diff --git "a/Accounting/accounts_in_theory_and_practice_1920.md" "b/Accounting/accounts_in_theory_and_practice_1920.md" new file mode 100644--- /dev/null +++ "b/Accounting/accounts_in_theory_and_practice_1920.md" @@ -0,0 +1,19030 @@ +A black and white photograph of a book cover with a dark, textured surface. + +THE ARTHUR YOUNG ACCOUNTING COLLECTION + +A circular emblem with a stylized "A" in the center. + +Graduate School of Business Administration +Library of the University of California +Los Angeles + +This book is DUE on the last date stamped below + +0 1925 +1 MAR 3 1927 +1926 APP + +MAY + +SOUTHERN BRANCH, +UNIVERSITY OF CALIFORNIA, +LIBRARY, +LOS ANGELES, CALIF. + +Library +Graduate School of Business Administration +University of California +Los Angeles 24, California + +Digitized by the Internet Archive +in 2007 with funding from +Microsoft Corporation + +http://www.archive.org/details/accountsintheory00saliiala + +ACCOUNTS +IN +THEORY AND PRACTICE + +McGraw-Hill Book Co. Inc. +PUBLISHERS OF BOOKS FOR +Coal Age • Electric Railway Journal +Electrical World • Engineering News-Record +American Machinist • Ingeniería Internacional +Engineering & Mining Journal • Power +Chemical & Metallurgical Engineering +Electrical Merchandising + +ACCOUNTS +IN +THEORY AND PRACTICE + +PRINCIPLES + +BY +EARL A. SALIERS, Ph.D. +ASSISTANT PROFESSOR OF ACCOUNTING IN THE SHEFFIELD SCIENTIFIC SCHOOL +OF YALE UNIVERSITY + +FIRST EDITION + +McGRAW-HILL BOOK COMPANY, Inc +NEW YORK: 239 WEST 39TH STREET +LONDON: 6 & 8 BOUVERIE ST., E. C. 4 +1920 +57159 + +COPYRIGHT, 1930, BY THE +McGRAW-HILL BOOK COMPANY, INC. + +A large, stylized text in Cyrillic script. +A smaller, stylized text in Cyrillic script. + +THE MAPLE PRESS YORK PA + +Bus. Admin. +Library + +HF +5625 +S16 + +13/10/24 + +D. V. S. +L. J. S. +M. D. S. + +. . . + +PREFACE + +The purpose of this book is to afford a first course in the principles of accounts. Although it is intended primarily as a first semester text it is the author's hope that it will prove useful in wider fields. An attempt has been made to work out an effective combination of theoretical discussion and practical application. The author realizes that every individual has his own ideas about the proper sequence of subjects and chapters. An attempt has therefore been made to arrange the material so that, if desirable, the order of study may be varied somewhat, and possibly some parts omitted. + +For several years the author has followed the plan of having his students construct their practice sets from ordinary commercial ledger and journal paper. Such alterations can be made as may be necessary to make them plainly conform to the requirements of the course. Such forms as are not readily obtainable should be drawn upon blank sheets of paper. This plan throws the learner upon his own resources, teaches him that forms are to be varied to meet requirements, and is at once simple and economical. All forms are shown in the text. These will serve as models in the preparation of the practice sets. The instructor should arrange to have in readiness a supply of ordinary two-column trial balance papers on which he can write, if possible, a supply of columnar papers from which to construct columnar journals, voucher receipts, etc. For this purpose ordinary trial balance paper, which contains twenty-four columns, may be used. Accountants' analysis paper will serve equally well. Reference to practice chapters VII, VIII, IX (same set continued), XVII, XX, and to chapter XXXIV will indicate that individuals need no more than on practice chapter VII may be begun as soon as desirable, but it is advisable that it be started after the second chapter III has been completed (See page 21). For reference purposes a bibliography has been inserted at the end of each of the six parts of the book. + +The author is planning a second volume which will treat of the more complicated aspects of general accounting procedure such as valuation, ledger analysis, consolidations, branch house vii + +viii +PREFACE + +accounts, and realization and liquidation. It is his belief that the further standardization of accounting courses will be along the lines followed in the present and proposed volumes, i.e., that the first half-year's work shall include a thorough study of the theory and practice of accounts with emphasis on fundamental principles, and that the second half-year's work should include a thorough study of the more complicated aspects of general procedure, such as those suggested above. + +Each of the six parts of this book is of about the proper length for review and examination purposes. To facilitate review work an appendix containing a series of questions on each chapter has been added. + +For suggestions and criticisms the author is under obligation to many individuals, including his students. He is especially indebted to Mr. J. D. Häuslein of Yale University and to Mr. James J. Markham, Controller of Sargent and Company, New Haven, Conn. Professor A. L. Bishop of the Sheffield Scientific School of Yale University has made useful suggestions regarding the arrangement of material. Mr. K. J. Ralph has made certain corrections in the manner of presentation of the material. The author nevertheless assumes full responsibility for any errors that still exist and he will consider it a favor to receive such corrections and criticisms as readers may wish to offer. + +EARL A. SALIERS. + +New Haven, Conn., +May 24, 1920. + +CONTENTS + +PREFACE +PAGE VII + +PART I Fundamental Principles + +CHAPTER +I. The Purpose of Accounts 1 +II. Recording Financial Transactions 8 +III. Recording Financial Transactions (Continued) 14 +IV. The Functional Classification of Transactions 22 +V. Functional Classification of Transactions Illustrated 28 +VI. Interpretation of Ledger Accounts 35 +VII. Recording Financial Transactions—Practice 44 +VIII. Recording Financial Transactions—Practice 55 +IX. The Cost of Goods Sold—Charges 60 +X. Accruals and Deferred Charges—Practice 65 +XI. Depreciation, Bad Debts, and Valuation Reserves—Practice 69 +XII. Depreciation, Bad Debts, and Valuation Reserves—Practice 81 + +PART II Partnership Accounting + +XIII. The Partnership—Special Considerations 87 +XIV. Theory of Partnership Accounting 92 +XV. Partnership Accounting—Practice 101 + +PART III Expansion of Accounting Records + +XVI. Subordinate Ledgers and Controlling Accounts 105 +XVII. Accounting for Petty Cash Payments 114 +XVIII. Controlling Accounts and Imprest System—Practice 119 +XIX. The Voucher Register 126 +XX. The Petty Cash Register—Practice 130 +XXI. The Private Ledger 139 +XXII. The Private Ledger—Practice 142 + +PART IV Corporation Accounting + +XXIII. The Corporation—Special Considerations 145 +XXIV. The Corporation—Accounting for Corporation Books 155 +XXV. Proprietaryship and Partnership Incorporated 159 +XXVI. The Corporation—Accounting for Bond Issues 167 +XXVII. The Corporation—Costing of Bonds 173 +XXVIII. The Corporation—Routine Accounting Procedure 180 +XXIX. The Corporation—Practice ix + +X + +CONTENTS + +PART V + +Financial Statements + +CHAPTER XXX. Construction and Interpretation of the Income Statement ..... 191 +XXXI. The Income Statement Illustrated ..... 202 +XXXII. Construction and Interpretation of the Balance Sheet ..... 208 +XXXIII. Construction and Interpretation of the Balance Sheet (Continued) ..... 218 + +PART VI + +Special Applications of Principles + +XXXIV. Department Accounting ..... 225 +XXXV. Department Accounting—Practice ..... 231 +XXXVlL Department Accounting—Practice (Continued) ..... 247 +XXXVII. Manufacturing Accounting ..... 251 +XXXVIII. Manufacturing Accounting (Continued) ..... 260 +XXXIX. Manufacturing Accounting—Practice ..... 269 +XL. Relation of Accounting to Management ..... 273 +XLl. Graphic Charts ..... 281 +Appendix A ..... 288 +Index ..... 297 + +ACCOUNTS IN THEORY AND PRACTICE + +PART I +FUNDAMENTAL PRINCIPLES + +CHAPTER I + +THE PURPOSE OF ACCOUNTS + +Accounting a Branch of Economics.—Accounting is an applied branch of the science of economics. Economics treats of the production and distribution of wealth. The economist usually employs these words in a comprehensive sense, as when speaking of the production and distribution in the United States of its earn- ing distribution among one hundred million or more inhabitants of the country. The economist studies the various agencies which facilitate or impede the production of wealth, the effects, for example, of legislation, legal and natural monopolies, franchises and special privileges, labor unions, government ownership of railroads, commission control, and so on. He encourages the introduction of reforms to increase the value of labor's productivity or lessen waste. As Adam Smith, more than one hun- dred years ago, pointed out the benefits of division of labor, so all economists since his time have been debating the pros and cons of those questions which relate to the productivity of wealth. + +Economists attempt to discover the principles which govern the distribution of wealth among the inhabitants of the country after it has been produced. This distribution is due partly to the capitalist, some to the landlord. Whether the present system of industry, as established by law and custom, secures the most equitable distribution of wealth is a disputed question, beyond the province of this book. Production and distribution of wealth, all will agree, require the expenditure of the energy and time of the inhabitants of a nation and consequently deserve the careful attention of those who study them and, if possible, improve them by introducing scientific methods of procedure. + +2 + +ACCOUNTS IN THEORY AND PRACTICE + +Scientific methods require adequate records. Such records enable one to see readily what has been accomplished and supply data valuable in making future improvements. + +**Modern Methods of Production.—The past century has wit- +nessed a remarkable growth in the productive capacity of most countries. This growth has been accompanied by such altera- +tions in the organization of industry as have been necessary +to cope with the new methods of production and distribution. +Along with the increase in wealth made possible by machine +methods, division of labor, etc., there has gone a concentration +of that wealth, if not in the ownership of a comparatively few +persons, at least in their control. The man who, had he lived a +century ago, would have employed his limited means in con- +structing a workman's cottage and then become the master +workman and surrounded himself with a few journeymen and +apprentices is likely, today, to become one of several hundred +or several thousand stockholders or bondholders in a corporation +with assets totaling millions of dollars and employees numbered +in thousands. + +Under the old conditions, when each capitalist was also a +workman and was enabled to supervise personally all the details +of his small enterprise, there was no occasion for any very com- +plicated system of record-keeping. The market was not so large +as wide and competition was not as keen as they are today. The +credit system, which underlies nearly all modern enterprise, +was still in its infancy. Railroads, the telegraph, the telephone, +the steamship, and those conveniences which, by "abridging distance," facilitate commercial intercourse over long distances, +were unknown. Commercial organization was less complicated. +Everything progressed at a slower pace, and there was not the +pressing need for accurate information as the roads so slowly +afterward carried information. These old days Mercer sent +vessels on cruises lasting two or three years and awaited patiently +the outcome of their ventures. Today they receive daily reports +by wireless of the progress of ocean liners. They keep in hourly +connection with the great markets of distant cities where prices +are made and telegraphed to the whole world. They demand +daily progress reports from their business managers. + +**The Importance of Accurate Records.—Accurate and timely information essential to success. To illustrate, the manager of a department store must so systematize his affairs** + +A black-and-white illustration of a man sitting at a desk with various documents spread out before him. + +THE PURPOSE OF ACCOUNTS 3 + +that he can not only tell whether his store as a whole is making a profit, but he must know also the standing of each department. +A manufacturer must not merely know at the close of the year that he has made a profit, required to know what part of the cost of each commodity that he manufactures, not annually but monthly or weekly, if he desires to operate on an efficient basis. The president of the Bethlehem Steel Company requires a complete report on each month's operations not later than the fifth day of the succeeding month. + +There are a number of features of modern business organization that make imperative the demand for accurate records. Chief among these are: + +(a) Price making and Competition. +(b) The Cost System. +(c) Management. +(d) Valuation. +(e) Taxation. +(f) Inventories. +(g) Profits—Determination and Division. + +Price Making and Competition.—Price making and competition are two inseparable factors in business. Competition usually brings vigorous and healthful activity into industry and commerce. But upon some enterprises its effects are destructive, especially upon those which are without any adequate knowledge of their costs and expenses and which consequently are unable to place prices upon their products except by adopting the prices set by their competitors or by attempting to outbid their competitors. The evils of this competitive system are greater than the benefits, for concerns so situated. If commodities are selling at only a fair profit it is dangerous policy to lower prices without compensating for the lowered selling price through economies or increased efficiency in some or all departments. When adequate accounts are kept they furnish the danger signals to the manager, showing him the limits beyond which he cannot safely go in point of price reduction. They also show him along with lines the greatest difficulties in production, and may suggest lines which it will be well to discontinue entirely. + +With an adequate system of accounts an enterprise with an average outlook should weather the competitive stress without difficulty; much more easily indeed, than a company better + +A page from a book about accounting principles. + +4 + +ACCOUNTS IN THEORY AND PRACTICE + +favored by natural conditions but lacking an adequate system of accounts. + +**The Credit System.**—A large percentage of business is done on a credit basis. Credit requires the reliance of one person or concern upon another person or concern. Character lies at the foundation of this system, but capacity and capital are also essential to its success. The possibility of fraudulent errors as well must be guarded against, to make the credit system most useful. Credit requires the use of various business papers, notes, drafts, acceptances, stocks, bonds, mortgages, etc., which must be properly filed and recorded and their bearing and influence shown. + +Credit is subject to misuse. Some take advantage of discounts to which they are not entitled. Some overbuy. Others grant credit to those who cannot pay it. These practices extend beyond the extension of credit becomes dangerous. Such over-extensions lead to panics and commercial crises. Although accounting cannot remedy all of the evils of the credit system it aids in the correct observance of its principles, and it furnishes information which helps to ameliorate the evils mentioned. + +**Management.**—Management begins with the promotion of an enterprise and its operation. The working manager supervises and continues his supervision until dissolution ends its affairs. High salaries are paid to secure efficient managers. Efficient managers demand the fullest information concerning the plants they superintend. They require daily, weekly, monthly and yearly reports showing operating results in all departments. They also require comparative statements illustrating changes in costs, selling prices, profits, etc., over periods of several years' duration. These cannot be supplied unless adequate accounts are kept. + +The management of a business rests largely upon that of the accounting department. The relationship which the business bears to the state, to other concerns and to individuals who do business with it, to banks, and to the purchasers of its securities, although important, is in a sense intermittent, occupying the attention of both parties occasionally, and then lapsing into a more or less static condition requiring little attention for a time. But the manager remains constantly at the helm and for his benefit above all others the accounts must be kept properly. + +For a more detailed study of the relation of accounting to management see Chapter XL. + +A bar graph showing data about different types of businesses. + +THE PURPOSE OF ACCOUNTS 5 + +**Valuation.—The property of a concern requires frequent valua- +tions for various purposes, for reasons which the student will +understand as he proceeds. Variations in the value of a concern's +property influence definitely its financial status. Allowance for +these changes must be made in the accounts. Among the chief +purposes of valuations, in addition to the one mentioned, are: +to aid the state in levying taxes, to determine proper charges +for service rendered to the public, and to determine values for +purposes of sale. + +In recent years the government, federal and state, has done +very extensive work along this line, both for purposes of taxation +and for rate-making. Public utilities, i.e., railroads, street +railways, water works and other establishments which supply services rendered to the public, have been most extensively +worked on in this respect, received the state's special attention. It is out +of our province to attempt a complete explanation of the reasons +for this innovation, except to note that the work is usually done +to secure a basis for rate-making or taxation, or both. If a +company has kept proper accounts the work of valuation is greatly simplified and expedited. + +**Taxation.—Taxation was mentioned as a purpose of valuations, +but whether taxation is imposed or not, taxes must be paid, if +not on the basis of a recent valuation then on the basis of other +available data. Good accounting records are indispensable to +an accurate history of the changes in the value of property. +The adoption of the income tax by the federal government and +some state governments as the chief means of securing revenue +has given a great impetus to the keeping of correct accounts. +Nothing else has done so much to create a demand for the services +of expert accountants. + +**Investments.—Investing is a corollary of modern large scale enterprise. Our present system of concentration of wealth under +the control of a comparatively few men—officials and directors +of corporations—implies that the great majority of the people +who become interested in these corporations do so as investors +rather than as direct participants in the management of the company. +The amount of the country's wealth is constantly increasing among individuals and among individuals, trust companies, +savings banks, insurance companies and other organizations, +which in one way or another come into the possession of funds +not required for their own immediate use. + +6 ACCOUNTS IN THEORY AND PRACTICE + +All who invest their money in enterprises the management and control of which rest in the hands of others must have accurate reports and information concerning the financial status of these enterprises. As the science of investments becomes better understood the securities of companies which tolerate any but the most efficient methods of accounts and control will go begging for a market, while those which give to the investing public the most up-to-date and accurate information will secure additional funds with greatest ease. The admirable policy of publicity adopted by some of our largest corporations, such as the United States Steel Corporation and the International Inve- estor Company, is made possible only by adequate accounting systems. + +**Profits—Determination and Distribution.—The purpose of all business undertakings, excepting those of an ecleemosyran character, is to make a profit. Profit is an increase in wealth secured through increased value given to materials through manufacture or through investment. It is given to owners by transferring them to salable points and augmenting them to consumers, or by providing needed services of one kind or another. When, how- ever, the equipment, supplies and other paraphernalia of manu- facture and commerce become costly and complex it is difficult to determine what profit is made in a given period, say a month or a year. The success and justice of the modern system of production and distribution depends upon the accurate determi- nation of profits. Without this, whether prices, etc., are certain to be more or less beneficial to some interests and favorable to others. The government taxes corporations on their net profits. If one corporation overstates its profits and another understates its profits, their taxes are too great and too small respectively. Prices must be fixed at such a point above costs as will allow an adequate percentage of profits. If costs and profits cannot be determined the work of pricing will be indefinite and unjust. + +Profits are usually distributed among claimants who possess varying privileges respecting them. The proportion of the profits which each claimant may receive is not usually a fixed one, but varies with the total amount of the profit. Consequently this aspect of the distribution of wealth rests directly upon sound accounting, without which injustice is certain to occur in the division of profits. + +THE PURPOSE OF ACCOUNTS 7 + +**Summary.**—We have shown how seven great phases of modern industrialism are directly dependent upon the science of accounting. Every student of business methods, therefore, will possess a more or less incomplete foundation for his approach to the problems that confront him unless he has first secured a mastery of the principles of this science. It is the purpose of this book to afford such knowledge of accounts as a fair amount of study should secure. Furthermore it will be our purpose to subordinate the consideration of unimportant detail and form to the consideration of those principles which, with variation as to details, apply most universally. + +A blank page. + +CHAPTER II + +RECORDING FINANCIAL TRANSACTIONS + +Cash and Credit Transactions.—Financial transactions are of two kinds—those based on credit and those based on cash. Credit as an aid to business has become increasingly important. At present about nineteen-twentieths of the world's trade is carried on with its aid. Cash transactions are limited largely to the retail trade. Even here credit sales tend to displace cash sales, and in many lines of retailing credit sales greatly exceed cash sales. + +Advantages of Credit.—There are reasons for the increasing employment of credit. Among these are its convenience, economy, and value as a substitute for cash. Its advantages outweigh its disadvantages. Although dangerous when carelessly employed, the evil consequences of its misuse can be minimized by taking proper steps to regulate and protect the credit system. + +Merchants buy goods on credit, pay part of their bills in cash and cash and they receive and disburse cash. Cash and credit are the media of business transactions. Cash takes the form of paper money, coin, and checks. Sometimes credit has no documentary evidence; sometimes it is more or less formally represented by a variety of written or printed documents, collectively known as credit instruments. + +Two Kinds of Transactions.—Cash and credit are means to an end—the exchange or transfer of commodities and services from those who provide them to those who consume them. If, when purchasing clothes, we pay cash, we employ it for an end—the satisfaction of a need. But if we do not pay immediately we accomplish the same end by a different means, namely, credit. In either case the transaction costs us a given amount; but in the one instance we assume the burden by surrendering cash, while in the other we assume the burden by pledging to pay in the future. It is true that unlike cash payments, those of transactions have a like effect upon our wealth. If we pay cash our liability ceases the same instant in which we incur it. + +8 + +RECORDING FINANCIAL TRANSACTIONS 9 + +and the transaction is completed. If we secure credit we incur a liability which must be paid later in cash or its equivalent. + +**Recording Transactions.**—Transactions being thus fundamentally simple may be recorded by the application of principles equally simple. Primitive merchants kept record upon which they "charged" or "exchanged" their goods on credit when purchasing from them. This they did by writing the names of their customers and entering beside or below them the amount and terms of the sale. As the result of experience, the primitive forms were gradually supplanted by improved ones, until it grew customary to record every transaction by means of a double entry. Thus a sale of goods for cash, $100, was recorded as follows, + +Cash .................................................. $100.00 +To Sales .............................................. $100.00 + +On the other hand a sale of goods on credit to a customer, John Allen, was recorded thus, + +John Allen ........................................... $100.00 +To Sales .............................................. $100.00 + +By placing "cash," or the name of the person "charged," above, and a little to the left of the name of the commodity sold we secure a classification, which conveniently separates cash, or the name of the person charged, from the name of the thing sold. This form, however, is not absolute, but is adhered to only so long as it is impossible to continue a better one. When the merchant's transactions grew sufficiently numerous to warrant further refinements a specially ruled book, the Journal, was made to receive these entries, thus, + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
DateDescriptionFDebit AmountCredit Amount
Cash100.00
To Sales100.00
John Allen100.00
To Sales100.00
+ +Naturally the Journal differed somewhat in form in different + +10 +ACCOUNTS IN THEORY AND PRACTICE + +times and places. Probably its development into the form shown above was a slow one. Any record may vary somewhat in form, depending upon the purpose for which it is intended and the wishes of its designer. + +**Function of the Journal.—** The Journal provides a convenient chronological record of transactions, that is, one in which they are entered as soon as convenient after their occurrence and in the order of their occurrence. Any transaction may be recorded in the Journal. Before it is recorded it must be split up into its two essential elements, one a debit or left side Journal entry, the other a credit or right side Journal entry. That element of the transaction which is placed on the left is the charge or debit element, and that which is placed on the right is the receipt or credit element. In the first transaction entered in this Journal above, cash is charged or debited $100. In the second entry John Allen is charged $100 and merchandise or sales is credited $100. + +**Meaning of Debit and Credit.—** As employed here the words debit and credit possess a technical meaning which must not be confused with the words debit and credit as ordinarily employed. Moreover each has a double and apparently contradictory use. Thus we have (a) to debit wealth received, (b) to credit wealth left in the Journal. Such a debited item, however, may indicate either (a) wealth received, or (b) losses or expenses incurred. Likewise an item credited, that is, placed to the right, in the Journal, represents (a) debts incurred, or (b) wealth surrendered, or (c) gains made. + +**Debits and Credits Illustrated.—** As an illustration of the foregoing propositions, consider the following journal entries: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Case I
Cash (i.e., wealth received)$ 100.00
To Storekeeper$ 100.00
To record a sale of merchandise for cash
Rent (i.e., expense incurred)$ 30.00
To Cashier$ 30.00
To record payment of rent in cash
Profit and Loss (i.e., loss incurred)$ 1,000.00
To Building (destroyed).$1,000.00
To record loss resulting from destruction of building by fire.
+ +By reference to the debit or left hand items above we can formulate the rule, debit or charge wealth received, and expenses + +RECORDING FINANCIAL TRANSACTIONS 11 + +and losses incurred, this having become, by custom, the method of indicating these items. + +Case II. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Purchases$200.00
To John Allen (i.e., debt incurred)$300.00
To record a purchase of merchandise from John Allen.
John Allen$100.00
To record a sale surrendered$100.00
To record a sale of merchandise to John Allen.
The full meaning of this last entry, assuming that the goods sold cost $90 may be expressed thus:
John Allen$100.00
To Sales (i.e., wealth surrendered at cost).$90.00
Profit and Loss (i.e., gains made).10.00
To record sale of merchandise to John Allen, showing selling price analyzed to indicate profit.
By reference to the credit or right hand items above we can formulate the rule, credit debts incurred, wealth surrendered and profits made, this having become, by custom, the mode of showing these items.
+ +**Rules for Debits and Credits.—The foregoing will help us to comprehend that the results of every transaction resolve themselves into two or more of the following:** + +1. Wealth received +2. Expenses incurred which are debits. +3. Loss incurred + +4. Debts incurred +5. Wealth surrendered which are credits. +6. Profits made + +Therefore, recognizing the real nature of transactions, we can formulate the rules for debit and credit. These are for debits: + +1. Debit wealth received by us. +2. Debit expenses incurred by us. +3. Debit losses incurred by us. + +and for credits: + +4. Credit wealth surrendered by us. +5. Credit expenses incurred by us. +6. Credit profits made by us. + +**Illustrations of Rules for Debits and Credits.—To illustrate the application of these rules let us assume that L. Gordon begins business with a cash investment of $3,000, and during the first week proceeds as follows:** + + +
DescriptionAmount
Purchases$200.00
To John Allen (i.e., debt incurred)$300.00
To record a purchase of merchandise from John Allen.$100.00
John Allen$100.00
To record a sale surrendered$100.00
To record a sale of merchandise to John Allen.
The full meaning of this last entry, assuming that the goods sold cost $90 may be expressed thus:
John Allen$100.00
To Sales (i.e., wealth surrendered at cost).$90.00
Profit and Loss (i.e., gains made).10.00
To record sale of merchandise to John Allen, showing selling price analyzed to indicate profit.
By reference to the credit or right hand items above we can formulate the rule, credit debts incurred, wealth surrendered and profits made, this having become, by custom, the mode of showing these items.
DescriptionAmount
Debts incurred
Wealth surrendered
Losses incurred
Credit wealth surrendered by us.
Credit expenses incurred by us.
Credit profits made by us.
+ +12 + +ACCOUNTS IN THEORY AND PRACTICE + +Buy merchandise, $400, on credit, from Meyer & Co. +Sell merchandise which cost $90 for $150, receiving cash in payment. +Sell merchandise which cost $100, receiving cash in payment. +Incur loss of $100 on merchandise, due to fire. +Sell to O. Rollo, on credit, merchandise which cost $100 for $150. +Pay rent for week $75. + +These transactions comprise the six possible kinds of transactions, as a study of the following entries recording them will show: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
DescriptionAmount
Purchases (wealth received—Rule 1)...$400.00
To Meyer & Co. (debt incurred—Rule 5)$400.00
To record purchase on credit.
Cash (wealth received—Rule 1)$100.00
To Sales (wealth surrendered—Rule 4)$90.00
Profit and Loss (profit made—Rule 6)10.00
To record sale, showing profits made.
Cash (wealth received—Rule 1)$40.00
Profit and Loss (profit made—Rule 6)10.00
To Sales (wealth surrendered—Rule 4)$5.00
To record sale, showing loss incurred.
Profit and Loss (loss incurred—Rule 3)$100.00
To Pay taxes (taxes incurred—Rule 4)$100.00
To record loss by fire of goods purchased.
O. Rollo (wealth surrendered—Rule 1)$150.00
To Sales (wealth surrendered—Rule 4)$100.00
Profit and Loss (profit made—Rule 6)50.00
To record sale, and profit made.
Profit and Loss (expense incurred—Rule 2)$15.00
To Cash (wealth surrendered—Rule 4)$15.00
To recover debt incurred by expense incurred.
+ +These entries require some elucidation. It is customary to adopt terms which signify the uses to which they are put. Thus when merchandise is purchased, "purchases" is debited, and when merchandise is sold, "sales" is credited. When a loss is incurred "loss" might be debited and when a profit is made "profit" might be credited, or, following custom, the two terms may be united as "profit and loss" to which losses are charged and profits credited, as shown above. If desirable to specialize on losses and profits regarding the different kinds, special terms may be used to indicate different kinds of losses and profits. Thus in the last entry the debit might have been made to "rent expense," or simply "rent," the word "expense" being implied. + +**Losses and Expenses Distinguished.—Although the phrase 'profit and loss' does not distinguish between losses and expenses,** + +RECORDING FINANCIAL TRANSACTIONS 13 + +both being comprehended under the single word "loss," it is well for the beginner to make the distinction in his own mind at least. Expenses are incurred in order that profits may be made. For this purpose money is made for dividends, interest, taxes, so on. When losses occur they in no way give rise to profits, unless indirectly, but usually not at all. A loss is sustained when merchandise is sold below cost. An expense is incurred when a building is rented. Losses remain uncompensated; expenses do not. Losses are avoided as far as possible. Their diminution is a favorable indication. Expenses are to be avoided only when they turn out to be losses, failing to pay for themselves through increased profits. + +CHAPTER III + +RECORDING FINANCIAL TRANSACTIONS—(Continued) + +Subdivision of the Journal.—We have found that transactions are made on either a cash or a credit basis. Acting according to this twofold classification it is desirable to make a subdivision of the Journal into two parts, one part to be employed exclusively for cash transactions and the other part for all other transactions. + +We can best secure an understanding of the functions of these subdivisions by first making a threefold classification of journal entries: + +1. Those in which cash does not enter. +2. Those in which cash enters as a receipt. +3. Those in which cash enters as a disbursement. + +Classifying the journal entries given above (page 12) on this threefold basis, we have: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
1. Those in which cash does not enter:
Purchase...$400.00
To Lee & Co.$400.00
Profit and Loss...$100.00
To Sales...$100.00
O. Rule...$150.00
To Sales...$100.00
Profit and Loss...50.00
2. Those in which cash enters as a receipt:
Cash...$100.00
To Sales...$90.00
Profit and Loss...10.00
Cash...$40.00
To Sales...$5.00
Profit and Loss...10.00
To Cash...$15.00
+ +3. Those in which cash enters as a disbursement: + + +
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.
The Cash Journal or Book.15 + +United in one book which may be termed either the Cash Journal or the Cash Book. We shall use the former term in this book. When this is done the two pages of the Cash Journal facing each other, right and left, respectively are in reality the cash receipts and cash payments Journals, although the plural title is not used. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Cash Journal (or Book)
MonthDayExplanationF. Amt.MonthDayExplanationsF. Amt.
