^ "^Sl^^^a i INTENTIONAL SECOND EXPOSURE f I ■ ' fc LECTURE XII ADJUSTING AND CLOSING JOURNAL ENTRIES Introductory. — The Profit and Loss Account, after the books have been closed at the end of each period, should show the individual items of income and expense. Therefore, theoretically, each individual expense and income account should be transferred by separate journal entry to Profit and Loss Account. In practice, however, only one compound journal entry is usually made, transferring all nominal accounts with debit bal- ances to the Profit and Loss Account. The debit to the Profit and Loss Account is posted in detail. This has the same effect as making a separate journal entry for every expense account transferred. Similarly, one compound journal entry is usually made, transferring all nominal accounts with credit balances to the Profit and Loss Account. The credit to Profit and Loss Account is also posted in detail. The adjusting and closing journal entries at April 30, 19 — , are shown in Illustration No. 114. The condition of the Profit and Loss Account after the clos- ing journal entries have been posted, is shown in Illustration No. 115. Observe that the debit to Profit and Loss Account, in amount $23,929.48, in the closing journal entry, as well as the credit to Profit and Loss Account, in amount $27,811.85, have been posted in detail. THE BALANCE SHEET Introductory. — It will be remembered that, in Lecture I, we said that one of the purposes in keeping books was to enable the proprietor to know the amount of gain or loss for any given period. The Profit & Loss Account not only furnishes this information, but also supplies the proprietor with information as to the nature of expenses incurred and the sources of income received. Another purpose in keeping books is to enable the proprietor to know what his financial condition is. This information he Illustration No. 114 ■ \/^^iJjU /f s/dM o. ■\0 ^C..f\.<.t -wy '?Ii yt >4f-^M J* . |^-u-t*A:..'l^.jP/j f: / r I? p I ^ ^ ^ iii " ta LECTURE XII 135 secures from a balance sheet prepared from a trial balance taken after the books have been closed. A trial balance taken from the General Ledger at April 30, 19 — , after closing, is as follows : Illustration No. 116 A. Reid Trial Balance April 30, 19 — (After closing) Cash Petty Cash Notes Receivable Customers* Controlling Account Merchandise Inventory Liberty Bonds Furniture & Fixtures Auto Truck Creditors' Controlling Account Notes Payable A. Reid, Proprietor Stationery & Printing Insurance $2,356.10 26.34 2,150.00 11,808.79 16,392.50 1,000.00 1,025.00 1,250.00 1500 200.00 $10,785.00 9,071.30 16,36743 $36,223.73 $36,223.73 In preparing a balance sheet, the assets and liabilities are classified and grouped under appropriate captions. Illustration No. 117 is a balance sheet prepared from the trial balance after closing, at April 30, 19—. 136 BOOKKEEPING, THEORY AND PRACTICE Illustration No. J17 Balance Current Assets Cash Petty Cash Liberty Bonds Accounts Receivable Notes Receivable A. REID Sheet April 30, Assets 19— $2,356.10 26.34 1,000.00 11,80879 2,150.00 Total Current Assets Inventories Merchandise Stationery & Printing Insurance $16,392.50 1500 200.00 Total Inventories Fixed Assets Furniture & Fixtures \uto Truck $1,025.00 1,250.00 Total Fixed Assets Total Assets $17,341.23 LECTURE XII 137 Current Liabilities Accounts Payable Notes Payable Liabilities & Capital $10,785.00 9,071-30 Total Current Liabilities A. Reid, Proprietor $19,856.30 $16,36743 $16,607.50 $2,275.00 $36,223.73 $36,223.73 f 138 BOOKKEEPING, THEORY AND PRACTICE The assets in this case have been divided into three groups only, viz., Current Assets, Inventories, and Fixed Assets. Current assets are those which are expected to be turned into cash within a comparatively short period of time. By a comparatively short period of time is meant within one year. Current assets are also known as "quick assets," "floating assets," and "liquid assets." The merchandise inventory is also a current asset. However, it is customary to show all inventories under a separate caption. Fixed assets are those which represent a fixed or permanent investment of capital, i.e., capital which is not available for liquidating the current liabilities of the business, in that it must remain permanently invested in the business. Current liabilities are those which will have to be paid within a comparatively short period of time. Arrangement of Groups and Items.— The order in which these groups should appear in the balance sheet and the order in which the items should appear in the groups, depend upon the purpose for which the balance sheet is prepared. A balance sheet may be prepared (a) for the use of the proprietor as a guide for future operations of the business, (b) for the use of bankers from whom request for a loan has been made, (c) for the use of a prospective investor, (d) for the use of creditors from whom a request for credit has been made. 1 ! \ SUPPLEMENTARY LECTURE KOTES LECTURE I SALES RETURNS AND ALLOWANCES Introductory.— At times, our customers find it necessary to return merchandise to us because of some defect, or to make a claim for shortage or overcharge, etc. Whenever such transactions are numerous, a separate journal known as the Sales Returns Journal and another journal known as the Sales Allowance Journal are kept. Whenever such trans- actions, however, are infrequent, only one journal is kept for both sales returns and sales allowances. Such a journal is known as the Sales Returns and Allowance Journal. Form of Sales Returns and Allowance Journal— The Sales Returns and Allowance Journal has no special form. It usually consists of loose-leaf sheets or carbon copies of credit memo- randa sent to customers. These sheets or carbon copies of credit memoranda, when placed in a binder, constitute the Sales Returns and Allowance Journal. An Abstract Sales Returns and Allowance Journal is frequently used for the purpose of classifying sales returns and allowances. Source of information from which entries are made on the Sales Returns and Allowance Journal.— When merchandise is returned to us, the customer usually sends us an invoice. This invoice, however, is not the source of information from which the entry is made in the Sales Returns and Allowance Journal. The source of information from which the entry is made in this book and from which the credit memorandum is written, is the ticket issued by our receiving department at the time the goods are actually received. When an allowance is to be made to customers, a ticket known as an allowance ticket or allowance memorandum is issued. This ticket, when approved by one in authority, becomes the source of information from which the entry is made and the credit memorandum issued. Posting from the Sales Returns and Allowance JoumaL— In practice, postings are made daily from the Sales Returns and Allowance Journal to the credit of customers' accounts in the 139 140 BOOKKEEPING, THEORY AND PRACTICE i*^ Customers' Ledger. At the end of each month, the total for the month is posted to the debit of Sales Account and to the credit of Customers' Controlling Account in the General Ledger. If an account is kept in the ledger for Sales Returns and Allow- ances, it follows that this account, instead of Sales Account, must be debited at the end of the month. Likewise, when sep- arate accounts are kept in the ledger for Sales Returns and for Sales Allowances, as is usually the case when separate journals are kept, the Sales Returns Account and the Sales Allowances Account, instead of Sales Account, must be debited at the end of the month. PURCHASE RETURNS AND ALLOWANCES Introductory. — Most concerns have occasion to return goods which have been purchased. Occasionally, also, the necessity arises for making a claim against a creditor for shortage, im- perfection, overcharge, etc. As in the case of sales returns and allowances, separate jour- nals may be used. Usually, however, purchase returns and allowances are recorded in the same book. Form of Purchase Returns and Allowance Journal — The Pur- chase Returns and Allowance Journal usually takes the same form as the Purchase Journal ; i.e., it is a coliminar ruled book with distribution columns. The need of such a book for pur- chase returns and allowances is obvious. Merchandise and goods other than merchandise, such as stationery, auto supplies, machinery, or furniture, are sometimes returned. In this case, different accounts are involved making necessary the use of a columnar ruled book. Source of information from which entries are made on the Purchase Returns and Allowance Journal. — In every well sys- tematized business, an entry must be made on the books of account whenever goods are received. Likewise, an entry must be made in the books of account whenever goods are shipped. Therefore, when goods are returned to a creditor, an entry is made in the Purchase Returns and Allowance Journal. The source of information from which the entry is made and the invoice written, is the shipping ticket issued when the goods are shipped and not the credit memoranda received from the creditor. When the necessity for making a claim against a creditor for an allowance arises, a charge ticket is issued. This is the SUPPLEMENTARY LECTURE I 141 I source of information from which the entry is made in the Purchase Returns and Allowance Journal and the invoice writ- ten. It should be noted that, although the creditor usually issues a credit memorandum, no entry is made on receipt of the credit memorandum. Posting from the Purchase Returns and Allowance Journal.