Sales100Expense15
Sales40
+ +The entries are the same as those shown on page 12, but note that each transaction occupies but one line in the Cash Journal, whereas in the General Journal (the term "general" being used to distinguish this Journal from the Cash Journal) two lines were occupied, the upper for the debit item and the lower for the credit item. This difference is not very remarkable because the entries on the left page in the Cash Journal are exclusively those representing cash receipts or debits, while the entries on the right hand page are exclusively those representing cash payments or credits. Consequently the total debit and the total credit to cash can be found at any time by adding the columns on the left and right pages of the Cash Journal. + +How Losses and Gains are Accounted for.--Although the entries in this book are made for individual transactions as those given on page 12; there exist certain discrepancies between them. The charges and credits to Profit and Loss do not appear in the Cash Journal while sales is credited $100 and $40, respectively. Both methods are correct, but it is not usual to show the amount to be charged or credited to Profit and Loss each time entry is made for a transaction. This procedure was followed on page 12 to illustrate two of the six rules of debit and credit. Practically all such transactions become lost until they go unaccounted for until the close of the accounting period, which is usually a month or a year. To look up the cost of goods sold each time a sale is consummated entails too much work. It is better to enter the credit to Sales at the selling price. Then at the end of the accounting period, by a process explained later on in this book, the cost of all goods sold during the accounting period is ascertained--thus arriving at the same result, namely, + +A table showing Cash Journal entries with explanations. + +16 +ACCOUNTS IN THEORY AND PRACTICE + +the loss or gain made on their sale, with much less labor. Had we followed this plan in making the journal entry on page 12, in which a loss of $10 is incurred on a sale of $40, it would have appeared: + + + + + + + + + + + + + + + + + + + + + + + + + + +
Cash$40.00
To Sales (selling price)$40.00
instead of,
Cash$40.00
Profit and Loss10.00
To Sales (cost price)$50.00
+ +When follow the usual custom of entering a sale of goods at selling price, whether that be above or below cost, our work remains incomplete because the loss or gain, represented by the difference between cost and selling price, is not shown. This incompleteness is a sacrifice made to save labor. The Cash Journal might easily be arranged to indicate separately the loss or gain on each sale, were it practicable to find it. + +**Function of the Journals.—** The word "journal" is an adapta- +tion from the French, *journal*, meaning daily. As its name implies the Journals described in this chapter are called books of original entry. In them records of transactions are entered chronologically, as soon as possible after the transactions are made. But in addition to a chronological record, which is based primarily on time of occurrence of transactions, there is needed another record based, not on time, but on the character and meaning of the transactions. The books of original entry, chronologically compiled, serve as a trustworthy record of all transactions. But they are changed therein it is unsystematic and difficult to interpret. With but one exception, cash, the items in the General and Cash Journals require analyzing on the basis of function; that is, these various items representing exchanges of wealth, and losses, expense and gains need classifying on the basis of the "account" which they affect. + +**"Account" Defined.—** An "account" is a statement showing the various items, in dollars and cents, which affect the value of any thing or class of things owned—which are termed assets—or any sum owed—which is a liability—or of any expense, or profit, or loss, or any class of these. + +**Function of the Ledger.—** To provide a record in which trans- +actions may be grouped according to their influence on accounts, + +RECORDING FINANCIAL TRANSACTIONS 17 + +is the purpose of the Ledger. In the Ledger are kept accounts for such assets, liabilities, expenses, losses and gains as the requirements of business make desirable. The extent to which accounts for these ought to be subdivided and consequently the number of the accounts is a question to be decided by the requirements of individual cases. + +Functional Classification of Accounts.—After John Allen has completed his January transactions he possesses cash, merchandise, and the obligation of O. Rollo to pay him $150. This was his initial capital. He made some gains. He has also incurred expenses and losses and made some gains. We learn these facts from a glance at the journal entries on page 12. If we rearrange these transactions on the basis of accounts affected, thus securing a functional classification, we have: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
DebitedCredited
Cash.$100.00$ 15.00
Purchases.40.00100.00
Sales (at cost).400.0050.00
Meyer & Co.100.0040.00
Profit and Loss.15.00400.00
O. Rollo.150.0010.00
Totale.$815.00$815.00
+ +Here we have the transactions classified on the basis of function. Note that in debiting Profit and Loss no distinction is made between expenses and losses. This defect might be obviated by setting up several accounts and thus subdividing the Profit and Loss account, which is here made sufficiently inclusive to cover all expenses, losses, and gains. The subdivisions may be as follows: + + + + + + + + + + + + + + + + + + + + + + +
DebitedCredited
General Expense.$ 15.00
Losses.100.0015.00
Gains.$10.00
+ +2 + +18 + +ACCOUNTS IN THEORY AND PRACTICE + +Two Classes of Accounts.—After this manner accounts permit of so great subdivision and classification as may be desirable. A study of the above classifications of accounts will make obvious certain facts. One of these facts is the fundamental distinction which exists between those accounts that record assets and liabilities and those that record expenses, losses, and gains. The asset and liability accounts represent actual possessions and actual responsibilities. The expense, loss, and gain accounts, on the contrary, merely measure the changes in values that the assets and liabilities have undergone. Note that expenses and losses aggregate $125, and gains $100, making a net debit of $125 – $100 = $25. The value of the assets has been increased by $25, while the value of the liabilities has taken the form of changes in values of assets and liabilities as shown below: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Liabilities increased:$400.00
Assets decreased:00.00
Total decrease of proprietorship:$100.00
Liabilities decreased:
Assets increased:
Assets increased:$65.00
Assets increased:$335.00
Total increase of proprietorship:$400.00
Net decrease of proprietorship:$65.00
+ +"Real" and "Nominal."—Thus we see that the loss or gain made in business may be discovered without keeping a record of the expenses, losses, and gains. However, it is necessary to keep accounts in order to wish to know just how the loss or gain came about. It is only by referring to the Profit and Loss items that the names and character of the losses, expenses and gains which give rise to the net decrease of wealth, amounting to $65, can be learned. The adjective "real" is used to designate those accounts which record assets and liabilities, and the adjective "nominal" to refer to those accounts which record the changes which the real accounts undergo during an accounting period. Therefore real accounts record assets and liabilities, and nominal + +\footnote{Found by deducting cost of goods sold and destroyed from purchases.} + +RECORDING FINANCIAL TRANSACTIONS 19 + +accounts record expenses, losses, and gains. In one form of bookkeeping, called single entry, nominal accounts are not kept, and the profit or loss for a period must be ascertained by finding the net result of the increases and decreases which have occurred in the assets and liabilities, or real accounts, during the period. Such a system is incomplete because it gives the results as shown by the alteration in the assets and liabilities but does not show how these changes occurred. In every system book-keeping these changes are analyzed and recorded in the nominal accounts. + +**Significance of Real and Nominal Accounts.**—The distinction between real and nominal accounts must be thoroughly grasped. Every item entered in the Journals finds its way into an account of one kind or another. The Journal entries contain both nominal and real elements, which is properly termed a mixed account. To illustrate the meaning of mixed accounts, assume that O. Rollo, whose account stands charged with $150, is able to pay only $100, in settlement. The remaining $50 is loss, but it stands in an account which also records an asset of $100. We have both a real or asset item of $100 and a nominal or loss item of $50 in the same account, so that such an account is rightly termed "mixed." When this condition arises it is necessary to classify all nominal items as either assets or liabilities in order to obtain that classification of all accounts into nominal and real which is essential to the work of making an accurate statement of losses, expenses, and gains, and another of assets and liabilities. + +**The Ledger Form Illustrated.**—We have shown the transactions grouped chronologically in the Journals. We have rearranged these transactions according to function on page 17. We have learned that the book in which the transactions are classified according to function is called the Ledger. We have also shown the transactions classified as to function, but in non-technical form, on page 17. Below, these same accounts (functional) are entered in the Ledger in regular form: + + + + + + + + + + + + + + +
Account TitleAmount
Real Assets$100
Nominal Items$50
+ +20 +ACCOUNTS IN THEORY AND PRACTICE + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Dr.LedgerCr.F
F CashP 15.00
100.00
40.00
Purchases
400.00100.00
Sales50.00
100.00
Moyer & Co.90.00
Profit and Loss400.00
10.0010.00
100.0050.00
15.00
O. Rollo150.00
+ +Chronological or Functional Records.—We have now shown the mode of recording transactions which has been evolved in accordance with the character and meaning of the transactions themselves. We have seen that these transactions can be recorded by either of two fundamental principles, (a) time of occurrence, (b) function of transaction. Both these principles must be applied, for it is first necessary to make a chronological record from which, in turn, the information can be secured for the compilation of a record based on the function of transactions. The Journals, general and cash, are the chronological records and the Ledger is the functional record. + +Variation in Forms of Records.—The specific form which these records must be given depends upon convenience and utility. Simple and widely accepted forms of Journals and Ledger have been shown. Some variations from these will be considered later. + +"Posting" Defined.—Since the functional record, the Ledger, is compiled from information recorded in the chronological records—the Journals, it is desirable to follow a definite procedure in transferring this information from the Journals to the Ledger. This procedure is called "posting." In posting it is not only necessary to make a record of each transaction in order to form the functional record, but it is necessary to make such notations in both the chronological and the functional records, i.e., the Journal and Ledger, respectively, that the + +RECORDING FINANCIAL TRANSACTIONS 21 + +page from which they are derived in the Journals will be shown in the Ledger and also that the page to which they are posted in the Ledger will be shown in the Journals. This result is secured by providing folio (meaning page) columns in both Journals and Ledger for the purpose of receiving figures designating the page of the complementary record to which or from which, as the case may be, a posting may be made. + +The "Folio" Column.-The location of the folio column, again, is a matter of convenience. In the Ledger, however, it should be placed as near as possible to the column which receives the item posted from the Journal. Likewise in the Journals its proximity to the money columns is desirable. In the forms shown in the following chapter the folio columns are indicated by vertical lines. The use of these terms will indicate the interrelation established, and its convenience for purpose of reference, between the Journals and Ledger. + +Note.—At this point work should be started on practice Chapter VII and pursued in connection with the study of Chapters IV, V and VI. + +CHAPTER IV + +THE FUNCTIONAL CLASSIFICATION OF TRANSACTIONS + +Work of Interpretation.—Financial records, the construction of which was discussed in the preceding chapter, are the means to an end. After they are constructed, chronologically and functionally, they require interpretation. If we care to fix arbitrarily a point at which bookkeeping ends and accounting begins it might well be said to be where recording ends and interpretation begins. We use the word recording in the narrow sense of routine operations. It does not include the work of contriving the record which precedes them. The record is prepared and follows bookkeeping. Acting synthetically or constructively, it plans records best adapted to the conditions. Then book-keeping fills out the record. Finally, accounting, operating analytically, interprets the record, making it useful in proportion to the accuracy, skill and judgment employed throughout the process. + +Value of Interpretation.—The value of an interpretation of financial records is dependent upon two factors, (a) the thoroughness and accuracy with which the original or chronological records are kept, and (b) the judgments and care employed in arranging the transactions according to function when they are posted to the Ledger. An outline of transactions based on their functions was presented in Chapter III. It was there shown that a debit means one or more of three things, (1) wealth received, (2) expense incurred, and (3) profit made. It was also shown that a credit means one or more of three things, (1) debt incurred, (2) wealth surrendered, and (3) profit made. We have found that debits and credits may result in any of four ultimate consequences: + +1. Liabilities increased. +2. Liabilities decreased. +3. Assets increased. +4. Assets decreased. + +22 + +FUNCTIONAL CLASSIFICATION OF TRANSACTIONS + +**Significance of Losses, Expenses and Gains.**—It follows that the significance of "expenses incurred," of "losses incurred," and of "profits made" lies ultimately in the increase or decrease of assets and liabilities. Expenses, losses, and profits merely measure the amount of the change in the assets and liabilities and indicate the manner of its occurrence. They may be compared to the gauge on a tank, which indicates the changing level of the water. But they do more than merely record changes in assets and liabilities. They also show the character and amount of both increases and decreases in assets and liabilities. + +Two of the most logical Accounting principles suggest the principle which governs the functional classification of accounts, i.e., that there must appear in the Ledger two distinct kinds of accounts: first, accounts whose titles are the names of the sundry assets and liabilities, which are collectively known as "real" accounts; and, secondly, accounts whose titles are the names of the sundry expenses, losses, and profits, which are collectively known as "nominal" accounts. Since losses, expenses and profits are incidental transactions, therefore only one kind of account has been used in the Ledger until after transactions occur which involve expenses, losses, and profits. + +**Capital Defined.**—So one about to engage in business opens ledger accounts for his sundry assets, and liabilities, if there are any of the latter. If there are liabilities the proprietor's interest in the assets is equal to their value. For example, if the assets worth $10,000 and liabilities amount to $5,000, the proprietor's interest in the assets is one-half of their value. We then say that his net worth, or capital, is $5,000. But if one begins business with $10,000 in assets and no liabilities, his interest is the total value of the assets—which figure also expresses his net worth or capital. Capital or net worth is the excess of the value of the assets over the liabilities. This may be expressed in the form of an equation, thus: + +Assets = Liabilities = Capital +or Assets = Capital + Liabilities +or Liabilities = Assets - Capital +or Capital = Assets - Liabilities + +If assets equal $10,000 and liabilities equal $5,000, the equation becomes: + +24 + +**ACCOUNTS IN THEORY AND PRACTICE** + +Assets, $10,000 = Liabilities, $5,000 = Capital, $5,000 or any other of the arrangements suggested above may be followed. If assets are $10,000 and there are no liabilities, then, + +Assets, $10,000 = Capital, $10,000 + +**Statement of Assets, Liabilities and Capital.**—Before opening a set of books it is necessary to make a statement showing assets, liabilities, and capital. The simplest condition is that in which cash is the only asset and there are no liabilities. Thus if Grant Atkins invests $8,000 cash, and has no liabilities, his statement appears as follows: + + + + + + + + + + + + + + + + + +
Statement of Assets, Liabilities, and Capital, Grant Atkins, as at July 2, 1917
Cash$8,000Liabilities and Capital$8,000
$8,000$8,000
+ +But if, in addition to cash, $8,000, Atkins possesses merchandise, $5,000, store and lot, $9,000 furniture and fixtures, $500, the statement reads: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Statement of Assets, Liabilities, and Capital, Grant Atkins, as at July 2, 1917
Cash$8,000Liabilities$96,000
Inventory5,000
Store and Lot.9,000Capital22,500
Furniture & Fixtures.550 Grant Atkins
$22,550$22,550
+ +**Opening Journal Entry.**—Note that this is a functional classification of transactions, not a chronological one; also that all of these accounts are real accounts. No nominal accounts appear. This is because all the ledger expenses have been made and no profits made. These are the accounts which ought to appear in the Ledger before any transactions are made. They might be entered directly in the Ledger. However, it is customary to enter them first in the Journal by means of an "opening entry," as follows: + + + + + + + + + + + + + + + + + +
Cash$8,000No One$96,000
Inventory5,000
Store and Lot.9,000Capital22,500
Furniture & Fixtures.550 Grant Atkins
$22,550$22,550
+ +FUNCTIONAL CLASSIFICATION OF TRANSACTIONS 25 + +Journal, Grant Atkins + +July 2, 1917 +Grant Atkins this day begins business as a retail general merchant, liabilities, and capital, as follows: +Cash... $8,000.00 +Inventory... $3,000.00 +Store Lots... $6,000.00 +Furniture and Fixtures... $500.00 +To Grant Atkins, Capital... $22,500.00 + +Arrangement of Accounts in the Ledger.—From the Journal these items are posted to the Ledger, where the arrangement must be made as convenient as possible. In actual practice it is best to enter but one account on a ledger page, placing it at the top, and thus leaving the whole page for additional entries to the account as time passes. For illustrative purposes, however, two or more accounts may be entered on the same page. The arrangement of the asset and liability accounts according to some plan is customary. This, however, is a matter of detail. Usually the assets are placed first, followed by the liabilities. +This may be followed by the assets and liabilities in the order in which they are shown in the opening journal entry. Possibly a different arrangement may be preferable. When business gets under way various personal accounts, both receivable and payable, will be opened; also nominal accounts, to record expenses, losses, and profits. The Ledger must be sufficiently large to contain these accounts and make possible a reasonable amount of expansion with the growth of business. It is necessary especially of the personal accounts receivable and accounts payable, which increase rapidly in number with the growth of business. + +The Ledger Illustrated.—When the Items in the opening entry, shown above, are posted to the Ledger of Grant Atkins, one account to a page, the ledger accounts, with cross references placed in the folio columns, appear as follows: + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Cash...2$8,000.00
Inventory...3$3,000.00
Store Lots...4$6,000.00
Furniture and Fixtures...1$500.00
To Grant Atkins, Capital...$22,500.00
+ +The word Sandries, which appears in the explanation column of the capital account of Grant Atkins, is used because sundry items were charged in the opening journal entry. + +26 ACCOUNTS IN THEORY AND PRACTICE + +Ledger, Grant Atkins +Grant Atkins, Capital page 1 + + + + + + + + + + + + +
1917FF
JulyCapi- talSundries J1 22,500.00
+ +Cash page 2 + + + + + + + + +
1917July2 Capital, Grant Atkins F J1 8,000.00F
+ +Merchandise page 3 + + + + + + + + +
1917July2 Capital, Grant Atkins F J1 5,000.00F
+ +Store and Lot page 4 + + + + + + + + +
1917July2 Capital, Grant Atkins F J1 9,000.00F
+ +Furniture and Fixtures page 5 + + + + + + + + +
1917July2 Capital, Grant Atkins F J1 500.00F
+ +"Cash" in the Opening Entry.—Although all cash transactions are ordinarily brought into the cash journal, it is best to bring the cash invested into the opening journal entry with the other assets. It is advisable to enter this item in the Cash Journal as desirable. Where this is done it is necessary to check (V) this item either in the General Journal or the Cash Journal to avoid posting it twice. If it is entered in the Cash Journal but posted from the General Journal, the left side of the Cash Journal should appear thus, after the item is checked off: + +Cash Journal, Grant Atkins + + + + + + + +
1917July2 Capital, Grant Atkins F V 8,000.00
+ +FUNCTIONAL CLASSIFICATION OF TRANSACTIONS 27 + +The (v) in the folio column shows that this item is not to be posted. If, on the other hand, it is thought best to post the item from the Cash Journal it may be checked off in the General Journal also. + +Entries of Routine Transactions.—All entries in the Journals having been posted or checked off, the books now await the entries which arise from the ordinary routine of business. These will record chiefly purchases, sales, losses, profits and expenses. +It is therefore necessary to reserve one section of the Ledger for the reception of creditor's accounts, i.e., the accounts of those from whom we purchase on credit; another section of the Ledger for the reception of debtor's accounts, i.e., the accounts of those to whom we owe on credit; and a third section for the account of nominal accounts, i.e., those which record losses, expenses, and profits. + +Accounts Payable and Accounts Receivable.—The accounts with creditors are collectively called "accounts payable." The accounts with debtors are collectively called "accounts receivable." +The number of these two classes of accounts lies largely beyond control, it being dependent upon the character and growth of the business. There is no reason why they should ordinarily be a voluntary matter. It would even be possible to have one general nominal account called "profit and loss," or more logically, "profit, loss, and expense," into which all nominal debits and credits would be posted from the Journals. The sole recommendation of this plan is its simplicity. By lumping together all of the nominal items the account becomes heterogeneous and unintelligible; thus the Ledger's purpose, which is to furnish a functional classification, is to that extent negatived. + +Analysis of Losses, Expenses and Profits.—We must know not merely the net effect of losses, expenses, and profits; we must also learn definitely the causes or conditions leading to it. If a proprietor sustains a net loss of $1,000 in a month, he seeks to discover the causes of that loss. To do this he analyzes his expenses, losses, and profits. He may be enabled to find where increased costs or decreases have occurred during some month or months and to take steps necessary to remedy the evil. +With the above considerations in mind, study the following subdivision of the profit and loss account: + + + + + + + + + + + + + + + + + + + + + + +
Accounts PayableAccounts ReceivableProfit and Loss
PurchasesSalesLosses
Cash received from customersCash paid to suppliersExpenses
Cash balance at end of monthCash balance at end of monthCash balance at end of month
+ +28 +ACCOUNTS IN THEORY AND PRACTICE + +EXPENSES AND LOSSES: +Rent Expense +Wages Expense +Stable Feed Expense +Heat and Light Expense +Miscellaneous Expenses and Losses + +PROFITS: +Merchandise (on Sales) +Miscellaneous + +Subdivision of Accounts.—The subdivision of accounts is an endless process. It is limited, however, by practical considerations. A small concern naturally demands a less minute subdivision of accounts than a large one having a great variety of expenses. The smaller concerns usually find it advisable to be opened for as many separate kinds of nominal items as it is desirable to keep separately recorded. Separate accounts should be opened for the more important nominal factors, the smaller and less significant ones being grouped together under "miscellaneous" or "general expense." Accounts must supply information required by the manager; the classification must be adapted to that end. + +CHAPTER V + +FUNCTIONAL CLASSIFICATION OF TRANSACTIONS ILLUSTRATED + +Accounting Procedure.—Let us assume that during the month of July, 1917, Grant Atkins carries on business as follows: + +July 2. Buys merchandise on account from Baxter and Company, $400. Pays rent for month, $35. Sells merchandise on account to Mr. Buckley, $15, and to Aaron Cole, $17. Buys stable supplies sufficient to last 2 months, $40, cash. +(2) Pays merchandise on account from Baker Wholesale Company, $725.00. +(6) Pays for stationery and printing, $3.10, cash. Sells on account to L. Lawrence, $18.00. +(7) Cash sales for week, $348.47. Sells on account to Mr. Buckley, $12.20, and to S. Sherman, $17.00. +(10) Pays Baxter & Co. Bill of July 2, $400. Buys on account from the Milton Drug Company, $150. +(11) Mr. Buckley pays account in full, $27.30. +(12) Sells on account to James Whittlesey, $37.20. +(14) Pays wages for 2 weeks: bookkeeper, $30; clerk, $25; delivery boy, $15. +(16) Pays for advertising, $10. Cash sales for week, $350.92. +(17) S. Sherman pays $10 on account. +(18) Buys merchandise from Baxter Co., merchandise $55.00, on account. +(21) Cash sales for week, $335.20. +(23) Miscellaneous expense, cash, $3.27. Sells on account to Oscar Morgan, merchandise, $14.00. +(24) Pays for merchandise Co. bill of $725.30. +(27) Sells on account to James Whittlesey, $14.20. +(31) Pays wages: bookkeeper, $30; clerk, $25; delivery boy, $15. Pays light bill for month, $5.50. Miscellaneous expense, cash, $6.20. Cash sales for week, $879.79. One-half of stable supplies are consumed during the month. + +The cash sales are given weekly, the daily cash sales having been kept on subordinate records to avoid making daily entries for this item in the Cash Journal. Below are shown the Journals and Ledger of Grant Atkins as they appear at the close of business July 31, 1917, after all transactions are entered and posted: + +29 + +30 ACCOUNTS IN THEORY AND PRACTICE + +General Journal, Grant Atkins + +July 2, 1917 +Grant Atkins this day begins business as a retail grocer, with assets, liabilities and capital, as follows: +Cash 8,000.00 +Inventory 3 5,000.00 +Store and Lot 4 9,000.00 +Furnishings and Fixtures 300.00 +Grant Atkins, Capital 1 22,500.00 +Purchases 3 400.00 +To Baxter & Company 40 400.00 +Freight In 1 15.00 +Mr. Buckley 80 15.00 +To Sales 3 15.00 +Aaron Cole 91 17.00 +To Sales 3 17.00 +July 3 +Purchases 3 725.30 +To Baker Wholesome Co. 41 725.30 +L. Laurens July 6 +To Sales 82 23.00 +July 7 +M. Buckley 3 23.00 +To Sales 82 12.20 +S. Sherman July 10 +To Sales 83 17.00 +To Sales July 18 +Purchases To Armstrong Supply Co. +To Milton Company July 23 +James Whittlesey To Sales July 27 +James Whittlesey To Sales + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
August115.00
August215.00
August315.00
August415.00
August515.00
August615.00
August715.00
August815.00
August915.00
August1015.00
August1115.00
August1215.00
August1315.00
August1415.00
August1515.00
August1615.00
August1715.00
August1815.00
August1915.00
August2015.00
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ + +| Account | Debit | Credit | +|---|---|---| +| Cash | $8,625 | $8,625 | +| Inventory | $3,625 | $3,625 | +| Store and Lot | $4,625 | $4,625 | +| Furnishings and Fixtures | $3,625 | $3,625 | +| Grant Atkins, Capital | $8,625 | $8,625 | +| Purchases | $8,625 | $8,625 | +| To Baxter & Company | $4,625 | $4,625 | +| Freight In | $8,625 | $8,625 | +| Mr. Buckley | $8,625 | $8,625 | +| To Sales | $8,625 | $8,625 | +| Aaron Cole | $8,625 | $8,625 | +| To Sales | $8,625 | $8,625 | + + +| Date | Description | Amount | +|---|---|---| +| August 3 | Purchases to Baxter & Company | $8,625 | +| August 4 | Purchases to Baxter & Company | $8,625 | +| August 7 | Purchases to Baxter & Company | $8,625 | +| August 9 | Purchases to Baxter & Company | $8,625 | +| August 14 | Purchases to Baxter & Company | $8,625 | + + +| Date | Description | Amount | +|---|---|---| +| August 3 | Sales to Baxter & Company | $8,625 | +| August 4 | Sales to Baxter & Company | $8,625 | +| August 7 | Sales to Baxter & Company | $8,625 | +| August 9 | Sales to Baxter & Company | $8,625 | +| August 14 | Sales to Baxter & Company | $8,625 | + + +| Account | Debit | Credit | +|---|---|---| +| Freight In (Baxter & Company) | $8,625 | $8,625 | +| Mr. Buckley (Baxter & Company) | $8,625 | $8,625 | +| Aaron Cole (Baxter & Company) | $8,625 | $8,625 | + + +| Date | Description | Amount | +|---|---|---| +| August 3 | Purchases to Baxter & Company (other) | $8,625 | +| August 4 | Purchases to Baxter & Company (other) | $8,625 | +| August 7 | Purchases to Baxter & Company (other) | $8,625 | +| August 9 | Purchases to Baxter & Company (other) | $8,625 | + + +| Date | Description | Amount | +|---|---|---| +| August 3 | Sales to Baxter & Company (other) | $8,625 | +| August 4 | Sales to Baxter & Company (other) | $8,625 | +| August 7 | Sales to Baxter & Company (other) | $8,625 | + + +| Account | Debit | Credit | +|---|---|---| +| Freight In (other) (Baxter & Company) | $8,625 | $8,625 | +A table showing accounts and their debits and credits.A table showing purchases and their amounts.A table showing sales and their amounts.A table showing other accounts and their debits and credits.A table showing other purchases and their amounts.A table showing other sales and their amounts.A table showing other other accounts and their debits and credits.A table showing other other purchases and their amounts.A table showing other other sales and their amounts.A table showing other other other accounts and their debits and credits.A table showing other other other purchases and their amounts.A table showing other other other sales and their amounts.A table showing other other other other accounts and their debits and credits.A table showing other other other other purchases and their amounts.A table showing other other other other sales and their amounts.A table showing other other other other other accounts and their debits and credits.A table showing other other other other other purchases and their amounts.A table showing other other other other other sales and their amounts.A table showing other other other other other other accounts and their debits and credits.A table showing other other other other other other purchases and their amounts.A table showing other other other other other other sales and their amounts.A table showing other other other other other other other accounts and their debits and credits.A table showing other other other other other other purchases and their amounts.A table showing其他销售和其他账户的金额。A table showing其他其他购买和其他账户的金额。A table showing其他其他销售和其他其他账户的金额。A table showing其他其他其他购买和其他其他账户的金额。A table showing其他其他其他销售和其他其他其他账户的金额。A table showing其他其他其他其他购买和其他其他其他账户的金额。A table showing其他其他其他其他销售和其他其他其他其他账户的金额。A table showing其他其他其他其他其他购买和其他其他其他其他账户的金额。A table showing其他其他其他其他销售和其他其他其他其他其他账户的金额。A table showing其他其他其他其他其他购买和其他其他其他其他账户的金额。A table showing其他其他其他其他销售和其他其他其他其他账户的金额。A table showing其他其他其他其他购买和其他账户的金额。A table showing 其他销售和其他账户的金额。Description: A line graph depicting the number of employees in different departments over time. +Title: Employee Count by Department +X-axis: Time period (e.g., January - December) +Y-axis: Number of Employees + +FUNCTIONAL CLASSIFICATION OF TRANSACTIONS 31 + +
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Cash Journal, Grant AtkinsCash Dr.Cash Cr.
1917F1917F
JulySandles8,000.00July2 Rent expense, for no. 10010035.90
7M. Buckley (in fall)8076 Miscellaneous expense10040.70
11M. Buckley (in fall)27.20(Dis., & Print.)1012.10
16Sales (cash).300.92Raw materials cost.1014.50
17 & Burrows count)8310.00
21 Sales (cash).203.20July 2.400.00
31 Sales (cash).397.20Wages.
Delivery boy 1570.90
16 Miscellaneous expense (Oct.)10.90
(Oct.)101
25 Misc. expense.3.27
28 Wages, Oct.41
bill July 3.723.30
31 Wages, Oct.102
Delivery boy 1570.90
Fuel & light (for no.5.90
Cash Dr.2,947.99
Cash Cr.2,1368.47
Balance:8,110.52
+ + + +
Cash Dr.Cash Cr.
Cash Dr.
+ + + +
Cash Dr.Cash Cr.
Cash Dr.
+ + + +
Cash Dr.Cash Cr.
Cash Dr.
+ + + +
Cash Dr.Cash Cr.
Cash Dr.
+ + + +
Cash Dr.Cash Cr.
Cash Dr.
+ + + +
Cash Dr.Cash Cr.
Cash Dr.
+ + + +
Cash Dr.Cash Cr.
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.
+ + +
Cash Dr.tableborderedAug.
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ + + + +
+ +This table shows the functional classification of transactions for the Cash Journal, Grant Atkins account. + +The table is organized into two columns: + +- The first column lists the cash transactions. +- The second column lists the corresponding cash accounts. + +The table includes the following categories: + +- Cash Inflow: + - Sales (cash) +- Cash Outflow: + - Rent expense for no. 100 (Rent) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + - Miscellaneous expense (Misc.) + +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflow: +- Cash Inflow: +- Cash Outflower + +32 +ACCOUNTS IN THEORY AND PRACTICE + +Ledger, Grant Atkins +REAL ACCOUNTS DIVISION OF LEDGER + +
+ + + + + + + + + + + + + + + + + + + + + +
Cash at Grant AtkinsBy SundriesJI22,500.00
1917 July 28To Sundries C.J.I 9,478.52Cash 1917 July 31 By SundriesC.J.I1,368.47
page 3
+ + + + + + + + + + + + + + + + + + + + + + + +
Inventory
1917 July 28To Sundries JI 5,000.00
page 3
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Purchase
1917 July 28To Baxter & Co... JI 600.00
July 31 To Baker Wholesalers JI 725.00
19 To Milton Co... JI 370.00
To Aetna Co... JI 25.00
ply Co. 1,559.30
page 3
+ + + 335.2021 By Cash...C.J.I335.2027 By J. Whitelaw...J214.9031 By Cash...J2397.79L.S.H.19
S.IssuedBy M. Buckley...JI15.00
S.IssuedBy Aaron Cole...JI17.00
S.IssuedBy S. Sherman...JI348.47
S.IssuedBy S. Sherman...JI17.00
S.IssuedBy J. Whitelaw...JI27.00
S.IssuedBy Cash...C.J.I
S.
+ + + <<
S.Issued
+ + +
+ + +
+ + +
+ + +
+ + +
+ + +
+ + +
+ + + + ACCOUNTS IN THEORY AND PRACTICE + Ledger, Grant Atkins + REAL ACCOUNTS DIVISION OF LEDGER + page 1 + page 2 + page 3 + page 4 + page 5 + page 6 + page 7 + page 8 + page 9 + page 10 + page 11 + page 12 + page 13 + page 14 + page 15 + page 16 + page 17 + page 18 + page 19 + page 20 + page 21 + page 22 + page 23 + page 24 + page 25 + page 26 + page 27 + page 28 + page 29 + page 30 + page 31 + page 32 + page 33 + page 34 + page 35 + page 36 + page 37 + page 38 + page 39 + page 40 + page 41 + page 42 + page 43 + page 44 + page 45 + page 46 + page 47 + page 48 + page 49 + page 50 + page 51 + page 52 + page 53 + page 54 + page 55 + page 56 + page 57 + page 58 + page 59 + page 60 + page 61 + page 62 + page 63 + page 64 + page 65 + page 66 + page 67 + page 68 + page 69 + +FUNCTIONAL CLASSIFICATION OF TRANSACTIONS 33 + +Ledger, Grant Atkins +Nominal Accounts Division of Ledger + +
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
page 100
1917Rent Expensepage 101
July 2 To Cash.... C.J.I 35.00
1917Miscellaneous Expensepage 102
July 6 To Cash.... C.J.I 3.10
16 To Cash.... C.J.I 10.00
23 To Cash.... C.J.I 2.27
31 To Cash.... C.J.I 6.2022.57
1917Wages Expensepage 103
July 14 To Cash.... C.J.I 70.00
31 To Cash.... C.J.I 70.0018.00
1917Fuel and Light Expense
July 31 To Cash.... C.J.I 5.00
+ +Ledger, Grant Atkins +Accounts Payable Division of Ledger +page 40 + + +
YearDescriptionTotal AmountNote(s)
1917
July 10 To Cash....
C.J.I 400.00
July 2 By Purchases.
J.I 400.00
page 41		Baker Wholesale Co.400.00
J.I 400.00
page 42		1917
July 24 To Cash....
C.J.I 725.30
July 3 By Purchases.
J.I 725.30
page 42
1917
July 10 By Purchases.
J.I 370.00
page 43		Milton Co.370.00
J.I 370.00
page 43		Armstrong Supply Co.
July 18 By Purchases.