— In practice, postings are made daily from the Purchase Returns and Allowance Journal to the debit of creditors' accounts in the Creditors' Ledger. At the end of each month, the total for the month is posted to the debit of Creditors' Controlling Account, and the totals of the various columns are posted to the credit of their respective accounts. Purchases Account is credited with the total sum of merchandise allowances and returns. If an account is kept in the ledger for purchase returns and allow- ances, it follows that this account must be credited at the end of the month for merchandise allowances and returns, instead of the Purchases Account. Likewise, when separate accounts are kept in the ledger for purchase returns, and for purchase allow- ances (as is usually the case when separate journals are kept), the Purchase Returns Account and the Purchase Allowance Account must be credited at the end of each month, instead of the Purchases Account. FREIGHTS Freight defined. — Freight is the compensation paid for the transportation of goods. Introductory. — ^When goods purchased or sold, are to be de- livered by freight or express, provision is usually made in the terms of sale for the payment of the freight or express charges. Unless otherwise indicated, when goods are sold P.O.B. point of shipment, the freight charges are to be borne by the pur- chaser; if sold P.O.B. destination, the freight charges are to be borne by the seller. In some instances, freight is borne by both the seller and the purchaser in agreed amounts. Such is the case when goods are sold subject to freight allowance not exceeding a certain amount per cwt. For example, goods sold subject to freight allowance not exceeding, let us say, 25c per cwt. Meaning of the Commercial Terms F.O.B., F.A.S., and C.A.F. — F.O.B. means "free on board." F.A.S. means "free aboard steamer." C.A.F. means "cost and freight." m I 142 BOOKKEEPING, THEORY AND PRACTICE Since freight is paid either on goods purchased or on goods sold, and since freight paid on merchandise purchased increases the cost of such merchandise, and freight paid on merchandise sold decreases the amount realized from the sale of such mer- chandise, it follows that the best method of accounting for such items is that of keeping two separate accounts. Hence it is customary to keep a separate account for Inward Freight and Express and a separate account for Outward Freight and Express. Merchandise purchased F.O.B. point of shipment— Unless otherwise agreed, if we purchase merchandise f.o.b point of shipment, freight is to be borne by us. («) If the goods are shipped to us freight collect, the freight will be paid by us on receipt of the goods. The double entry to be made by us when the freight is paid is as follows: Inward Freight and Express To Cash or Petty Cash (b) If the seller for any reason prepays the freight, he will render us an invoice for the freight. The double entry to be made on our books on receipt of the invoice is as follows: Inward Freight and Express To Creditor Merchandise purchased F.O.B. destination. Unless otherwise agreed, if we purchase merchandise f.o.b. destination, freight is to be borne by the shipper. (a) If the freight is prepaid, no entry need be made on our books. (b) If the shipment is made freight collect, freight will be paid by us on arrival of the goods. Since, however, the freight is to be borne by the shipper, it follows that his account must be debited. The double entry to be made on our books is as follows : Creditor To Cash or Petty Cash (c) Some concerns follow the practice of shipping goods freight collect, but make a deduction from the amount of the invoice for the freight. Let us assume, for the purpose of illustration, that we pur- chase $1,000 worth of merchandise from Eclipse Mills; that the SUPPLEMENTARY LECTURE I 143 freight is to be borne by them; that they ship freight collect; and that they follow the practice of allowing for the freight on the invoice covering the merchandise. They would render us an invoice as follows: Merchandise Less freight $1,000 10 $990 The double entry to be made on our books on the receipt of the goods is as follows: Merchandise To Creditor (Eclipse Mills) To Inward Freight and Express $1,000 $990 10 When we pay the freight, the double entry to be made on our books is as follows: Inward Freight and Express To Cash $10 $10 Thus it will be seen that insofar as this transaction is concerned. Inward Freight and Express Account will be in balance, having been debited and credited in the amount of $10. Sales made f.o.b. point of shipment — Unless otherwise agreed, if we sell merchandise f.o.b. point of shipment, the freight is to be borne by the customer. (a) If shipment is made by us freight collect, no entry will be made on our books covering the freight. (b) If, on request of the customer, we ship the goods freight prepaid, it follows that the customer's account must be debited with the freight charges. The usual procedure, in this case, is to add to the invoice covering the merchandise shipped, the amoimt of freight pre- paid. Let us assume, for the purpose of illustration, that we sell Dublin & Co. merchandise in amount $1,000; that freight is to be borne by them ; and that, as an accommodation to them, we prepay the freight. Assuming the amount of freight paid by us to be $10, our invoice would be as follows: Merchandise Freight Prepaid $1,000 10 $1,010 144 BOOKKEEPING, THEORY AND PRACTICE When we pay the freight, the double entry to be made on our books is as follows: Freight Prepaid To Cash or Petty Cash $10 $10 The double entry to be made in the Sales Journal covering the merchandise sold and freight charges is as follows: Customer (Dublin & Co.) To Sales To Freight Prepaid $1,010 $1,000 10 The "Freight Prepaid Account" is used as a clearing account. To it are charged all payments of freight to be borne by cus- tomers. It is closed by charging the customer and crediting freight prepaid. Some concerns follow the practice of rendering a separate invoice for the freight paid. In this case, the double entry to be made from the Sales Journal is as follows: Customer (Dublin & Co.) To Sales $1,000 $1,000 The double entry to be made from the cash or petty cash journal is as follows: Customer (Dublin & Co.) To Cash $10 $10 Sales made f.o.b. destination. — ^Unless otherwise agreed, if we sell merchandise f.o.b. destination, freight is to be borne by us. (a) If the freight is paid by us when the goods are shipped, the following double entry is made: Outward Freight and Express To Cash or Petty Cash (h) If we ship the goods freight collect, the customer in all probability will send us an invoice covering the amount of freight paid by him, or will make a deduction for the freight charges paid by him when he remits. The double entry to be made by us on receipt of the invoice is as follows : Outward Freight and Express To Customer SUPPLEMENTARY LECTURE I 145 (c) If we follow the practice of making all shipments freight collect and, at the same time, make a deduction for the freight on the invoice covering merchandise sold, the double entry to be made on our books would be as follows: Customer Outward Freight and Express To Sales In general. — Freight paid by us on goods returned to us by a customer must be charged to Outward Freight and Express if the freight is to be borne by us, since freight paid on sales decreases the amount realized from sales. Similarly, freight paid by us on merchandise returned by us to a creditor, must be charged to Inward Freight or Express if the freight is to be borne by us, since freight paid by us on merchandise pur- chased increases the cost of such purchases. Only freight paid by us on merchandise purchases or purchase returns should be charged to Inward Freight and Express Account. Freight paid on purchases other than merchandise must be charged to the same account as the goods purchased are charged to. To illustrate: freight paid on an auto pur- chased should be charged to Auto Truck Account, and freight paid on furniture purchased should be charged to Furniture and Fixtures Account. 10 w PART II STATEMENTS OF TRANSACTIONS I *, J(. ASSIGNMENT I Outline : (i) Outline of the course. (2) Exercise in the application of debits and credits as applied to personal accounts. (3) Exercise in writing the following business papers : (a) Purchase invoices. (b) Sales invoices. (c) Check stubs and checks. Laboratory Exercise. Set up on loose sheets of paper, skeleton (T) ledger accounts for each customer and creditor listed below, recording therein the following transactions : Jan. 2. A. Reid starts in business investing in cash $10,000 4. Purchased on account from Bell & Co. mer- chandise in amount c 000 5. Sold on account to Cann & Co. merchandise inamount ^^^ 5. Sold on account to J. Link mdse. in amount 1,500 10. Sold on account to L. Crane mdse. in amount 700 11. Received from Cann & Co. check 2,000 12. Paid Bell & Co. on account i^qo 14. Purchased on account from Reynolds & Co. mdse. in amount 2 000 15. Sold on account to L. Crane mdse. in amount '700 18. Received from J. Link on account i 000 19. Purchased on account from Bell & Co 2000 20. Sold to I. Hughes on account mdse. in amount ^,000 26. Received from J. Link check, balance of acct. '500 27. Paid Bell & Co. balance of invoice Jan. 4. . 3,500 28. Sold on account to DubHn & Co. mdse. in ^'"o^t ^^ 29. Sold on account to W. Hall mdse. in amount 800 30. Received from L. Crane check in amount. . 700 149 ■I ISO BOOKKEEPING, THEORY AND PRACTICE Home Work: (a) Write purchase invoices for January trans- actions numbered 2, 3, 4, 5, 6, 7, and 8. (b) Write sales invoices for January transac- tions numbered 9, and 10. (c) Fill out the check stubs and checks for Jan- uary transactions niunbered 2, 11, and 12. I I u ASSIGNMENT U Outline : Enter January transactions i to 12 inclusive. This STATEMENT OF TRANSACTIONS JANUARY TRANSACTIONS A. Reid decides to go into business for himself as a iobh^r m woolens. He has $10,000 in cash to invest He rms a suitable store at No. 320 Madison Avenue. New York 0^1^ "Thfbc^.':"''"^";"'' '^'^''^ *° begin' work TmtdtTe'ly The bookkeeper confers with Mr. Reid as to his ideas of the limtdlt\''^' ""'■ ^^-^'^ '^--'^'^^^ «^ b:>Lke;rng i limited, but he mstructs the bookkeeper to Hp in o ^ K furnish him with information as to 7/ ^oSl ^1 "s „5Tt"otI° Thrb ■ .r"""'"": ""'■ ^""^ '^ '" ^-- «f - simple W ber of bolr"' "''°''' '^"'^^ *° "^^ *^ minimum'^^r Der of books, viz., a journal and a ledeer and tn r^r..^ T transactions by the double entry system "''^ '^^ Instructions : Number the pages in "The Journal" (page style) Number the pages in the "General I^dger^L^fs vie) begjnnmg with the first ledger-ruled page '^ 'rth:;X:lr:-^°-'-^^^i- accounts Note: The letters indicate on what part of the page the account ,s to be opened. Where two a^ A ,„d,cates the account to be opened at the top of he page; letter "B," the account to be opened in the middle of the page 151 I. 2. 3- J f I (l:.| 152 BOOKKEEPING, THEORY AND PRACTICE lA. Cash. 5A. Furniture & Fixtures. 8A. A. Reid, Proprietor. loA. Merchandise. 1 1 A. Expense. 28A. Cann & Co Brooklyn, N. Y. 28B. J. Link Newark, N. J. 29A. L. Crane City. 29B. I. Hughes City. 30A. Dublin & Co Chicago, 111. 30B. W. Hall Mt. Vernon, N. Y. 36A. Tower Mfg. Co City. 36B. John Slater City. 37A. Sellew & Co City. 37B. N. Y. Desk Co City. 38A. Bell & Co Passaic, N. J. 38B. Baldwin Mfg. Co Altoona, Pa. 39A. Reynolds & Co Passaic, N. J. 39B. Taylor Mfg. Co Paterson, N. J. The transactions for the month of January were as follows: Transaction No. i January 2, 19 . A. Reid opens an account with the Wall Street Trust Company, depositing therein $10,000 in cash. Transaction No. 2 January 2, 19 . Paid by check #1, Jay Realty Co., rent for January, $200. Transaction No. 3 January 3, 19 . Received invoice, in amount $50, from Tower Mfg. Co., for stationery. Transaction No. 4 January 4, 19 . Received invoice, in amount $30, from John Slater, for printed matter. Transaction No. 5 January 4, 19 . Received invoice, in amount $700, from Sellew & Co., covering contract for installation of partitions and shelves. Transaction No. 6 January 4, 19 . Received invoice, in amount $60, from N. Y. Desk Co., for desks and chairs. ASSIGNMENT II 153 Transaction No. 7 January 4, 19 . ' Received invoice, in amount $5,000, from Bell & Co., for merchandise purchased as follows: 625 yds. Serge (all wool) at $1.60 1000 " Flannel " 1.20 1000 " Fancy Suitings " 1.30 1000 " Cloakings " 1.50 $1,000 1,200 1,300 1,500 $5,000 Transaction No. 8 January 4, 19 . Received invoice, in amount $6,500, from Baldwin Mfg. Co., for merchandise purchased: 1500 yds. Broadcloth at $3.20 $4,800 680 " Flannel " 1.20 816 680 " Fancy Suitings " 1.30 884 $6,500 Transaction No. 9 January 5, 19 . Sold to Cann & Co., Brooklyn, N. Y. 500 yds. Broadcloth at $4.00 $2,000 Shipping Ticket No. i Transaction No. 10 Sold to J. Link, Newark, N. J. 1000 yds. Flannel at $1.50 Shipping Ticket No. 2 January 5, 19 . $1,500 Transaction No. 11 January 5, 19 . Purchased for cash (check #2) safe from Marvin Hall Safe Co., $75. Transaction No. 12 January 5, 19 . Drew check #3 to the order of J. Smith, bookkeeper, for salaries, $45. Paid salary of bookkeeper, $25, and salary of clerk, $20. Home Work: (a) Write purchase invoices for January trans- actions numbered 17, 21, and 22. (b) Write sales invoices for January transac- tions numbered 13, 18, 23, 27, and 28. (c) Fill out check stubs and checks for January transactions 15, 16, 20, 24, 26, 30, and 31. Uir ASSIGNMENT III I [I Outline : ASSIGNMENT III Enter January transactions 13 to 31 inclusive. This work is to be done in class under the guidance of the instructor. STATEMENT OF TRANSACTIONS JANUARY TRANSACTIONS CONTINUED January 10, 19 . $600 100 $700 Transaction No. 13 Sold to L. Crane, City. 300 yds. Serge (all wool) at $2.00 50 " Golf Cloth " 2.00 Shipping Ticket No. 3 Transaction No. 14 January 11, 19 . Received from Cann & Co., check for $2,000, in pay- ment of invoice dated Jan. 5, 19 . Transaction No. 15 January 12, 19 . Paid Bell & Co. (check #4) on account, $1,500. Transaction No. 16 January 12, 19 . Drew check #5 to the order of J. Smith for salaries, $45. Transaction No. 17 January 14, 19 . Received from Reynolds & Co., invoice, in amount $2,000, for merchandise purchased. 625 yds. Broadcloth at $3.20 $2,000 Transaction No. 18 Sold to L. Crane, City. 400 yds. Fancy Suitings at $1.75 Shipping Ticket No. 4 January 15, 19 . $700 Transaction No. 19 January 18, 19 . Received on account from J. Link check, in amount $1,000. 154 ISS Transaction No. 20 January 19, 19 Drew check #6 to the order of J. Smith for salaries $45- Transaction No. 21 January 19, 19 Received from Taylor Manufacturing Co., invoice, in amount $5,980, for merchandise purchased: 1800 yds. Melton at $2.60 $4,680 1000 " Fancy Suitings " 1.30 1,300 $5,980 Transaction No. 22 January 19, 19 Received from Bell & Co., invoice, in amount $2,000, for merchandise purchased: 1250 yds. Golf Cloth at $1.60 $2,000 Transaction No. 23 Sold to I. Hughes, City. 500 yds. Melton 100 " Fancy Suitings 100 " Golf Cloth Shipping Ticket No. 5 January 20, 19 . at $3.25 1.75 2.00 (( (( $1,625 175 200 $2,000 Transaction No. 24 January 26, 19 . Paid by check #7, Bell & Co., balance of invoice Jan. 4, 19 , $3,500. Transaction No. 25 January 2^, 19 . Received from J. Link check for $500, balance of ac- count. Transaction No. 26 January 26, 19 . Drew check #8 to the order of J. Smith, in amount $45, in payment of salaries. Transaction No. 27 January 28, 19 . Sold to Dublin & Co., Chicago, 111. 100 yds. Broadcloth at $4.00 $400 50 Serge f( 2.00 100 $500 Shipping Ticket No. 6 I 1 I .1 i 156 BOOKKEEPING, THEORY AND PRACTICE Transaction No. 28 January 29, 19 Sold to W. Hall, Mt. Vernon, N. Y. 200 yds. Melton at $3.25 $650 100 Flannel ft 1.50 150 $800 Shipping Ticket No. 7 Transaction No. 29 January 30, 19 . Received check $700 from L. Crane in payment of invoice January 15, 19 . Transaction No. 30 January 31, 19 . Paid by check #9, Dry Goods Journal, for advertise- ment in January issue, $40. Transaction No. 31 January 31, 19 . Paid by check #10, salary of Mr. Reid for the month of January, $200. Balance the check book. Home Work: (i) Foot the pages in "The Journal," carrying forward the totals. The total of the debit and the credit columns for January is $50415- (2) Discontinue writing purchase and sales in- voices. (3) Fill out check stubs, and checks for Feb- ruary transactions. ASSIGNMENT IV Outline : (i) Post January transactions. (2) Take a trial balance. Note: This work is to be done in class under the guidance of the instructor. Home Work: (i) Begin on the next page in "The Journal" and enter therein February purchase and sales transactions only. Cash receipts and payments will be entered in the Cash Journal, in class at the next session. The purchase and sales transactions to be re- corded in "The Journal" are as follows : 34, 35, 37y 40, 45» 46, 50, 5i> 52, 57» 58, 59» 60, 66, 69, and 70. (2) Fill out check stubs and write checks for Feb- ruary transactions. 'i far 157 It Ijif . il ASSIGNMENT V Outline : Enter February transactions. Note: February cash, and petty cash receipts and payments only, are to be recorded in class under the guidance of the instructor. Sales and purchase transactions must be re- corded outside of class. STATEMENT OF TRANSACTIONS FEBRUARY TRANSACTIONS The bookkeeper realizes that the amount of mechanical labor necessary in posting can be greatly reduced, and that informa- tion regarding receipts and payments of cash can be had more readily by using a Cash Journal He therefore decides to sup- plement "The Journal" with a "Cash Journal" and to supple- ment the latter with a "Petty Cash Journal." Instructions : (i) Number the pages in the "Cash Journal" and "Petty Cash Journal," page style. (2) Open the following accounts in the "General Ledger" : . 23B. Interest & Discount Earned. y 31A. Miller & Co Albany, N. Y. ^ 31B. Stewart & Myers Syracuse, N. Y. 32A. James T. Ludlow Boston, Mass. 32B. T. Wilson & Co. ... . .Bridgeport, Conn.^ 33A. Marshall & Co New Haven, Conn. "^ 33B. Tompkins & Co Philadelphia, Pa.V"^ 34A. Wm. Bradhurst Boston, Mass. -^ The transactions for the month of February were as follows : Transaction No. 32 February i, 19 . V Paid by check #11, Jay Realty Co., rent for February, $200. 158 v/ ASSIGNMENT V j-^ Transaction No. 33 February i, 19 . Paid by check #12, N. Y. Telephone Co., $12.50, for telephone service. Transaction No. 34 February 2, 19 ^ Sold to Miller & Co., Albany, N. Y. 500 yds. Cloakings at $2.00 $1,000 Terms 2/10, n/30 Shipping Ticket #8 Transaction No. 35 February 2, 19 . >. Sold to Stewart & Myers, Syracuse, N. Y. 1000 yds. Fancy Suitings at $1.75 $1,750 Terms 2/10, n/30 Shipping Ticket #9 Transaction No. 36 February 2, 19 Drew check #13, in amount $45, for salaries. Transaction No. 37 February 2, 19 . Purchased from Reynolds & Co. on account 3000 yds. Serge at $1.60 $4,800 Terms 2/10, n/30 Transaction No. 38 February 4, 19 . Paid by check #14, invoice of Consolidated Gas Co. for January service, $12. Transaction No. 39 February 4, 19 . Drew check #15, in amount $25, to the order of J. Smith, bookkeeper, for petty disbursements. Transaction No. 40 February 4, 19 . l^ Received invoice from Bell & Co. for merchandise pur- chased : 2000 yds. Flannels at $1.20 $2400 1000 " Fancy Suitings " 1.30 1,300 $3,700 Terms 2/10, n/30 Transaction No. 41 February 4, 19 . (X^ Paid by check #16, John Slater, $2940, covering in- voice of January 4, ($30 less 2% cash discount .60). Transaction No. 42 February 5, 19 . Paid by check #17, Sellew & Co., $700.00, covering*^ invoice of January 3. y J t i6o BOOKKEEPING, THEORY AND PRACTICE Transaction No. 43 February 5, 19 . Had pass-book balanced at the bank. Received state- \y ment showing a balance at January 31, 19 , of $12,059.17. The bank has allowed $14.17 interest and has returned cancelled checks i to 6 inclusive and checks 8 and 10. Transaction No. 44 February 5, 19 . \/ Paid by check #18, Tower Manufacturing Co., $49, covering invoice of Jan. 3, $50 less 2% cash discount $1.00. Transaction No. 45 February 6, 19 .y Sold to James T. Ludlow, Boston, Mass. 250 yds. Cloakings at $2.00 $500 Terms 2/10, n/30 Shipping Ticket #10 Transaction No. 46 February 6, 19 \J Sold to Wm. Bradhurst, Boston, Mass. 500 yds. Golf Cloth at $2.00 $1,000 Terms 2/10, n/30 Shipping Ticket #11 Transaction No. 47 February 6, 19 . Paid out of petty cash for postage stamps, $10. Transaction No. 48 February 9, 19 r Drew check #19, for salaries, $45. Transaction No. 49 February 9, 19 . y Received check, in amount $700, from L. Crane in payment of invoice January lo. Transaction No. 50 February 9, 19 \^ Sold to T. Wilson & Co., Bridgeport, Conn. 500 yds. Golf Cloth at $2.00 $1,000 200 » ^%..,f'%.^ ¥ -^ w >-«^ Outline : Enter March transactions 75 to loi inclusive. Note: This work is to be done in class under the guidance of the instructor. STATEMENT OF TRANSACTIONS MARCH TRANSACTIONS In order to minimize the time necessary in posting, the book- keeper deades further to supplement the books of ori^^l^^ now m use with a "Purchase Journal" and a "Sales TS^ Moreover, the bookkeeper realizes that, in order tolui^rfhe proprietor wth such information regarding loss" rd^a^ a^ he would hke to receive, it would be necessary, were £ to continue using only the "Expense Account" and S; "Serchal Period" Td VV"^'r '°* '""^'^ ^•^^^ ^' the Jo?tS; period. And finding that analyzing accounts is a time-consum- of'tS^'Vh !.:"'' ''"'' "*"•' ""*^ *° discontinue the use fnr 1 . Mf f ^nd'se Account." keeping in its stead an account ISd Slet" ""'" ''''''' ^"•' "I--tory." "Purch^"'' Note: Make an entry in "The Journal" transferrins th^ On Mr. Reid's request to have the "Cash Account" in the edger represent the account with the Wall Street Trust (S he bookkeeper opens an account for "Petty Cash" and tra^- ^i^'?:^:^^^r ^-^ ^-- -e "Cash Acer- petty cash on hand «ty Cash Account, the amount of ill 164 I6S i66 BOOKKEEPING, THEORY AND PRACTICE ! ' If I tf New accounts to be opened in the General Ledger. Asset Accounts: H2A. Notes Receivable. ^2B. Petty Cash. ^. Merchandise Inventory U4B. Potash & Perlmutter. t«5B. C. O. D. Liability Accounts: 67B. Notes Payable. i4oA. ^Brewster & Co. L40B. Jackson Mills. U^iA. Eclipse Mills. Expense K9B. i*3A. k^A. "rsA. LfSB. ^A. W6B. ^7A. U7B. |^8B. a9B. or Loss Accounts: Stationery & Printing. Insurance. Interest & Discount Expense. Purchases. Salaries of Salesmen. Travelling Expenses of Salesmen. . Advertising. Salaries — Office. Postage. Rent. Light. Telephone & Telegrams. Cartage. Salary — Mr. Reid. Income or Gain Accoimt: UsB. Sales. The transactions from March i to March 11 were as follows Transaction No. 75 March i, 19 . Paid by check #29, Quick Delivery Co., $100, for February carting. Transaction No. 76 March i, 19 . ^ Paid by check #30, Jay Realty Co., $200, rent for March. / Transaction No. yy March 2, 19 . (/ Paid by check #31, Tower Mfg. Co., $11.76, invoice of February 20 ($12 less 2%, $ .24). ASSIGNMENT VII Transaction No, 78 March 2, 19 . Received invoice from Brewster & Co., in amount $240, for insurance on merchandise and furniture for one year from March i. Transaction No. 79 Sold to Potash & Perlmutter. 