J.I 55.00
page 43
Ledger, Grant Atkins
Accounts Receivable Division of Ledger
M. Buckley
July 2 To Sales.... J.I 15.00 July 11 By Cash.... C.J.I 27.20
7 To Sales.... J.I 12.20
3		M. Buckleypage 80M. Buckley
+ +A page from a ledger book showing financial transactions between Ledger, Grant Atkins and various suppliers. + + +
FUNCTIONAL CLASSIFICATION OF TRANSACTIONS
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
Ledger, Grant Atkins Nominal Accounts Division of Ledger page 80
+ + +<
FUNCTIONAL CLASSIFICATION OF TRANSACTIONS - Ledgers & Grants - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledgers - General Ledges + +34 +ACCOUNTS IN THEORY AND PRACTICE + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
1917Aaron Colepage 81
July 2 To SalesJ.117.00page 82
1917L. Laurens
July 6 To SalesJ.123.00page 83
1917S. Sherman
July 7 To SalesJ.117.00 July 17 By CashC.J.1 10.00
7.00page 84
1917James Whittlesey
July 12 To SalesJ.127.00
27 To SalesJ.214.20
41.20page 85
1917Oscar Morgan
July 23 To SalesJ.214.00
page 85
+ +A page from a financial ledger showing accounts and their balances. + +CHAPTER VI + +INTERPRETATION OF LEDGER ACCOUNTS + +Grouping Ledger Accounts.—The ledger accounts shown in the preceding chapter require some study. They represent the functional classification of the transactions which were recorded chronologically in the Journals. They have been grouped into classes in the Ledger, on the basis of similarity—accounts receivable in one section of the Ledger, accounts payable in another, and so on. Strictly speaking, the nominal accounts cannot be entirely isolated, because some of the accounts in other sections are sometimes mixed, and so contain nominal elements. + +Interpretation of Accounts—the Trial Balance.—Recording ends when the ledger accounts are set up and all transactions are posted to them. At this point the work of interpretation begins. First, however, it is necessary to “take a trial balance” of the Ledger. The purpose of the trial balance is to prove the correctness of the recording, within certain limits, and to supply a statement which can be made to the world that no mistake has occurred. A trial balance consists of a schedule of the balances of the various ledger accounts, listed in two columns, debit and credit, accordingly as the balances are debit or credit balances. An account has a debit balance when the amount charged to it exceeds the amount credited to it. It has a credit balance when the amount credited to it exceeds the amount charged to it. When it is desirable to indicate what the balance of an account is may be called a nominal figure, it is entered in the account, as shown in the ledger accounts in the preceding chapter. A trial balance made up of these balances is given below. + +Nature of the Trial Balance.—The balances are grouped here to correspond with the classification of the ledger accounts, although this is not necessary, and in practice such a grouping is not usually followed. Perhaps the most striking feature of the trial balance is its emphasis upon cash receipts and payments. This is an outgrowth of the nature of the entries made in the Journals, + +35 + +36 +ACCOUNTS IN THEORY AND PRACTICE + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Trial Balance, Grant Atkins, as at July 31, 1917$22,500.00
Capital—Grant Atkins
Cash8,110.52
Store and Lard9,000.00
Furnishings and Fixtures600.00
Stable Supplies40.00
Rent Expense35.00
Purchases1,550.30
Sales1,581.19
Miscellaneous Expense:22.57
Inventory, July 2, 19175,000.00
Wages Expense140.00
Food and Light Expense5.60
Milton G.376.00
Armstrong Supply Co.55.00
Aaron Cole17.00
L. Laurens23.00
S. Shanks7.00
James Whitlessy41.20
Oscar Morgan14.00
+ +$24,506.19$ $24,506.19$ + +namely, the equality of debits and credits. This equality persists in the Ledger, for all debits in the Journals become debits in the Ledger, and all credits in the Journals become credits in the Ledger. Although we take only the balances of the ledger accounts into the trial balance, these are sufficient because the total of the debit balances will equal the total of the credit balances if the posting is done correctly and no omissions are made. The balances of the two accounts are the uncanceled portions. Since the cancelled parts of the accounts are equal, debit for credit, it follows that the sum of the debit balances must equal the sum of the credit balances. + +Consequently, instead of taking merely the balances of the ledger accounts. However, a trial balance may be made up of the total charges and credits in the ledger—an unnecessary increase of work over the usual method. It would require the inclusion of all accounts, even though some stand debited and credited with equal amounts. When balances only are taken into the trial balance these latter are conveniently ignored. + +An examination of the trial balance affords interesting results. The first of the four divisions consists of the balances of miscel- + +INTERPRETATION OF LEDGER ACCOUNTS 37 + +laneous real and mixed accounts, but excludes accounts receiv- +able and accounts payable. The first and second divisions are +balances of impersonal accounts. The third and fourth divisions +are balances of personal accounts. The first division is com- +posed of the real accounts. The balances in divisions three and +four are real with the possible exception of nominal elements in +section three, resulting from uncollectible accounts. + +Two Checks on the Trial Balance. The trial balance +checks up work done and serves as a basis for an interpretation +of the Ledger from which it is taken. It contains most of the +information needed for such an interpretation, which is the next +step in accounting procedure. + +Mixed Accounts.—As already shown, nominal accounts record +expenses, losses, and profits. From an examination of section 2 +of the trial balance one might therefore conclude that expenses +and losses are equal to $6,753.47 while the single nominal de- +bates make a total of $6,753.47 while the single nominal credit +balance, "sales," is but $1,851.90. The secret of the matter lies +in the balances of the "Purchases" and "Inventory July 2" accounts. +These are in reality mixed accounts because not all of +the merchandise on hand at the beginning of the month and +purchased during the month has been sold. Assume that an +actual table shows that the nominal debit balance is $6,753.47, +$5,400, cost price. This means that the actual total of the +nominal debit balances is $6,753.47—$5,400, or $1,353.47, for +it is only by extracting the real item of $5,400 from the mixed +debit balances that we secure the purely nominal elements. The +inventory for July 2 is the old or nominal inventory. The inventory, +$5,400, for July 31, is the new or real inventory. +The operation required may be simply illustrated as follows. +Assume that we have 2 bushels of wheat which cost $1 per bushel. +We buy another 2 bushels at $1.25 per bushel and sell 1 bushel at +bushels at $1.50 per bushel. We then have remaining, as an +inventory should show, 2 bushels of wheat, cost, $2. Placing these transactions and facts in technical form we have: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Inventory (old)
To Sundries2.00
Purchases
To Cash2.00
Sales
By Cash3.00
5 7 1 5 9
+ +38 ACCOUNTS IN THEORY AND PRACTICE + +Here we have debits amounting to $4.00 and credits amounting to $3.00. It is only by remembering that only one-half of our wheat is sold, and that therefore one-half of the debits, or $2, is real, that we can account for the profit made, $1.00, which is represented by the excess of the nominal debit items, $3, over the nominal debit items, $2. The result can best be shown by closing the old inventory, purchases, and sales accounts into a single profit and loss account, which should also be credited with the amount of the new inventory and a "new" inventory account charged. This is best done by means of journal entries, thus: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Profit and Loss$2.00
To Inventory (old)$2.00
Profit and Loss$2.00
To Purchases$2.00
Sales$3.00
To Profit and Loss$3.00
Inventory (new)$2.00
To Profit and Loss$2.00
+ +When these entries are posted to the Ledger, the old inventory purchases, and sales accounts are closed and new accounts opened as follows: + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Profit and Loss
To Inventory (old)2.00 By Sales.3.00
To Purchases2.00 By Inventory (new).2.00
Inventory (new)
To Profit and Loss2.00
+ +The profit and loss account now contains a purely nominal balance, which is a credit of $1, representing profit made. The new inventory account is real, showing the worth of the wheat still on hand. Had there been any expenses incurred in connection with the purchase and sale of the wheat those would appear in suitable nominal accounts and should likewise be closed into the profit and loss account in suitable journal entries, thus reducing the net balance to the actual profit made, or possibly showing a net debit balance, therefore a loss. + +The entries required to close all the nominal accounts shown + +1 Sometimes the inventory, purchases and sales accounts are carried to "merchandise" and the balance of merchandise to profit and loss. The net result is the same by either method. + +INTERPRETATION OF LEDGER ACCOUNTS 39 + +in the trial balance of Grant Atkins into profit and loss are as follows: + +Profit and Loss $1,550.30 +To Purchases $1,550.30 +Sales $1,581.19 +To Profit and Loss $1,581.19 +Profit and Loss $5,000.00 +To Inventory (old) $5,000.00 +Inventory (new) $5,400.00 +To Profit and Loss $5,400.00 +Profit and Loss $223.17 +To Stable Supplies $20.00 +Rent Expense 35.00 +Miscellaneous Expense 22.27 +Wages 140.00 +Fuel and Light 5.60 + +Closing the Nominal Accounts.—When these entries are posted to the proper ledger accounts all the nominal accounts balance and may be closed by adding up to the two sides and underlining the totals, or if there is but one item on each side, by merely underlining each item, debit and credit, respectively. Thus the purchases account will appear as follows: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
FF
July 2 To Baxter & Co.J1 400.00July 31 By Profit and Loss1,550.30
3 To Baker Whal Co.J1 725.30
10 To Milton Co.J1 370.00
18 To Armstrong Supply Co.J1 55.00
1,550.301,550.30
+ +and the rent expense account as follows: + + + + + + + + + + + + + + + + + + +
FF
July 2 To Cash… C.J.I 35.00 July 31 By Profit and Loss.July 31 By Profit and Loss.35.00
+ +The Profit and Loss Account.—There now remain open in the Ledger only the real accounts, with the possible exception of the + +40 ACCOUNTS IN THEORY AND PRACTICE + +profit and loss account, which stands debited and credited with the various nominal items that have been closed into it. It may or may not appear in the Ledger. It might not be desirable to open this account in the Ledger because of the important information which it contains. For illustrative purposes it may be opened in the Ledger. The profit and loss account appears thus after the closing entries are posted: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Profit and LossF
1917July 31To Purchases...1,550.30Mar 31To Inventory (Old)5,000.00By Sales....1,581.19
To Stable Sup-plies...20.00By Inventory (New)5,400.00
To Rent Ex- pense...35.00
To Misc. Ex- pense...22.57
To Wages Ex- pense...140.00
To Fuel and Light Expense Balance560Profit Carried to Capital...207.726,981.19 +
Disposition of Net Profit.FF
The account shows a credit balance of $207.72, which is the net profit made by Grant Atkins during the month of July. This means that his net worth or capital has been increased by that amount. It is customary to show the increased or decreased capital by carrying the balance of the profit and loss account to the proprietor's capital account. This may be done by a final closing entry, as follows:
Profit and Loss Account.$207.72$207.72
To Grant Atkins Capital...To transfer profit for month to capital account.
+ +When this entry is posted the profit and loss account is closed, as shown above, and the capital account of Grant Atkins becomes: + +INTERPRETATION OF LEDGER ACCOUNTS +41 + +Grant Atkins—Capital +1817 +By Sundries J1 22,500.00 +By Profit and Loss. J(? ) 207.72 + +This capital account may be permitted to stand as above or, if desirable, it may be ruled off and the balance brought down as shown below: + +mi Grant Atkins—Capital +July 31, To Balance. July 1, By Sundries11. 22,500.00 +Net Capital. 22,707.72 July 31, Profit and Loss J(? ) 207.72 +Aug. 1, By Balance, Net Capital, 22,707.72 + +The Final Trial Balance.—Another trial balance should now be taken of the Ledger. This is known as the final trial balance. +The final trial balance shows the amount of the assets, liabilities and capital after a period's transactions—in this case one month—and the open accounts shown in the first trial balance are real accounts. Sometimes the final trial balance is termed the "balance sheet," but it is better to apply this expression to a rearrangement of the items listed in the final trial balance. In this rearranged statement items of like character are listed under suitable subheads, as shown below: + +Balance Sheet, Grant Atkins, as at July 31, 1917 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
AssetsLiabilities and Capital
Fixed AssetsFixed Liabilities
Sites and Lot$ 9,000.00$ 00.00
Purchases andNone.
Fixtures500.00
Current AssetsCurrent Liabilities
Cash.8,110.62Accounts Payable.425.00
Accounts Receivable.1,402.20
Inventory, July 31.5,600.00
Deferred ChargesCapital
Stable Supplies.20.00Grant Atkins.22,707.72
Total Assets.$23,132.72Total Liabilities and Capital.$23,132.72
+ +The profit and loss account may also be put into a form more intelligible to the individual unacquainted with accounts. It is then termed "profit and loss statement," or "income state- + +42 ACCOUNTS IN THEORY AND PRACTICE + +ment." Below is shown a profit and loss statement for the business of Grant Atkins for the month ending July 31, 1917. This should be carefully compared with the profit and loss accounts given above, and the rearrangement of the items noted. + +**Profit and Loss Statement, Grant Atkins, for the Month Ending July 31, 1917** + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Sales for Month.$1,581.19
Deduct Cost of Goods Sold:
Inventory, July 1.$5,000.00
Purchases During Month.1,530.30
$6,530.30
Less: Inventory July 31.5,400.00
$1,150.30
Gross Profit on Sales:$ 430.89
Deduct Expenses of Operation:
Rent.$ 35.00
Wages.140.00
Fuel and Light.5.60
Stable Supplies.20.00
Miscellaneous.22.57 $ 223.17
+ +Net Profit for Month... $ 207.72 + +**Process of Ledger Interpretation.—** Thus we find that the interpretation of the Ledger includes six distinct steps: + +1. Taking the trial balance. +2. Entering the closing journal entries and posting them, thus closing the nominal accounts and setting up the profit and loss account. +3. Closing the balance of the profit and loss account (net profit) into the capital account. +4. Taking the final trial balance. +5. Rearranging the profit and loss account into the profit and loss statement. +6. Rearranging the final trial balance into the balance sheet. + +**The Financial Statements—** The profit and loss statement and the balance sheet are the ends toward which all preceding work is made to aim. They interpret the financial condition of a thing, being a distinct part of them. The profit and loss statement details the expenses, losses, and profits. The balance sheet shows the amount of all assets and liabilities and the net worth or proprietorship. It indicates the financial condition of an enterprise at a given instant of time, presenting a kind of cross-sectional view of it. + +INTERPRETATION OF LEDGER ACCOUNTS 43 + +The profit and loss statement and the balance sheet are the two most essential documents issued to afford material for the study of the history and progress of an enterprise. Unincor- +porated concerns, such as sole proprietorships, do not usually publish these statements but keep the information they supply more or less private. Their value is largely comparative. That is, if a system of accounts is continued for several years, useful comparative statements can be constructed, showing changes and tendencies in the affairs of the concern, and thus avoided misdirected projects. The usefulness of the information supplied by the Ledger is conditioned largely upon its timeliness. Next to accuracy of results timeliness is the most important requirement. + +The Month as the Accounting Period.—Formerly, and even today in some instances, the nominal accounts were closed out irregular and infrequently. In modern conditions require that statements of financial statements from month to month, and promptly. The month has become the most popular period of time upon which to base these statements. It is not so long but that any unfavorable tendencies can be discovered before much injury results from them. It is sufficiently long to allow influences and tendencies to materialize considerably, to make an interpretation of them reliable, and yet not interfere too much with daily office routine by the additional labor entailed. + +CHAPTER VII + +RECORDING FINANCIAL TRANSACTIONS—PRACTICE + +Purpose of Practice Chapters.—If the student has grasped thoroughly the contents of the preceding chapters he is now prepared to confirm these fundamental principles and fix them in mind by applying them to actual transactions. The performance of these problems in a careful and thoroughgoing manner is as necessary to the successful study of accounting as is a study of the theory that underlies them. It is for this reason that separate practice chapters have been given equal emphasis along with those that are given over to an exposition of principles. + +Character of Practice Work.—If this practice work is to do the greatest possible good the student must be self-reliant, attempting at every stage to catch the full significance of all transactions and to apply the principles explained in the chapters treating of the theory. In no instance will practice problems anticipate theory; but in every instance there will be found in preceding chapters an exposition adequate to enable the student to proceed intelligently with the problem. Practice problems found in later practice chapters illustrate not only the chapter on theory immediately preceding but will frequently be found to be dependent upon earlier theory chapters, thus affording continuous review exercises. + +Materials Required—Construction of Books.—The student should supply himself with a small quantity of ordinary journal and ledger paper. For the exercises in this chapter two double sheets of ledger paper and two double sheets of journal paper will suffice. As more will be needed it will be best to buy it in quantities of not less than six sheets of each. He is now ready to construct his General Journal, Cash Journal and Ledger. On the first page of journal paper make the notations shown in the following diagram: + +44 + +RECORDING FINANCIAL TRANSACTIONS 45 + + + + + + + + + + + + + + + + + + + + + +
General Journal, A. B. GrayPage 1.
DateExplanationFDr.Cr.
1919
+ +Note the page number, location in center of page of the title "General Journal," the date, "1919," and the designations "Dr." and "Cr." at the top of the first and second money columns respectively. If the column headed "F" is lacking it should be supplied by the student. + +Next construct a Cash Journal by opening a sheet of Journal Paper and making therein the notations shown in the following diagram: + +A blank journal entry form with space for date, explanation, F (for F), Dr., Cr., and a line for additional information. + +46 +ACCOUNTS IN THEORY AND PRACTICE + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Page 1DateExplanation Cash Dr.Cash Journal A. B. GrayAmt. ColumnsCash Cr.ExplanationAmt. ColumnsF
P
Amt. Columns
+ +1970 + +RECORDING FINANCIAL TRANSACTIONS 47 + +Note that "Page 1" is entered on both sides of the double page. Note also the location of the "F" or folio columns, which should be supplied if lacking. + +Lastly, take a double sheet of ledger paper and on the first page enter the following notations: + + + + + + + + + + + + + + + + + + +
DateExplanationFAmt.DateExplanationFAmt.
Page 1
+ +Having finished the first page of the Ledger open the sheet and make the same notations on the inner left hand page, then on the inner right hand pages, if any, on the outer or fourth page, but paging them respectively "Page 2," "Page 3," and "Page 4." + +You are now ready to enter the transactions of A. B. Gray for the month of September, as follows: + +Diary of Events—A. B. Gray—Sept., 1919. +Sept. 1, 1919. A. B. Gray enters the retail grocery business, investing $4,000 in cash. Pays Sept. rent $50.00. He pays $400.00 for a horse and deducts $50 per month for its upkeep and feed. He pays $50 per month. He also engages a clerk at $30.00 per month and a bookkeeper at $60.00. These persons begin work as of Sept. 1, and are to receive payment semi-monthly. + +Note.—The opening entry should be made in both Journal and Cash Book. Ordinarily cash items do not appear in the Journal and it would not be wrong in this instance to enter the $4,000.00 original investment, in the Cash Journal and omit it from the General Journal. Since, however, it is customary to show the original investment entry in the Journal it is best + +48 +ACCOUNTS IN THEORY AND PRACTICE + +(to enter it in both General Journal and Cash Journal but checked thus (√) in the General Journal folio column to indicate that it is to be posted from the Cash Journal. This entry then appears thus in General Journal and Cash Journal.) + +**General Journal** + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
DateExplanationFDr.Cr.
1935 Sept.1 A. B. Gray this day enters the retail grocery business with assets and capital as follows:
CashV4,000.00
A. B. Gray, Capital4,000.00
+ +**Cash Journal (left page)** + + + + + + + + + + + + + + + + + + +
DateExplanationFAmt. columns
1935 Sept.1 A. B. Gray, Capital4,000.00
+ +The payments of $50. Sept. rent and $400 for horse and wagon are next made on the right side of the Cash Book, thus: + +**Cash Journal (right page)** + + + + + + + + + + + + + + + + + + + + + + + + +
DateExplanationFAmt. columns
1935 Sept.1 Expense—Sept. rent...50.00
Delivery Equipment—horse and wagon...400.00
+ +The remainder of the data for Sept. 1 is mere memoranda and should not be entered in the books. + +Sept. 2 Buys from Cloverdale Wholesale Co. mdse. $500.00, on account, 30 days. + +NOTE.—Make this entry in the Journal immediately below the one for Sept. 1, as follows: + + +| Date | Explanation | F | Amt. | +|---|---|---|---| +| Sept. 2 | Purchases | $500.00 | | +| | Cloverdale Wholesale Co. | $500.00 | | +| | On acct. 30 da. | | | +
+ +RECORDING FINANCIAL TRANSACTIONS 49 + +Sept. 3. Sells to T. M. Phillips, on account, mde., $8.75, and to Andrew Fry, on account, mde., $11.43. + +Note.—These entries are made in the General Journal, as follows: + + + + + + + + + + + + + + + + + + + + + + +
Sect.T. M. Phillips$8.75
Sales$8.75
Andrew Fry$11.43
Sales$11.43
+ +Since all transactions on account appear in the General Journal and since time of credit granted is not given no explanation need be appended to these entries. + +Sept. 5. He buys a display case for his store window from the Oldmire Manufacturing Co., on account, 10 days, $20.00. + +Note.—The following General Journal entry: Why? Charge "Furniture and Fixtures" and credit "Oldmire Manufacturing Co.", making an explanation, beneath the entry, of the nature of the transaction, thus: + + + + + + + + + + +
Furniture and Fixtures$20.00
Oldmire Manufacturing Co.$20.00
+ +For display case bought on acct. 10 days. + +The student will learn that accountants possess a variety of stereotyped phrases which conveniently express classes of assets, liabilities, losses, etc. Among these are Furniture and Fixtures, Delivery Equipment, Supplies, Accounts Receivable, Accounts Payable, Profit and Loss, and so on. The full significance of these titles appear as we proceed. + +Sept. 6. Sells mde. for cash $15.22, and to T. Thomas, on account, mde., $7.27. + +The cash sale is entered on the left side of the Cash Journal thus: + + + + + + + +
Sect.Sales$15.22
+ +The amount should appear in the first money column. +For S. Thomas, see transactions on Sept. 3. +Sept. 8. Cash sales $10.03. Buys 2 tons hay for delivery horse, $30.00, cash. + +For the first transaction see Sept. 6. +For 2 tons hay bought make following entry on right side of Cash Journal: +Sept. 8 Supplies—2 tons hay................. $30.00 +Sept. 9 Sells mde., on account, mde., to T. M. Phillips $6.42; to R. T. Myers, $7.00; and to H. L. McLaughlin, $3.25. +(See entries in Sects. 3 and 6.) +T. M. Phillips pays bills of Sept. 3, $8.75. + +Q + +50 ACCOUNTS IN THEORY AND PRACTICE + +The sales on account will be understood by turning to the entries referred to in parentheses. Hereafter when entries similar to those already made are met with the only explanation will be the reference to the preceding page. The entry for T. M. Phillips is made at the left margin of the Cash Journal. + +Sept. 9 T. M. Phillips--bill of Sept. 3, $87.5 +Sept. 10 Gray pays telephone bill for Sept. 3, $30.0 (see Sept. 1). Sells to J. J. Tiery, on account, mdse., $6.00 (see Sept. 9). Buys mdse., on account, 30 days, from Cloverdale Wholesale Co., $400.00 (see Sept. 2). +Cash sales, $22.35 (see Sept. 8). +Sept. 11 Oldmore Manufacturing Co. bill of Sept. 5, $50.00. +Cash sales, $24.00 (see Sept. 9). Pays $10.00 for advertising and $5.00 for sign painting on store. (See entry for rent, Sept. 1.) + +Note.--The payment to Oldmore Mfgr. Co. is entered on the right side of the Cash Journal, thus: + +Sept. 11 Oldmore Manufacturing Co. bill Sept. 5, $50.00 +Sept. 12 Cash sales, $30.00 (see Sept. 1). +Sept. 13 R.T. Myers pays bill Sept. 6, $27.2 (See Sept. 6). R.T. Myers pays bill of Sept. 7, $40.00 (see Sept.). Pays assistants their first half-month's salaries as follows: +Delivery boy... $15.00 +Clerk............ 25.00 +Bookkeeper..... 30.00 +He also withdraws $40.00 for personal use. + +Note.--Enter payment of salaries on right side of Cash Journal thus: + +Sept. 13 Expenses: Delivery boy... $15.00 +Clerk............ 25.00 +Bookkeeper..... 30.00 $70.00 + +The salaries are itemized in the explanation column and the total extended into the first money column. +Enter withdrawal of cash on right side of Cash Journal thus: + +Sept. 13 A.B. Gray Withdrawals... $40.00 +Sept. 15 Cash sales, $35.00 (see Sept. 12). Andrew Pry pays bill of Sept. 3, $141.43 (see Sept. 9). +Sept. 16 Cash sales, $40.00 (see Sept. 15). Sells on account to S.Thomas, $44.00; to T.M.Philips, $52.0; to R.T.Myers, $52.0 (see Sept. +16). +Sept. 17 Buys mdse., from Cloverdale Wholesale Co., $150.00, on account, 2% 10 days, net 30 days (see Sept. +16). Cash sales, $37.75 (See Sept. +16.) + +RECORDING FINANCIAL TRANSACTIONS 51 + +Sept. 18. T. M. Phillips gives note, due in 10 days, in payment of bill of Sept. 9. Cash sales, $40.00 (see Sept. 17). Pys $10.00 for repairs on store (see Sept. 11). + +Note.—Notes are sometimes given in payment of an account. +When this is done the personal account of the giver is credited and "Notes Receivable" charged. This entry is made in the General Journal thus: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
$6.42
T. M. Phillips$6.42
Note given in, in payment of bill of Sept. 9.
Sept. 19. Sella on account to D. Hathaway, mdec., $7.20; to R. T. Myers, $3.20 (see Sept. 16).
Cash sales, $45.00 (see Sept. 18).
Sept. 20. Cash sales, $45.00 (see Sept. 18).
Buyers' charge for store, each, $30.00 (see Sept. 5).
Wholesale Co., bill due Oct. 15.
Sept. 22. Sella mdec. to S. Adams, $15.00.
Adams gives note for 30 days for purchases.
Cash sales, $28.50 (see Sept. 20).
Miscellaneous expense, $4.25 (see Sept. 11).
Stationery and postage, $9.50 (see Sept. 11).
Note.—Charge S. Adams and credit Sales as in any charge account. +Then in the General Journal charge Notes Receivable and credit S. Adams, thus:
S. Adams..................................................$15.00
Cash Sales..............................................$15.00
Notes Receivable.........................................$15.00
S. Adams....................................................$15.00
Note due in 30 da.
Sept. 23. Cash sales, $32.20 (see Sept. 22).$147.00
B. L McLaughlin pays bill of Sept. 9, $32.50 (see Sept. 15).$147.00
Taken $100 from cash drawer for personal use (see Sept. 13).
Sella on account to B. Ward, mdec., $5.00; D Hathaway, mdec., $11.60; R T Myers, $55 (see Sept. 1).
Sept. 24.$3375
Sept. 25.Cash sales, $33.15 (see Sept. 24).
Sept. 27.Pays Cloverdale Wholesale Co., bill of Sept. 17, less discount.
Cash sales, $43.77 (see Sept. 27).$3375
Note.—Enter the net cash payment on the right side of the Cash Journal, thus:$3375
Cloverdale Wholesale Co., (-) bill Sept, 17.$3375
In the Journal charge Cloverdale Wholesale Co and credit Discount on Purchases thus:$3375
Cloverdale Wholesale Co.$3375
To Discount on Purchases$3375
For discounts due Oct.$3375
Sept. 28.T M Phillips pays note due today. +Cash sales, $4377 +(see Sept. 27).
+ +Note.—Enter the net cash payment on the right side of the Cash Journal, thus: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
In the Journal charge Cloverdale Wholesale Co and credit Discount on Purchases thus:
Cloverdale Wholesale Co.$3375
To Discount on Purchases$3375
For discounts due Oct.$3375
Sept. 28.T M Phillips pays note due today. +Cash sales, $4377 +(see Sept. 27).
+ +52 ACCOUNTS IN THEORY AND PRACTICE + +Note.—Charge cash and credit Notes Receivable on the left side of the Cash Book thus: + +Sept. 28. Notes Receivable—T. M. Phillips $6.42 +Sept. 30. Cash, $33.00 (see Sept. 28). Pay assistants as follows: (see Sept. 13) +Delivery boy 15.00 +Clerk 25.00 +Bookkeeper 30.00 + +D. Hathaway pays his account in full (see Sept. 23). Mr. Gray, wishing to know the results of the month's transactions, takes inventory, finding that it amounts to $313.00. You are instructed to draw up a statement showing profit or loss for the month. + +Note.—First, however, it will be necessary to post from the General Journal and Cash Journal to the Ledger. Ordinarily this posting is done day by day. Here we have first made all entries in the General Journal and Cash Journal. Two double sheets of ledger paper will suffice for the Ledger. Page it 1, 2, 3, 4, and so on. Open accounts as follows: +Page 1: +Line 1 A.B. Gray, Capital +Line 6 A.B. Gray, Withdrawals +Line 20 Cash + +Page 2: +Line 1 Purchases +Line 9 Sales + +Page 3: +Line 1 T.M. Phillips +Line 10 Andrew Frey +Line 20 S. Thomas +Line 30 R.T. Myers + +Page 4: +Line 1 B.D. McLaughlin +Line 18 D.H. +Line 20 D. Hathaway +Line 30 S. Adams +Line 35 B. Ward + +Page 5: +Line 1 Cheverdale Wholesale Co. +Line 10 Oldmore Manufacturing Co. + +Page 6: +Line 1 Discount on Purchases +Line 10 Wages and Salaries +Line 20 Expenses +Line 30 Supplies + +RECORDING FINANCIAL TRANSACTIONS 53 + +Page 7: +Line 1 Furniture and Fixtures +Line 10 Notes Receivable +Line 20 Delivery Equipment + +Page 8: +Line 1 Profit and Loss + +Following the principles and illustrations in Chapter VI, post from the General Journal and Cash Journal to the Ledger. +Note that items appearing on the debit side of the Cash Journal are posted to the credit side of the Ledger and vice versa. This is because items appearing on the left side are credits to the account appearing in the explanation columns and a charge to cash. Cash, however, is posted only in total at the end of the month. The explanation column on the credit side are to be charged while the cash credit is posted in total at the end of the month. + +When all postings are made see that all cross references have been inserted in the folio columns. Next prepare a trial balance of the Ledger. This should agree with the following: + +Trial Balance—A. B. Gray—as at Sept. 30, 1910 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
































































































<
Assume that $\frac{1}{4}$ of the supplies have been consumed. Make closing entries in the General Journal and carry net profit or loss +$6,202.62 $6,202.62 + +54 +ACCOUNTS IN THEORY AND PRACTICE + +to A. B. Gray's withdrawal account and the balance of withdrawals to capital. Note that there is no old inventory as in case of Grant Atkins explained in Chapter V. Bring down balance of A. B. Gray's capital account as of Oct. 1. Set up balance sheet and profit and loss statement. Gray's capital as of Oct. 1 should be $3,326.37. + +A page from a book about accounting theory and practice. + +CHAPTER VIII + +RECORDING FINANCIAL TRANSACTIONS—PRACTICE + +Dairy of Events—A. B. Gray—Oct. 1919. + +Oct. 1. Begin month by opening new books—General Journal, Cash Journal and Ledger. The Journal should contain 8 pages, the Cash Journal two double pages (composed of 2 double sheets of journal paper), and the Ledger 24 pages (composed of 6 double sheets of ledger paper). Page these books. + +A. B. Gray, Capital; p. 2—at top, Furniture and Fixtures; at middle, Delivery Equipment; p. 3—at top, Purchases; at middle, Sales; p. 4—at top, Cash at Bank; p. 5—at top, Cash on Hand; p. 6—at top, Merchandise Inventory; p. 7—at top, M. Phillips; at middle, S. Thomas; p. 14—at top, R. T. Myers; at middle, J.J. Tiery; p. 15—at top, B. Ward; p. 20—at top, Cloverdale Whole- sale Co. + +Using the balance sheet of A. B. Gray as at Sept. 30, 1919, as a basis, make the opening Journal entry for Oct. 1, 1919, in the new Journal, making the proper preliminary explanation in the Journal, to effect that A. B. Gray opens new books with assets, liabilities and capital brought from the old books. + +Note.—In the Cash Journal designate the two debit columns “Sales” and “Sundries,” respectively, and the two credit columns “General Expense” and “Sundries,” respectively. + +Cash sales $47.20. Advertising paid in advance for month, $15.00 (charge to Expense, opening account in Ledger page 5, at middle). Pays Cloverdale Wholesale Co bill of Sept. 2, $500.00. + +Note.—Charge Purchases account for all purchases of merchandise made and credit Sales account for all sales of merchandise. To enter “Cash sales $47.20” in the Cash Journal write “Sales” in the explanation column and enter the amount, $47.20, in the “Sales” column. All cash sales should be similarly entered. +For Advertising paid in advance see Advertising Expense and enter the amount in this column in the General Expense column. +Hereafter enter all expense items in the “General Expense” column unless a special account is required, as in case of “Insurance” paid for on Oct. 6 (see below), in which case it should be taken into “Sundries” column. + +55 + +56 +ACCOUNTS IN THEORY AND PRACTICE + +Oct. 2. Cash sales, $43.00. Sales made, on account to M. Harria, $18.30 (Ledger p. 15), to S. Thomas, on account, $10.00. Pays rent for October, $50.00 (General Expense). + +Oct. 3. Receives $100 from Cleverdale Wholesale Co., on account, mdse, $500; 2% net 10 days, net 30 days. Cash sales $332.0. + +Oct. 4. Takes out insurance on merchandise, paying premium for 1 year, $126.96 (Ledger, p. 7, top). Cash sales, $418. + +Oct. 6. Mr. Gray makes a loan of $1,000 to B. Arthur, receiving therefor Mr. B. Arthur's note for 20 days, at interest at 6%. Cash sales $121.0. + +Note.—In the Cash Journal charge Store and Lot for $1,950, and in the General Journal charge Store and Lot $3,050, crediting Expense, $50, and Mortgage, $3,000. Make proper explanation following the entry, covering the expense adjustment, the mortgage, and the terms thereof. + +Oct. 7. Mr. Gray makes a loan of $1,000 to B. Arthur, receiving therefor Mr. B. Arthur's note for 20 days, with interest at 6%. Cash sales $126.96. +Sold to J. J. Tiery, on acct., mdse., $121.0. + +Note.—For the loan to B. Arthur charge "Notes Receivable" indicating "from B. Arthur" in the explanation column in the Cash Journal, thus: + +Notes Receivable—from B. Arthur $1,000 +putting the amount in the "Sundries" column, right side of the Cash Book. + +Oct. 8. R. T. Myers, one of Mr. Gray's customers, has made an assignment in bankruptcy, and after his business has been liquidated he has paid his unsecured creditors at the rate of 67 cents on the dollar. Mr. Myers owes Mr. Gray $250 on account; he also owes Mr. Myers on an above basis (Bad Debts p. 7, middle). Cash sales, $455. + +Note.—In the Cash Journal credit R. T. Myers with the amount he is able to pay—in the General Journal charge Bad Debts and credit R. T. Myers for the loss resulting from bankruptcy. + +Oct. 9. Mr. Gray buys a barn and storage house for $2,000. He gives a mortgage for $1,000 at 6%, for 2 yrs., interest payable annually, and pays the balance in cash. +As he has not sufficient cash on hand to make the payment, he discounts his note, payable in 30 days, at a bank; face $298; proceeds $298 × .98 = $293. +Ward pays his account in fall; J.J.Tiery pays his account in fall. + +A page from a ledger book showing accounts and transactions. + +RECORDING FINANCIAL TRANSACTIONS 57 + +Note.--Enter the mortgage in the General Journal, crediting "Mortgage" and charging "Barn and Storage House" (Ledger, p. 8). The discounted note may be handled in either of two ways: + +(a) By charging Cash and crediting Notes Payable for $200 on the receipt side of the Cash Journal and then charging Interest and crediting Cash on the payment side of the Cash Journal. + +(b) By charging Cash and crediting Notes Payable for $108 in the receipts side of the Cash Journal and by charging Interest and crediting Notes Payable in the General Journal. + +It is suggested that the latter method be followed here. + +Oct. 10. Cash sales, $40.50. Pays Clevelanddale Wholesale Co. bill of Sept. 10. +Oct. 13. Sale on acct. to M. Arnold, mdes. $14.00; to T. M. Phillips, $52.30; to S. Thomas, $7.60; Cash sales, $43.15. Pays telephone bill for Oct., $3.00. +Oct. 13. Pays Clevelanddale Wholesale Co. bill of Oct. 3, less discount (Direct. Purser's p. 8, middle). Cash sales, $38.50. Sales on acct., mdes. to L. Floyd, $15.73; to R. Smith, $2.11 (p. 16); to B. Ward, $33.00; to the Brighton Club, $14.00 (p. 16). +Oct. 14. Cash sales, $63.30. Pays assistants as follows: +Delivery boy: $18.00 +Cashier: 30.00 +Bookkeeper: 40.00 + +Withdraw for personal use $40.00 (A. B. Gray, Withdrawals, p. 1, middle). Charge wages of help to "Expense." + +Oct. 15. Repairs on store, $23.0 (Repairs, p. 9, top). +Oct. 16. Mr. Gray buys another horse and wagon, paying $40 for the wagon and $150 for the horse. He pays in cash in the wagon, and gives a note payable in 10 days for the horse to Weller, N. Norton (p. 21, top). He engages another delivery man for $30 per month. + +Note.--For the purchase of the horse charge Delivery Equipment and credit N. Norton in the General Journal; then in another Journal entry charge N. Norton and credit Notes Payable. Reference to the additional delivery boy requires no entry. + +Oct. 17. Cash sales, $75.00. +Oct. 18. B. Ward pays acct. in full. Cash sales $76.75. +Oct. 20. Cash sales, $79.00. Pays mdes of Clevelanddale Wholesale Co., $218; net $409. Pays Clevelanddale Wholesale Co. bill of Septe., $690.00. +Oct. 21. Buys grain for stable, $40.00, cashs this is sufficient to last + +58 ACCOUNTS IN THEORY AND PRACTICE + +4 mo. (Stable Suppliers, p. 9, middle). Cash sales, $33.00. Pays member- +ship fee in Cloverdale Merchants' Association, $6.00 (Exp.). Oct. 22. Cash sales, $75.00; cash sales, $90.00. On acct. to T. M. Phillips, $20.00; to R. Story, $34.00 (p. 17). +Oct. 23. Mr. Gray has electric and gas combination fixtures placed throughout his store at a total cost of $175.00. The old fixtures which originally cost him $150.00 have been sold for a figure when the store was bought are sold for $10 cash. Cash sales, $35.00. +Note.—Charge Store and Lot for the new fixtures. Why not charge Furniture and Fixtures? Credit Store and Lot for sale of old fixtures. In the General Journal charge Expense and credit Store and Lot for loss incurred on old fixtures. + +Oct. 24. Cash sales, $33.00. +Oct. 25. Sells on acct., to R. Story, $34.00; to D. Hathaway, $31.7. Cash sales, $83.7. +Oct. 27. B. Arthur pays note today, with interest (20/365 of 1 yr. for int.). Cash sales, $87.20. Pays note due N. Norton. + +Note.—Make separate entries for "Notes Receivable" and "Interest" when B. Arthur pays. + +Oct. 28. Cash sales, $90.30. +Oct. 29. T. M. Phillips pays acct., in full. Cash sales $89.00. +Oct. 30. Cash sales, $156; Pays Cloverdale Wholesale Co bill Oct. +20, less disc% Discounts note at bank, face $30; proceeds $298. (15 days.) + +Oct. 31: Cash sales $100.00; Pays assistants: +Delivery boy No: 1 .................................................. $18 +Delivered goods ...................................................... 15 +Clerk ................................................................. 30 +Bookkeeper ......................................................... 40 + +A. B. Gray, desirous of knowing the results of the month's trading, requests you to present him with a profit and loss account, also a profit and loss statement for the month, after taking a trial balance and making the closing journal entries. + +Inventory Oct. 31—$1500. Of the Supplies $15 have been consumed. + +Note.—A. B. Gray's capital account as of Nov. 1 should be $4,978.24 Interest accrued on the mortgages must be taken into the books before making closing entries Charge "Interest" and credit "Interest Accrued," in the General Journal. +"In-terest" is a normal account while "Interest Accrued" is a real account, representing a deferred liability. +Preserve the books of A.B.Gray They will be used to record the diary of events in Chapter XV. + +
A. B. Gray, Capital.$4,000.00
Purchases.$1,650.00
Sales.699.62
Cash.3,698.47
T. M. Phillips8.00
S. Thomas14.00
R. T. Myers23.40
J. J. Thomas6.00
B. Ward.5.00
Cloverbilt Wholesale Co.1,500.00
Discounthouse.3.00
Wages and Salaries.140.00
Expense.91.75
Supplies.35.50
Furniture and Fixture.80.00
Notes Receivable.15.00
Delivery Equipment.400.00
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Cash Sales$33
Cash Sales$75
Cash Sales$90
Cash Sales$156
Cash Sales$100
Interest Accrued$6
Interest Accrued$298
Interest Accrued$4978.
Interest Accrued$24
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156
Interest Accrued$156.
+ + +
Cash Sales - Oct.$33
$75
$90
$156
$100
$6
$298
$4978.
$24
$156
$156
$156
$156
$156
$156
$156
$156
$156
$156
$156
$156
$156
$156
$156
$156.
+ + +
Cash Sales - Oct.$33
$75
$90
$156
$100
$6
$298
$4978.
$24
$156
$156
$156
$156
$156
$156
$156
$156
$156
$156
$156.
+ + +
Cash Sales - Oct.$33
$75
$90
$156
$100
$6
$298
$4978.
$24
$156.
+ + +
Cash Sales - Oct.$33
$75.
+ + +
Cash Sales - Oct.$33.
+ + +
Cash Sales - Oct.$33.
+ + +
Cash Sales - Oct.$33.
+ + +
Cash Sales - Oct.$33.
+ + +
Cash Sales - Oct.
+ + +
Cash Sales - Oct.
+ + +
Cash Sales - Oct.
+ + +
Cash Sales - Oct.
+ + +
Cash Sales - Oct.
+ + +
Cash Sales - Oct.
+ + +
Cash Sales - Oct.
+ + +
Cash Sales - Oct.
+ + +<
Cash Sales - Oct.
+ + +<
Cash Sales - Oct.
+ + +<
Cash Sales - Oct.
+ + +<
Cash Sales - Oct.
+ + +<
Cash Sales - Oct.
+ + +<
Cash Sales - Oct.
+ + +<
Cash Sales - Oct.
+ + +<
Cash Sales - Oct.
+ + +<
Cash Sales - Oct.
+ + +<
Cash Sales - Oct.
+ + +<
Cash Sales - Oct.
+ + +< + +CHAPTER IX + +THE THEORY OF ACCRUALS AND OF DEFERRED CHARGES + +There are certain kinds of expenses which, although incurred daily, are paid for in cash only at certain, sometimes distant, intervals. There are also certain kinds of expenses which must be paid for in advance of the time when they are actually incurred. These two classes of expenses give rise to two special problems in accounting which may be treated under the subjects "accruals" and "deferred charges," respectively. + +Interest.-Interest is a charge on the amount borrowed. It sometimes represents a very permanent and fixed charge, as when it is paid for the use of funds borrowed on mortgage security. Sometimes it is a temporary expense, as when it is incurred on overdue accounts payable, notes discounted at the bank to secure temporary advances of money, etc. When money is borrowed on a mortgage the mortgagee or creditor then secures a lien on the real estate of the mortgagor or borrower. In case the mortgagor becomes unable to pay the interest on the loan the mortgagee may foreclose the mortgage and sell the mortgaged property for the satisfaction of both interest and debt. + +Interest Periods Differ from Accounting Periods.—Interest is reckoned as a percentage per annum on the amount loaned and normally ranges from 3 to 7 per cent, depending on the safety of the loan and its term. Interest is usually due at stated periods termed usury. Interest is paid at regular intervals which are usually determined upon in advance when the loan is made. On mortgage indebtedness interest is generally paid semimonthly, at the end of six-month intervals. When money is borrowed at a bank the loan is customarily made for one month with a renewal privilege; consequently interest is then paid monthly. It is readily seen, therefore, that interest periods and accounting periods do not always coincide in all cases. If the nominal accounts are closed at the end of each + +59 + +60 ACCOUNTS IN THEORY AND PRACTICE + +month while interest payments are made semi-annually, it follows, that if half a year's interest is debited to profit and loss as an expense in that month in which it happens to fall due and be paid, then that month bears a burden which ought to be distributed over several months. + +To illustrate, assume that on January 1 a merchant borrows $6000 for a term of years, agreeing to pay 5 per cent interest thereon, payable semi-annually on December 31 and June 30. Interest will amount to $300 yearly, and each semi-annual instalment will amount to $150. Furthermore, suppose that the merchant makes no entry in his books for interest until the first half year's instalment fails due, when he credits cash, $150, in the Cash Journal, and at the same time charges "interest expense," $150, to the Profit and Loss Account. "Interest" is a nominal or expense item, and is closed into the profit and loss account for the month ending June 30. Clearly the profit and loss account for June is thus debited with interest, which should have been pro-rated over the first six months of the year. The profit and loss accounts for the preceding five months have not been charged with their proportion of the interest expense. + +The "Accrued" Account.--To distribute properly such expenses over the periods to which they are incident we must have recourse to a device known as the "accrued" account. In the instance cited above the interest incident to each month is one-twelfth of $300, or $25. Before making the closing journal entries an adjustment entry should be made in the General Journal to show the expense incurred in form of interest and the corresponding liability arising therefrom, thus: + +
+ + + + + + + + + + + + +
Interest...$25.00
To Interest Accrued...$25.00
+ +When this is posted to the Ledger, "interest" is charged with the month's due proportion of this expense; and "interest accrued," which is a real account, records the concern's liability incurred on interest but as yet not payable because not due until June 30. As "interest" is a nominal account, it is closed into profit and loss and does not appear on the balance sheet. "Interest accrued," being a real account, appears in the balance sheet as a liability. + +At the end of February another entry is made in the Journal + +THE THEORY OF ACCRUALS + +61 + +identical with the one shown above. "Interest" is again charged to profit and loss and the "interest accrued" account shows a liability for two months' interest, or $50. This process is continued until the half year has passed and interest for that time falls due. At this point the interest is paid and the interest cannot be credited to "interest accrued." If it is credited to "interest accrued" through a journal entry, then when the interest is paid the following entry is required in the Cash Journal (here written in general journal form): + + + + + + + + + + +
Interest Accrued$150.00
To Cash$150.00
+ +If the sixth month's interest is not credited to "interest accrued," then the entry in the Cash Journal is: + + + + + + + + + + +
Interest$25.00
Interest Accrued$125.00
+ +$150.00 + +Whichever method is followed, the result is the same. If the first plan is pursued "interest" for the last month is charged in the General Journal. If the second plan is followed "interest" is charged in the Cash Journal for the sixth month. In either case "interest accrued" is closed out by being charged from the Cash Journal with the full amount of the items which have accumulated to its credit during the preceding months. If the last month's interest is charged in the Journal and credited to "interest accrued," then when the "interest accrued" account is finally closed by being charged with the cash paid out, it appears thus: + + + + + + + + + + + + + + +
Interest Accrued
June 30 To Cash$150.00 Jan. 31 By Interest $25.00 Feb. 28 By Interest $25.00 Mar. 28 By Interest $25.00 Apr. 30 By Interest $25.00 May 31 By Interest $25.00 June 30 By Interest $25.00
$150.00
+ +If, on the other hand, the sixth month's interest is charged in the Cash Journal, the "interest accrued" account, when finally closed, shows total credits, "by interest," of $125, and a charge "to cash" for the same amount. Through this procedure the profit and loss account for each month is debited with its + +62 ACCOUNTS IN THEORY AND PRACTICE + +proper proportion of interest expense and the balance sheet at the close of each month shows what the liability on interest accrued but not due is. If there is more than one liability upon which interest is incurred, the same principle applies to all. The interest expense account may be kept as a single aggregate account and be shown as separate liabilities in the balance sheet, or it may be entered in one interest accrued account and shown as one item in the balance sheet. + +**Wages and Salaries.**—Wages and salaries sometimes require the same treatment as interest. Salaries are customarily paid monthly, and consequently they may be charged to a "salaries expense" account when they are paid in cash. By so doing the month's profit or loss that they charge is charged to profit and loss. It is only when the time of payment of salaries is not monthly that the theory of accruals applies. Wages are usually paid weekly or semi-monthly, and since the month-ends do not, as a rule, correspond with week-ends, there occurs an overlapping of wages expense in a weekly or semi-monthly period which extend from one month into the next one. The wages expense for such a period must be accurately pro-rated over the months to which it relates. + +**Wages Accrued Illustrated.**—One illustration will suffice. A merchant pays his assistants semi-monthly. A certain payday falls on the seventh of June. The profit and loss account for May must be charged with the wages accruing during the last week of May even though they are not due until June 7. If one week's wages amount to $40 the adjustment can be made in the General Journal, thus: + + + + + + + + + + + + + + +
May 31
Wages Expense$10.00
To Wages Accrued.$10.00
+ +*Wages expense* is carried to the profit and loss account and *wages accrued* enters the balance sheet as of May 31 as a liability. This *wages accrued* account will be closed when wages are paid, June 7, as follows (Cash Journal): + + + + + + + + + + +
Wages$40.00
To Cash.$80.00
+ +Miscellaneous Accruals.—The same principle applies to all other expenses which accrue over an accounting period, but for + +THE THEORY OF ACCRUALS + +63 + +which payment is delayed to a day in some succeeding period for some reason. Taxes are usually of this character. Theoretically very small expenses ought to be similarly distributed. But the error may be so slight in charging them entirely to profit and loss in the month in which they occur that the work required to make a distribution is not worth while. Association dues of small amount and similar items may be thus cared for. + +**Deferred Charges.—As some expenses cannot be paid until after the period to which they are incident is closed, so other expenses must be paid in advance of the period to which they are incident. Perhaps the most important class of such expenses are those incurred by a new enterprise. When a concern is in this stage of its development it is frequently compelled to spend large amounts of money on advertising, exploiting, and general development work, of which the benefits are likely to continue for several years. Take, for example, oil wells. Before oil can be worked it is necessary to strip the ore beds of the underlying strata. To charge the cost of ore-stripping, calculated to suffice for, say, five years, to profit and loss during one year would unjustly burden it with expenses really applicable to a period of five years. It is better to charge such unusual expenses to "deferred charges," "deferred charges," or "deferred charges" to profit and loss, these phrases being used synonymously. Then at the end of each accounting period this account is credited with the amount applicable to that period and a corresponding charge is made to profit and loss." + +**Deferred Charges Illustrated.—George Warren invests $100,000 cash in a mine which he is about to develop. He pays $50,000 for the land which the mineral deposits underlie and invests $25,000 in plant and machinery. His condition before beginning operations is shown by the following balance sheet:** + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, George Warren
Land$50,000Capital—George Warren$100,000
Plant and Machinery25,000
Cash25,000
$100,000$100,000
+ +He now spends $14,100 in stripping the ores of overlying strata, thus uncovering enough ore bed to last for a period of six years. His balance sheet becomes: + +A table showing George Warren's balance sheet. + +64 +ACCOUNTS IN THEORY AND PRACTICE + +Balance Sheet, George Warren + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Land$ 50,000Capital—George Warren.$100,000
Plant and Machinery25,000
Cash10,000
Deferred Charges14,400
$100,000$100,000
+ +During the first year one-sixth of the amount originally debited to "deferred charges" should be written off by monthly entries as follows: + +Profit and Loss. +To Deferred Charges. + +$300.00 +$236.00 + +In this way the monthly profit and loss account is charged with its proper proportion of the cost of ore-stripping, and at the end of the sixth year the entire amount of the cost of stripping, $14,400, will be charged off. + +**Wider Application of Theory of Deferred Charges.—** In a broader sense the theory of deferred charges applies to all assets which diminish in value as time passes. These comprise buildings, machinery, tools, furniture and fixtures. Nearly short, nearly all classes of so-called fixed assets, land usually being an exception to this rule. Investments in such assets are in reality expenses of future production, and it is quite as essential to accurate accounting that proper allowance be made in the profit and loss account for costs occasioned by the depreciation of the more permanent assets as it is to take into consideration those expenses which are paid out a shorter time in advance, as well as those which are incurred for different accounting periods to which they are incident. It is best to consider depreciation as a distinct topic since the accounting procedure required is somewhat different. + +CHAPTER X + +ACCRUALS AND DEFERRED CHARGES - PRACTICE + +Problem 1.-A merchant, Oliver Matthews, mortgages his store and lot in order to secure funds with which to make certain improvements. The transaction by which the money is secured occurs on June 12, 1920, the following being the entry in the merchant's Cash Journal put in form of a General Journal entry: + +June 12, 1920 + + + + + + + + + + + + + + +
Cash$4,000.00
Mortgage.$4,000.00
For loan secured by mortgage, interest at 6 per cent., payable semi-annually.
+ +Mr. Matthews employs help which he pays at the end of each two weeks' period. The last pay day occurred June 19 and the one preceding that on June 5. The next one will occur on July 3 or 4, depending upon the month. The amount of wages at each pay day is $327.32. The disbursements on June 5 was charged thus: + + + + + + + + + + + + + + +
Wages Accrued...$210.42
Wages...116.90
Cash...$327.32
+ +For payment of accrued wages, 2 weeks. + +Mr. Matthews' annual salary is $2,400 which he draws quarterly, Jan. 31, April 31, July 31, and so on for the preceding quarter. + +Mr. Matthews has engaged in an extensive advertising campaign during the preceding months of the present calendar year, the disbursements on that account amounting to the following sums: + + + + + + + + + + + + + + + + + + + + + + + + + + +
January...$300.00
February...216.00
March...300.00
April...818.60
May...192.00
June...324.00
+ +5 G3 + +66 ACCOUNTS IN THEORY AND PRACTICE + +It is calculated that the amount expended thus each month represents a deferred charge which may be equitably charged to profit and loss over a period of 12 months. Thus of the $300 spent in January, $\frac{1}{12}$, or $25$, is a proper charge to expense in January; $\frac{1}{12}$ in March, and so on. + +The trial balance of the Ledger taken on June 30 is as follows: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Total Balance, Oliver Matthews—Capital.$35,000.00
Store and Lots.$16,000.00
Furniture and Fixtures.$40.00
Delivery Equipment.900.00
Inventory, May 31.10,181.00
Merchandise.2,000.00
Accounts Receivable.3,400.00
Notes Receivable.390.00
Supplies.390.00
Wages.441.22
Salaries Accrued—Oliver Matthews.400.00
Expense.620.00
Cash.800.00
Mortgage.4,000.00
Accounts Payable.2,329.12
Notes Payable.200.00
Discount on Purchases.-65.10
+ +$33,985.22 $33,985.22 + +The inventory on June 30 is $9,940.00. After making such Journal entries as are necessary to adjust the interest accrued on mortgage, wages accrued, and salaries accrued, draw up a trial balance showing these adjustments. + +These adjustment entries should be in the following form: + +Interest. +Interest Accrued. +To bring into the books the expense of interest accrued on mortgage and to show the liability therefore. +Wages. +Wages Accrued. +To bring into the books the expense of wages accrued to date and to show the liability therefore. +Salaries. +Salaries Accrued. +To bring into the books the expense of salaries accrued to date and to show the liability therefore. + +A table showing a trial balance of accounts for Oliver Matthews' business as of June 30, with balances for capital, store and lots, furniture and fixtures, delivery equipment, inventory, merchandise, accounts receivable, notes receivable, supplies, wages, salaries accrued - Oliver Matthews, expenses, cash, mortgage, accounts payable, notes payable, discount on purchases, and total liabilities and equity. + + +
DescriptionBalance
Total Balance, Oliver Matthews—Capital.$35,000.00
Store and Lots.$16,000.00
Furniture and Fixtures.$48.75
Delivery Equipment.$999.75
Inventory, May 31.$11,818.75
Merchandise.$2,487.75
Accounts Receivable.$3,487.75
Notes Receivable.$399.75
Supplies.$399.75
Wages.$441.75
Salaries Accrued—Oliver Matthews.$487.75
Expense.$628.75
Cash.$899.75
Mortgage.$4,487.75
Accounts Payable.$2,328.75
Notes Payable.$299.75
Discount on Purchases.-65.75
+ +$33,985.22 $33,985.22 + +**ACCRUALS AND DEFERRED CHARGES** + +In finding interest accrued reckon it on $4,000 for 18 days (3/5 of 1 mo.), and for wages accrued reckon 11 days. + +Sometimes all adjustments are made before taking the trial balance. Here, however, it becomes necessary to draw up a second trial balance. The footings of this trial balance should be $34,444.00. + +The accounts "Interest Accrued," "Wages Accrued," and "Salaries Accrued" are real accounts while the corresponding debit accounts, "Interest," "Wages" and "Salaries" are nominal. When these do not appear in the trial balance submitted they must be supplied in the trial balance drawn up to show effects of adjustments. From the revised trial balance and other information presented set up the closing Journal entries and present a profit statement. + +**Problem 2.—A. G. Williams is a merchant engaged in the retail business. Before making adjustments for certain accruals and deferred charges he takes a trial balance as at Dec. 31, 1919, which is as follows:** + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Trial Balance, A. G. Williams, as at Dec. 31, 1919:$ 50,000.00
Real Estate.$ 25,000.00
Delivery Equipment.2,500.00
Inventories, June 30, 1919.6,000.00
Furniture and Fixtures.3,000.00
Purchases.57,300.00
Sales.63,350.00
Accounts Receivable.4,520.00
Wages.1,900.00
Supplies on Hand, June 30, 1919.620.00
Supplies Purchased.300.00
Interest.350.00
Salaries.1,500.00
Miscellaneous Expense.425.00
Cash.2,665.00
Notes Payable.10,955.00
Accounts Payable.
DescriptionAmount
Cash$129,415.00
Total Amount Due to Williams$129,415.00
Rent of Delivery Equipment187.55$129,415.00
+ +Wages were last paid on Dec. 27, so that 4 days' wages accrued are not shown. These amount to $127.50. Interest on Notes Payable was paid semi-annually March 1 and Sept. I respectively, + +68 ACCOUNTS IN THEORY AND PRACTICE + +at the rate of 6 % per annum. Salaries, totaling $3,000.00, are paid to the proprietor quarterly, Mar. 31, June 30, Sept. 30, and Dec. 31. There are on hand supplies valued at $500.00. + +After making all necessary adjustments set up a revised trial balance, entries to close, and a profit and loss account and balance sheet. + +CHAPTER XI + +DEPRECIATION, BAD DEBTS, AND VALUATION RESERVES + +Nearly every business enterprise incurs unavoidable expenses due to the deterioration of material assets and the uncollectible character of some of its accounts receivable. These two classes of losses, although in no way related to each other, can best be considered together because of the similarity in the accounting methods required to record and interpret them. + +**Meaning of Depreciation.**—In a wide sense, depreciation losses include bad debts. But for practical purposes it is better to limit the application of the word to the deterioration of physical assets. Even when the application of the word is thus limited it has several uses which may be discussed under the three-fold terminology: + +1. Wear and tear +2. Inadequacy +3. Obsolescence + +**Nature of Depreciation.**—Depreciation from wear and tear occurs when a material structure undergoes physical deterioration due to weathering or usage, or both. Depreciation from inadequacy occurs when a material structure undergoes deterioration in value, due to its failure to perform the functions which increasing demands upon it require. Depreciation from obsolescence occurs when a material structure undergoes deterioration in value, due to the invention of devices better adapted to perform the same work. + +**Nature of Invested Capital.**—Failure to make adequate allowance for depreciation costs is a prolific source of financial embarrassment. This truth is a corollary of a fundamental principle of accounts, viz., that the original investment must be kept intact. To prosper, a concern must be supported by an + +70 +ACCOUNTS IN THEORY AND PRACTICE + +invested capital large enough to meet the various demands made by the productive and distributive processes. Some of these demands are for fixed capital, i.e., capital invested in buildings, equipment, and so on. Other demands are for working capital, i.e., capital in the form of cash, accounts receivable, acceptances receivable, merchandise, and so on. In a general way the fixed assets counterbalance the fixed liabilities while working assets counterbalance current liabilities and provide the means for temporarily increasing the volume of transactions when desirable, and of paying wages and liquidating other current costs. + +Anything which diminishes the amount of the working capital creates a stringency in the funds available for purchasing commodities and for paying the usual running expenses as they fall due. Such a stringency is very quickly perceived and therefore usually remedied before it is too late. The diminution of the fixed capital, however, in the long run deprives us of physical plant, machinery, etc., which continue for a considerable time without creating alarm an apparent shortage of any kind, but which for this very reason is liable, ultimately, to leave a concern in a very much depleted condition. Only when it becomes necessary to make replacements or extensive repairs—which must generally be met by working heavily on working capital—does a situation of apparent dimity arise. But if it then be too late to recover the long-suffering which have in- sistently continued to value the fixed assets at their full time retaining sufficient funds to meet running expenses which cannot be delayed. In such cases the only recourse left is to borrow money to pay a part of the expenses, thus saddling the enterprise with increased indebtedness and larger interest burdens without increasing its productive capacity—a procedure which alleviates but does not cure the difficulty. + +**Efforts to Increase Capital Illustrated,**—Lawrence Oliver begins business with cash, $200,000, $190,000 of which he invests in plant, etc., reserving $10,000 in cash for current needs. His condition is then as shown in the following balance sheet: + +The word "capital" is here employed in the economic sense as re- ferring to wealth employed to produce wealth. In this book the word is more frequently employed in the accounting sense as indicating net worth or proprietorship. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
CashPlantCurrent AssetsLiabilitiesCapital
Beginning Balance$200,000$190,000$10,000$190,000$190,000
Expenses(35%)(35%)(35%)(35%)(35%)
Expenses (35%) = $77,500$77,500
Expenses (35%) = $77,500$77,500
Expenses (35%) = $77,500$77,500
Expenses (35%) = $77,500$77,500
Total Expenses:$148,500$148,500$148,500$148,500$148,500
Net Income:$61,500$61,500$61,500$61,500$61,500
Total Liabilities:$261,500$261,500$261,500$261,500$261,500
Total Capital:$261,500$261,500$261,500$261,500$261,500
+ +DEPRECIATION, BAD DEBTS, ETC. +71 + +Balance Sheet, Lawrence Oliver + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Land$ 20,000Capital—Lawrence Oliver$200,000
Buildings100,000
Fixtures30,000
Inventory40,000
Cash10,000
$200,000$200,000
+ +The buildings will not last forever. They will depreciate in value with the passing of time. The fixtures also will depreciate. Nevertheless it will be possible for Oliver to do business for a considerable number of years without in any way being inconvenienced by the depreciation of his assets. He makes no allowance for this lessening of asset values. At the end of the first year the profit and loss account for the year appears thus: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Profit and Loss, Lawrence Oliver
Inventory (old)$ 40,000Inventory (new)$ 44,000
Purchases330,000Sales.330,000
Expenses18,565
Balance, Net Profit$374,165$374,165
+ +Proceeding on the assumption that he has made a net profit of $24,000, Oliver withdraws that amount from the business in cash, and spends it for private purposes. He continues doing the same for twenty years, making no allowance for depreciation of buildings and fixtures in the profit and loss account, and withdrawing and spending as much as the balance of the profit and loss account indicates to be net profit. His balance sheet at the end of the twentieth year is as follows: + +Balance Sheet, Lawrence Oliver + + + + + + $285,165 + + + 199,965


































































































<
OLIVER'S ACCOUNTS PAYABLE AND ACCEPTANCES PAYABLE ARE $15,000 AND $15,165 RESPECTIVELY.
+ +
Land$ 228,165Accounts Payable—Lawrence Oliver
Buildings
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Lawrence Oliver + +Land
$ 228,165
Accounts Payable—Lawrence Oliver
$285,165
Buildings
199,965
Acceptances Payable
$15,165
Fixtures
33,965
Cash
15,165
Inventory
43,965
Accounts Receivable
23,965
Cash
$228,165
Accounts Receivable
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
Cash
$228,165
 +
Balance Sheet, Lawrence Oliver
Land.$ 20,000Capital—Lawrence Oliver.$100,000
Buildings.25,000Accounts Payable.18,000
Fixtures.5,900Acceptances Payable.10,000
Inventory.