400 yds. Fancy Suitings at $1.75 200 " Serge " 2.00 March 4, 19 s ' $700 400 $1,100 Terms 2/10, n/30 Transaction No. 80 March 4, 19 . Sold (for cash on delivery) C. O. D. to Melon & Co City. 200 yds. Fancy Suitings at $1.75 $350 Terms 2% cash. ' 1 See transaction No. 82. Transaction No. 81 March 4, 19 . Received check from Tompkins & Co., in amount $4,287.50 (mvoice Feb. 20, $4,375 less 2% cash discount $87.50). Transaction No. 82 March 4, 19 . Received check from Melon & Co., C. O. D. customer, m amount $343 (invoice March 4, $350 less 2% cash discount, $7.00). Transaction No. 83 March 4, 19 . ' Received check from W. Hall, in amount $300, payment on account of invoice Jan. 29. Transaction No. 84 March 4, 19 Had pass-book balanced at the bank. Received state- ment showing balance at Feb. 28 of $7 066.92. The bank has allowed $11.30 interest. Ljetes^harged $1.25 for exchange and has returned cancelled checks numbers 7, 9, 11 to 24, and 2y. Transaction No. 85 March 4, 19 . Received from W. Hall, note dated March 4, at 15 days with interest at 6%, in amount $500, in payment of bal- ance of account. Il i68 BOOKKEEPING, THEORY AND PRACTICE I 41 ( i Transaction No. 86 March 4, 19 . Gave Reynolds & Co. note dated March 2, due in one month with interest at 6% for $4,800 in settlement of invoice dated Feb. 2. Tpansaction No. 87 March 5, 19 . Sold to Marshall & Co., New Haven, Conn. 500 yds. Serge at $2.00 $1,000 )y ASSIGNMENT VII 300 tt Golf Cloth « 2.00 600 $1,600 Terms 2/10, n/30 Transaction No. 88 March 5, 19 . Sold to J. T. Ludlow, Boston, Mass. 300 yds. Golf Cloth at $2.00 $600 Terms 2/10, n/30 Transaction No. 89 March 5, 19 . K Paid by check #32, Reynolds & Co., $2,000, invoice Jan. 14. Transaction No. 90 March 5, 19 . Paid by check #33, N. Y. Desk Co., $60, invoice Jan. 4. Transaction No. 91 March 5, 19 . Received invoice from Jackson Mills, Scranton, Pa., for merchandise purchased: 1200 yds. Serge at $1.50 $1,800 1000 " Fancy Suitings " 1.25 1,250 $3,050 Terms 2/10, n/30 Transaction No. 92 March 5, 19 . Received invoice from John Slater, for printed mat- ter, $20. Transaction No. 93 March 9, 19 . Paid by check #34, Consolidated Gas Co., for Feb. service, $10.50. / 169 Transaction No. 94 March 9, 19 . . Received note from Miller & Co. dated March i due in 30 days, in amount $1,005, in settlement of invoice dated Feb. i, $1,000 and interest $5.00. Transaction No. 95 March 9, 19 Received check from James T. Ludlow, in amount $882^ in payment of account, $900 less 2% discount $18. Transaction No. 96 March 9, 19 . Paid by check #35, N. Y. Telephone Co., $14, for tele- phone service. Iransaction No. 97 March 11, 19 . Paid by check #36, Taylor Mfg. Co., $5,980, invoice Jan. 19. Transaction No. 98 March 11, 19 . , Received note from Cann & Co., in amount $400, dated March 10, due in one month with interest at 6%, in settle- ment of invoice Feb. 11, 19 . Transaction No. 99 March 11, 19 . Bell & Co. request payment of their invoice dated Feb. 4, in amount $3,700. Not having sufficient cash with which to pay them, Mr. Reid discounts at the bank his 60-day note for $5,000. Discount rate 6%. Transaction No. 100 Paid by check #37, Bell & Co. Feb. 4. Transaction No. loi Paid out of petty cash: Telegram Dinner for clerk Towel service March 11, 19 7 $ .70 125 2.25 Home Work: Fill out check stubs for March transactions 106, 109, no, 121, 122, 123, and 124. ASSIGNMENT VIII 171 41. I ■ I It I I If Outline : ASSIGNMENT VIII Enter March transactions numbered 102 to 125 inclu- sive. Note: This work is to be done in class under the guidance of the instructor. STATEMENT OF TRANSACTIONS MARCH TRANSACTIONS The transactions from March 12 to March 31 were as fol- lows: Transaction No. 102 March i? 10 Received check from Marshall & Co., in amount $1,568,' in payment of invoice March 5, $1,600 less 2% cash dis- count $^2. Transaction No. 103 March 15, 19 . Left note of W. Hall, in amount $500, due March 19, with bank for collection. Make no entry. Transaction No. 104 March 15, 19 . Received invoice from Eclipse Mills, Altoona, Pa., for merchandise purchased. 1000 yds. Golf Cloth at $1.50 $1,500 1000 " Flannel " 1,10 1,100 $2,600 / Special terms 5% cash. Transaction No. 105 March 15, 19 . , Received invoice from Reynolds & Co., Passaic, N. J., for merchandise purchased: 500 yds. Broadcloth at $3.20 $1,600 Terms 2/10, n/30 Transaction No. 106 March 15, 19 . Paid by check #38, Eclipse Mills, $2470, invoice March 15, $2,600 less 5% cash discount $130. Transaction No. 107 March 15, 19 Sold Dublin & Co., Chicago, 111. 500 yds. Cloakings at $2.25 $1,125 200 " Golf Cloth " 2.20 440 200 " Fancy Suitings " 1.90 380 $1,945 Terms 2/10, n/30 Transaction No. 108 March 15, 19 Sold to Cann & Co., Brooklyn, N. Y. 250 yds. Cloakings at $2.00 $500 Terms 2/10, n/30 Transaction No. 109 March 15, 19 . Paid by check #39, N. Y. Edison Co., $17.25, service for February. Transaction No. no March 15, 19 .' Drew check #40, for petty cash, $25. Transaction No. in Sold to L. Crane, City. 200 yds. Melton 400 " Broadcloth Terms 2/10, n/30 • at $3.25 it 4.00 March 18, 19 . $650 1,600 $2,250 Transaction No. 112 March 18, 19 . Sold to Marshall & Co., New Haven. 500 yds. Flannel at $1.50 $750 300 « Melton « 325 975 $1,725 Terms 2/10, n/30 Transaction No. 113 March 18, 19 . Sold to James T. Ludlow, Boston, Mass. 200 yds. Melton at $3.25 $650 100 (« Broadcloth M 4.00 400 $1,050 Terms 2/10, n/30 170 'I r, 172 BOOKKEEPING, THEORY AND PRACTICE *! u !/ Transaction No. 114 Paid out of petty cash : For postage stamps Cleaning windows March 20, 19 $10.00 2.00 Transaction No. 115 March 20, 19 . Received invoice from Bell & Co., Passaic, N. J., f merchandise purchased. 1000 yds. Cloakings at $1.50 $1,500 Terms 2/10, n/30 Transaction No. 116 March 20, 19 . Received invoice from Baldwin Mfg. Co., Altoona, Pa., for merchandise purchased: 600 yds. Melton at $2.50 $1,500 Terms 2/10, n/30 1^ Transaction No. 117 March 22, 19 . Sold to Tompkins & Co., Philadelphia, Pa. 1000 yds. Serge at $2.00 $2,000 500 " Flannels " 1.50 750 $2,750 1/ Terms 2/10, n/30 Transaction No. 118 March 22, 19 . Cx^ Sold (for cash on delivery) C. O. D. to Modern Tailor- ing Co., City. 100 yds. Cloakings at $2.00 $200 Terms 2% cash. See transaction No. 120. Transaction No. 119 March 22, 19 Received notice from bank that W. Hall's note due March 19 was paid and that our account has been cred- ited. (Note of March 4, for $500 due in 15 days with interest at 6%.) / Transaction No. 120 March 22, lo Received check from Modern Tailoring Co., C. O. D. customer, for $196, invoice March 22, $200 less discount $4.00. y ASSIGNMENT VIII 173 Transaction No. 121 March 25, 19 Paid by check #41, H. Jenkins, $80, travelling ex- penses. Transaction No. 122 March 30, 19 . Paid by check #42, salaries, $430, made up as follows Mr. Reid $200.00 Bookkeeper — March $110 plus four days in February 126.67 Clerk — March $90 plus four days in February 103.33 Transaction No. 123 March 30, 19 . Paid by check #43, H. Jenkins, $175, salary for March. Transaction No. 124 March 30, 19 . Paid by check #44, Dry Goods Journal, $40, adver- tising for March. Transaction No. 125 March 30, 19 . Left note of Cann & Co., Brooklyn, due March 31, with bank for collection. Make no entry. Home Work: (i) Post March Transactions. Note: In posting the March transactions, post from the books of original entry in the following order: (i) Sales Journal. (2) Purchase Journal. (3) Journal. (4) Cash Journal. (5) Petty Cash Journal. (2) Take a trial balance. it ASSIGNMENT IX ASSIGNMENT IX Note: Books are not closed at Mar. 31, 19 (i) Prepare a six-column statement at March 31, 19 , show- ing the profit for the month of March. (2) Prepare Profit & Loss Account. (3) Prepare Balance Sheet. The inventories at March 31, 19 , were as follows: (a) Merchandise 325 yds. Serge at $1.60 $520 ^^ " " " 1.50 1,800 $2,320 it 1000 380 " Flannels . . April 2, 19 . Being in need of funds, Mr. Reid instructs the book- keeper to draw at sight, through the Wall Street Trust Co. for collection, on all customers owing February in- voices. The bookkeeper draws at sight on the following customers : ^ $437-50 — invoice Feb. 28 i»37500 — invoice Feb. 21 J. Link, City I. Hughes, City T. Wilson & Co., Bridgeport, Conn. 1,300.00— invoice Feb. 9 Transaction No. irz a -i Received invoice from Remington Typewriter Co, for combination typewriter and billing machine $150 Terms n/30 ASSIGNMENT X 179 Transaction No. 133 April 3, 19 . Received check from Tompkins & Co., Phila., in amount $2,695, invoice March 22, $2,750 less 2% cash discount $55. Transaction No. 134 April 3, 19 . Sold to Marshall & Co., New Haven, Conn. 500 yds. Broadcloth at $4.00 $2,000 200 " Melton " 3.25 650 $2,650 Terms 2/10, n/30 Transaction No. 135 Sold to Miller & Co., Albany, N. Y. 500 yds. Cloakings at $2.00 100 " Broadcloth " 4.00 Special terms 5% for cash. Transaction No. 136 April 3, 19 . Sold to King & Co., Jacksonville, Fla. 250 yds. Broadcloth at $4.00 $1,000 April 3, 19 . $1,000 400 $1400 400 n Flannel (( 1.50 600 $1,600 Terms 2% Sight Draft, Bill of Lading attached. Debit C. O. D. Account. Transaction No. 137 April 3, 19 . Left sight draft, in amount $1,568, with B/L attached, on King & Co., with Wall Street Trust Co. for collection. Make no entry. Transaction No. 138 April 4, 19 . Bank reports sight draft on L Hughes $1,375 ^^^ T. Wilson & Co. $1,300 paid, and returns unpaid draft on J. Link with notation "will remit direct." See transaction No. 131. i8o II V I BOOKKEEPING, THEORY AND PRACTICE Transaction No. 139 . Received invoice from Eclipse Mills, Altoona!'pa for merchandise purchased • ' 800 yds. Broadcloth at $3.00 $;,,4oo Terms 2% subject to draft payable in 10 days See transaction No. 140. Transaction No. 140 . ., Accepted (payable at Wall Street Trust^Co M^raft of Echpse M,lls dated April 2, payable ,0 days after sLt m amount $2,352, (invoice April 4, $2400 less 2% W Transaction No. 141 ^^Received invoice from Tower Mfg. Co., for statlone;y. Transaction No. 142 . .. Received invoice from N. Y Desk Cn ^flr^^ '? * ^ chair, $40. ^^" ^"""^ ^^^^ ^"^ Transaction No. 143 . Received check from Miller & Co.. in amount ^ 3,0 m^payment of invoice April 3. $1400 less 5% dilS Transaction No. 144 Sold for cash: 50 yds. Serge less 2% April 8, 19 . at $2.00 $100 2 $98 ■ Transaction No. 145 . . Had pass-book balanced at the bank and received^state- ment showing a balance of $4,733 57 The bank has allowed $7.16 interest on deposits has heTnSr '7 ""r'°"' ^"' ''^^ returned' canceJed ^ecks numbered 25, 26, and 28 to 42 inclusive, except Transaction No. 146 AIR Received check dated April 20 from J. t" Ludlow in amount $600, in payment of invoice datld March 5 ASSIGNMENT X 181 Transaction No. 147 April 10, 19 . Purchased light delivery truck from Wilcox Motor Truck Co., in amount $1,200, freight $50, payable $650 in cash and balance in interest bearing notes as follows : Dated April 10, due in i mo., interest 6%— i$ioo ID, ID, 10, ID, 10, (( it t( tt it 2 3 4 5 6 (( « (( tt t( h — 100 ^ — 100 ^ — 100 ^ — 100 ^ — 100 Notes were made payable at Wall Street Trust Co. Drew check #47 for $650. Engaged chauffeur at $80 per month. Transaction No. 148 Sold to I. Hughes, City. 300 yds. Fancy Suitings at $1.75 200 (( Serge it 2.00 April 12, 19 . $525 400 $925 Terms 2/10, n/30 Transaction No. 149 April 12, 19 . Sold to T. Wilson & Co., Bridgeport, Conn. 250 yds. Golf Cloth at $2.00 $500 Terms 2% subject to acceptance of draft, payable 10 days after date. See transaction No. 150. Transaction No. 150 April 12, 19 . Drew on T. Wilson & Co., Bridgeport, Conn., at 10 days after date for $490 (invoice April 12— ^$500 less 2%). Draft was accepted April 13 and returned to us. Left draft with bank for collection. Make no entry. Transaction No. 151 April 13, 19 . Paid by check #48, Brewster & Co., $240, invoice March i. Transaction No. 152 April 13, 19 . Paid by check #49, Baldwin Mfg. Co., $5,400, invoice Feb. 18, 19 . l82 BOOKKEEPING, THEORY AND PRACTICE ASSIGNMENT X 183 Transaction No. 153 April 13, 19 . Paid by check #50, Consolidated Gas Co., $9.50, for March service. Transaction No. 154 April 13, 19 . Received notice from bank that sight draft on King & Co., in amount $1,568 (invoice April 3, $1,600, less discoimt $32), has been paid. See transaction No. 136. Transaction No. 155 Paid out of petty cash: For Gasoline Window cleaning Towel service tt H April 13, 19 $3.90 2.00 2.25 I Transaction No. 156 April 15, 19 Paid by check #51, "Modern Garage," rent of* auto for April, $16 (2/3 of a month at $24 per month). Transaction No. 157 April 15, 19 . Received check from Marshall & Co., in amount $4,322, in payment of invoice March 18, $1,725, and April 3, $2,650, less 2% cash discount $53. Transaction No. 158 April 15, 19 . Reynolds & Co. request payment of invoice in amount $1,600, dated March 15. Mr. Reid draws on Dublin & Co. (who owe invoice of March 15, $1,945) at sight, requesting them to accept the draft and forward same to Reynolds & Co., Passaic, N. J. The draft, in amount $1,600, is accepted. Transaction No. 159. April 15, 19 . Sold C. O. D. to Modem Tailoring Co. 50 yds. Melton at $3.25 $162.50 Terms Cash less 2%. Debit C O. D. Account. See transaction No. 160. Transaction No, 160 April 15 10 Received from Modern Tailoring Co., C. O. D. cus- tomer, check for $159.25 in payment of invoice of even, date, $162.50 less 2% cash discount $3.25. Transaction No. 161 April 15, 19 . Paid by check #52, Bell & Co., $1470, invoice of March 20 ($1,500 less 2% cash discount $30). Note that their terms are 2/10, n/30. Transaction No. 162 April 15, 19 . Draft of Eclipse Mills dated April 2, payable in 10 days after sight, in amount $2,352, and accepted by us on April 4, presented to the Wall Street Trust Co. and paid. See transaction No. 140. Home Work : (i) Enter in the Purchase Journal transactions numbered 132, 139, 141, 142, and 147. (2) Enter in the Sales Jotu^nal transactions numbered 134, 135, 136, 148, 149, and 159- (3) Fill out check stubs for April transactions numbered 163, 167, 171, 173, 181, 182, 188, 189, 190, 191, and 192. II I ry I ASSIGNMENT XI Outline: Enter April transactions numbered 163 to 101; inclu- sive. Note: Purchase and sales transactions are to be re- corded by the students outside of class; all other transactions are to be recorded by the students in class under the guidance of the instructor. For the purpose of brevity omit details of invoices in recording sales transac- tions. STATEMENT OF TRANSACTIONS APRIL TRANSACTIONS the transactions from April 16 to 30 were as follows : Transaction No. 16^ a -i ^ T> • J . , •' , April 16, 19 . Paid by check #53, Wall Street Trust Co.. $2,000, for two $1,000 Third Liberty Loan Bonds purchased. One bond IS to be carried as an investment by the business; the other is a personal investment of Mr. Reid's Mr Reid^instructs the bookkeeper to open a drawing account Transaction No. 164 April 17, 19 . Received notice from bank that check of Modem lailonng Co., in amount $159.25, has been protested, and that our account has been charged $160.54, covering check $159.25 and protest fees $1.29. The discount allowed at time of payment was $3.25. See transactions numbered 159 and 160. Transaction No. le"; a •• Bell & Co return our check #52, in amount $1,470 and request check for the full amount as discount period has expired. Note that invoice will not be paid at pres- ent Amount of invoice $1,500, discount deducted $30 bee transaction No. 161. Transaction No. 166 A I K ^^ ^u'^!T' *""' P"'°"^' "^^^^^ '" «'"°""t S, clashed by the bookkeeper out of petty cash. 184 ASSIGNMENT XI o Transaction No. 167 ^pril 18, 19 Drew check #54, in amount $25, for petty cash. ' Transaction No. 168 a„,., n • 1 April 19 IQ Received note from Potash & Perlmutter dated Aoril 4, in amount $1,100, due in 60 days with interest at 6% in settlement of invoice dated March 4, 19 . Transaction No. 160 * -i T, ■ . r April 20, 19 . Received note from J. T. Ludlow dated April i8 in amount $1,050, due in one month with interest at c% in settlement of invoice dated March 4, 19 . Transaction No. 170 April 20. 19 . Deposited check for $600 dated April 20, received on March ^" ^"'"'"^ '" ^""^""^^ °* '"^°'"=^ -^^'^ Transaction No. 171 April 22, 19 . Paid by check #55, N. Y. Edison Co., $i6, for March service* Transaction No. 172 ^pril 23, 19 Received notice from bank that draft on T. Wilson & Co., in amount $490, drawn by us on April 12 and accepted by them April 13, has been paid. See trans- actions numbered 149 and 150. Transaction No. 173 ^pril 23, 19 . Received request from N. Y. Edison Co. for payment of their invoice dated March 15 for February service. Mr. Reid informs them over telephone that the invoice in question was paid by his check #39 dated March ic in amount $17.25 and payable at the Wall Street Trust Co. The payee did not receive the check. Mr Reid requests the bank, over the telephone, to stop payment on the check and confirms the request in writing Drew check #56 to the order of N. Y. Edison Co for $17.25 covering February service. See transaction No. 109. i86 BOOKKEEPING, THEORY AND PRACTICE li ♦I Transaction No. 174 April 23, 19 . Sold to Cann & Co., Brooklyn, N. Y. ICO yds. Serge at $2.00 $200.00 150 " Fancy Suitings " 1.75 262.50 $462.50 Terms 2/10, n/30 Transaction No. 175 Sold to L. Crane, City. 500 yds. Cloakings at $2.00 Terms 2/10, n/30 Transaction No. 176 Sold Miller & Co., Albany, N. Y. 300 yds. Gold Qoth at $2.00 100 u Melton ft 3.25 April 23, 19 . $1,000 $1,000 April 23, 19 . $600 325 $925 Terms 2/10, n/30 Transaction No. 177 April 23, 19 . Sold to Dublin & Co., Chicago, 111. .400 yds. Broadcloth at $4.25 $1,700 250 " Serge " 2.20 550 $2,250 Terms 2/10, n/30 Transaction No. 178 April 23, 19 Sold to W. Hall & Co., Mt. Vernon, N. Y. ' 200 yds. Flannel at $1.50 $300 $300 Terms 2/10, n/30 Transaction No. 179 April 23, 19 . Sold to Stewart & Myers, Syracuse, N. Y. 300 yds. Flannel at $1.50 $450 200 Melton M 4.00 800 $1,250 Terms 2/10, n/30 Transaction No. 180 April 23, 19 Received notice to attend a meeting of the creditors of the Modem Tailoring Co. ASSIGNMENT XI 187 Transaction No. 181 April 23, 19 Received invoice from "Bradstreet's" mercantile agency for year's subscription $150. Paid by check #57. Transaction No. 182 April 23, 19 With Mr. Reid*s consent, the bookkeeper pays his (the bookkeeper's) insurance premium by check of the firm m amount $75.00 in exchange for currency which is de- posited in the bank. Drew check #58 to order of J. Smith, bookkeeper, in amount $75.00. Transaction No. 183 April 25, 19 . Gave Taylor Mfg. Co. note dated April 26, due in 2 months, in amount $347i-30» in payment of invoice Feb. 26, $3420 and interest from March 26 to June 26 (3 months) at 6%, $51.30. Transaction No. 184 April 25, 19 Received invoice from Bell & Co., Passaic, N. J., for merchandise purchased: 500 yds. Serge at $1.60 $800 500 " Flannel " 1.20 600 $1400 Terms 2/10, n/30 Transaction No. 185 April 25, 19 Received invoice from Reynolds & Co., Passaic, N. J., for merchandise purchased: 750 yds. Fancy Suitings at $1.25 $937-50 Terms 2/10, n/30 Transaction No. 186 April 25, 19 Received invoice from Eclipse Mills, Scranton, Pa., for merchandise purchased: 1000 yds. Cloakings at $1.40 $1400 500 " Golf Cloth " 1.50 750 $2,150 Terms 2/10, n/30 i I I ■ill N !. l88 BOOKKEEPING, THEORY AND PRACTICE Transaction No. 187 April 25, 19 Received invoice from Taylor Mfg. Co., Paterson, JN. J., for merchandise purchased: 250 yds. Melton at $2.50 $62^ Terms S/D. B/L attached. Taylor Mfg. Co. notified Mr. Reid that they were draw- ing on him at sight for $612.50 (invoice of even date $625 less 2% cash discount $12.50) with B/L attached See transaction No. 188. Transaction No. 188 April 25, 19 Paid by certified check #59 (drawn to the order of University National Bank) draft of Taylor Mfg Co in amount $612.50. Transaction No. 189 April 25, 19 Paid by check #60, N. Y. Telephone Co., $15, for tele- phone service. Transaction No. 190 April 25, 19 Paid by check #61, in amount $45333, salaries as fol- lows: Bookkeeper $110.00 Clerk ^*^^*^ 90.00 Mr. Reid ^oo.oo Chauffeur, 2/3 of a month ^^ ^ 53.33 $453-33 Transaction No. 191 April 30, 19 Paid by check #62, H. Jenkins, salesman, $235, salary for month $175, travelling expenses $60. Transaction No. 192 April 30, 19 Paid by check #63, Dry Goods Journal, $40, for April advertisements. Transaction No. 193 April 30, 19 Received invoice from Auto Supply Co., in amount $25, for auto supplies. Debit— Auto Expense. Home Work: (5) ASSIGNMENT XI 189 (1) Enter in the Purchase Journal transactions numbered 184, 185, 186, 187, and 193. (2) Enter m the Sales Journal transactions nmnbered 174, 175, 176, 177, ,78, and (3) Post. (4) Take a trial balance. Prepare the following schedules : (a) Customers' balances. (b) Creditors' balances. lit f i4' \t ASSIGNMENT XII Close the books at April 30, 19 , and prepare a balance sheet. Note : This work is to be done in class under the guidance of the instructor. APRIL CLOSING The inventories at April 30, 19 , were as follows : 925 yds. Serge at $1.50 $1,487.50 5^ " " " 1.60 800.00 $2,287.50 100 880 Flannels Fancy Suitings Goakings " Broadcloth < ft f * Melton ' Golf Cloth " 1. 