Accounts Receivable.20,000
Cash.15,000
$128,000$128,000
+ +This shows a serious condition of affairs, yet one which has many analogies in real life. Oliver, by spending more than he makes, because of erroneous accounting, has greatly depleted his net worth. Buildings and fixtures must soon be replaced. Where are the replacement funds to be secured? For this purpose $100,000 will be required. There is $15,000 cash on hand, and the accounts receivable, if all are collectible, will bring in an additional $25,000. But most of this cash will be needed to liquidate the old buildings and fixtures which are valuable but not profitable. Together these amount to $28,000, which leaves only $7,000 in cash free for other purposes. Oliver must get the money outside the business. Unless he can fall back on his own private fortune, he must borrow. + +Assume that Oliver borrows the required amount, $100,000, at 6 per cent interest, by giving a mortgage on all real estate including the newly constructed buildings. The old buildings and fixtures are disposed of for $65,000 cash. This with the $100,000 borrowed furnishes the amount required to pay for the + +DEPRECIATION, BAD DEBTS, ETC. 73 + +new buildings. If other accounts than those directly affected by the sale of the old fixtures and buildings and the construction and purchase of the new ones remain unchanged, the balance sheet becomes: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Lawrence Oliver
Land$ 20,000Capital—Lawrence Oliver$100,000
Buildings100,000
Fixtures30,000Accounts Payable18,000
Inventory45,000Acceptances Payable10,000
Accounts Receivable20,000
Cash15,000
$285,000$228,000
+ +As a consequence of erroneous accounting, Oliver has reduced his interest in the business to one-half its original amount. He has, for all purposes, shared it half and half with the mortgagee who loaned him $100,000. Interest on the mortgage amounts to $6,000 per annum, which is an addition to the fixed charges or expenses of the business. If Oliver continues for another twenty years at the same rate of interest during the past twenty years, his net worth will be reduced to nothing and the creditors will become the owners of the enterprise. + +**Depreciation a Cause of Bankruptcy.**—Although, in actual business, conditions do not recur with unchanging regularity, the situation described above has many prototypes. Their similarity to our illustration is sometimes obscured by the multiplicity of detail surrounding them. The failure to understand that depreciation is a charge against income and not an expense, is a prolific source of financial embarrassment and bankruptcy. Sometimes the failure to make sufficient allowance for depreciation is wilful, being a recourse to show favorable profits when they are not favorable in reality. Many expenses, such as labor, interest, and taxes, must be paid within a short period after they are incurred. Therefore it is natural that depreciation be sometimes neglected in the presence of more pressing demands. This is too frequently with the result that in the end it presents a problem much more serious than those whose solution was aided by ignoring it. + +**Valuation Reserves.**—Depreciation expense or burden may be distributed equitably by a simple accounting procedure. It makes use of "valuation reserves." Suppose that Oliver had + +74 ACCOUNTS IN THEORY AND PRACTICE + +determined to make due allowance for depreciation instead of neglecting it. This he could have done by making the following entry in the General Journal: + + + + + + + + + + + + + + + + + + +
Profit and Loss.$5,000.00
To Reserve for Depreciation of Fixtures.$1,250.00
Reserve for Depreciation of Building.3,750.00
To charge profit and loss for the amount of depreciation expense for the year ending
+ +The reserves credited in this entry are termed valuation reserves. They perform an important and unique function. Accounts are opened in the Ledger entitled "Reserve for Depreciation of Fixtures" and "Reserve for Depreciation of Building." When the above entry is posted these reserve accounts will be credited with the amounts indicated. These reserves are real accounts and remain open in the Ledger. Although they have credit balances they represent neither liabilities nor capital, as do most reserve accounts in the Ledger. There is a distinct class, because their usefulness arises out of the complementary relationship which exists between them and the asset accounts, "Fixtures" and "Buildings." They evaluate, i.e., give a valuation to, fixtures and buildings. They record the accrued depreciation on these assets. The present value of fixtures and buildings cannot be found from an examination of the fixtures and buildings accounts because these accounts stand charged with the original cost of these assets. It is essential to retain the original cost figure unchanged. This in itself justifies the use of complementary valuation reserves. Otherwise accounting requirements would be satisfied by substituting for the above entry the following: + + + + + + + + + + +
Profit and Loss.$5,000.00
To Buildings Fixtures.$3,750.00
1,250.00
+ +So far as the profit and loss account is concerned this entry has the same effect as the preceding. But it leaves the asset accounts in the Ledger in a different condition. Instead of permitting "Buildings" and "Fixtures" to remain charged with $100,000 and $30,000, respectively, and creating depreciation reserve accounts for both with credit balances of $3,750 and + +DEPRECIATION, BAD DEBTS, ETC. 75 + +$1,250, respectively, it diminishes the "Buildings" and "Fixtures" accounts by these amounts. Technically, either method is correct. But when the depreciation allowance is credited directly to the asset account to which it applies, the balances of those accounts will be reduced by cost. A thorough comprehension of the advantages of opening valuation reserve accounts will be secured as we proceed. + +**Valuation Reserves Illustrated.**—If, each month, Oliver had charged profit and loss and credited the proper valuation reserve accounts to cover the depreciation of buildings and fixtures, his balance sheet at the end of the twentieth year would have been essentially as follows: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Lawrence Oliver
Land$ 20,000Capital—Lawrence Oliver$200,000
Buildings100,000Reserve for Depreciation of Fixtures75,000
Fixtures
Inventory43,000Reserve for Depreciation of Fixtures25,000
Accounts Receivable.20,000Accounts Payable18,000
Cash115,000Acceptances Payable.10,000
$328,000$328,000
+ +This balance sheet shows assets $100,000 in excess of those shown in the balance sheet on page 73. The buildings and fixtures are not valued at their amounts shown, but $25,000 and $5,000, respectively. To show the condition even better it is proper to show the depreciation reserves deducted from their complementary asset accounts, as below: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +CONTROLLING ACCOUNTS 123 + +As occasion arises additional accounts should be opened where convenient in the General Ledger. Next enter the individual accounts receivable and the individual accounts pay-able in the Accounts Receivable Ledger and the Accounts Payable Ledger, respectively, two to a page, and in the order given in Tables I and II. In the explanation column in these ledgers write, for each account, the word "Balance," together with the date. + +Diary of Events, Allen and Goodloe, January, 1919 + +Jan. 1. Establish a Petty Cash fund of $100. Pay the Daily News Co. with check, $10.00, for current advertising. Set off account to B. A. Barton, mds., $15.20 and to G. J. Winters $61.75. Pay petty cash $0.75 for telegram (charge General Expense) and $1.20 for stationery. + +NOTE.—Enter the charge for advertising in the Cash Journal, charging "Advertising," and entering the amount in the "Sundries" column. Enter this charge in B. A. Barton's Sales Journal, putting the amount in the "Totals" column. This entry differs from an entry in the General Journal in that but one line is required for the entry proper, thus: + +
Balance Sheet, Lawrence Oliver
Land$ 20,000Capital—Lawrence Oliver$200,000
Buildings$100,000
Lease: Reserve for Depreciation.75,000Accounts Payable.18,000
Fixtures.$35,000
Lease: Reserve for Depreciation.25,0005,000 Acceptances Payable.18,556 (rounded)
Inventory.43,000
Accounts Receivable.29,556 (rounded)
Cash.115,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228,556 (rounded)$228, + +76 ACCOUNTS IN THEORY AND PRACTICE + +**Employment of Reserves.—** By charging the profit and loss account each year with the amount of the depreciation, $5,000, "paper" profits are diminished by that amount. Consequently Oliver would withdraw much less cash from the business, a sum which would greatly increase its apparent value on the balance sheet given above. This is an addition to cash. It is not necessary, however, that the amount thus reserved be kept in the form of cash. The essential step is to keep it. Ordinarily it can best be employed in the usual channels of business as a part of working or fixed capital, or both. When the time comes to make the replacement of the buildings and fixtures, this wealth will be found "on duty," either in the form of cash or of wealth which will serve as security in obtaining a loan of cash. For example, suppose Oliver had invested $10,000 and had not diminished. He still possesses his original capital and any money he may borrow will be to increase the amount invested in the business, not to take the place of funds improperly withdrawn under the guise of profits. + +**Growth of Depreciation Reserves.—** The depreciation reserve grows at a rate which presumably corresponds with the rate of decrease in the value of the corresponding asset. It is quite improbable that the growth of the depreciation reserve at the end of any accounting period will exactly equal the decrease in value of the corresponding asset. An approximation is the best that can be expected. Estimates of the lifetime of buildings may require revision from time to time. Unexpected changes, inventions, etc., may cut down the usefulness of a machine very greatly, causing it to be scrapped long before it is worn out. Continuation in use of inadequate or obsolete machinery may cause a reduction in output and low selling price early replacement almost compulsory. Various disturbing elements enter which make the depreciation problem one of the most difficult with which the accountant is confronted. + +**The Reserve as a Clearing Account.—** One additional function of the depreciation reserve requires discussion here. This is its use as a clearing account when replacements are made. We have seen that the asset accounts remain charged with the original cost price, while the depreciation is shown in the credit balance of the depreciation reserve account. It follows that if the + +1 See Salves: Principles of Depreciation, p. 30. + +DEPRECIATION, BAD DEBTS, ETC. +77 + +reserve account reflects accurately the amount of the depreciation, it will be equal to the amount charged (original cost) to the asset account, when the asset is entirely worn out or useless. Or if the asset possesses a scrap value or possibly a second hand value, then theoretically the depreciation reserve should equal the amount represented by the difference between original cost and scrap or second hand value. Thus if a merchant begins business with affairs as shown in the following balance sheet, + + + + + + + + + + + + + + + + + + + + +
Buildings$30,000Capital$30,000
Other Assets10,000
$30,000$30,000
+ +and his buildings, during a period of forty years, depreciate in value to zero, his balance sheet will then show, + + + + + + + + + + + + + + + + + + + + +
Buildings$20,000Capital$30,000
Less: Reserve for Depreciation20,000
Other Assets$30,000$30,000
+ +assuming that there have been no changes except in the valuation account which indicates the amount reserved to take the place of the decreased value of buildings, and in the asset accounts which contain this reservation. When the time arrives to make the replacement of the buildings the old building account is closed by charging it to the depreciation reserve account through the following journal entry: + + + + + + + + + + + + + + + + + + + + + + + + + + + $30,000 + + u$30,000 + + + + + + + + + + + + + + u$30,00 + + + + u$18,5 + + +
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ +78 +ACCOUNTS IN THEORY AND PRACTICE + +**Average Normal Depreciation.**—In practice it is customary to set up a single depreciation reserve to cover a number of assets having varying terms of longevity. In this case the reserve never entirely disappears from the balance sheet, but at the end of any accounting period its amount reflects, theoretically, the total accrued depreciation of existing assets. When buildings, etc., are new, the reserve grows rapidly in amount, but as replacements begin to be made and the original cost of assets replaced is charged to the reserve, the reserve tends to diminish until the plant arrives at a normal condition replacements, on an average from year to year, equal depreciation, and the reserve tends to remain stationary. Its average credit balance then indicates the extent to which depreciation unavoidably exists among the assets, owing to the fact that there are always some assets which are in a condition of greater or less depreciation. When a plant arrives at that stage when the depreciation reserve remains about the same year after year, may be said to have reached a state of average normal depreciation. + +**Efficiency vs. Depreciation.**—This does not necessarily mean that the efficiency and earning power of the assets are impaired. On the contrary they are likely to be greater than when the plant was new. Nor does it mean that the total value of the assets is any less than when the plant was new, for it is not. It simply means that the value per certain of the assets is less because of their shorter life expectancy than before, and that whatever has been lost in this way has been compensated for by reservations in some other form of assets—possibly by an increase in the cash account, or more likely by an enhancement in value of some of the fixed assets or the purchase of additional ones. + +**Bad Debts Losses an Estimate.**—The accounting procedure employed for depreciation may be used to care for losses in the form of uncollectible accounts receivable. The amount of the loss arising from this source depends upon the character of the business and the diligence employed in selecting customers and in collecting outstanding accounts. The amount of the loss from this source sustained during any particular accounting period is necessarily a matter of estimate, because at least a part of the accounts receivable originating during such period cannot be liquidated within the period. It is customary to make this estimate upon the basis of past losses, and by a journal entry to + +DEPRECIATION, BAD DEBTS, ETC. +79 + +charge the amounts thus estimated to profit and loss, at the same time crediting a reserve for bad debts thus: + +Profit and Loss ____________ To Reserve for Bad Debts ____________ + +To charge profit and loss credit reserve for bad debts for the estimated loss on uncollectible accounts for the period ending ____________ + +Accounting for Actual Losses. When an individual account receivable is found to be worthless it is charged to the reserve for bad debts, thus: + +Reserve for Bad Debts ____________ +To Accounts Receivable (name of Party) ____________ + +Below is the balance sheet of a merchant after the reserve for bad debts for his estimated losses on uncollectible accounts is set up: + +
Reserve for Depreciation$20,000. 00
To Buildings$20,000. 00
after which the balance sheet becomes:
Balance Sheet
Other Assets.$30,000Capital.$30,000
and after the replacement is made:
Balance Sheet
Buildings.$20,000Capital.
Other Assets.
Total Assets.$31,585. 56Total Liabilities.$31,585. 56Total Capital.$31,585. 56Total Reserves.$31,585. 56Total Liabilities and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56Total Capital and Reserves.$31,585. 56
+ + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet
Accounts Receivable$100,000Capital$399,500
Less: Reserve for Bad Debts500
Other Assets$ 99,500
$300,000		$399,500
+ +During the next accounting period all accounts receivable which originated during the preceding period are collected, with the exception of the following, which are found to be worthless: + +The Imperial Company $300.00 +Arthur Morris 233.60 +Harper and Jones 23.10 + +Total $456.70 + +The following journal entries are in order at the time each account, respectively, is found worthless: + +Reserve for Bad Debts $300.00 +To the Imperial Company $300.00 +Reserve for Bad Debts 233.60 +To Arthur Morris 233.60 +Reserve for Bad Debts 23.10 +To Harper and Jones 23.10 + +80 +ACCOUNTS IN THEORY AND PRACTICE + +These entries close the worthless accounts receivable and reduce the reserve for bad debts to a credit balance of $43.40. This amount measures the excess of the allowance made for bad debts over the actual loss from that source. The allowance for the year was $50.00, and the loss was $16.60. Enough should be charged to profit and loss and credited to the reserve for bad debts, each period, to equal, on an average, the loss from that source. If the reserve gradually grows larger it is an indication that an excessive allowance is being made—more than is necessary to cover losses. + +A page from a book about accounting theory and practice. + +CHAPTER XII + +DEPRECIATION, BAD DEBTS, AND VALUATION RESERVES—PRACTICE + +Problem 1.—Following is the trial balance of the Ledger of James Andrews as at December 31, 1919: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
James Andrews, Capital.$ 40,000.00
James Andrews, Withdrawals.8 200.00
Delivery Equipment.5,500.00
Store and Lot.15,000.00
Furniture and Fixtures.600.00
Purchases.50,000.00
Sales.60,000.00
Inventory, Dec. 31, 1918.10,000.00
Accounts Receivable.15,000.00
Accounts Payable.6,000.00
Cash.3,000.00
Reserve for Depreciation of Store Building....250.00
Reserve for Depreciation of Delivery Equipment500.00
Reserve for Depreciation of Furniture and
Fixtures.60.00
Wages.6,000.00
Interest.200.00
Gross Expenses.700.00
Advertising.25.00
Insurance.30.00
+ +$166,819.1 $166,819.1 + +The following additional data is given. The inventory as of Dec. 31, 1919, is $15,000; advertising includes $18 paid in advance; while $28 of the insurance is prepaid. The store building cost $11,875, and has an estimated life of forty years and an estimated residual value of $1,875. One year's depreciation has already been written off. The delivery equipment is written down at the rate of $35 per annum and the furniture and fixtures at the yearly rate of ten per cent on cost. + +e81 + +82 ACCOUNTS IN THEORY AND PRACTICE + +Submit (a) adjustment and closing journal entries, (b) a profit and loss account, and (c) a balance sheet. + +NOTE.—In making entries for depreciation, charge depreciation and credit the proper depreciation reserve. This depreciation account is a nominal account and is closed into profit and loss. When this method is pursued the entry charging depreciation and crediting the reserve is strictly an adjustment entry and may be made before taking a trial balance. Similarly the adjustments for advertising and insurance might be made before taking a trial balance. This, of course, is impossible here because the trial balance given above was taken before making the adjustments. + +The capital account of James Andrews as at Jan. 1, 1920, should be $16,840.00. + +In setting up the balance sheet show the depreciation reserves as deductions from the asset accounts to which they are supplementary, thus: + + + + + + + + + + + + + + + + + + + + + +
(a)(b)
Store and Lot
Less: Depreciation Reserve.
+ +The deductions should be made in interior column (a) and the net result shown in column (b). Also classify the assets as fixed, current, and deferred, and the liabilities as fixed (if any), current, and capital account. + +The accounting period here is one year. It is customary to close books monthly, however, and when that is done it is necessary to enter all accruals and set up all reserves on a monthly instead of a yearly basis. Even then, however, in case of cor- porations, income statements are sent directly to the government for income tax purposes, and in any case to show in proper form the results of the fiscal year's business. This consists of a profit and loss statement compiled from the monthly statements, and a balance sheet as of the close of the fiscal year. The balance sheet is the same whether the books are closed monthly or not. + +**Problem 2.—The following is the trial balance of the Ledger of Amos Baldwin as at Dec. 31, 1915:** + + + + + + + + + + + + + + + + + + +
Store and Lot$16,840.00
Less: Depreciation Reserve.
+ +DEPRECIATION, BAD DEBTS, ETC. +S3 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Amos Baldwin, Capital.$25,000.00
Interest Accrued.36.40
Accounts Receivable.$ 4,056.00
Accounts Payable.5,000.00
Reserve for Depreciation of Store Building and Land.15,500.00
Rent of Delivery Equipment.1,500.00
Purchases.10,000.00
Sales.12,500.00
Inventory, Nov. 30, 1918.15,600.40
Cash.700.00
Furniture and Fixtures.300.00
Reserve for Depreciation of Store Building.690.00
Reserve for Depreciation of Furniture and Fixtures.115.00
Expenses.1,200.00
Mortgage.5,640.00
+ +Additional data: The inventory as of Dec. 31, 1918, is $16,000.00. Write off for bad debts for December an amount equivalent to $\frac{1}{2}$ of per cent of the total of accounts receivable. The store building cost $14,000 and has an estimated residual value of $2,000. Write off depreciation for the month on the basis of an assumed useful life of 48 years. Write off depreciation on furniture and fixtures at the yearly rate of 12% on cost. The mortgage bears interest at the rate of 6% payable semi-annually September 30 and March 31. + +Submit (a) adjusted trial balance closing entries, and (b) a profit and loss account, and (c) a balance sheet. + +Note.—In this problem the accounting period is one month, and the adjustment for the interest on the mortgage must be made on this basis. In bringing into the books the charge for bad debts, by means of a journal entry, either the Bad Debts account or the Profit and Loss account may be charged when the Reserve for Bad Debts accounts is credited. It is suggested that the first method be followed, the entry being an adjustment preliminary to closing. + +The purpose of the adjustment entry charging Bad Debts and setting up a Reserve for Bad Debts is to enable us to charge Profit and Loss with the current period's due burden of expense arising from uncollectible debts. Experience proves that we may expect a loss of this kind, which will vary with different lines of business, but which in a given line and under given con + +84 +ACCOUNTS IN THEORY AND PRACTICE + +ditions remains fairly uniform from month to month. The advantages of charging Bad Debts and crediting a reserve are two: (a) the current period is charged with its due burden, where-as it would be charged at any time until we can learn what accounts are bad; (b) the bur den is evenly distributed from month to month. When individual accounts are ascertained to be bad, they are charged against the bad debts reserve. Should experi- ence prove that the credits to this reserve are greater than the charges against it of the uncollectible accounts, it would be an indication that too much is being charged periodically to Bad Debts and credited to the reserve. The amount reserved should then be lessened by a suitable amount. + +BIBLIOGRAPHY + +Part I. Fundamental Principles + +BOULE, A. M. Comprehensive Book-keeping. New York, 1905. A clearly written treatise of elementary character, giving many exercises. +COLE, W. M. Accounts: Their Construction and Interpretation. Re- vised and Enlarged Edition. Boston, 1915. Chapters one to five, inclusive, give much material of an elementary character. +DISCUSSION ON BOOK-KEEPING. New York, 1913. New York, 1913. +Chapter I contains a brief treatise on bookkeeping, but not adapted for the beginner. +ESQUERRETTA, A. Simplified Theory of Accounts. New York, 1914. Con- tains chapters on both single and double entry. +GILMAN, S. Principles of Accounting. Chicago, 1916. Employs the graphic method to assist the beginner. +HARKINS, J. H. Elementary Book-keeping. New York, 1901. +A book of general interest to students of accounts. +HATFIELD, R. H. Modern Accounting. New York, 1909. Chapters 1 and II treat the theory of double entry in considerable detail. +KENTON, H. L., and others. Textbook of Accounting for First Year Students. New York, 1917. Presents the theory and practice of double entry at length. +KLEIN, J. J. Elements of Accounting. New York, 1913. Gives a brief treatment of double entry. +LEAKE, P. D. Depreciation and Wasting Assets. London, 1917. Treats depreciation from the English point of view. +LUCK, G., and others. Principles of Accounting. Edinburgh, 1900. Treats the subject from the English point of view. +Paton, W. A., and Stevenson, R. A. Principles of Accounting. New York, 1918. Contains considerable material on the theory of double entry. + +DEPRECIATION, BAD DEBTS, ETC. +85 + +SALIERS, E. A. Principles of Depreciation. New York, 1915. A general treatise on depreciation. Contains a selected bibliography. + +SPRAGUE, C. The Philosophy of Accounts. New York, 1908. A theoretical treatise on accounting. + +VANDENBERG, P. V. Business and Education. New York, 1907. A book of general interest. + +- + +PART II +PARTNERSHIP ACCOUNTING + +CHAPTER XIII +THE PARTNERSHIP—SPECIAL CONSIDERATIONS + +Value of the Partnership Form.—Partnerships afford a variety of legal problems which influence accounting procedure. The student should make his consideration of them a preliminary to his study of partnership accounting. Although the corporation has superceded the partnership in many fields there are many kinds of enterprises in which partnerships are still used. + +If it is necessary to appeal to a large number of investors to secure necessary funds the corporation is ordinarily best suited for the purpose. However, there is a very considerable class of undertakings which depend to a great degree upon personal or professional qualifications. These take the form of partnerships or of "personal service corporations." The Income Tax Law of 1918, for purposes of taxation, places these personal service corporations on the same basis as partnerships, being defined as a corporation as one "whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor." + +**Partnership Classified.**—For certain purposes it is best to consider personal service corporations as partnerships. Thus under the Income Tax Act of 1918 the personal service corporation is taxed upon the same plan as the partnership, that is, the tax is levied upon the individual members and not upon the corporation as such. We have, therefore: + +1. Common law partnerships +2. Limited partnerships +3. Personal service corporations + +87 + +88 +ACCOUNTS IN THEORY AND PRACTICE + +Common Law Partnerships.—When reference is made to partnerships without limitations or qualification it may be assumed that common law partnerships are meant. These are governed, not by statute, but by the common law, which is simply the common law as developed in England by the courts and which now serves as the basis of our legal system. The common law may be modified by statute. There are certain fundamental principles applicable to common law partnerships, the most important being limited liability of the partners. According to this principle a partner is liable for the debts of the partnership to the full amount of his private fortune. + +Limited Partnerships.—Practically all states have passed laws making it possible for partnerships to place restrictions on the liability of some of the partners by following out a prescribed procedure. Those partners who are limited in liability to their investments are known as "special" partners while those who retain unlimited liability are known as general partners. For these the law usually requires that a certificate be deposited in a public office stating: + +1. Name of the firm. +2. Name and residence of each partner, and whether special or general. +3. Character of the business. +4. Amount invested by each partner. +5. Amount of the capital. +6. Duration of partnership. + +In Pennsylvania and a few other states the law authorizes the formation of partnerships with limited liability for all partners, provides for the transfer of partnership shares, and permits the holding of real estate and the bringing of suit in the common name. Such partnerships resemble corporations more than they do ordinary partnerships. The principal feature of such laws, as typified in the New York laws, is to provide limited liability for the special partners only, leaving the general partners in the status of common law partners, by making death or attempted transfer of the interest of a general partner a basis of dissolution, and by making the holding of real estate or suing in the partnership name impossible. Limited partnerships in Michigan and Illinois and special partnerships in California are in this class. Partnership associations in Michigan and in Virginia are corporate in nature. + +A page from an accounting textbook discussing common law partnerships and limited partnerships. + +THE PARTNERSHIP-SPECIAL CONSIDERATIONS 89 + +**Personal Service Corporations.—The Bureau of Internal Revenue defines a personal service corporation as one “the income of which is derived from a profession or business (a) which consists principally of rendering personal service, (b) the earnings of which are to be ascribed primarily to the activities of the principal owners or stockholders and (c) in which the employment of others is incidental or secondary.” Whether any given corporation is a personal service corporation or not can be determined only by examination. It is sufficient for our purpose to know that for most accounting purposes the personal service corporation is not different from other corporations. The distinction has been made chiefly for purposes of taxation. + +**General Definitions.—The English Partnership Act of 1890 defined a partnership as “the relation which subsists between persons carrying on a business with a view of profit.”** + +The New York law says that “a partnership as between the members thereof is the association, not incorporated, of two or more persons who have agreed to combine their labor, property and skill, or some of them, for the purpose of engaging in any lawful trade or business and sharing the profits and losses as well between them.” + +**Articles of Agreement.—It is customary for prospective partners to form a covenant wherein they agree upon the manner in which their enterprise shall be managed. Unforeseen discrepancies frequently arise due to the failure to put into the articles of agreement adequate provision against future contingencies. In addition to the name, address, purpose and duration of the partnership there should appear in the articles of agreement specific information as to: + +1. **Capital contributions by the Individual Partners.—Not only should the proportions and amounts of the contributions be stated but also the proportions in which it is to be distributed at dissolution. Full provision should be made here for the admission of new partners and for such adjustments of goodwill as may be necessary at that time. It should be remembered that if there is no agreement to the contrary the excess of the assets over capital, after creditors are satisfied, is divisible on the same basis as assets on the theory that such excess represents accumu- +lated profits.** +1 Regulations 45, Art. 1523. + +90 +ACCOUNTS IN THEORY AND PRACTICE + +2. Provision regarding interest to be allowed on capital in- +vested by partners. +3. Provision regarding the division of profits and losses among +partners. In the absence of provision to the contrary these are +allocated equally to the partners. +4. Treatment of withdrawals. +5. Regulation of admission of New Partners.—It is often +desirable, as a preliminary to adjust book values so that they will +agree with real values, especially when goodwill exists. +6. Provision should be made regarding the keeping of the +records, preferably by double entry, and periodical audits by +expert accountants should be provided for. +7. Rules to Govern Dissolution.—Unless there is provision to +the contrary any partner who has paid his capital after creditors are +satisfied, will be divided equally amongst the partners, on the theory that such excess represents accumulated profits. + +**Other Provisions in the Agreement.**—The provisions made in +the articles of agreement need not be limited to the above and in +any case special conditions arising from individual circum- +stances may make special clauses desirable. Dicksee suggests that +the name of the auditor be inserted in the agreement so that a substitute auditor could be secured only with the un- +animous consent of all partners, and that no change in the articles necessary to change the articles of agreement. This would +prevent changes being made by a majority of partners to the +prejudice of a minority—a not unlikely occurrence in view of the +delicate questions that may arise in partnership adjustments. +It may also be desirable to enter in the agreement provision to +the effect that the accounts be kept by double entry and that +questions involving accounting principles be submitted to the +auditor for settlement. + +The agreement ought to enter into sufficient detail regarding +the interest question to prevent possible future misunderstanding. +This involves the question of drawings. It may be desirable +to establish a prescribed limit to drawings, interest being charged +on any excess over the prescribed amount and credited on any +excess of the amount prescribed and that actually withdrawn. + +**Provision to Avoid Dissolution.**—Since the partnership is a +strictly reciprocal arrangement any occurrence which interrupts, +such arrangements must be avoided. The dissolution clause is common +occurring to the contrary in the agreement. This is a common + +THE PARTNERSHIP—SPECIAL CONSIDERATIONS 91 + +law dictum. Such events are apt to occur at times when to make an accounting by closing the books would cause inconvenience. +If profits do not fluctuate greatly provision should be made to the effect that the outgoing partner or his estate be compensated on the basis of the preceding year's profits. It will perhaps be preferable to make such payment on the instalment plan to avoid the disbursement of too great an amount at one time. + +**Cause of Dissolution.** A partnership may be dissolved (a) by arrival of its term prescribed by agreement, (b) by unanimous consent of the partners, (c) by the illegality of its purpose or the impossibility of accomplishing it, (d) by assignment of a partner's interest without the consent of the other partners, (e) by death of a partner, and (f) by anything which incapacitates a partner for his duties, as insanity, bankruptcy, drunkenness, and so on. + +**Distribution of Assets at Dissolution.** At the dissolution of a partnership the interested parties are satisfied in the following order: + +1. Creditors. +2. Loans from partners. +3. Capital of partners. +4. Residue distributed among partners in the profit and loss sharing ratio. + +CHAPTER XIV + +THEORY OF PARTNERSHIP ACCOUNTING + +Peculiarities of Partnership Accounting.—In general, partnership accounting follows the principles which we have already discussed. The chief variations from the procedure followed in case of sole proprietors arise in connection with the treatment of capital investments and the allocation of the net profits among the partners. We have considered some of the common law principles that govern partnerships and also certain of the variations that may occur in practice. We shall now proceed to study the accounting procedure peculiar to partnerships. These may be considered under the following heads: + +1. Opening entries. +2. Interest on investments. +3. Closing entries. +4. Disbursing. +5. Admission of partners. + +**Opening Entries.**—Opening entries for partnerships should express clearly the contribution made by each partner. For example, two individuals enter into a partnership with the following assets and liabilities: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
L. GordonAssets:Cash$ 1,000.00
Merchandise4,000.00
Store and Lot7,000.00
Accounts Receivable2,000.00
Furniture and Fixtures2,000.00
Notes Receivable3,000.00
Total Assets$17,500.00
R. TarrantLiabilities:Accounts Payable$ 1,500.00
Mortgage3,000.00
Total Liabilities$ 4,500.00
Assets:Cash$10,000.00
Liabilities:None
+ +92 + +THEORY OF PARTNERSHIP ACCOUNTING 93 + +The student should note that the question of valuation (i.e., determination of value or worth) has been introduced in connec-tion with such items as merchandise, store and lot, and good-will. Perhaps the records of the cost of merchandise and of store and lot are incomplete, untrustworthy, or lost. Their value in dollars and cents therefore must be fixed, also that of the goodwill, which is not the result of a purchase but of general business ability and foresight. + +It may be agreed that Tarrant's investment is to entitle him to half the profits and an interest in the total investment pro-portionate to his contribution. Or it may be agreed that his contribution entitles him to a half interest in the assets, in which case it is necessary to adjust the capital accounts of the partners so that their interests will agree. Suppose the interpretation that his interest in the total investment is to be proportionate to his contribution the opening entry is: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
L. Gordon$ 1,000.00
Cash
Merchandise4,000.00
Store and Lot7,000.00
Accounts Receivable2,000.00
Furniture & Fixtures5,000.00
Notes Receivable3,000.00
To Accounts Payable.$ 1,500.00
Mortgage.3,000.00
L. Gordon Capital.13,000.00
Investments of L. Gordon in firm of Gordon & Tarrant.