10 " 1.20 " 1.30 " 1.25 " r.50 " r.40 * 3.20 * 300 * 2.60 * 2.50 * 1.60 * 1.50 110.00 1,056.00 1,166.00 630 1300 819.00 1,625.00 2,444.00 1200 1000 1,800.00 1,400.00 3,200.00 225 • 800 * 720.00 2400.00 3,120.00 400 * 300 ' 1,040.00 750.00 1,790.00 600 * 950 ' 960.00 1425.00 2,385.00 Total Merchandise Inventory $16,392.50 Stationery & Printing = Insurance ( 10 months at $20) ~ 15.00 200.00 Home Work: (I) (2) (3) (4) I' Post closing journal entries. Balance the real accounts. Take a trial balance. Without aid from the instructor, prepare a six-column statement at April 30, 19 showing the profit for the period. 190 ASSIGNMENT XIII Outline : Enter May transactions. Note: Purchase and sales transactions are to be re- corded by the students outside of class; all other transactions are to be recorded by the students in class under the guidance of the instructor. STATEMENT OF TRANSACTIONS MAY TRANSACTIONS Mr. Reid requests the bookkeeper to open accounts which will enable him in the future to tell from the trial balance the amount of cash discount allowed customers and the amount of cash discount deducted in paying purchase invoices. The bookkeeper accordingly discontinues the use of the In- terest and Discount Expense and the Interest and Discount Earned accounts, and opens in their stead the following ac- counts : Cash Discount on Sales, Discounts on Notes. Interest on Notes Payable, Interest on Bank Balances, Interest on Notes Receivable, and Cash Discount on Purchases. New Accounts to be Opened: In General Ledger: 12A. Expense. 18A. 19A. 22A. 22B. 23A. 24A. 24B. 25A. Cash Discount on Sales. Discount on Notes. Freight & Express Inward. Freight and Express Out^-ard. Interest on Notes Payable. Interest on Bank Balances. Interest on Notes Receivable. Cash Discount on Purchases. In Customers* Ledger: 9A. Lawrence Bros. 9B. Dawson & Co. In Creditors* Ledger: 7B. Lawrence Bros. 191 i' ASSIGNMENT XII Close the books at April 30, 19 , and prepare a balance sheet. Note: This work is to be done in class under the guidance of the instructor. APRIL CLOSING The inventories at April 30, 19 , were as follows: 525 yds. Serge at $1.50 $1487.50 500 " " « 1.60 800.00 $2,287.50 fW 100 880 630 1300 « <« (( « Flannels tt i.ro 110.00 1.20 1,056.00 1,166.00 Fancy Suitings " 1.30 819.00 " " 1.25 1,625.00 2,444.00 1200 " Cloakings 1000 « (( u 225 " Broadcloth 800 ti €t (i 400 " Melton 300 « « tt ft it t$ tt tt 1.50 1,800.00 1.40 1,400.00 3,200.00 3.20 720.00 3.00 2400.00 3,120.00 2.60 1,040.00 2.50 750.00 1,790.00 it 600 " Golf Qoth 950 " tt tt " 1 .60 960.00 " 1.50 142500 2,385.00 Total Merchandise Inventory $16,392.50 Stationery & Printing "" Insurance ( 10 months at $20) ~~ 15.00 200.00 Home Work: (I) (2) (3) (4) Post closing journal entries. Balance the real accounts. Take a trial balance. Without aid from the instructor, prepare a six-column statement at April 30, 19 , showing the profit for the period. 190 : ii ASSIGNMENT XIII Outline : Enter May transactions. Note: Purchase and sales transactions are to be re- corded by the students outside of class ; all other transactions are to be recorded by the students in class under the guidance of the instructor. STATEMENT OF TRANSACTIONS MAY TRANSACTIONS Mr. Reid requests the bookkeeper to open accounts which will enable him in the future to tell from the trial balance the amount of cash discount allowed customers and the amount of cash discount deducted in paying purchase invoices. The bookkeeper accordingly discontinues the use of the In- terest and Discount Expense and the Interest and Discount Earned accounts, and opens in their stead the following ac- counts: Cash Discount on Sales, Discounts on Notes, Interest on Notes Payable, Interest on Bank Balances, Interest on Notes Receivable, and Cash Discount on Purchases. New Accounts to be Opened: In General Ledger: 1 2 A. Expense. 18A. Cash Discount on Sales. 19A. Discount on Notes. 22A. Freight Si Express Inward. 22B. Freight and Express Outward. 23A. Interest on Notes Payable. 24A. Interest on Bank Balances. 24B. Interest on Notes Receivable. 25A. Cash Discount on Purchases. In Customers' Ledger: 9A. Lawrence Bros. 9B. Dawson & Co. In Creditors' Ledger: 7B. Lawrence Bros. 191 HBAMa r 192 BOOKKEEPING, THEORY AND PRACTICE i jj */ ;, I The transactions for the month of May were as follows: Note: Bring forward the balance of cash in the net cash column. Transaction No. 194 May i, 19 Discovered error in extension of item in the inventory. The item of 925 yds. Serge at $1.50 $1,487.50 should be 1,387.50 Difference 100.00 Make the necessary entry to correct this error. Transaction No. 195 May i, 19 . Left note of Jas. T. Ludlow due on May 19, with bank for collection. Make no entry. Transaction No. 196 • May i, 19 Paid by check #64, Modern Garage, $24, May rent for auto. Transaction No. 197 May i, 19 . Paid by check #65, Jay Realty Co., $200, rent for May. Transaction No. 198 May i, 19 . Paid by check #66, Quick Delivery Co., $33.33, cart- age for ten days ended April 10. Transaction No. 199 May 2, 19 . Sold Marshall & Co., New Haven, Conn. 500 yds. Cloakings at $2.00 $1,000 200 " Fancy Suitings " 1.75 350 $1,350 Terms 2/10, n/30 Transaction No. 200 May 2, 19 . Sold to T. Wilson & Co., Bridgeport, Conn. 400 yds. Fancy Suitings at $1.80 $720 200 " Serge " 2.10 420 $1,140 Terms 2/10, n/30 ASSIGNMENT XIII 193 Transaction No. 201 May 2, 19 . Sold Keller & Co., C. O. D. customer. 200 yds. Cloakings at $2.00 $400 Terms: 2% for cash. Debit— C. O. D. See transaction No. 202. Transaction No. 202 May 2, 19 . Received cash in amount $392 from Keller & Co., C. O. D. customer, covering invoice May 2, $400 less 2^0 cash discount $8. Transaction No. 203 May 2, 19 . The bookkeeper draws at sight through the Wall Street Trust Co. for collection on all customers who owe Feb- ruary and March invoices. Drafts were drawn on the following: J. Link invoice 2/28 $ 437-50 L. Crane " 3/18 2,250.00 Cann & Co. " 3/i5 5«>-oo Transaction No. 204 May 3, 19 • Received notice from bank that drafts on J. Link $437.50 and L. Crane $2,250 were paid. Draft on Cann & Co. is returned with the notation "sent note yester- day." Transaction No. 205 May 3, 19 . Received note from Cann & Co. dated May i, at 60 days with interest at 5%, in amount $500, invoice March 15. Transaction No. 206 May 4, 19 • Received invoice from Marshall & Co. for freight on invoice May 2, $6.50. Transaction No. 207 May 4, I9 • Received check, in amount $2,550, from Dublin & Co., in payment of account, $2,595 less 2% discount $45. on invoice of April 23. Transaction No. 208 May 4, I9 • Paid by check #67, Tower Mfg. Co., $12.50, invoice April 4. u 1^ i ^ 1 It f 194 BOOKKEEPING, THEORY AND PRACTICE tf' 'I 1 w 15 'W ■{ Transaction No. 209 ^^y ^ jq Paid by check #68, N. Y. Desk Co., $40' invoice April 4. Transaction No. 210 May 6, 19 Received invoice from Bell & Co., Passaic, N. J., for merchandise purchased: 800 yds. Serge at $1.50 $1,200 (( 1. 10 550 $1,750 500 " Flannel Terms 2/10, n/30 Transaction No. 211 May 6, 19 . Bank pass-book shows balance of $2,628.71 at April 30 after allowing $3.11 interest and charging $5.50 for collections. All cancelled checks returned with the ex- ception of #62 and 63. Transaction No. 212 May 6, 19 Received invoice from Taylor Mfg. Co. for merchan- dise purchased: 500 yds. Broadcloth at $3.10 $1,550 Terms 2/10, n/30 Transaction No. 213 May 6, 19 . Received invoice from Baldwin Mfg. Co. for merchan- dise purchased: 1000 yds. Fancy Suitings at $1.25 $1,250 Terms 2/10, n/30 Transaction No. 214 Paid out of petty cash : Freight on merchandise purchased Charge Inward Freight. Freight on merchandise sold Charge Outward Freight. Postage (stamps) May 7, 19 $4-75 9-75 5.00 Transaction No. 215 May 7, 19 Drew check #69, in amount $25, for petty cash. ASSIGNMENT XIII 195 Transaction No. 216 May 8, 19 Paid by check #70, Jackson Mills, $3,050, invoice March 5, 19 . Transaction No. 217 May 9, 19 Bell & Co. drew at 10 days after date for $1,500, cover- ing invoice dated March 20. Draft is accepted by us payable at the Wall Street Trust Co. Transaction No. 218 May 10, 19 Note at 60 days, in amount $5,000, discounted at Wall Street Trust Co. on March 11, is due today. Mr. Reid requests the bank to accept $1,000 on account and re- newal note for $4,000 due in 2 months. The bank charges Mr. Reid's account with $1,040.67. Transaction No. 219 May 10, 19 Note of Mr. Reid's, in amount $100, in favor of Wilcox Motor Truck Co., dated April 10, payable in one month with interest at 6%, presented to Wall Street Trust Co. and paid. Transaction No. 220 May 11, 19 Sold Marshall & Co., New Haven, Conn. 500 yds. Fancy Suitings at $1.75 $875 300 Broadcloth (( 4.00 1,200 $2,075 Terms 2/10, n/30 Transaction No. 221 Sold Lynn & Jones, Buffalo, N. Y. 250 yds. Melton at $4.00 300 " Golf Cloth « 2.00 May II, 19 . $1,000 600 $1,600 Terms 2% S/D with B/L attached. Charge C. O. D. Account. See transaction No. 222. Transaction No. 222 May 11, 19 Drew on Lynn & Jones (C. O. D. customer), Buffalo, N. Y., at sight for $1,568 invoice May 11, $1,600 less 2% discount ($32). The draft was paid. See transaction No. 221. 196 BOOKKEEPING, THEORY AND PRACTICE I Transaction No. 223 Paid out of petty cash: Ferrying auto Window cleaning Towel service Freight on shipment to Lynn & Jones (Charge Freight & Express Outward) May II, 19 $1.60 2.00 2.25 12.50 I Transaction No. 224 May 13, 19 Received check, in amount $1,316.50, from Marshall & Co. in payment of their account as follows : Invoice May 2 $1,350.00 Less 2% discount 27.00 Less freight $1,323.00 6.50 $1,316.50 Transaction No. 225 May 16, 19 . Paid by check #71, Taylor Mfg. Co., Paterson, N. J., $1,519, invoice May 6, $1,550 less 2% cash discount $31. Transaction No. 226 May 16, 19 Paid by check #72, Remington Typewriter Co., $150, invoice Apr. 2. Transaction No. 227 May 16, 19 . Purchased from Reynolds & Co., Passaic, N. J. 750 yds. Cloakings at $1.50 $1,125 500 " Broadcloth " 3.20 1,600 $2,725 Terms 2/10, n/30 Transaction No. 228 May 16, 19 Purchased from Lawrence Bros., City: Auto Supplies, $46. Debit — ^Auto Expense. ASSIGNMENT XIII jg^ Transaction No. 229 May 18, 19 . Purchased from Eclipse Mills, Altoona, Pa. 500 yds. Melton at $2.50 $1,250 Terms 2% S/D with B/L attached. See transaction No. 230. Transaction No. 230 May 18, 19 . Paid by check #73, sight draft of Eclipse Mills, in amount $1,225, presented by University National Bank. Invoice May 18, $1,250, less 2% cash discount $25. See transaction No. 229. Transaction No. 231 May 19, 19 , Draft of Bell & Co. dated May 9 at 10 days after date, in amount $1,500 and accepted by us, presented to the Wall Street Trust Co. and paid. See transaction No. 217. Transaction No. 232 May 19, 19 . Note of Jas. T. Ludlow, in amount $1,050, at one month with interest at 5% due today, reported paid by the bank. Transaction No. 233 May 20, 19 . Sold for cash, 50 yds. Fancy Suitings at $1.75, $87.50 less 2% $1.75, cash received $85.75. Transaction No. 234 May 20, 19 . The Modern Tailoring Co. is only temporarily embar- rassed owing to the failure of a large customer ; hence the creditors agree to accept 40% of their accounts in cash and to take notes maturing monthly for three months for the balance. Received from Modem Tailoring Co. check, in amount $65.52, and notes as follows: May 20 due in i month with int. at 6% $32.76 (( f< 20 20 it it (( If tt « « « : Transaction No. 235 Sold Lawrence Bros., City: 250 yds. Serge at $2.00 Terms 2/10, n/30 6% 32.76 6% 32.75 May 20, 19 $500 198 BOOKKEEPING, THEORY AND PRACTICE II i i 14 II I iV'l f* I ; i Transaction No. 236 Sold Dawson & Co., Utica, N. Y. 200 yds. Melton at $3.25 Terms 2/10, n/30 Transaction No. 22i'j Sold Dublin & Co., Chicago, 111. 250 yds. Flannel at $1.60 350 " Qoakings " 2.10 Terms 2/10, n/30 Transaction No. 238 Sold W. Hall, Mt. Vernon, N. Y. 300 yds. Fancy Suitings at $1.75 Terms 2/10, n/30 Transaction No. 239 Sold I. Hughes, City 400 yds. Broadcloth 300 " Cloakings Terms 2/10, n/30 May 20, 19 . $650 May 20, 19 . $400 735 $1,135 at $4.00 2.00 « May 20, 19 . $525 May 22, 19 . $1,600 600 $2,200 Transaction No. 240 May 23, 19 Paid by check #74, N. Y. Edison Co., $14.25, April lighting. Transaction No. 241 May 22,, 19 Paid by check #75, N. Y. Telephone Co., $18.75, for April service. Transaction No. 242 May 23, 19 Drew check ^yd, in amount $25, for petty cash. Transaction No. 243 May 23, 19 Paid by check i^y-j. Consolidated Gas Co., $8.75, April lighting. Transaction No. 244 May 25, 19 Drew check #78, in amount $100, to order of Wall Street Trust Co. Red Cross Fund. ASSIGNMENT XIII 199 Transaction No. 245 May 25, 19 Cashed check of Mr. Reid, in amount $10, out of petty cash. Transaction No. 246 May 25, 19 Paid by check #79, Reynolds & Co., $937.50, invoice April 25, 19 . Transaction No. 247 Sold Jas. T. Ludlow, Boston, Mass. 500 yds. Serge at $2.00 200 « Flannel u 1.50 May 25, 19 . $1,000 300 $1,300 Terms 2/10, n/30 Transaction No. 248 Sold Potash & Perlmutter, City : 200 yds. Broadcloth at $4.10 Terms 2/10, n/30 {as June 10) May 2y, 19 $1,025 Transaction No. 249 May 27, 19 Sold to Miller & Co., Albany, N. Y. 400 yds. Serge at $2.00 $800 . 250 " Golf Cloth " 2.00 500 $1,300 Terms 2/10, n/30 Transaction No. 250 May 31, 19 Paid by check #80, in amount $480, salaries as fol- lows : Mr. Reid $200 Bookkeeper 1 10 Clerk 90 Chauffeur 80 J" Transaction No. 251 May 31, 19 . Paid by check #81, in amount $255, H. Jenkins, sales- man, salary $175, travelling expenses $80. Transaction No. 252 May 31, 19 . Paid by check #82, Dry Goods Journal, $40, adver- tising for month. f 200 BOOKKEEPING, THEORY AND PRACTICE 1 I f H Af V. r I Transaction No. 253 May 31, 19 . Received invoice from Tower Mfg. Co., $25, for sta- tionery. Debit — Stationery & Printing. Transaction No. 254 May 31, 19 . Received invoice from Auto Supply Co., $40, for auto supplies. Debit — ^Auto Expense. Home Work: (i) Enter in the Sales Journal transactions numbered 199, 200, 201, 220, 221, 235, 236, 237, 238, 239, 247, 248, and 249. (2) Enter in the Purchase Journal transactions numbered 210, 212, 213, 227, 228, 229, 253, and 254. (3) Post May transactions from books of orig- inal entry in the following order: (a) Sales Journal. (b) Purchase Journal. (c) Journal. (d) Cash Journal. (e) Petty Cash Journal. (4) Prepare : (a) Trial Balance. (b) Schedule of Customers' Accounts. (c) Schedule of Creditors* Accounts. ASSIGNMENT XIV REVIEW Home Work: Without aid from the instructor, close the books and prepare a balance sheet at May 31, 19 , using as a guide the closing entries made at April 30, 19 . Tl (a) le inventories at May 31, 19 , are as Merchandise : 175 yds. Serge at $1.60 800 " " " 1.50 500 " Flannels '* i.io 230 " " " 1.20 1480 " Fancy Suitings " 1.25 850 " Cloakings " 1.40 750 " " " 1.50 500 " Broadcloth " 3.20 500 " " " 3.10 75 " " " 300 750 " Melton " 2.50 450 " Golf Cloth " 1.50 Total Merchandise In Stationery & Printing Insurance (9 months at $20) follows : $280 1,200 $1,480 550 276 826 1,190 1,125 11,850 2,315 1,600 1,550 225 3,375 ventory 1,875 675 (b) $12,396 $ 15 (c) $ 180 r i 201 14 1 r SUPPLEMENTARY ASSIGNMENT I 203 I [ ' II I III Outline : Note: SUPPLEMENTARY ASSIGNMENTS ASSIGNMENT I Enter June transactions. Note: Sales and purchase transactions are to be re- corded by the students outside of class; all other transactions are to be recorded by the students in class under the guidance of the instructor. STATEMENT OF TRANSACTIONS JUNE TRANSACTIONS A separate page in the Purchase Journal should be used for recording purchase returns and allowances, and a separate page in the Sales Journal should be used for recording sales returns and allowances. New Accounts to be Opened: In General Ledger: 6B. Freight Prepaid. In Customers' Ledger. loA. Tompkins & Co. loB. Phila. R. R. Co. In Creditors* Ledger. 8A. Sellew & Co. The transactions for the month of June were as follows : Transaction No. 255 June i, 19 . Left note of Potash & Perlmutter due June 3 with bank for collection. Transaction No. 256 June i 10 Paid by check #83, Jay Realty Co., $200, Vent for June. Transaction No. 257 June i, 19 . Paid by check #84, Modern Garage, $24, rent of auto for June. 2Q2 Transaction No. 258 June i, 19 The bookkeeper draws at sight on the following cus- tomers : L. Crane invoice April 23 $1,000 L Hughes " " 12 g2S W. Hall " " 23 300 Miller & Co. " " 23 925 Stewart & Meyers invoice April 23 1,250 Transaction No. 259 June 3, 19 . Received check from Lawrence Bros., in amount $450,. and statement of remittance as follows: May 30 Your invoice $500 Less 2% 10 $490 May 16 Our invoice 40 $450 Transaction No. 260 June 3, 19 Note of Potash & Perlmutter, in amount $1,100, dated April 4, at 60 days with interest at 6%, is paid at bank. Transaction No. 261 Jime 3, 19 Received check from Stewart & Myers, in amount $1,100, in payment of invoice April 23, $1,250 less $150 for overcharge on items of 200 yds. Melton at $4.00. The price should be $3.25. The deduction is allowed. Transaction No. 262 June 3, 19 Received invoice from Jas. T. Ludlow, Boston, (our customer), covering one piece 50 yds. Serge at $2, $100,. returned on account of defect in weave. Goods have not as yet been received. Make no entry. Transaction No. 263 June 4, 19 Received notice from bank that the following sight drafts have been paid: L. Crane $1,000 I. Hughes 925 W. Hall 300 Miller & Co. 925 The draft on Stewart & Myers is returned with the notation, "Have remitted direct." I. f \f fll 1 204 BOOKKEEPING, THEORY AND PRACTICE Transaction No. 264 June 4, 19 Received invoice from Taylor Mfg. Co., Paterson, N. J., for merchandise purchased: 1000 yds. Golf Cloth at $1.50 $1,500 Terms 2/10, n/30 F. O. B. N. Y. (Shipped freight collect.) Transaction No. 265 June 5, 19 Received invoice from Baldwin Mfg. Co., Altoona, Pa., for merchandise purchased: 1000 yds. Flannel at $1.10 $r, 100.00 Freight prepaid 5.50 $1,105.50 Terms 2/10, n/30 F. O. B. Altoona. Transaction No. 266 June 5, 19 Received invoice from Eclipse Mills, Altoona, Pa., for merchandise purchased: 1200 yds. Serge at $1.50 $1,800 Terms 2% subject to acceptance payable 10 days after date. F. O. B. Altoona, Pa. Transaction No. 267 June 6, 10 Accepted (payable at Wall Street Trust Co.) draft of Eclipse Mills, in amount $1,764, payable 10 days after date (June 5). Invoice June 5, $1,800, less 2% cash discount $36. Transaction No. 268 June 6, 19 . Drew check #85, in amount $25, for petty cash. Transaction No. 269 June 6, 19 . Received from Jas. T. Ludlow, Boston, 50 yds. Serge at $2.00, $100, returned by them. Credit memo, is issued; material was defective. SUPPLEMENTARY ASSIGNMENT I 205 Transaction No. 270 Paid out of petty cash: Freight on shipment of Taylor Mfg. Co. See transaction No. 264. Freight on shipment of Eclipse Mills See transaction No. 266. Expressage on package received from Jas. T. Ludlow See transaction No. 269. June 6, 19 $6.25 8.75 •75 Transaction No. 271 June 7, 19 . Sold to L. Crane, City: 300 yds. Serge at $2.00 $600 400 " Cloakings " 2.00 800 $1,400 Terms 2/10, n/30 Transaction No. 272 June 7, 19 . Sold to L Hughes, City: 250 yds. Broadcloth at $4.00 $1,000 Terms 2/10, n/30 Transaction No. 273 June 7, 19 . Sold to W. Hall, City: 300 yds. Melton at $3.25 $975 Terms 2/10, n/30 Transaction No. 274 June 8, 19 . Sold to Miller & Co., Albany, N. Y. 300 yds. Fancy Suitings at $1.75 $525 200 " Serge " 2.00 400 $925 Terms 2/10, n/30 F. O. B. N. Y. Transaction No. 275 June 8, 19 . Received invoice from L Hughes (our customer) cover- ing shortage of one piece 50 yds. Broadcloth at $4, $200, on our shipment of June 7. The claim is allowed, as an error was made in billing. The quantity actually shipped was 200 yds. instead of 250. I t ''4 'Pfl) S'}} i (/ 206 BOOKKEEPING, THEORY AND PRACTICE Transaction No 276 j^„^ ^^ Note of Modern Tailoring Co. $32.76 dated May 10 at 30 days with interest at 6% reported by the bank as paid. Transaction No. 277 t„„^ ,^ XT £ June 10, 19 . Note of April 10 in favor of Wilcox Motor Truck Co in amount $100 and interest at 6%, presented to Wall Street Trust Co. and paid. SUPPLEMENTARY ASSIGNMENT I 207 Transaction No. 278 Received checks