To R. Tarrant, Capital.$10,000.00
Investment of R. Tarrant in firm of Gordon & Tarrant.$10,000.00
+ +If nothing to the contrary appears in the agreement Gordon and Tarrant will share equally in the profits although their investments stand at $13 and $10. If, however, it is desired that Tarrant receive a half interest in the business it will be necessary to adjust the accounts by debiting his charge to capital and crediting Tarrant's capital account with one-half the difference between them, viz., $1,500, or (b) by bringing in good-will at $3,000 as a part of Tarrant's investment. In case of (a) the adjusting entry is: + + + + + +
L. Gordon $ 1,500.00
+ + + + + +
R. Tarrant $13,500.00
+ + + + + +
Gordon & Tarrant Capital Account $15,500.00
+ + + + + +
Tarrant's Interest in Goodwill $3,500.00
+ + + + + +
Tarrant's Interest in Store and Lot $7,500.00
+ + + + + +
Tarrant's Interest in Merchandise $4,500.00
+ + + + + +
Tarrant's Interest in Accounts Receivable $3,500.00
+ + + + + +
Tarrant's Interest in Furniture & Fixtures $8,500.00
+ + + + + +
Tarrant's Interest in Notes Receivable $3,500.00
+ + + + + +
Tarrant's Interest in Mortgage $3,500.00
+ + + + + +
Tarrant's Interest in Accounts Payable (To L. Gordon) $1,555.88
+ + + + + +
Tarrant's Interest in Investments of L. Gordon (To R. Tarrant) $13,555.88
+ + + + + +
Tarrant's Interest in Investments of R. Tarrant (To L. Gordon) $15,555.88
+ + + + + +
Tarrant's Interest in Goodwill (To L. Gordon) $3,555.88
+ + + + + +
Tarrant's Interest in Store and Lot (To R. Tarrant) $7,555.88
+ + + + + +
Tarrant's Interest in Merchandise (To R. Tarrant) $4,555.88
+ + + + + +
Tarrant's Interest in Accounts Receivable (To L. Gordon) $3,555.88
+ + + +
Tarrant's Interest in Furniture & Fixtures (To R.Tarran)
94 +ACCOUNTS IN THEORY AND PRACTICE + +L. Gordon, Capital. $1,500 +To R. Tarrant, Capital. $1,500 +To equalize the partners' capital accounts. +while in case of (b) the original entry for Tarrant, instead of the above, would be: +Cash. $10,000 +Goodwill. 3,000 +Investment of R. Tarrant in firm of Gordon & Tarrant. $13,000 + +In the same manner the capital accounts of the two partners may be established in any desired ratio to each other, either by bringing goodwill into the books, or by making adjustments between the capital accounts of the partners. There is no objection to bringing goodwill into the books, but it is better to adjust the real account, that is, if the partner whose account is increased by the amount charged to goodwill really brings into the business connections of value equal to that ascribed to goodwill. If, however, the proper ratio between the partners' capital accounts cannot be thus secured it should be done by adjustments made between the capital accounts. + +Interest on investments.—The interest question arises in two ways in connection with accounting: (a) as a means of adjusting profits and (b) as a charge or credit in connection with withdrawals by the partners. Thus when interest is employed to adjust profits it is done with a view to granting something more than the rule of equal division of profits would give to the partner whose investment is greater than the average and something less than that rule would give to the partner whose investment is below the average. For example, if A, B, and C invest $50,000, $75,000, and $85,000 respectively, and if A's capital account is $75,000, and if each partner is credited with 6% on his capital account, (i.e., this interest is to be carried to Profit and Loss) then the accounts of the partners will be credited with the following amounts for interest: + + + + + + + + + + + +
A.$ 3,000
B.4,500
C.6,900
+ +Total interest ... $13,500 + +The $13,500 will be charged to Profit and Loss with the result that each partner will bear ½ of its cost, or $4,500. We see + +THEORY OF PARTNERSHIP ACCOUNTING 95 + +that B, whose investment was just equal to the average investment of the partners, or $75,000, neither gains nor loses by the procedure, and that A secures $1,500 less and C $1,500 more than would be the case were the partners not credited with interest on their capital accounts. This net result might have been accomplished by the following adjustment: + + + + + + + + + + +
A$1,500
C$1,500
+ +This avoids carrying the interest to the Profit and Loss account and since the effect is merely an adjustment of profits as between partners it appears to be more logical than to credit each partner's account with 6% of its amount, and charge it with $\frac{1}{2}$ of the total interest, thus bringing it into the Profit and Loss account. + +When profits are distributed to partners in proportion to investments, the only object is to distinguish between interest on the amounts invested and profits beyond that, since each partner will be credited with the same amount as if interest were not considered. In this case it is necessary to carry interest to Profit and Loss. + +If the agreement provides for allowing interest on the average investment of the partners, then any withdrawals or contributions made during the year by the partners must be taken into consideration together with the time during which they are withdrawn or invested. If two partners, A and B, respectively, invest $5,000 and $10,000 on January 1st and make the following withdrawals and additional investments: + + + + + + + + + + + + + + + + + + + + + + + + + + +
Withdrawals
A March 31st.$100.00
Sept. 30th.200.00
B April 30th.$ 50.00
July 31st.75.00
Oct. 31st.90.00
+ +Additional Investments: +A June 30th. +B March 31st. + +then at the end of the year A has invested: +$5,000 for 12 mo. or $60,000 for 1 mo. +1,000 for 6 mo. or 6,000 for 1 mo. + +He has withdrawn or $60,000 for 1 mo. + +96 + +ACCOUNTS IN THEORY AND PRACTICE + +$100 for 9 mo. or $800 for 1 mo. +200 for 3 mo. or 600 for 1 mo. + +or +$1,500 for 1 mo. + +Therefore his investment is $60,000 — $1,500, or $64,500 for 1 month, or an average investment of (64,500 + 12) = $5,375. Similarly at the end of the year B has invested: + +$10,000 for 12 mo. or $120,000 for 1 mo. +2,000 for 9 mo. or 18,000 for 1 mo. + +He has withdrawn: +$50 for 8 mo. or $400 for 1 mo. +75 for 5 mo. or 375 for 1 mo. +90 for 2 mo. or 180 for 1 mo. + +or +$855 for 1 mo. + +and his investment is $138,000 — $955, or $137,045 for 1 month, or an average investment of (137,045 + 12) = $11,420.42. Interest will then be calculated on A's average investment of $5,375 and B's average investment of $11,420.42. + +Closing Entries—The general closing entries for a partnership are essentially different from those of a single proprietor. Before they can be made, however, all requirements regarding interest on investments must be met because it may be necessary, as shown above, to carry this interest through the Profit and Loss account. Whether or not this is done the balance of Profit and Loss must be transferred to the capital accounts according to an accepted ratio; or, in the absence of an agreement to the contrary, it must be shared equally. The net profits and withdrawals are not carried to the Profit and Loss account because they do not represent disbursements made for the business but for the benefit of the partners personally. They must therefore be carried to the partners' capital accounts. The usual plan is to bring the net profits into the withdrawal accounts and then carry the balance to capital. Thus if A, B, and C are partners sharing equally in profits, if their total net profits in the Profit and Loss account is $15,000, and if A, B, and C are charged $100, $200 and $300 respectively in their withdrawal account, then the entries to carry profits to the withdrawal accounts and thence to the capital accounts are: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
$138,045Profit and LossBalance after interest
$955WithdrawalsBalance after interest
$5,375Capital Accounts - ABalance after interest
$5,375Capital Accounts - BBalance after interest
$5,375Capital Accounts - CBalance after interest
$137,045Profit and LossTotal profit and loss account balance
$955WithdrawalsTotal profit and loss account balance
$5,375Capital Accounts - ATotal profit and loss account balance
$5,375Capital Accounts - BTotal profit and loss account balance
$5,375Capital Accounts - CTotal profit and loss account balance
$138,045 - $955 = $128,495Profit and Loss Balance after Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & Capital Accounts - A & B & C Total Balance After Interest & Withdrawals & +A bar graph showing the distribution of profits among partners.                                                                        
+ + +
$138,045 - $955 = $128,495Profit and Loss Balance after Interest and Withdrawals and Capital Accounts - A and B and C Total Balance After Interest and Withdrawals and Capital Accounts - A and B and C Total Balance After Interest and Withdrawals and Capital Accounts - A and B and C Total Balance After Interest and Withdrawals and Capital Accounts - A and B and C Total Balance After Interest and Withdrawals and Capital Accounts - A and B and C Total Balance After Interest and Withdrawals and Capital Accounts - A and B and C Total Balance After Interest and Withdrawals and Capital Accounts - A and B and C Total Balance After Interest and Withdrawals and Capital Accounts - A and B and C Total Balance After Interest and Withdrawals and Capital Accounts - A and B and C Total Balance After Interest and Withdrawals +A pie chart showing the distribution of profits among partners. 
+ + +
$138,045 - $955 = $128,495Profit and Loss Balance after Interest and Withdrawals and Capital Accounts - A and B and C Total Balance After Interest and Withdrawals and Capital Accounts - A and B and C Total Balance After Interest and Withdrawals +A line graph showing the distribution of profits among partners. 
+ + +
$138,045 - $955 = $128,495Profit and Loss Balance after Interest +A line graph showing the distribution of profits among partners. 
+ + +
$138,045 - $955 = $128,495Profit +A line graph showing the distribution of profits among partners. 
+ + +
$138,045 - $955 = $128,495Losses +A line graph showing the distribution of losses among partners. 
+ + +
$138,045 - $955 = $128,495Net Income +A line graph showing the distribution of net income among partners. 
+ + +
$138,045 - $955 = $128,495Net Income +A line graph showing the distribution of net income among partners. 
+ + +
$138,045 - $955 = $128,495Net Income +A line graph showing the distribution of net income among partners. 
+ + +
$138,045 - $955 = $128,495Net Income +A line graph showing the distribution of net income among partners. 
+ + +
$138,045 - $955 = $128,495
Net Income +A line graph showing the distribution of net income among partners. \nNet Income +A line graph showing the distribution of net income among partners. \nNet Income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing the distribution of net income among partners.&net_income +A line graph showing + +THEORY OF PARTNERSHIP ACCOUNTING 97 + +Profit and Loss... $15,000 + +To A. Withdrawals $3,000 +B. Withdrawals 5,000 +C. Withdrawals 5,000 + +To carry profits to partners' withdrawal accounts. +A. Withdrawals $ 4,900 +To A. Capital... $4,000 +B. Withdrawals $ 4,800 +To B. Capital... $4,800 +C. Withdrawals $ 4,700 +To C. Capital... $4,700 + +To carry net profits retained in the business to the partners' capital accounts. + +The partner's withdrawal accounts now appear thus: + +
Description:
Description:
Description:
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
A. WithdrawalsB. WithdrawalsC. Withdrawals
To Cash.$ 100.00By Profit and Loss.$5,000.00
To A, Capital.4,900.00
5,000.00$5,000.00
To Cash.$ 200.00By Profit and Loss.$5,000.00
To B, Capital.4,800.00$5,000.00
5,000.00$5,000.00
To Cash.$ 300.00By Profit and Loss.$5,000.00
To C, Capital.1,700.00$5,000.00
8,556.96$5,226.96
Dissolution—In the preceding chapter we have seen that the same principle that governs distribution of profits does not govern the distribution of assets in case of dissolution. In theory capital invested is treated as a fixed sum of money invested at the ratio in which it was invested. Any increase in the value of the invest-ment over the contributions by the partners represents accumulated profits and is governed by the rule for distribution of profits and losses. Likewise a deficit represents accumulated losses and is governed by the same rule. Consequently the first step in the distribution of funds is to divide the accumulated + +98 ACCOUNTS IN THEORY AND PRACTICE + +profits or the deficit among the partners according to the rule governing division of losses and gains, after which remaining values are distributed to partners in proportion to their capital accounts. In case of a deficit the ratio of the partners' capital accounts will be changed, except when profits or losses are distributed in the ratio of the investments, because they will be reduced by amounts whose ratio to one another is the basis of profit distribution. + +Assume that the balance sheet of A and B is as follows: + + + + + + + + + + + + + + + + + + + + +
Assets.$50,000Capital, A.$50,000
Deficit.20,000Capital, B.20,000
$70,000$70,000
+ +If profits are distributed equally the deficit will be charged $\frac{1}{2}$ to A and $\frac{1}{2}$ to B and the balance sheet becomes: + + + + + + + + + + + + + + + + + + + + +
Assets.$50,000Capital, A.$40,000
Capital, B.10,000
$50,000$50,000
+ +and the distribution of the assets will be made to A and B in the ratio of 4 to 1, not of 5 to 2, the ratio of the original investments. + +It is quite possible that the distribution of the deficit to the partners' capital accounts on the profit and loss sharing ratio will change the capital account of a partner to a deficit account, in which case the other partners have a claim against him for the amount of the deficit. Thus when the following balance sheet, showing a deficit of $60,000: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Assets.$40,000A, Capital.$5,000
Deficit.60,000B, Capital.10,000
C, Capital.20,000
D, Capital.20,000
$100,000$100,000
+ +THEORY OF PARTNERSHIP ACCOUNTING 99 + +is altered to show the distribution of the deficit equally among the partners it becomes: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet of A, B, C, and D, as at—
Assets$40,000A, Capital$35,000
B, Capital5,000C, Capital5,000
D, Capital5,000
$45,000$45,000
+ +If B makes good the claim against him for $5,000 the other partners will receive the assets in distribution as shown by their capital accounts. If he fails, however, this loss must in turn be distributed among A, C and D equally, each bearing $1,666.67 of the loss, after which the distribution will be made on the basis of the capital account balances then remaining. + +Assuming that Partner A has not yet admitted his contribution on condition to share equally with the other partners in profits no matter what the amount of his investment, unless there is an agreement to the contrary. If it is specifically agreed that he is to share equally with the other partners in proprietorship then it may be necessary to make adjustments to establish the desired ratio among the capital accounts. Thus if the following is the balance sheet of A and B: + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet of A and B, as at—
Cash$ 1,000A, Capital$ 5,500
Other assets10,000B, Capital5,500
$11,000$11,000
+ +and they agree to admit C to the partnership, giving him a ½ interest on condition that he invest $7,000, then it is necessary either, +(a) to bring goodwill into the books, according to some agreement between A and B, +or +(b) to make an adjustment among the capital accounts without introducing goodwill. + +If the plan suggested in (a) above is followed the following Journal entry is necessary to bring goodwill into the books: + +100 +ACCOUNTS IN THEORY AND PRACTICE + +Goodwill.................................................. $3,000 +To A, Capital............................................. $1,500 +B, Capital.................................................. 1,500 +To bring goodwill into the books, etc. + +The capital accounts of A and B are both increased to $7,000 and when C contributes his share the capital accounts of each of the three partners will stand at that amount. +If the plan suggested in (b) above is followed the following entry made after C invests his $7,000 will equalize the capital accounts of A, B and C: +C, Capital.................................................. $1,000 +To A, Capital............................................. $500 +B, Capital.................................................. 500 +As per explanation, etc. + +A different problem arises when a party buys an interest in a partnership without contributing anything to the partnership. Here entrance to the partnership is secured by a transfer of interest to the new partner, not by the investment of new money. Thus if the following is the balance sheet of A and B: + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet of A and B, as at--
Assets.$100,000A, Capital$60,000
B, Capital40,000
$100,000$100,000
+ +and A sells one-half of his interest to C, the following entry is necessary to make the adjustment, +A, Capital.................................................. $30,000 +To C, Capital............................................... $30,000 +and the balance sheet becomes: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet of A and B, as at--
Assets.$100,000A, Capital$30,000
B, Capital40,000
C, Capital30,000
$100,000$100,000
+ +Note that the investment has not been increased and that the only change has been to transfer one-half of A's capital account to C's capital account. The only transfer of funds has been from C to A, personally. + +CHAPTER XV + +PARTNERSHIP ACCOUNTING-PRACTICE + +Diary of Events—November—A. B. Gray, owing to increasing business, and the need for more capital, has concluded to take for a partner Mr. J. A. Smith. On condition of payment, by Mr. Smith, into the business of $4,000.00 in cash, J. A. Smith is to become a partner, under the firm name of Gray and Smith. + +According to the partnership agreement, each partner is to be credited with 5% interest on his investment before distribution of profits. Profits and losses are to be shared equally. Use same books as for the October diary of events. + +Nov. 1. Make entry in Cash journal for Smith's investment (J. A. Smith Capital, p. 1, below). Of course, no formal entry may be made in the General Journal for Smith. This, both debit and credit, should be checked (✓) in the folio column to show that it is posted from the Cash journal. Such a formal journal entry is especially desirable when it is desired to have a record of all transactions affecting the partnership organization. As all petty cash payments are to be made on the Imprest System (see note below), a check is written out for $30 and charged to Petty Cash account (p. 10). It is calculated that this will be more than sufficient for all petty cash disbursements during the month. All cash disbursements are limited to $30 or less. Any payment over $5.00 will be made by check. On a sheet of blank paper run up a page of the Petty Cash book, with the following columns: A/cumulative column; Transactions; Stationery & Printing; Telephone; Telegraph; A. B. Gray; Advertising; Smith; Withdrawals; General Expense; Freight; Totals. Cash sales $97.00. +Cash sales will be given hereafter for each week at the close to save labor. +Additional furniture for a store is ordered from Anderson & Co. + +Note: For description of the Imprest System of cash payment see Chapter XVII. + +Nov. 3. Some condemned improvements are carried out. The house and wagons are sold at their best value. A new mobile delivery wagon is purchased for $1,500, cash. An adjoining building is purchased for $2,000 for a storage house; $1,500 is paid in cash, and a note given for the balance payable in 30 days with interest at 6%. A contractor is secured to make a new roof for the storehouse at $1,500, one-half to be paid on Nov. 5, and the balance on completion of the work. + +101 + +102 +ACCOUNTS IN THEORY AND PRACTICE + +Note.—Make entries in Cash Journal for purchases and sales of delivery equipment. Charge "Storage House No. 2" for the new one purchased. This requires two entries, one in the Cash Journal and one in the General Journal. The information regarding the contract requires no entry. + +Nov. 4. Purchase note, from Cloverdale Wholesale Co., 2/10, n/30, $875.00. Telegrams, $420. Stationery and Printing $3.10. Sell on account to T. M. Phillips, $16.00; to D. Hathaway, $5.00. M. Arnold pays bill in full. + +Nov. 5. Pay telephone bill for mo., $3.00. Rent second floor of store to the X. Y. Z. Club, at monthly rental of $3.00. Accept $25 cash for rent in advance (see Nov. 1). Sell on account to R. B. Ward, $78.72; to T. Bradford (new) $11.00. + +Nov. 6. General Expense $335; telegram, $1.00. Sell on account to T. M. Phillips, $115. + +Nov. 7. A note is received from bank that bill of lading with sight draft for $175.00 attached has been received from Anderson & Co. Draft is paid and bill of lading secured. Freight on shipment, $4.00, paid in cash. + +Note.—Charge Furniture and Fixtures and credit cash when sight draft is paid. + +Nov. 8. Cash sales for week, $622.14. L. Floyd pays $10.00 on account. + +Pay note of $200 due at bank. + +Nov. 10. T. Bradford returns defective goods purchased Nov. 5 and receives cash payment of $55. + +Nov. 11. Purchase of the Townsend Supply Company, 25/3 days, net 60 days, less $425.00. + +Nov. 12. Obtain a defective chimney the store takes fire and damage is done to the extent of $540, as determined by a board of appraisers. This amount is paid over by the insurance company, in which A.B. Gray had insured his store. Make proper entries in books. Arrangements are at once made with the insurance company for payment and for completion of the work. + +Nov. 13. Donate $80 to Salvation Army and give $100 to Society for Preventing Cruelty to Animals, General Fund; Give $25 to Society for Advertising in the papers; Sell on account to S. Thomas, $114; to T.M Phillips $75. + +Nov. 14. Pay Cloverdale Wholesale Company bill of Nov. 4, less discount. + +Nov. 15. Pay contractor $250 in part payment for improvements on store, as per agreement. +Cash sales for week, $6313. +Write out check for proper amount to replenish petty cash, charging proper accounts. +Pay assistant to Mr., H.R., $25; pay assistant to Mr., B.Ward, $2732. +T.M.Philips and S.Thomas pay their accounts in full. + +Note.—Charge Store and Lot for payment to contractor. + +Nov. 17. Sell on account to R.Ritter (new) $1750; Return defective + +**PARTNERSHIP ACCOUNTING PRACTICE** + +103 + +goods to Cloverdale Wholesale Co., receiving credit for $23.00; and to Town- +send Supply Co., credit $13.40. + +**Note.**—For mdse. returned debit Sales and credit Cloverdale Wholesale Co. + +Nov. 18. Purchase mdse. from Armour and Co., 2/10, n/30, $200.00. +From Cresca Company $48.70, net 30 days. +From Park and Tillard, $77.00. +2/10, n/30. Open note for $56.70. +Make entry for general expenses of the Ledger. +General expenses $4.00, stationary printing $2.50, Diagrams, $2.50. +A. B. Gray withdraws $3.00 from petty cash for personal use. + +Nov. 20. Sell on account to R. Ritter $3.00; to B. Ward, $7.00; to O. +Freiberg, $8.50; to J. A. Smith, $15.50; to C. H. Johnson, $16.50; +to W. H. Johnson, $18.50; to J. L. Johnson, $21.50; to J. M. +Henderson, $23.50; to J. E. Johnson, $24.50; to J. A. Smith, +n/30). They accept our note payable in 19 days for purchase of Nov. +less discount. +Make note for $40 less 2%. Make proper Journal entry +for note and for discount. As Arbogast and Bastian desist payment we offer to accept their note at 6% interest for 3 months after date of +the note and we pay them its face less discount. Reckon interest for +19/365 of a year, at 6%. Make proper entries: J. A. Smith withdraws +$25 for personal use. Cash sales for week, $893.00. + +**Note.**—For purchase from Arbogast and Bastian make entry in General Journal, charging Purchases and crediting Arbogast and Bastian. +Then make entry for note thus: + + + + + + + + + + + + + + + + + + + + + + +
Arbogast and Bastian$40.00
To Cash Payable$29.20
Discount on Purchases.$8
+ +Next make entry for discount on their note. The discount is +$0.12 In the Cash Journal charge Notes Payable and credit +Cash $39.08. In the General Journal charge Notes Payable +and credit Interest $0.05. + +Nov. 23. B. Ward pays account in full. +Nov. 24. General expense, $3.00; telegrams, $1.00. +Nov. 25, Sell on acct to D. Hathaway, $5.00; to M Arnold, $20.06; +to L Boyd, $26. +Loyd gives note for $48 for one mo., Int.at 6%, for purchase +of Nov. 25. +Nov. 28, Armour & Co., accept out note payable in 30 days, Int at 6%; +for purchase of Nov 18, less discount. +Nov. 29, Sell on account to T.M Phillips mde., $30.06. +Mr Phillips gives note for his account in full due in 20 days., Int.at 6% (20/365 of one year). +Nov. 30 Pay assistants as on preceding pay-day., Cash sales for week, +$702.63 Telegrams, $8.06 Check draw to replenish petty cash fund. + +(a) Take a trial balance. +(b) Make proper Journal entries, among them being those for charging interest and crediting partners' accounts, at 5%. + +A page from a book or document with text about partnership accounting practice. + +104 ACCOUNTS IN THEORY AND PRACTICE + +(c) Set up profit and loss account. +(d) Balance sheet. +Inventory, Nov. 30. $1,200 + +Carry profits to the withdrawal accounts, then close latter into the capital accounts of the partners. + +The capital accounts as of Dec. 1 should stand with credit balances as follows: + + + + + + + + + + +
A. B. Gray$5,251.31
J. A. Smith4,336.99
+ +BIBLIOGRAPHY + +Part II. Partnership Accounting + +CHILD, P. Partnership Accounts. London, 1904. + +COLE, W. M. Accounts: Their Construction and Interpretation. Re- +vised and Enlarged Edition. Boston, 1915. Chapter XXII. + +EQUEREAU, F.J. Applied Theory of Accounts. New York, 1914. Chapter XXXI. + +GILMAN, S. Principles of Accounting. Chicago, 1916. Chapter IX. + +GREENDLINGER, L. Accountancy Problems. New York, 1910. Vol. +I, pp. 7-8. Both volumes I and II contain much miscellaneous +matter on partnerships, p. 4, page 2 gives a brief bibliography on +partnership. + +HAYFIELD, H.R. Modern Accounting (1909). Chapter XVI. + +KROGER, C.H., Accountancy Theory and Practice: Vol. I. New York, +1917. Chapters XL-XLIIV. + +KLEIN, J.J. Elements of Accounting. New York, 1913. Chapter V. + +PATON, W.A. and STEVENSON, R.A. Principles of Accounting. New +York, 1925. Chapter XVIII. + +REGULATIONS 45, Bureau of Internal Revenue, Washington, D.C. Con- +tains regulations promulgated by the Treasury Department under the +Revenue Act of 1918. + +PART III + +EXPANSION OF ACCOUNTING RECORDS + +CHAPTER XVI + +SUBORDINATE LEDGERS AND CONTROLLING ACCOUNTS + +Records must be Adaptable.—Accounting records must be correct in principle; they must also be adapted to actual conditions. This latter consideration necessitates the introduction of such additions and additional records as may make them at all times more satisfactory. As a concern's market widens its customers and creditors become more numerous, and the sources of profit as well as of expenses and losses increase correspondingly. Under such conditions the very simple arrangement which consists of the General and Cash Journals and the Ledger becomes inadequate. The General Journal is crowded with a multiplicity of entries, of which many, probably the great majority, record purchases and sales on credit. + +Controlling Accounts and Columnar Journals.—As far as cash is concerned the Cash Journal remains an adequate record; nevertheless even here improvements for the handling of certain classes of receipts and disbursements become desirable. The growing number of accounts receivable and payable encumber the Ledger, making errors liable to occur and equipment difficult to locate after their payment. The work of taking up trial balance is greatly increased. With only two Journals and one Ledger a proper subdivision of work among clerks grows constantly more difficult. General inadequacy of the system results. + +As a remedy for such a situation, the ingenuity of accountants has succeeded in obtaining not merely a further subdivision of the Journal, but also a subdivision of the Ledger through the application of the principle of controlling accounts and columnar journals. Briefly, controlling accounts are accounts kept in + +185 + +106 +ACCOUNTS IN THEORY AND PRACTICE + +The general Ledger ("general" being the word used to distinguish the main Ledger from the "subordinate" Ledgers) to which are posted, from the Journals, the totals of the debits and credits which are posted in detail to the subordinate Ledgers which these controlling accounts "control." The subordinate Ledger is frequently known by the same name as its controlling account. +Thus if all accounts receivable are kept in a subordinate Ledger, that Ledger may be called the Accounts Receivable Ledger and its controlling account in the General Ledger the Accounts Receivable Controlling Account. Similarly if the accounts payable are kept in a subordinate Ledger, that Ledger may be called the Accounts Payable Ledger and its controlling account the Accounts Payable Controlling Account. + +Controlling accounts and subordinate Ledgers require a certain amount of specialization, in the forms of the Journals, beyond that which we have already described. First, it is desirable to take out of the General Journal those entries which affect accounts in the subordinate Ledgers, as far as possible, or else provide special columns in this Journal for their reception. In the Cash Journal also, special columns must be provided for the reception of these entries. By providing either (a) special Journals, or (b) special columns in the General and Cash Journals, or both, for the reception of those items which are to be posted in detail to subordinate Ledgers, it is possible to post the totals of the items entered in the special Journals and in the special columns in the General and Cash Journals to the controlling accounts thus fulfilling the requirement mentioned of carrying out the construction of records with totals of debits and credits which are posted in detail to the subordinate Ledgers. + +**Controlling Accounts Provide Elasticity.**—The principle of controlling accounts permits of the greatest freedom and elasticity in the construction of accounting records. The extent of its application is limited only by the nature and magnitude of the business to which it is applied. There may be as many special Journals, and as many special columns in the General and Cash Journals, and as many subordinate Ledgers, as circumstances require. + +**Specialized Journals Illustrated.**—To clarify this matter, let us assume that a merchant, Marion Smith, has in operation a system of accounts consisting of the General and Cash Journals and a Ledger. With the growth of his business he experiences + +**LEDGERS AND CONTROLLING ACCOUNTS** 107 + +certain difficulties with his accounts. His General Journal is crowded with an excessive number of entries owing to his numer- +ous purchases and sales. For various reasons it would be better if purchases and sales could be segregated in special Purchases and Sales Journals, but this would entail a large volume of detail from the General Journal, but it would also make the subdivision of labor among the office force, hitherto impossible. +When purchases and sales are entered in the General Journal all entries must either be made therein by one person, or the General Journal must be shifted inconveniently from one person to another. The subdivision of the General Journal into three Journals, one becoming the Sales Journal, one the Purchases Journal, and one remaining the General Journal, obviates this difficulty. The following is a sample page on the Sales Journal, one on the Purchases Journal, and so on. + +Below are shown forms for Sales and Purchases Journals: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
DateName of CustomerL.F.Amount
Jan.3 A. L. Grant50 00
3 O. O. McDonald25 00
12 O. O. Stein25 00
Accounts Receivable, Dr.147 00
Sales, Cr.
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
DateName of CreditorL.F.Amount
Jan.1 Atlas Company:200 00
2 American Co.160 00
11 Oregon & Son:150 00
16 Atlas Co.125 00
17 Newton Company:98 00
Accounts Payable, Cr.673 00
Purchases, Dr.
+ +In these specialized Journals it is necessary to use but one line for a double entry. The customer is charged in the Sales + +108 +ACCOUNTS IN THEORY AND PRACTICE + +Journal. The party from whom a purchase is made is credited in the Purchases Journal. When a sale is made the credit to Sales need not be shown separately in the Sales Journal, since the total sales for the month can be obtained by adding the items entered in the amount column. This total may then be posted to the credit of the sales account. Likewise in the Purchases Journal it is unnecessary to write the word Purchases each time an entry is made, since the total of the columns containing the amounts of the purchases is posted to the purchases account in the General Ledger at the month's end. + +Specialized Ledgers.—If, because of the number of customers and creditors, it is necessary to provide special Journals for them, it will also be well to supply subordinate ledgers for the purpose of keeping the accounts with these customers and creditors. These are the Sales Ledger and the Purchases Ledger, respectively. In the Sales Ledger are kept only the accounts with customers (i.e., the accounts receivable), while in the Purchases Ledger are kept only the accounts with creditors, i.e., the accounts payable. + +In place of the individual accounts receivable and payable in the General Ledger there appear the accounts receivable and payable controlling accounts, which are charged at the end of each month with the total amount of the detailed charges made to the corresponding accounts in the subordinate ledgers and credited with the total amount of detailed credits made to the corresponding accounts in the subordinate ledgers. In this way the controlling accounts are charged and credited with their own amounts, in toto, as the subordinate ledgers are charged and credited with, in detail. + +Special Columns in Journals Illustrated.—To complete the system it is necessary to introduce special columns in the General and Cash Journals for the receipt of items representing charges or credits to Accounts Receivable and Accounts Payable, since cash receipts are entered on the left hand page of the Cash Journal, a column should be provided there for Accounts Receivable, and since accounts paid are entered on the right hand page of the Cash Journal, a column should be provided there for Accounts Payable. Sometimes open accounts are settled by note, draft, or trade acceptance. When this occurs entry must be made in the General Journal, and a debit column should be provided therein for Accounts Payable and a credit column for Accounts Receivable. These will also be useful in making adjustments for + +**LEIDGERS AND CONTROLLING ACCOUNTS** 109 + +returned purchases and returned sales when no special journals are provided for recording them. When these special columns are provided, the individual items can be posted to the proper accounts in the subordinate ledgers, while the totals of the columns can be carried each month to the proper controlling accounts. Forms of Cash and General Journals with special accounts receivable and payable columns are shown below: + + + + + + + + + + + + + + + + + + + + + + +
DateExplanationF Accounts Rec.General
Jan. 18A. L. Grant
L. O. McDonald		50.00
25.00
Accounts Receivable, Cr.75.00
Cash, Dr.
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
DateExplanationF Accounts Pay.General
Jan. 9Atlas Company:200.00
19Oregon & Sons:150.00
22Newton & Company:98.00
Accounts Payable, Dr.448.00
Cash, Cr.
+ + + + + + + + + + + + + + + + + +
Due Note Payable:
Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:

Note due in 1 mo., int. at %:
Atlas Company:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payable:
To Note Payble: Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Month, Int At %. Due In One Mo + +110 ACCOUNTS IN THEORY AND PRACTICE + +A variation in the form of the General Journal is shown below: + +
ExplanationF A/cd.Dr.Cr.A/cds. Rec.Cr.General
Jan. 10
Faller Supply Co.
+ + + + + + + + + + + + + + + + + +
General Journal, Marion Smith
Accts. Pay.General Dr.FExplanationAccts. Recev.
Cr.