from: T. Wilson & Co., invoice May 2 Jas. T. Ludlow, bal. of a/c $1,200 less 2% cash discount $24 Potash & Perlmutter, May 2^, $1,025 less 2% cash discount $20.50 June 10, 19 $1,140.00 1,176.00 1,004.50 Transaction No. 279 j^^^ ^^ ^^ Had bank pass-book balanced. The bank's statement .11 ^^ l\o^. ' '^°^' ' ^"^""'^ «^ $^'515.04 after allowmg $4.68 for interest and charging $6.25 for collec- tions. All checks were returned except 79, 81 and 82. Transaction No. 280 j^„, ^^ Returned to Bell & Co., Passaic, N. J., via express col- lect 50 yds. Serge at $1.50, $75. (Returned on account ot detects in weave.) Transaction No. 281 j„„, ,^^ ^^ Sent Taylor Mfg. Co. our invoice for $150 covering shortage of 100 yds. Golf Cloth at $1.50 in their shipment of June 5, 19 . Transaction No. 282 j^„, ^^^ ^^ Paid by check #86, J. Slater, $20, invoice Mar. 5. Transaction No. 283 j^„e 12, 19 . Paid by check #87, N. Y. Edison Co., $13, May service. Transaction No. 284 j^^e 13, 19 . Drew check #88, in amount $50, for petty cash. Transaction No. 285 June 13, 19 . Paid by check #89, N. Y. Telephone, $19.25, for tele- phone service. Transaction No. 286 June 14, 19 . Paid by check #90, Taylor Mfg. Co., $1,316.75, in- voice June 4, 19 , $1,500 less our claim for shortage $150, cash discount $27 and freight $6.25. Transaction No. 287 June 14, 19 . Paid by check #91, N. Y. Life Insurance Co., $300, premium on personal policy of Mr. Reid. Transaction No. 288 June 15, 19 . Received from Bell & Co. credit memo., in amount $75, covering 50 yds. Serge at $1.50, $75, returned by us June 12, 19 . See transaction No. 280. Make no entry. Transaction No. 289 June 15, 19 . Received from Taylor Mfg. Co. credit memo., in amount $150, covering shortage of 100 yds. Golf Cloth at $1.50 on the shipment of June 4, 19 . Make no entry. See transaction No. 281. Transaction No. 290 June 15, 19 . Draft of Eclipse Mills, in amount $1,764, dated June 5, and accepted by us, is presented to the Wall Street Trust Co. and paid. Transaction No. 291 June 15, 19 . Received note dated June 11, at 2 months with interest at 6%, in amount $2,075, ^rom Marshall & Co., in pay- ment of invoice May 11, $2,075. Transaction No. 292 June 16, 19 . Sold to Jas. T. Ludlow, Boston, Mass. 500 yds. Serge at $2.00 $1,000 300 it Flannels (( 1.50 450 $1,450 Terms 2/10, n/30, F. O. B. Boston, Mass. I K 1:1 IM UiHf ¥ h tilt 208 BOOKKEEPING, THEORY AND PRACTICE SUPPLEMENTARY ASSIGNMENT I Transaction No. 293 Sold to Lawrence Bros., City: 250 yds. Cloakings at $2.00 200 Broadcloth tt 4.00 June 16, 19 . $500 800 $1,300 Terms 2/10, n/30 Transaction No. 294 June 18, 19 . Sold to Dawson & Co., Utica, N. Y. 500 yds. Flannels at $1.50 $750 300 " Serge " 2.00 600 $1,350 Terms 2/10, n/30, F. O. B. N. Y. Transaction No. 295 June 18, 19 . Sold to Lynn & Jones, Buffalo, N. Y. 500 yds. Golf Cloth at $2.00 $1,000.00 300 " Broadcloth " 4.00 1,200.00 " 325 812.50 $3,012.50 250 n Melton (Shipped freight prepaid) 12.25 $3,024.75 Total Terms 2% S/D with B/L F. O. B. N. Y. (Charge C. O. D. a/c.) Transaction No. 296 June 18, 19 Drew on Lynn & Jones at sight with bill of lading attached for $2,964.50 invoice June 18, $3,024.75 less 2% discount ($60.25) on $3,012.50. The draft was paid. June 18, 19 Transaction No. 297 Paid out of petty cash: Freight on shipment to Lynn & Jones, Buffalo, N. Y., $12.25. Charge Freight Prepaid. See transaction No. 295. Postage stamps $10.00 Ferrying auto j ^q Dinner for bookkeeper 1.25 209 Transaction No. 298 June 18, 19 . Received check, in the amount of $784, from I. Hughes in payment of invoice June 7, $1,000 less allowance for shortage $200 and 2% cash discount $16. Transaction No. 299 June 21, 19 Gave Eclipse Mills note dated June 21, at one month . with interest at 6% in the amount of $2,150 in settlement of invoice dated April 25. Transaction No. 300 June 21, 19 . Paid by check #92, Baldwin Mfg. Co., $2,750, invoice of March 20 ($1,500) and May 6 ($1,250). Transaction No. 301 June 22, 19 . Paid by check #93, Bell & Co., $1400, invoice April 17. Transaction No. 302 June 22, 19 . Received invoice from Reynolds & Co., Passaic, N. J., for merchandise purchased: 750 yds. Fancy Suitings at $1.20 $900 500 tt Broadcloth t* 3.20 1,600 $2,500 Terms 2/10, n/30, F. O. B. Passaic, N. J. Transaction No. 303 June 24, 19 . Received invoice from Jackson Mills, Scranton, Pa., for merchandise purchased: 1200 yds. Melton at $2.50 $3,000 Terms 2/10, n/30, F. O. B. Scranton, Pa. Transaction No. 304 June 24, 19 . Received invoice from Bell & Co., Passaic, N. J., for merchandise purchased: 500 yds. Cloakings at $1.40 $700 500 " Serge "1.60 800 $1,500 Terms 2/10, n/30, F. O. B. Passaic, N. J. 14 f 2IO BOOKKEEPING. THEORY AND PRACTICE 111 I Transaction No. 305 June 25, 19 . Sold to Tompkins & Co., Phila., Pa. 500 yds. Fancy Suitings at $1.75 $875 350 " Cloakings " 2.00 700 $1,575 Terms 2/10, n/30, F. O. B. N. Y. Transaction No. 306 Sold to J. Link, Newark, N. J. 500 yds. Melton at $3.25 Terms 2/10, n/30, F. O. B. N. Y. June 26, 19 $1,625 June 2^, 19 . Transaction No. 307 Paid out of petty cash : Freight on shipment from Reynolds & Co. $10.75 Jackson Mills 1450 " " " " Bell & Co. 8.25 See transactions #302, 303, and 304. Transaction No. 308 June 26, 19 . Our note dated April 26, in favor of Taylor Mfg. Co., in amount $3,471 30, is presented at the Wall Street Trust Co. and paid. See transaction #185. Transaction No. 309 June 27, 19 . Received invoice from Sellew & Co. for filing cabinet $35. Transaction No. 310 june 28, 19 . Received invoice from Tower Mfg. Co. for stationery $25. Transaction No. 311 June 29, 19 . Paid by check #94, in the amount of $660, salaries for the month as follows : Mr. Reid $300 Bookkeeper 150 Clerk no Chauffeur 100 As a result of the high cost of living, salaries have been increased. SUPPLEMENTARY ASSIGNMENT I 211 Transaction No. 312 June 29, 19 . Paid by check #95, Auto Supply Co., $65, invoices of April 30, and May 31. Transaction No. 313 June 29, 19 . Paid by check #96, H. Jenkins, salesman, $285, salary $200, travelling expenses $85. Transaction No. 314 June 29, 19 . Paid by check #97, Dry Goods Journal, $40, June advertisement. Transaction No. 315 June 29, 19 . Received note from Dawson & Co. dated June 20 at two months with interest at 6% for $650 in payment of invoice dated May 20. Transaction No. 316 June 29, 19 . Tompkins & Co., Phila., Pa., send invoice covering two pieces 100 yds. Cloakings at $2.00 short on shipment of June 25. Claim is filed by us with Phila. R. R. Co. Transaction No. 317 June 29, 19 . Dawson & Co. of Utica, N. Y., request us to have ship- ment of June 18 traced. Transaction No. 318 June 29, 19 . Received check, in amount $600, from W. Young, Re- ceiver, representing first and final dividend of 60% on our claim of $1,000 in re Wm. Bradhurst who had been forced into bankruptcy. Home work: ( 1 ) Post. (2) Take a trial balance. (3) Prepare the following statements: (a) Schedule of Customers* balances. (b) Schedule of Creditors' balances. 11 r i ■la ! (I) (2) (a) ASSIGNMENT II Close the books at June 30, 19 , using a Trading and Profit & Loss Account. Prepare a balance sheet at June 30, 19 The inventories at June 30, 19 , are as follows: Merchandise. 875 yds Serge at $1.50 $1,312.50 500 « (f Flannels tt tt 1.60 1. 10 800.00 $2,112.50 430 473.00 680 n Fancy Suitings tt 1-25 850.00 750 tt tt Cloakings tt tt 1.20 1.50 900.00 1,75000 1 100 1,650.00 300 n Broadcloth *t 3.10 930.00 75 it Form No. i Deposit Side of Check Stub Jk^^ j^-^ I /O ef90 217 iH V Ipl # 2l8 BOOKKEEPING, THEORY AND PRACTICE Form No. 2 Deposit Slip BEPOSITED TO THE C^REIHT OF VilOlr: WALL ST. TRUST CO. PLEASE OMIT ALL DOLLAR SIGNS Rftin DOLLARS CENTS ^ll\/FP 1 Rll 1 5i 1! rh'k nn Bank. /q_ r9 cJ £) ti 1 - JIC ^J=L. Ojcy Q ^ f /? ,.. ir., 4 . SelmJ. »m*mtltf/*M 7r~r H^ * • ■ « .< W *> | y^ .AA Form No. 4 Example of Rubber Stamp Used for Approving Purchase Invoices Received Prices & Terms O. K. Material Rec'd Rec'd by Calculations O. K Sent to N. Y Approved Charge Ent'd Purch. Journal Charge R. B. B Payment Approved Date Pay On Date Paid Check No r 220 BOOKKEEPING, THEORY AND PRACTICE I >< D ■^m 1 ■ • ^ a 5 « - « i 3 1 * ^ 1 a m ""4. a, 5 .^^ SOI M z 2 • < m : a: i H S • • H ^ ^^ Cx3 z%C < ' CO > 1 :^'^ \^ 1 1 • « ^ ! i Stub and Chei ■^^ w V r ) — • v^ •i 1 1 1 1 1 ■ > ** i ^. ^ 1 ^ « < { 1 i BUSINESS FORMS AND PAPERS 221 Form No. 6 Purchase Invoice Covering Merchandise Purchased See Transaction No. 7 12 0>^A, ./-/^.j. ■^ '^-- - AMtraAA*M O-M^ A9jt± '^■^'^"-f ^^.-^ 1 , - -« Ja^£^ -"--ft' 7 :^ AJ/,p. L... ^ -y^. x^^ i. G> /"' tS^ ^^' g> t'^^ ro /o •» /Vtfg /%^g» /r-tf g <>^*o I f# # 222 BOOKKEEPING, THEORY AND PRACTICE Form No. 7 Shipping Ticket TerM JiSL IflTCioe ■<^, Priced bir Checked hv Shipped ttf Bill checked pj Registered PMfaiRes Caaes t tltv 'Onlt Stock Reogr<^ .£&&£!£. Cuatomere * Order fift^ Our Order Mg, Date Deecrintinr^ Price KarKc aad KUBberr Freight Amount BUSINESS FORMS AND PAPERS 223 Form No. 8 Sales Invoice ^'dr- (^ /v ./-/^: o>J ^^.. /4 '„ y^** , , /tf y^^ ^(pi^mJ. BllHifm^» fT'iO , la-» sTa ^<4.4i.^. ,aI AA.tff£^ r 74 Ch V TT ^LljU^ (S> V h o a /tf tf :z^ ii V M 224 BOOKKEEPING, THEORY AND PRACTICE Form No. p Examples of Indorsements Blank Indorsement: Special Indorsement: Qualified Indorsement Restrictive Indorsement Waiving conditions: A. Reid Pay to order of Wall St. Trust Co. A. Reid Without recourse A. Reid or Pay to Wall St. Trust Co. without recourse A. Reid Pay to Wall St. Trust Co. for collection A. Reid Waiving protest A. Reid or Pay to Wall St. Trust Co., waiving protest A. Reid BUSINESS FORMS AND PAPERS ! o 225 15 226 >/ 'i! 1; BOOKKEEPING, THEORY AND PRACTICE BUSINESS FORMS AND PAPERS 22'J u 9NIlN3S3dd 3yOd3a dJO SlHi y V31 iS3I0yd ON 228 BOOKKEEPING, THEORY AND PRACTICE '/ u s ^ ^NUM3S3dd adOdaa iJO SIHI dV31 ISUOHd ON BUSINESS FORMS AND PAPERS 229 Form No. 14 Statement of Account Periodically, but usually at the end of each month, it is the practice in business to send to each customer a statement of account showing the balance due. The statement may show only the unpaid invoices as follows : STATEMENT FOLJO- ".^ CA )t l^Vy. /i<^^^. J/ iOI - ^^^*/^ TERMS 5!L3^. 230 BOOKKEEPING, THEORY AND PRACTICE Or, it may begin with the balance on the preceding statement and show all the debits and credits made in the account during the period. Porm No. i^ Statement of Account STATEMENT FOUO. M .yi^. — V^^ — i^ Ala. -^^'^-^i.-^ J I 101 • C/aJ^ (JcK£,sM^a yJ» 7^4^ /Dr f i "im Date Due :^^ ei^^6-lJ43 ^ fyrv V ■. i SEP 1 2 1924 u uri5^ ' ^^"7/2f CTT:^ -MAR 2 81994 ^f 5/y 0099s D420 Rosenkampff Bookkeeping • • E722 END OF TITLE