+ +**Diary of Events.** The specimen entries shown are the following: + +Jan. 1. Smith buys of Atlas Company, mde., $200, on account. +Jan. 2. Smith buys of Fuller Supply Co., mde., $100, on account. +Jan. 3. Smith sells to A. L. Grant, mde., $50.00, on account, and to L. O. McPherson, mde., $100, on account. +Jan. 9. Smith pays Atlas Company, bill Jan. 1, $200.00. +Jan. 10. Smith gives note, due in one mo., interest at 6%, to Fuller Supply Co., in payment of bill of Jan. 2, $100. +Jan. 15. Smith pays Fuller Supply Co., bill Jan. 2, $150, on account. +Jan. 12. Sells to O. O. Stout, mde., on account, $72.00. +Jan. 16. Buys mde., from Atlas Co., $125, on account. +Jan. 17. Buys mde. of the Newton Co., $85, on account. +Jan. 18. Smith pays note account, $250, L. O. McPherson pays account, $25.00. +Jan. 19. Pays Oregon & Son, bill Jan. 11, $150, cash. +Jan. 20. O. O. Stout gives note due in one mo., in settlement of account, interest at 6%. +Jan. 21. Pays Atlas Co. bill of Jan. 16, with note due in one mo., at 6%. +Jan. 22. Pays Newton & Co., bill of Jan. 17, Cash, $98. + +**Postings Explained.—The postings of the totals of the details in these special columns are carried to the subordinate ledgers. + +Thus from the Sales Journal the individual accounts receivable are debited in the subordinate Accounts Receivable Ledger, while the total of sales is charged to the Accounts Receivable controlling account and credited to the Accounts Receivable in the General Ledger. + +From the Purchases Journal the individual accounts payable are credited in the subordinate Accounts Payable Ledger, while the total of purchases is charged to Purchases account and credited to the Accounts Payable controlling account in the General Ledger. + +From the left side of the Cash Journal the individual accounts receivable are credited in the subordinate Accounts Receivable Ledger, while the total amount of the accounts receivable column is posted to the credit side of the accounts receivable controlling account in the General... + +**LEDGERS AND CONTROLLING ACCOUNTS** + +Ledger. From the right side of the Cash Journal the individual accounts payable are debited in the subordinate Accounts Payable Ledger, while the total amount of the accounts payable column is posted to the debit side of the accounts payable controlling account in the General Ledger. From the accounts payable column in the General Journal the individual accounts payable in the subordinate Accounts Payable Ledger are debited, while the total of the column is posted to the debit side of the accounts payable controlling account in the General Ledger. From the accounts receivable column in the General Journal the individual accounts receivable in the subordinate Accounts Receivable Ledger are credited, while the total of the column is posted to the credit side of the accounts receivable controlling account in the General Ledger. As a result of these postings the two controlling accounts appear thus: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Accounts Receivable
Jan. 31 To sales147.00Jan. 31 By Cash75.00
31 By Notes Receiv- able72.00
Jan. 31 To Cash448.00Jan. 31 By Purchases673.00
31 To Notes Payable225.00
+ +As it happens, all accounts, both receivable and payable, are settled, so that no balance occurs either in controlling account. Likewise, if the subordinate ledgers were shown, all individual accounts therein would appear balanced. Ordinarily some accounts will have a zero and some accounts receivable will remain unpaid, in which case the balance of their controlling account should equal the total of balances of the subordinate ledger which it controls. Thus if the Accounts Receivable account in the General Ledger shows a balance of $227.10, then the total of the debit balances in the subordinate Accounts Receivable Ledger should equal $227.10, and so on. + +**Location of Errors Facilitated—The specialization possible under this system of controlling accounts and subordinate ledgers is limited only by the requirements of the business. Note that the number of accounts in the General Ledger is greatly diminished by the removal of the individual accounts receivable and payable. This facilitates taking the trial balance and locating errors. If, when all postings have been made, a sub- + +112 +ACCOUNTS IN THEORY AND PRACTICE + +ordinate ledger is not in agreement with its controlling account, the error is thus localized and search for it can be made within a limited field. + +Notes Receivable and Payable Journals.—When the number of notes receivable and payable become large enough to warrant, special journals should be introduced to receive them. These journals should be kept separately under Notes Receivable Journal and Notes Payable Journal. It is not customary, however, to post these to subordinate ledgers similarly named, as is done with accounts receivable and accounts payable. This is because notes receivable and payable are usually given in settlement of personal accounts receivable and payable and consequently are posted to the subordinates ledgers which contain these personal accounts. The entries in the special journals record the dates of the notes. Since notes receivable are received in satisfaction of accounts receivable, postings from the Notes Receivable Journal will be made in detail to the Accounts Receivable Ledger, while the total of the Notes Receivable entered for the month is posted to the credit of the accounts receivable controlling account and to the debit of the notes receivable account in the General Ledger. Since notes payable are given in payment of accounts payable, postings from the Notes Payable Journal will be made in detail to the Accounts Payable controlling account and to the total of the notes payable entered for the month is posted to the debit of the accounts payable controlling account and to the credit of the notes payable account in the General Ledger. + +Returned Sales and Purchases.—When the returned sales and purchases are not numerous they may be recorded in the General Journal, either by providing special columns for their reception, or by entering them in the general or sundries column and posting them individually "returned sales" and "returned purchases" accounts to the General Ledger. If, however, either or both of these classes of transactions become numerous, it is then necessary to provide special journals for them. These are known respectively, as the Returned Sales Journal and the Returned Purchases Journal. They differ in no way from the ordinary form of journal. In the Returned Sales Journal the name of the party credited is entered in the explanation column, and the amount of his credit is entered at the crest of his account in the Accounts Receivable Ledger. At the end of the month, the total of the returned sales is posted to the debit of the "returned" + + + + + + + + + + +
Notes Receivable and Payable Journals.When the number of notes receivable and payable become large enough to warrant, special journals should be introduced to receive them. These journals should be kept separately under Notes Receivable Journal and Notes Payable Journal. It is not customary, however, to post these to subordinate ledgers similarly named, as is done with accounts receivable and accounts payable. This is because notes receivable and payable are usually given in settlement of personal accounts receivable and payable and consequently are posted to the subordinates ledgers which contain these personal accounts. The entries in the special journals record the dates of the notes. Since notes receivable are received in satisfaction of accounts receivable, postings from the Notes Receivable Journal will be made in detail to the Accounts Receivable Ledger, while the total of the Notes Receivable entered for the month is posted to the credit of the accounts receivable controlling account and to the debit of the notes receivable account in the General Ledger. Since notes payable are given in payment of accounts payable, postings from the Notes Payable Journal will be made in detail to the Accounts Payable controlling account and to the total of the notes payable entered for the month is posted to the debit of the accounts payable controlling account and to the credit of the notes payable account in the General Ledger.
Returned Sales and Purchases.When the returned sales and purchases are not numerous they may be recorded in the General Journal, either by providing special columns for their reception, or by entering them in the general or sundries column and posting them individually "returned sales" and "returned purchases" accounts to the General Ledger. If, however, either or both of these classes of transactions become numerous, it is then necessary to provide special journals for them. These are known respectively, as the Returned Sales Journal and the Returned Purchases Journal. They differ in no way from the ordinary form of journal. In the Returned Sales Journal the name of the party credited is entered in the explanation column, and the amount of his credit is entered at the crest of his account in the Accounts Receivable Ledger. At the end of the month, the total of the returned sales is posted to the debit of the "returned"
+ +LEIDERS AND CONTROLLING ACCOUNTS 113 + +sales" account and to the credit of the "accounts receivable" controlling account in the General Ledger. + +In the Returned Purchases Journal the name of the party charged is likewise entered in the explanation column and the amount of the charge is entered in the debit account in the Purchases Ledger. At the month's end the total of returned purchases is posted to two accounts in the General Ledger—to the debit of the Accounts Payable controlling account and to the credit of the Returned Purchases account. + +Note.—At this point work should be started or the practical exercises given in Chapter XVIII and pursued together with the study of Chapter XVII. + +CHAPTER XVII + +ACCOUNTING FOR PETTY CASH PAYMENTS + +The Bank Account.—A problem which arises in the daily routine of business consists in efficiently paying out small sums of cash. It is customary for nearly every proprietor, firm, and company to keep an account at one or more banks. Banks furnish many conveniences. It is through them that the plan of making payment by means of checks becomes possible. Banks possess facilities for collection, credit granting, etc., which make them indispensable to business enterprises. An account is opened at a bank by making an initial deposit of money for which the depositor receives a receipt in the form of a pass book with the amount of the deposit inserted. He also receives a check book which contains blank checks. These he fills out and signs when making a payment by check. + +Petty Cash Disbursements.—Checks are the best medium of payment for small sums of money. There small payments are usually best made in coin, and in order to secure an adequate supervision and control over such disbursements the imprest system of handling petty cash has been widely adopted. A little reflection will show that if all cash receipts are entered in the Cash Journal and also deposited in the bank, and that if all cash payments are entered in the Cash Journal and drawn out of the bank by check, then the balance of the Cash Journal should agree with the balance of the check book, and also with the actual amount of cash on hand. This would be so except outstanding checks being taken into consideration. It would be a simple procedure to deposit the total receipts of each day on the day following were it not for the fact that certain small cash disbursements (not by check) are being made continually. When these petty disbursements of cash are being made out of the cash receipts for the day, the full amount of the cash receipts cannot be deposited on the following day. As a consequence, the day's receipts must be kept in a separate fund until they are re- spent in amount with the deposit for that day. Moreover, the + +114 + +ACCOUNTING FOR PETTY CASH PAYMENTS 115 + +cash payments, as shown by the right side of the Cash Journal, are in excess of the checks drawn by the amount of the disbursements made directly from the cash drawer. + +The Impress System.—This leads to confusion and makes it difficult to ascertain whether any errors arise between the Cash Journal on the one hand and the check book and pass book on the other.¹ This trouble may be avoided by drawing a check, to "cash," upon the bank for a sum sufficient to make all petty cash payments for a given period—a week, or possibly two weeks. In the Cash Journal this check should be charged to "petty cash," thus: + +Petty Cash To Cash + +The amount thus drawn is called the petty cash fund, and from it all disbursements other than those by check should be made. These small disbursements of cash should not be entered directly in the Cash Journal, but a specially ruled book known as the Petty Cash Book should be kept for this purpose. The Petty Cash Book should contain as many columns as are needed in order to charge each disbursement to the proper account. Blank columns should also be provided for the receipt of more unusual charges, or at least a "miscellaneous" column should be provided. If expense accounts are kept in the General Ledger for Stationery and Printing, General Expense, Telegrams, Withdrawals (proprietors'), Purchases, Advertising, charges to which accounts frequently result from these small disbursements of cash, in addition to those made by check, then the following rule shows a suitable form of Petty Cash Book (page 116). + +Suppose that $100 is sufficient to make all petty cash disbursements for one week, and that sum is drawn by check as suggested above. When this is posted to the Ledger an account is opened for petty cash, thus: + + + + + + + + + + +
Petty Cash
Jan. 1. To Cash$100.00
+ +From the petty cash fund the following disbursements are made during the week and entered in the Petty Cash Book, as shown above: + +¹ The pass book is being displaced by the monthly statement, which lists checks drawn and deposits made. + +116 ACCOUNTS IN THEORY AND PRACTICE + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Petty Cash Book, Marion SmithMiscellaneousAmounts
DebitReceiptPaymentGeneralExpanseTotal CashWithdrawalsPurchasesAdjustmentsAverage
Item123456789
2.202.20102.601.004.00-10.00
5.00
10.20
-
12.00
15.80
-
52.20
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-		InterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterestInterest
+ +A table showing Petty Cash Book entries for Marion Smith. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + + + +
Debit Item Description Amounts (in $)
+ + + 117 + +June 1. Stationery and printing, $2.20; telegrams, $3.00; purchases, $10.00. +2. Withdrawals, $5.00; advertising, $3.00; purchases, $5.00. +3. Purchases, $10.20. +4. General expense, $0.10; interest, $10.00. +5. General expense, $26.00; purchases, $12.00. +6. Withdrawals, $3.00; general expense, $26.00; purchases, $12.00. +7. General expense, $1.00; telegrams, $4.00; advertising, $1.60; purchases, $15.00. + +At the end of the week the total column shows how much has been disbursed for each account, while the total petty cash disbursements represent the amount paid out of the petty cash fund. This total is found by listing the totals of the special columns and any items that may appear in the miscellaneous column, thus: + +
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Stationery and Printing$ 2 20
General Expense3 60
Telegrams7 00
Withdrawals10 00
Purchases52 20
Advertising4 00
Interest10 00
Total.$89.60
+ +Consequently there should remain $11 in the petty cash fund. +It is next in order to replenish the petty cash fund by drawing a check for $89, at the same time charging, in the Cash Journal, the various accounts for which the money was paid out. +Whether any particular account ought to be paid by check or out of petty cash depends upon circumstances. Usually the question must be decided by the amount—if large, a check is better; if small, direct cash payment may be better. Every petty cash disbursement should be receipted for to prevent the possibility of improper withdrawals from the petty cash fund. + +Advantages of Imprest System.—The petty cash fund should be kept separate from the daily cash receipts. Its introduction makes it easy to deposit as one sum the total of the day's receipts. +The amounts are entered on a special check book and in the bank pass book; thus making uniform the record of receipts in Cash Journal, check book, and pass book. Moreover, all disbursements are made either directly or indirectly by check, + +118 +ACCOUNTS IN THEORY AND PRACTICE + +since the petty cash fund is replenished only by drawing a check for the amount of the petty cash disbursements. Hence the disbursements side of the Cash Journal should also be in agreement with the check book and bank statement, when outstanding checks are considered. Correct accounting for cash is greatly simplified through the use of the imprest system. + +CHAPTER XVIII +CONTROLLING ACCOUNTS AND IMPREST SYSTEM PRACTICE + +Diary of Events.—A. J. Allen and R. T. Goodloe, partners engaged in the general retail business, decide to open new books as of Jan. 1, 1919. Previously to this they have kept a General Journal, Cash Journal and Ledger, and small cash disbursements have been made from cash on hand, no attempt being made to deposit this cash in a bank. The large number of accounts of customers and creditors has filled the Ledger with a large number of accounts, making it difficult to take a trial balance and to subdivide the clerical work among the office force. + +Having consulted public accountants, Allen and Goodloe decide to install a new system of accounts requiring the use of the following books: + +1. Cash Journal. +2. General Journal. +3. Sales Journal. +4. Purchases Journal. +5. Accounts Payable Ledger. +6. Petty Cash Book. +7. Record of Sales Journal. +8. Returned Purchases Journal. +9. General Ledger. + +After closing the old books the accountants make an analysis of the accounts and submit the following balance sheet of Allen and Goodloe: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Allen and Goodloe, as at January 1, 1919:
AssetsLiability and Capital
Buildings and Land$22,500Capital—A. J. Allen$15,500
Inventory 1/1/191910,310Capital—R. T. Goodloe14,300
Accounts Receivable (Schedule D.)4,312Accounts Payable (Schedule D.)3,317
+
DescriptionAmount
Insurance200
Furniture and Fixtures900
Notes Receivable500
Cash3,200
Salesmen Prepaid250
Total Assets$42,172
Total Liabilities and Capital$42,172
+
Mortgage on Buildings9,655
119
+ +A page from a ledger showing a balance sheet for Allen and Goodloe's business as of January 1, 1919. + +120 ACCOUNTS IN THEORY AND PRACTICE + +**Schedule I** + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
List of Accounts Receivable, Allen and Goodloe, as at January 1, 1919:
J. M. Ogden$ 217.40
L. B. Brewer100.00
S. K. Cortland27.12
O. D. Davis328.65
R. Rutherford10.40
A. K. Cornwall813.50
The Wildwood Club1400.00
N. S. Smith100.00
B. A. Barton43.10
L. D. Donovan77.11
A. A. Ablen528.50
G. J. Weller43.70
M. S. Gates15.70
K. N. Brown117.66
D. F. Swanson73.10
L. O. Dent112.00
S. S. Sutherland200.00
J. J. Oliver3.12
S. K. Cousins175.45
Total Accounts Receivable:$4,312.00
+ +**Schedule II** + + +
List of Accounts Payable, Allen and Goodloe, as at January 1, 1919:
Burton and Fitch...$213.00
Clyde Manufacturing Co.275.40
Wholesale Grocery Co.638.98
Atkins and Jones...127.00
L. O. Marsh23.00
Johnson and Company378.60
S. Simonson...386.98
Allen and Allen...320.00
S. Tompkins & Sons...140.00
J. Lomie...688.98
Gordon and Smith...225.00
Total Accounts Payable...$3,317.00
+ +Note—These schedules contain fewer accounts than would originally be found in practice. The number is purposely limited to avoid bringing unnecessary details into the problem. + +We must now determine the form and arrangement of the required books. The General Ledger and the Accounts Receivable and Accounts Payable Ledgers should contain twelve pages each of ordinary ledger paper. For the Sales Journal, Returned Sales Journal, Purchases Journal, and Returned Purchases Journal use ordinary journal paper; one single sheet for + +**CONTROLBING ACCOUNTS** + +121 + +each. Page these books and head the money columns of each of the four journals “Extensions” and “Totals,” respectively. +Write in the title of each book, “General Ledger,” “Sales Journal,” and “Cash Book.” + +Make the Cash Journal from a double sheet of four column journal paper, heading the columns on the left side, respectively, +“Accounts Receivable,” “Discount on Sales,” “Sundries,” +and “Net.” Head the columns on the right side “Accounts Payable,” +“Discount on Purchases,” “Sundries” and “Net.” +The form is shown below (page 122). + +Note: The term sundries means that the Cash Book should be such +as are found by experience to be necessary; that is, they are for +such accounts as receive charges most frequently from small +cash payments where checks are not used. The more unusual +items can be cared for in the “Sundries” column. + +To construct the General Journal use a sheet of six-column +journal paper and head the first three, or debit, columns, respec- +tively, “Accounts Payable,” “Notes Receivable,” and Sundries, +and the last three, or credit, columns, respectively, “Accounts +Receivable” and “Notes Payable,” and “Sundries.” + +Next open this new set of books with an entry in the General +Journal charging the assets invested and crediting liabilities +and the partners’ capital accounts. Enter the debits (as listed +in the balance sheet) in the “Sundries” debit column and the +credits (as listed in the balance sheet) in the “Sundries” credit +column in the General Journal. Check Cash ($\textbackslash$) in the General +Journal entry against the Cash Journal entry in the Balance Sheet +in the explanation column and placing the amount in the “Net” +column. Post these (except Cash, which will be posted from +the Cash Journal) to the General Ledger, opening accounts +therein as follows: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Capital—A. J. Allenpage 1, top
Capital—R. T. Goodloepage 1, middle
Buildingspage 1, top
Inventorypage 2, middle
Insurance Prepaidpage 3, top
Furniture and Fixturespage 3, middle
Notes Receivablepage 4, top
Cashpage 4, middle
Salaried Prepaidpage 5, top
Accounts Receivablepage 5, top
Accounts Receivablepage 6, middle
Mortgage on Buildingspage 7, top
+ +122 ACCOUNTS IN THEORY AND PRACTICE + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Dr.Ct.
DateExplanationAccountAmountExpenditureNetBalance
Cash Journal - Area and GoodsExpenditureNetBalance
AccountAmountExpenditureNetBalance
+
DateAmountSundry PurchasePref. Cash Book - Area and GoodsWidhastala GoodsPurchasesAdvertisingSundry AmountsAccount Amount
For the Petty Cash Book rule up a blank sheet of paper with the columns arranged and headed as shown below:
DateAmountSundry PurchasePref. Cash Book - Area and GoodsWidhastala GoodsPurchasesAdvertisingSundry AmountsAccount Amount
+
+ + + + + + + + + + + + +
Total
B. A. Barton$15.20
+ +Also make the entry for G. J. Winters. Before making the payment from petty cash it is necessary to establish a petty cash fund. This is done by drawing a check for the required amount, here $100, making it payable to "Petty Cash" for all disbursements not made by check. Charge "Petty Cash" in Cash Journal, entering the amount in the "Sundries" column. + +Next enter the payment from petty cash in the Petty Cash Book under the date of "Jan. 1," placing the total ($1.95) in the "Amount" column and making the distributions, "General Expense," $0.75, and "Stationery & Printing," $1.20. + +Jan. 2. Pay Johnson & Co. in full of account, $378.60, taking a discount on that amount of 2%. + +Enter this in the Cash Journal, charging Johnson & Co., with $378.60 in the "Accounts Payable" column, entering the d-accoun-nt in the "Discount on Purchases" column, and the net amount paid in the "Net" column. + +Jan. 3. Sell on account to O. D. Dunn, $201.15, and to L. O. Donovan, $62.30. G. J. Winters pays account in full. Petty cash payments for General Expense, $84.00. + + + + + + + + + + + + + + +
+ +124 + +ACCOUNTS IN THEORY AND PRACTICE + +Jan. 1. Pay Atkins and Jones in full of account, taking the discount of 1%. +Jan. 8. Pay the Wholesale Grocery Co. in full of account, taking the dis- +count of 25%. + +Jan. 7. Cash sales for week $920.16. Purchase from the Wholesale +Grocery Co. $437.30, 2½%; 10 days, net 30. Petty cash disburse- +ments: $100.00 to A. M. Ogden; $100.00 to K. N. Brown; $50.00 to A. A. Alden; +$10.40. The Wildwood Club and A. A. Alden pay in full to date. + +Note.—Enter cash sales in the "Net" column of the Cash +Journal. Enter the purchase from the Wholesale Grocery Co. +in the Purchases Journal, "Totals" column, indicating terms +in the "Explanation" column, thus: +Wholesa'e Grocery Co., 2/10, n/30. +Total: $147.30 + +Jan. 8. Purchase from Allen and Allen show case, $50.00 net, and mde., +$100, terms 2/10, net 30. + +Note.—It is necessary to make two entries for this purchase. +Enter the purchase of $100, mde., in the Purchases Journal, and +the purchase of show case in the General Journal, charging Furni- +ture and Fixtures in the debit "Sundries" column and crediting +Allen and Allen in the credit "Sundries" column. In posting +this credit to Allen and Allen carry it to both the credit side of +the Allen and Allen account in the Purchases Journal and +to the credit side of the Accounts Payable controlling account in +the General Ledger. This is an unusual procedure and if many +items of purchases other than mde. occurred it would be desir- +able to supply one or more special columns in the Purchases +Journal for purchases other than mde. Another plan would +be to provide an "Accounts Payable" credit column in the Gen- +eral Journal. + +Jan. 9. Pay Burton & Fitch $213 in full of account; also Clyde Manufac- +turing Co. $275.40. +Petty Cash payments: purchases $114.87; general expenses, $825. +Jan. 13. Purchase from Gordon & Smith, mde., $110.00, net 15 days. +Pay Gordon & Smith bill of $225.00, net. +Jan. 14. Purchase from J. Loomis, furniture for store, $75.00 net 15 days. +Sell on account to J. Loomis $115.00. Pay help for 2 weeks, +$350.00. +Draw check for amount of petty cash disbursements changing +proper account in Cash Journal. +Cash sales for week, $872.41. + +Note.—Enter purchases of furniture similarly to that made on +Jan. 8. + + + + + + + + + + + + + + + + + + + + + + + + + +
Wholesa'e Grocery Co.2/10, n/30.$147.30
Allen & Allen show case$50.00 net
mde.$100
+ +**CONTROLLING ACCOUNTS** + +125 + +Jan. 15. Mr. Allen withdraws $5 from petty cash for personal use. Sell mule, $60. Account to N. N. Smith, $38.20. +Jan. 16. Pay V. W. Smith, $17.40; discount on Jan. 7, $147.30, less discount. +Petty cash disbursements: general expense, $14.60; purchases, $18.92. +Jan. 17. Pay Allen and Allen bill on Jan. 8, $148 net. +Jan. 18. R. K. Rutheford returns mules, receiving credit, $10.20. A. K. Cornwall pays account in full, $81.50. + +Note.—Enter the returned sales transaction in the Returned Sales Journal, writing "A. K. Cornwall" in the explanation column, and placing the amount in the "Totals" column. Post to credit of Cornwall's account. + +Jan. 20. Petty cash payments: R. T. Goodloe, withdrawals, $11.06; purchases $8.40; general expense $3.10. Pay L. O. March, $25.00; also S-Tung-Mine Co., $25. +Jan. 21. Cash sales for week, $3134.42. Pay Gordon & Smith $10.00 net. +Jan. 22. R.A.Barton returns goods, $5.00. +Jan. 23. Purchase mule, purchased from Wholesale Grocery Co., $55, and to S.Simon and Sons, $25.90. +Petty cash payments: general expense, $2.15; purchases, $18.00. +Jan. 25. Sell on account to Wildwood Club, $40. +Jan. 27. Pay J.Loomis bill of $75 net. +Jan. 28. B.Roberts pays account in full, $115.20. +Jan. 31. O.D.Gunn gives note due in 2 mo., int at 6% in payment in full of his account: Pay help, $375.00; Cash sales since Jan 21, $1140. +Draw check for payment petty cash, making proper entry: Purchase adjoining building lot A.I., paying $4000; paying $100 cash and giving note due in 6 mo., for balance, $300. + +Take a trial balance, make adjustment and closing entries and set up profit and loss account and balance sheet. +Interest on the mortgage is at 6% payable semi-annually, June 30 and Dec 31. +Make entry for accrued interest on mortgage in the General Journal. +The inventory as at Jan. 31 is $8,000. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Jan.15.Mr.Allenwithdraws$5frompettycashforpersonaluse.Sellmule,$60.AccounttoN.N.Smith,$38.20.
Jan.16.PayV.W.Smith,$17..40;discountonJan.7,$147..30,lessdiscount.
Jan.17.Pettycashdisbursements:generalexpense,$14..60;purchases,$18..92.
Jan.18.R.K.RuthefordReturnsmules,receivingcredit,$10..20.A.K.CornwallpaysaccountInFulL,$81..50.
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Note.—Enter the returned sales transaction in the Returned Sales Journal, writing "A.K.Cornwall" in the explanation column, and placing the amount in the "Totals" column.. Post to credit of Cornwall's account. + + + + + + + +
Jan.
Jan.
+ + + + +
Jan.
+ + + + +
+ + +
+ + +
+ + +
+ + +
+ + +
+ + +
+ + +
+ + +
+1Sometimes the invoice is not sent to the receiving department to be checked up with goods received. Instead, a duplicate of the purchasing order, with the items omitted, is sent to the receiving department to be filled in by the receiving clerk before presenting it with the invoice. In this way errors in checking the invoice is prevented. + +126 + +THE VOUCHER REGISTER +127 + +is posted monthly to the credit of the vouchers payable account in the General Ledger. This account takes the place of the accounts payable controlling account. + +The voucher with invoice attached is now filed in an Unpaid Vouchers' File, where the arrangement may be made alphabetically, or according to time of payment. When a check is issued in payment of one of these vouchers, that voucher is entered in the column headed "Check No." by inserting the number of the check. The voucher is then filed in a Paid Vouchers file which is frequently indexed by a card index system to facilitate the location of all vouchers applicable to any particular item. The two voucher files then correspond to the Accounts Payable Ledger, the amount of the unpaid vouchers being equal to the credit balance of the Vouchers Payable account in the General Ledger after all entries are posted. The Cash Journal should contain a Vouchers Payable column under which the total should be charged to the Vouchers Payable account at the end of the month. In the General Ledger the Vouchers Payable account takes the place of the Accounts Payable account. + +When the check is mailed in payment of a voucher the invoice may be sent with it for the purpose of having it receipted. The chief objection to this procedure is that the invoice may not be promptly returned, or possibly not at all. For this reason the check is sometimes + +
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
InvoiceDateVoucher RegisterVoucher No.Cash - C.N.S.CreditDescriptionAmount
TermsFob.Chg.
Jan. 42/10Feb. 3320402A. Grun200.00
4N/20Feb. 3321403R. Buzen150.00
N/3030.00
+ +Number +Payable +$ 200.00 +$ 150.00 +$ 3 +Repeats +$ 20.00 +$ 100.00 +$ 3 + +128 +ACCOUNTS IN THEORY AND PRACTICE + +sent without the invoice and when returned through the bank it is attached to the voucher and invoice. Ordinarily this will afford a sufficient receipt. The demand for a more specific and definite receipt in the form of an endorsed check has led to the adoption of the voucher check. Essentially a voucher check consists of an ordinary check form with the addition of a space for an itemized statement of the charge for which payment is made. When such a voucher check is cashed it automatically becomes a receipt. When returned it may be filed with the invoice for which it was issued in payment. + +The Voucher Register may be made to handle only the ordinary liabilities that arise from the purchase of merchandise, or it may be made more inclusive so that the Voucher Register becomes the medium or making practically all charges, other than adjustments, including wages, expense, and all other charges involving the incurrence of expense or liabilities. + +CHAPTER XX + +THE VOUCHER REGISTER—PRACTICE + +The exercise given in Chapter XVIII is repeated in the following pages to show the variations necessary when the Voucher Register is employed. The transactions are identical, with only some changes being made in the form of the books. + +Diary of Events—A. J. Allen and R. T. Goodloe, partners engaged in the general retail business, decide to open new books as of January 1, 1919. Previously to this they have kept a General Journal, Cash Journal, and Ledger, and small cash disbursements have been made from cash on hand, no attempt being made to deposit receipts in the Bank. The constantly increasing number of customers and creditors has filled the Ledger with a large number of accounts, making it difficult to take a trial balance and to divide the work of keeping the accounts among the office force. + +Having consulted public accountants, Allen and Goodloe decide to install a new system of accounts to consist of the following books: + +1. Cash Journal. +2. General Journal. +3. Sales Journal. +4. Accounts Receivable Ledger. + +After closing the old books the accountants make an analysis of the accounts and submit the following balance sheet of Allen and Goodloe: + +Balance Sheet, Allen and Goodloe, as at January 1, 1919— + +| Account | Amount | Description | +|---|---|---| +| Buildings and Land... | $22,500.00 Capital–A. J. Allen... | $15,500.00 | +| Inventory, 1/1/19... | 10,310.00 Capital–R. T. Goodloe | 14,300.00 | + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
A c c o u n t s R e c e i v a b l e (S c h e d u l e 1)...Y o u c h e r s P a y a b l e (S c h e d u l e 1 H)...
4,312.003,317.00
Insurance Prepaid... | 200.00 Mortgage on Buildings | 9,055.00
Furniture and Fixtures... | 900.00 |
Notes Receivable... | 500.00 |
Cash... | 3,268.00 |
Sahares Fripies... | 259.00 |
Total Accounts Receivable | $42,172.00 | $42,172.00
+ +9 129 + +130 +ACCOUNTS IN THEORY AND PRACTICE + +Schedule I + +List of Accounts Receivable, Allen and Goodloe, as at January 1, 1919: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
J. M. Odgen$ 217.40
L. B. Brewer100.00
S. K. Cortland87.50
G. D. Davis328.65
E. R. Rutherford10.40
A. K. Cornwall813.50
The Wildwood Club1400.90
X. N. Smith216.00
B. A. Burton43.10
L. D. Donovan77.11
A. A. Alston320.00
G. J. Winters43.70
M. S. Gates15.70
K. N. Brown11.70
D. F. Swain71.90
L. O. Dent112.00
S. S. Sutherland200.00
J. J. Oliver3.12
S. K. Comin175.45
+ +Total Accounts Receivable $4312.00 + +Schedule II + +List of Vouchers Payable, Allen and Goodloe, as at January 1, 1919: + + +
NameTenant or Agent's NameAmount (net)Discount (net)
Burton & Fitch...$213.00none
The Clyde Manufacturing Co.275.40none
Wholesale Grocery Co.2% off to and including Jan., 7.$22630$270.
Atkins & Jones1% off to and including Jan., 5.12573.127.
L. O. March...-23.

+ +Johnson and Company... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2395,46 + + +
NameTenant or Agent's NameAmount (net)Discount (net)
Simpson & Sons...

+ +Allen & Allen... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... $220,00 none + +S. Tompkins & Son... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ............. $140,00 none + +J. Loomis... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... $600,00 none + +Gordon & Smith... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. $225,66 + +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. The number is purposely limited to avoid bringing unnecessary details into the problem. + +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into the problem. +Note.--These schedules contain fewer accounts than would ordinarily be the case in practice. +The number is purposely limited to avoid bringing unnecessary details into + +THE VOUCHER REGISTER—PRACTICE 131 + +The term Vouchers Payable is used in anticipation of the opening of the new books. In reality the Accounts Payable do not become Vouchers Payable until put through the routine required by the voucher system. + +The next step is to contrive the form and arrangement of the required books. The General Ledger and the Accounts Receivable Ledger should contain twelve pages each, of ordinary ledger paper. For the Sales Journal and the Returned Sales Journal use ordinary journal paper, one single sheet for each. Page these books and in the Sales Journal write "Extensions" and "Totals" at the head of the first and second money columns respectively. Head the columns of the Returned Sales Journal likewise. + +The Cash Journal may be constructed of ordinary journal paper, one sheet (double) being sufficient for this exercise. Head the two columns on the left side, Accounts Receivable and Sundries, respectively, and on the right side, Vouchers Payable and Sundries, respectively. + +For the Petty Cash Book rule up a blank sheet of paper with the columns arranged and headed as shown below: + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
DateStationery and PrintingGeneral ExpenseWithdrawalsPurchasesAdvertisingSundriesAccountAmount
+ +Note.—The columns in the Petty Cash Book must be such as are shown by experience to be necessary. Special columns should be provided for the accounts which receive charges frequently on account of petty cash disbursements, while those made infrequently can be provided for in the Sundries column. + +To construct the General Journal use a sheet of six-column journal paper, heading the first three columns, respectively, Vouchers Payable, Notes Receivable, and Sundries, and the last three columns, respectively, Accounts Receivable, Notes Payable, + +A table showing Petty Cash Book details. + +132 ACCOUNTS IN THEORY AND PRACTICE + +and Sundries. The first three columns are debit columns and the last three columns are credit columns. + +To construct the Voucher Register use a single sheet of twelve-column journal paper. Head the columns as shown below, making such alterations and additions as may be necessary to bring it into conformity with the following outline (page 134). + +It is possible, when the Voucher Register is properly constructed, to make most charges through it; consequently the credit side of the Cash Journal is used exclusively for charging Vouchers to creditors' accounts payable. + +In practice it is customary to have vouchers printed in pads. Upon the face of the voucher is space for the following information: + +Name of concern. +Name of creditor. +Voucher No. +Check No. +Details of items purchased. +Approval of proper officials. +Receipt of creditor. + +Upon the reverse side are listed the various accounts to which charges may be made for items listed in the voucher, with money columns for the amounts. It is from this distribution that entry is made in the Voucher Register. + +Numerous variations from the arrangement suggested above may be found. Sometimes the book and check are combined and called "the voucher book." This plan makes certain the return of the voucher properly received. + +The next step is to open the new books of Allen and Goodloe with an entry in the General Journal charging the assets invested and crediting liabilities and the partners' capital accounts. Enter the debits in the Sundries debit column and the credits in the Sundries credit column. Check cash ($\times$) in the General Journal and enter it in the Cash Journal, writing "Balance" in the expenditure column and placing the amount in the Sundries column. Post these to the General Ledger, opening the accounts therein as follows: + + + + + + + + + + + + + + + + + + +
Capital—A. J. Allenpage 1, top.
Capital—R. T. Goodloepage 1, middle.
Buildingspage 2, top.
Inventorypage 2, middle.
+ +THE VOUCHER REGISTER—PRACTICE + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Insurance Prepaidpage 5, top.
Furniture and Fixturespage 3, middle.
Note Receivablepage 4, top.
Cashpage 4, middle.
Salaries Prepaidpage 8, top.
Vouchers Payablepage 6, top.
Mortgage on Buildingpage 6, middle.
+ +Next enter the individual accounts receivable in the Accounts Receivable Ledger, two to a page, and in the order shown in Schedule I. For explanation write in the explanation column in the Accounts Receivable Ledger the word Balance. Also enter the individual vouchers payable in the Voucher Register, numbering them in the Ve. No. columns, 1, 2, 3, and so on, entering the amount of each voucher in the amount column. Place a check mark (✓) beside each amount to indicate that it has already been carried to the General Ledger through the opening journal entry. Total the vouchers payable and the discount on purchases columns and under the totals draw double lines. + +The totals should be $3295.46 and $21.54, respectively. + +In practice the unpaid vouchers are filed in an Unpaid Vouchers' Tickler File when paid they are transferred to a Paid Vouchers' File. Sometimes this practice is followed by attaching the returned check to the paid voucher; sometimes the returned checks are filed separately. + +Following are the transactions of Allen and Goodloe for the month of January: + +Jan. 1. Pay the Daily News Co. with check, $10 for current advertising. +Sell an account to B. A. Barton, mone$, $13.20, and to G. J. Winters $61.75. +Pay from petty cash, $0.75 for telegram (General Expense) and $1.20 for stationery. + +Note.—Enter the charge for advertising in the Voucher Register, writing the name of the creditor—the Daily News Co.—in the Customer column, and then place the amount in the column headed Advertising Charge—$10—and in the Cash column under Payment, and "Cc. #1" in the How Pd. column. Charge Vouchers Payable in the Cash Journal, $10.00. Enter the sale to B. A. Barton in the Sales Journal, placing the amount in the Totals column. This entry differs from an entry in the General Journal in that but one line is required, thus: +B. A. Barton +Extensions +Totals +15.20 + +Also make the entry for G. J. Winters. + +134 +ACCOUNTS IN THEORY AND PRACTICE + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Teacher RegisterAlarms and Good-ByePayablePurchaseReceiptsAdvertisingWater
No.Name of Co-
No.Name of Co-TermsPurchaseReceiptsPurchaseReceipts
No.Name of Co-PayablePurchaseReceiptsPurchaseReceipts
No.Name of Co-PayablePurchaseReceiptsPurchaseReceipts
No.Name of Co-PayablePurchaseReceiptsPurchaseReceipts
No.Name of Co-PayablePurchaseReceiptsPurchaseReceipts
No.Name of Co-PayablePurchaseReceipts
Description of ItemAmount (in Dollars)
Cash in Petty Cash Fund (No. 100)$100.00
Cash in Petty Cash Fund (No. 101)$101.00
Cash in Petty Cash Fund (No. 102)$102.00
Cash in Petty Cash Fund (No. 103)$103.00
Cash in Petty Cash Fund (No. 104)$104.00
Cash in Petty Cash Fund (No. 105)$105.00
Cash in Petty Cash Fund (No. 106)$106.00
Cash in Petty Cash Fund (No. 107)$107.00
Cash in Petty Cash Fund (No. 108)$108.00
Cash in Petty Cash Fund (No. 109)$109.00
Cash in Petty Cash Fund (No. 110)$110.00
Cash in Petty Cash Fund (No. 111)$111.00
Cash in Petty Cash Fund (No. 112)$112.00
Cash in Petty Cash Fund (No. 113)$113.00
Cash in Petty Cash Fund (No. 114)$114.00
Cash in Petty Cash Fund (No. 115)$115.00
Cash in Petty Cash Fund (No. 116)$116.00
Cash in Petty Cash Fund (No. 117)$117.00
Cash in Petty Cash Fund (No. 118)$118.00
Cash in Petty Cash Fund (No. 119)$119.00
+ +Before making the payment from petty cash it will be necessary to establish a petty cash fund. Like other disbursements this should be charged to the Voucher Register. Write "Cash" in the explanation column, "13" in the Vo.No.column, the amount (make it $10) in the Vouchers Payable column and also in the Sundries amount column, writing "Petty Cash" in the column headed Accountant. + +This is paid at once by drawing a check to one's account, $/i/ in the Date column under Paying, and "C" $25 under Hm.Pd. + +In the Cash Book write "Cash," in the explanation column and carry the amount into the Vouchers Payable column. + +The payment from Petty Cash should next be entered in the Petty Cash Book under date of Jan. 1, and extended into the General Expense column ($875) and the Stationery and Printing column ($25). + +The Petty Cash Book may be handled in different ways. Thus each payment may be entered separately, or the petty cash disbursements for the day may be combined and the distribution of the total made to the proper columns. + +As explained in the preceding chapter its purpose is to avoid mingling checks for large amounts with those for small amounts and at the same time permit the deposit of all cash receipts in the bank; which means that all disbursements are ultimately represented by checks. + +Jan. 2. Pay Johnson & Co, in full of account, $378.60, taking a discount on that amount of $2%. + +This illustrates one of the several complications likely to arise in connection with the use of the Voucher Register. If it is known at the time of opening the new books that the discounts will be all taken, then the voucher should be made out for the net + +THE VOUCHER REGISTER—PRACTICE + +135 + +amount and the discount shown in the discount on purchases column. If, for purposes of illustration, we assume that this was not known, it now becomes necessary to adjust the credit to vouchers payable by $378.60 at $378.60. This adjustment may be made in different ways. One way is to provide a Discount on Purchases column in the Cash Journal and when making the disbursement charge vouchers payable for the full amount and enter the discount in the Discount on Purchases column. This is the best method except when there is certainty of making all discounts, in which case the voucher should be made out for the net amount and entered in the Discount on Purchases column of the Voucher Register. Follow this plan, as all discounts will be taken. Make entry in the Cash Journal entering the net amount in the Vouchers Payable column and writing the name of the payee in the explanation column. + +Jan. 3. Sell on account to O. D. Dunn, $120.15, and to L. O. Donovan, $62.30. G. J. Winters pays account in full. Petty cash payments for General Expense, $8.40. +Jan. 4. Pay Atkins and Jones in full of account, taking the discount of 1%. +Jan. 6. Pay the Wholesale Grocery Co. in full of account, taking the discount of 2%. + +Note.—In both cases charge Vouchers Payable for the net amount in the Cash Journal. + +Jan. 7. Cash sales for week, $209.16. Receive invoice from the Wholesale Grocery Co. for mdeh., $147.30, 2/10, 20/10 days, net 30 days. Petty cash disbursements: purchases, $114; advertising, $88; general expense, $5.32; Selby Co., $10; A.A. Allen Co., $20; A.A. Alden Co., $20; to A.A. Alden, $10.40. The Wildwood Club Co., A.A. Alden pay full date to date. Enter cash sales in the Sundries column in the Cash Journal. + +Note.—Since it is the policy of the firm to take all cash discounts, enter the purchase from the Wholesale Grocery Co. in the Vouchers Payable column in the Voucher Register for net, the discount in the Discount on Purchases column, and the total in the Purchases column. In practice, the voucher would now be placed in the Vouchers Payable Tickler for the discount day. + +Jan. 8. Receive invoice from Allen and Allen for show case, $50.00 net, and mdeh., $100, terms 2/10, net 30. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Jan.$120.15
3.$62.30
4.$8.40
6.$2%
7.$209.16
8.$50
$100
+ +136 +ACCOUNTS IN THEORY AND PRACTICE + +NOTE.—Enter in the Voucher Register, $148 in the Vouchers Payable column, $2.00 in the Discount on Purchases column, $100 in the Purchases column and $50, under Sundays, writing "For Fixing the Account column and the amount in the Amount column. Had it been desirable to pay this item in parts on different days separate vouchers should have been made out. + +Jan. 9. Pay Burton and Fitch voucher payable no. 1 for $213.00; also Clyde Manufacturing Co. voucher payable no. 2, $275.40. Petty cash payments; purchases, $11.40; general expense, $6.37. + +Jan. 13. Pay J. Loomis voucher payable no. 1, $10.00; net 15 days. Pay Gordon & Smith voucher payable no. 11, $225.00. + +Jan. 14. Receive invoice from J. Loomis, for furniture for store, $72.00; net 15 days. Sell on account to R. R. Rutheford, netd., $15.00. Pay help for two weeks at $3 per week, net 15 days. Make deposit of funds made and draw check to replenish the fund. Cash sales for week, $872.41. + +NOTE.—The voucher is made out for the full amount of E.C wages and entered in the Voucher Register. Write "Cash for wages" in the explanation column. Next make entry in the Cash Journal for check drawn for that amount. From this cash fund the individual wage earners are paid. + +In entering the voucher for petty cash in the Voucher Register, write, "Cash for petty cash, 2 wks." in the explanation column and distribute the amount properly in the distribution columns. +These are first determined by totaling the distribution columns of the Petty Cash Book and ruling it up to indicate that a voucher is being drawn to reimburse the petty cash fund. When the check is drawn the amount turned into petty cash the fund again stands at $100. + +Jan. 15. Mr. Allen withdraws $5.00 from petty cash for personal use. +Sell mde., on account to N. N. Smith, $38.20. +Jan. 16. Pay Wholesale Grocery Co. voucher no. 14 of Jan. 7, $147.30, less discount. +Petty cash disbursements: general expense, $14.60; purchases $183.92. +Jan. 17. Pay Allen and Allen voucher no. 15, of Jan. 8, $148.00. +Jan. 18. R. R Rutheford returns goods, receiving credit, $10.20; A.K Cornwall pays account in full, $813.50. + +NOTE.—Enter the returned sales transaction in the Returned Sales Journal, writing A.K Cornwall in the explanation column and placing the amount in the Totals column. +Post to the credit of Cornwall's account in the Accounts Receivable Ledger. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Jan.$275
Feb.$225
Mar.$72
Apr.$3
May.$38
Jun.$148
Jul.$814
Aug.$39
Sep.$39
Oct.$39
Nov.$39
Dec.$39
+ + + + + +
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

+
Cash Disbursements:General Expense:Purchases:Discount on Purchases:Sales:Net Sales:Net Sales Less Discount:Net Sales Less Discount Less Discount on Purchases:Net Sales Less Discount Less Discount on Purchases Less Net Sales:Net Sales Less Discount Less Discount on Purchases Less Net Sales Less Net Sales:Net Sales Less Discount Less Discount on Purchases Less Net Sales Less Net Sales Less Net Sales:Net Sales Less Discount Less Discount on Purchases Less Net Sales Less Net Sales Less Net Sales Less Net Sales:Net Sales Less Discount Less Discount on Purchases Less Net Sales Less Net Sales Less Net Sales Less Net Sales Less Net Sales:Net Sales Less Discount Less Discount on Purchases Less Net Sales Less Net Sales Less Net Sales Less Net Sales Less Net Sales Less Net Sales:Net Sales Less Discount Less Discount on Purchases Less Net Sales Less Net Sales Less Net Sales Less Net Sales Less Net Sales Less Net Sales:Net Sales Less Discount Less Discount on Purchases Less Net Sales Less Net Sales Less Net Sales Less Net Sales Less Net Sales Less Net Sales:Net Sales Less Discount Less Discount on Purchases Less Net Sales Less Net Sales Less Net Sales Less Net Sales Less Net Sales:Net Sales Less Discount Less Discount on Purchases Less Net Sales Less Net Sales Less Net Sales Less Net Sales:Net Sales Less Discount Less Discount on Purchases Less Net Sales Less Net Sales Less Net Sales:Net Sales Less Discount on Purchases:Net Saless less Discount on Purchases less Discount on Purchases:Net Saless less Discount on Purchases less Discount on Purchases less Saless less Discount on Purchases:Net Saless less Discount on Purchases less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases:Net Saless less Discount on Purchases less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases:Net Saless less Discount on Purchases less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases:Net Saless less Discount on Purchases less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases:Net Saless less Discount on Purchases less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases:Net Saless less Discount on Purchases less Discount on Purchases less Saless less Discount on Purchases less Saless less Discount on Purchases less Salessless Discount o
+ +THE VOUCHER REGISTER—PRACTICE 137 + +Jan. 20. Petty cash payments: R. T. Goodloe, withdrawals, $110.00; purchases, $8.40; general expense, $5.10. Pay L. O. March voucher payable no. 5, $23.00; also S. Tompkins & Son, voucher payable no. 9, $140.00. +Jan. 21. Cash sales for week, $1315.42. Pay Gordon & Smith voucher payable no. 6, $23.00. +Jan. 22. B. A. Barton returns goods, $5.00. +Jan. 23. Receive invoice of mdc, from Wholesale Grocery Co., 2/10, net $30, $27.00. +Jan. 24. Return mdc, purchased to Wholesale Grocery Co., $55.00; and to Sisson & Sons, $25.50. Petty cash payments: general expense, $23.1; purchases, $18.05. + +Note.—The returns of merchandise to the Wholesale Gro- +cery Co. and to Sisson & Sons illustrate some of the possible complications that arise when the voucher register is used. If the vouchers have not been paid the best procedure is to cancel the original vouchers and make out new ones for the amount less returns. +In the case of Sisson & Sons, it will necessitate changing one line of unpaid vouchers: Make an entry in the General Journal for the Vouchers Payable column and credit Inventory for $25.50. Charge Vouchers Payable in the debit Sundries column and credit Inventory in the credit Sundries column. +Make proper changes in amounts in the voucher Register. +In the case of the Wholesale Grocery Co., the entry in the Voucher Register should be canceled by drawing a line through it and a new voucher (No. 21) made out. The discount is of course deducted from $144.54 to $144.54 less 6% = $144.54 less $8.68 = $135.86. +In the Purchases column is reduced by $127.00 to $72.00. +An alternative method is to leave the original figures uncanceled, entering the reductions in amounts in red ink just above the original amounts. These must then be deducted when the columns are added. +When this method is followed the original voucher may be canceled and a new one made out (in which case the number on the vouchers in the Voucher Register No. column must be changed), or a duplicate may be made of different colored paper, may be attached to the original voucher, indicating the changes to be made in the Voucher Register. + +Jan. 25. Sell on account to the Wildwood Club, $40.00. +Jan. 27. Pay J. Leonois, voucher payable no. 17, $750 net. +Jan. 28. R.T.Rutherford pays account in full, $115.20. +Jan. 31. O.D.Gunn gives note due in 2 months at 6% in payment in full of his account: Pay help $378.00; Cash sales since Jan., $1375. +0r pay money to replace property sold under Agreement of Purchase + +138 +ACCOUNTS IN THEORY AND PRACTICE + +adjoining building from A. A. Smith for $4000.00, paying $1000.00 cash and giving note due in 6 mo. for balance. + +Note.—The entry for the purchase of the building will be entered in the Voucher Register as voucher no. 23. Write "Cash and Note" in the Terms column, $4,000 in the Vouchers Payable column and extend it into the Amount column under Sundries, writing "Buildings and Land" in the Account column. +In the Payment columns, write "1/3/15" under Date and "Ck #15 & Note" under How Pd. + +All entries being made, draw a line under the various amount columns in the Voucher Register and bring the totals of all columns together to get the totals of the credit columns, Vouchers Payable, and Discount on Purchases, when added together ($0,483.39) should equal the totals of the distribution columns. + +Next post the total of the Vouchers Payable column to the credit side of the Vouchers Payable Account in the General Ledger, the total of the Discount on Purchases column to the credit of the Discount on Purchases account in the General Ledger, and the totals of the distribution columns to the debit of the property and equipment account in the General Ledger. Draw a line across the Sundries column from which the items must be posted separately to Furniture and Fixtures, $50.00 and $75.00, A. J. Allen, withdrawals, $5.00, R. T. Goodloe, withdrawals, $11.00, and Buildings and Land, $4,000.00. Check (✓) each item as it is posted to avoid posting it twice. Use the abbreviation "V.R.I." in the General Ledger folio column. Post all other books. + +Interest on the mortgage on Buildings is at 6%, payable semi-annually June 30th and Dec. 31st. The interest expense accrued on the mortgage is recorded in the General Journal. Take a trial balance of the General Ledger. Submit a Profit and Loss Account and a Balance Sheet. The inventory as at Jan. 31 is $8,000. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Cash$4,000
Note$1,000
Vouchers Payable$4,000
Discount on Purchases$15
Distribution Columns$483.39
Furniture and Fixtures$50$75A.J.Allen.
Withdrawals$5$11R.T.Goodloe.
Buildings and Land$4,000
Total Credit Columns$4,683.39
Total Distribution Columns$483.39
Total Credit Columns - Distribution Columns$4,200.00
Property and Equipment Account$4,200.00
Total Credit Columns - Property and Equipment Account$4,200.00
+
Distribution Columns - Property and Equipment Account
Furniture and Fixtures$50.00A.J.Allen.Withdrawals.
Buildings and Land$75.00R.T.Goodloe.Withdrawals.
Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns - Property and Equipment Account - Total Credit Columns - Property and Equipment Account - Distribution Columns + +CHAPTER XXI + +THE PRIVATE LEDGER + +Use of the Private Ledger.—Sometimes it is desirable to keep certain ledger accounts, particularly those relating to proprietorship, in a Private Ledger, where they are subject to inspection by none except the manager or a trusted employee. The accounts kept in such a ledger may be few or many, as required. Generally they are few in number and of a character requiring only infrequent changes through postings. Corresponding to the Private Ledger there should be kept a Private Journal in which all entries affecting Private Ledger accounts are kept. To illustrate the method of setting up a Private Ledger, assume that the following is the final trial balance of the General Ledger of Allen Graham, as at December 31, 1916: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet Allen Graham, as at Dec. 31, 1916:$10,000
Allen Graham—Capital.
Real Estate.$ 8,000
Inventory, Dec. 31, 1916.5,000
Cash.800
Accounts Receivable.3,000
Accounts Payable.2,000
Mortgage.4,800
$16,800
$16,800
+ +If, now, Graham desires to transfer his capital account and the accounts for Mortgage and Real Estate to a Private Ledger, it is necessary to close these accounts in the General Ledger by the following entry in the General Journal: + + + + + + + + + + + + + + + + + + +
Allen Graham—Capital.$10,000
Mortgage.4,800
To Real Estate.$8,000
Private Ledger.6,800
+ +139 + +140 +ACCOUNTS IN THEORY AND PRACTICE + +After this entry is posted a trial balance of the General Ledger appears: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Inventory, Dec. 31, 1916$5,000
Private Ledger$6,800
Cash...800
Cash...800
Accounts Receivable.5,000
Accounts Payable.2,000
$8,800$8,800
+ +In the Private Journal the following entry is made: + + + + + + + + + + + + + + + + + + +
General Ledger.$6,800
Real Estate...8,000
To Allen Graham—Capital.$10,800
Mortgage.4,800
+ +After this entry is posted to the Private Ledger a trial balance taken from that ledger appears thus: + + + + + + + + + + + + + + + + + + + + + +
General Ledger.$6,800
Real Estate...8,000
Allen Graham—Capital.$10,800
Mortgage.4,800
$14,800$14,800
+ +It is only when a transaction occurs which affects accounts in both the Private and General Ledgers that the balancing accounts, Private Ledger and General Ledger, are affected. +To illustrate, if cash is received in payment of an account receivable the entry is made in the Cash Journal and posted to the debit of cash and credit of accounts receivable, both of which accounts are in the General Ledger. If, on the other hand a parcel of real estate is sold for $2,000, one account in the Private Ledger and one account in the General Ledger will be affected, namely, Real Estate and Cash. Therefore instead of crediting Real Estate in the Cash Journal, Private Ledger is credited, thus: + + + + + + + + + +
Cash...$2,000.00
To Private Ledger.$2,000.00
and in the Private Journal the following entry is required:200.00
+ + +
General Ledger:200.00
+ +
To Real Estate:200.00
+ +THE PRIVATE LEDGER 141 + +In this way any accounts, real or nominal, may be kept in the Private Ledger. It is entirely feasible to set up the Profit and Loss account in the Private Ledger by closing out the debit and credit nominal balances of the General Ledger, and then in the Private Journal, charging the debit nominal balances to profit and loss and crediting General Ledger account, and crediting the credit nominal items to profit and loss, at the same time charging General Ledger account. + +CHAPTER XXII + +THE PRIVATE LEDGER—PRACTICE + +**Problem 1.—Following is the balance sheet of Amos Chandler, as at Dec. 31, 1919:** + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Amos Chandler, Capital$18,500
Buildings and Real Estate.$ 8,400
Cash.900
Accounts Receivable.2,700
Notes Receivable.400
Inventory, 1/31/196,000
Mortgage on Buildings.2,000
Supplies.200
Furniture and Fixture.400
Accounts Payable.100
Investments.2,500
$21,500
+ +Chandler desires to set up a Private Ledger to contain accounts for capital, investments, and mortgage on buildings. Show entries necessary in the General and Private Journals and submit trial balances for the General and Private Ledgers after these entries have been posted. + +**Solution, Problem 1.—The entry in the General Journal is as follows:** + + + + + + + + + + + + + + + + + + +
Amos Chandler, Capital$18,500
Mortgage on Buildings.2,000
To Investments.$2,500
To Private Ledger.18,000
+ +The entry in the Private Journal is as follows: + + + + + + + + + + + + + + + + + + + +




















































































<
General Ledger.$18,000
To Investments.2,500
To Amos Chandler, Capital.18,500
To Mortgage on Buildings.2,000
To bring accounts into the Private Ledger of Amos Chandler.
+ +142 + +THE PRIVATE LEDGER—PRACTICE + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Trial Balance, General Ledger:$8,400
Buildings and Real Estate...
Cash...900
Accounts Receivable...2,700
Notes Receivable...600
Inventory, 1/1, '196,000
Supplies...200
Furniture and Fixtures...400
Accounts Payable...$ 1,000
Private Ledger...18,000
$19,000
+ + + + + + + + + + + + + + + + + + + + + + + + + + +
Trial Balance, Private Ledger:$18,000
General Ledger...
Investments...2,500
Amos Chandler, Capital...$18,500
Mortgage on Buildings2,000
$20,500 $20,500
+ +**Problem 2.—Amos Chandler, on Jan. 15, 1920, sells $2,000 of his investments at cost ($2,000). Make proper entries.** +On Jan. 31, he pays $1,000 cash on the mortgage on buildings. +Make proper entries. + +**Problem 3.—The trial balance of the General Ledger of Amos Chandler as at Dec. 31, 1920, is as follows:** + + +
Buildings and Real Estate.$8,400
Cash.3,000
Accounts Receivable.2,800
Notes Receivable.400
Inventory (Dec. 31, '20).6,600
General Expense.700
Purchases.13,700
Sales.$15,500
Supplies (consumed).300
Furniture and Fixtures.400
Accounts Payable.1,200
Private Ledger.19,500
Total.$35,700 $35,756
+ +The inventory as of Dec. 31, 1920 is $7,500. Interest has accrued from July 1, 1920, on the mortgage which stands at $1,500 and bears interest at 6%. This interest accrued has not been brought into the accounts. Close the books, setting up the Profit and Loss Account in the Private Ledger. Submit balance sheet as at Dec. 31, 1920. + +144 +ACCOUNTS IN THEORY AND PRACTICE + +BIBLIOGRAPHY + +Part III. Expansion of Accounting Records + +DICKINSON, A. L. Accounting Practice and Procedure. New York, 1913. Chapter XI. + +Esquerand, P. J. Applied Theory of Accounts. New York, 1914. Chapters VII-XVI. + +GILMAN, S. Principles of Accounting. Chicago, 1916. Chapter XII. + +HUFFNER, H. Modern Accounting. New York, 1909. Chapter XIX. + +KESTER, R. B. Accounting Theory and Practice. New York, 1917. Vol. I. + +KLEIN, J. J. Elements of Accounting. New York, 1913. Chapter III. + +PATTEN, W. A. and STEVENS, R. A. Principles of Accounting. New York, 1918. Chapter V. + +SPRAGUE, C. E. The Philosophy of Accounts. New York, 1908. pp. 82-125. + +PART IV +CORPORATION ACCOUNTING + +CHAPTER XXIII +THE CORPORATION—SPECIAL CONSIDERATIONS + +Corporation Defined.—The corporation is a form of organization possessing certain features which commend it to most enterprises carried out on a fairly large scale. It affords certain advantages which neither the sole proprietorship nor the partnership enjoys. On the other hand certain requirements are imposed upon the corporation from which the other two forms of organization are exempt. The difficulty attaching to the definition given by Chief Justice John Marshall, in the Dartmouth College Case, is “an artificial being, invisible, intangible and existing only in contemplation of law.” Consequently the corporation is an offspring of the law, exists only by consent of the law, and may be dissolved by the law. + +Limitations of Partnership.—With the growth of their capital and the extension of their markets, in brief, with the development of their interests generally, the limitations of the primitive forms of organization become apparent. The sole proprietor frequently lacks ability or capital, or both, to enlarge his plant to meet growing needs. He may supply the defect by accepting one or more partners, but the growth of partnerships is quite restricted beyond a certain point. When there are only a few partners, they are apt to quarrel over organizational questions and ordinarily proceed without friction. When, however, to obtain an increase of capital, or for other reason, the number of partners is increased, the point is soon reached when the number of the partners is an impediment. Recalling the causes of partnership dissolution will indicate this. + +Advantages of Incorporation.—Perhaps the two most important considerations that lead to incorporation are (a) the need for limited liability, and (b) unlimited possibilities of growth of the corporation. + +145 + +146 +ACCOUNTS IN THEORY AND PRACTICE + +Limited Liability.—A partner's liability for the debts of his partnership are not limited to his investment therein, but his private fortune as well may be confiscated for their payment, if necessary. Naturally, this fact serves as a deterrent to those who are considering the advisability of becoming partners in any enterprise. The corporate form of organization obviates this difficulty by placing the liability of the corporation on its stockholders' liability. What this limitation is determined by the statutes of the state in which the corporation is chartered. Usually one's liability is limited to his actual investment in a corporation, but to this rule there are some exceptions, notably in case of national banks where one is liable for twice the amount of his investment. In two states, moreover, the statutes make excep-tional provisions. In Minnesota a stockholder's liability is but partly limited, while in California a stockholder's liability is unlimited, except that it must be prorated on the basis of holdings. + +Possibilities of Growth.—Provision for future expansion is an important consideration. Sometimes this growth is more, sometimes less rapid, than anticipated. It is not always possible, therefore, and rarely desirable, to provide capital at organization time for distant future development. But there should remain avenues open for expansion when they become difficult without great difficulty when it is needed. The corporation is well adapted to meet this requirement. The readiness with which it permits the expansion of its capital, and the manner in which the ownership of that capital may be transferred from party to party are two corporate essentials. + +The units into which the capital of a corporation may be divided are called stocks. When there exists a sum total of capital worth more than par value of the stocks it is called surplus. The amount of the stock which a corporation is authorized to issue is specifically stated in the charter. The amount of the stock which, at any time after incorporation, is outstanding, that is, which has been sold to secure capital, is the issued stock. Usually the amount of the authorized stock placed at a considerably higher figure than the amount which the corporation will care to issue for a considerable time; thus a portion of the authorized stock will never be issued; then again, in future, more capital is required. Moreover, the number of shares of stock is usually so large that the worth of a single share + +THE CORPORATION—SPECIAL CONSIDERATION 147 + +is not usually very much. Each share is generally given an arbitrary or par value, usually $100, but sometimes much less, possibly $5 or $10. This par value, or face value, must not be confused with the market price of the shares. The market price may be wholly arbitrary while the selling price is determined by the equity, that is the actual value, which underlies the share. The selling price may be either below or above par. + +**Status of Stockholder.—** The relatively small value of a share of stock makes it possible for the corporation to appeal to a very wide range of people who have money to invest. Moreover, the ownership of any number of shares is readily transmissible from parent to child, and thus it is possible for a large number of persons to participate in the activities of the corporation. Although the control of the corporation rests ultimately in the stockholders, their influence makes itself felt indirectly through the board of directors, which is elected by the stockholders, and to which the stockholders delegate nearly all, if not all, of the actual work of management and supervision. Where the burden is thus placed upon the stockholders a few thousand dollars will rarely be invested by more than twenty men—the interest of the stockholder in the current affairs of the company is often slight, frequently too slight for his own good. However that may be, the relationship existing between stockholders is not personal in the sense that partners are related to one another. Hence there is no need of terminating the company's existence when a stockholder dies, or is mentally incapacitated, or does any of the things which cause the dissolution of a partnership. + +When a partner dies, unless some agreement has been previously made, modifying the common law, the partnership must be dissolved and its assets sold to satisfy creditors, any balance remaining being distributed among the living partners and the estate of the deceased partner. When a stockholder dies the corporation is usually not affected in any way, except perhaps through its loss of his services, if he wishes to have them as an official director. His death will not subject him to the laws of personal property. The recipients of it will continue to hold it and exercise any rights and privileges which were accorded to the original holder. + +**Close and Open Corporations.—** A corporation may be close or open. In case of a close corporation the stock is usually held by a comparatively few persons, sometimes practically all by + +148 +ACCOUNTS IN THEORY AND PRACTICE + +one person, and consequently transfers of its stock take place but infrequently. In case of an open corporation there are usually a considerable number of stockholders and many trans- +fers of stock are made from sellers to purveyors. The number of stockholders oftentimes runs into the thousands. There are 114,779 stockholders in the Pennsylvania Railroad Company¹ and 152,228 in the United States Steel Corporation.² When such is the case special machinery must be provided to facilitate the transfer of stock. For this purpose one or more stock books or ledgers are kept. In the stock ledger space is provided for the name of each stockholder, the number of shares of stock pur- +chased by him, the date of purchase, and the price at which the stock certificate issued to him, and such other data as may be desired. +In some states, as New York, the form of the stock ledger is prescribed by law. + +The Stock Certificate.—The stock certificate is a document which affords visible evidence of the ownership of stock. Some- +times, when the work of engraving these certificates is not com- +pleted, purchasers sign their original purchases of stock and these are later exchanged for the new certificates. Simi- +larly, when, as often occurs, the subscribers to the stock of a company pay for it in instalments, that is, so much down, and the balance in specified sums on stated succeeding dates, receipts are issued for the various instalments, the formal stock certificates being issued only when the last instalment has been paid. The essential features of a certificate of stock are, the name of the owner, the number and kind of shares, the number of +the certificate, the pledges that attach to them and the +validating signatures of the proper corporation officials. On +the back of the certificate is provided a form for transfer of ownership to be filled in by the owner of the stock upon sale of a part or whole of his interest. Note that any number of shares of stock may be represented by one certificate. Accordingly if one man purchases all the holdings of three other men, of any particular stock, then three certificates are canceled and, providing the transfers are made simultaneously, one single certificate is issued in their place. + +Transfer of Ownership.—Upon the stock market, shares of +stock are bought and sold sometimes many times over in one + +¹ As of Nov. 30, 1919. +² As of date books were last closed in 1919 for dividend purposes. + +THE CORPORATION—SPECIAL CONSIDERATION 149 + +day, for speculative purposes. When this is done stock cer- +tificates may be assigned in blank, i.e., the seller may sign away +his interest in his shares by merely placing his signature in the +proper place on the form on the back of the certificate without +designating any transferee. When this is done the certificate +becomes transferable by delivery, and may be passed from +hand to hand without further formality. When it finally comes +into the hands of an investor or speculator who intends to hold +it for a time, it is necessary, for reasons to be explained, that he +have a bill of sale. + +**Dividends.—** Money paid for the stock of a corporation is said +to be invested. These who invest money in stock expect to +secure a reasonable income thereon. Income on stocks is called +dividends. Dividends are figured as a percentage of the par +value of the stock. Thus if the par value of a share is $100, and +the corporation issuing this stock pays a dividend of 6% per +annum, payable quarterly, then for every share of stock that +one owns one would receive each quarter year a dividend of +$1.50. The advisability of paying dividends or of discontinuing +their payment rests with the board of directors. They do not +possess complete freedom in this matter, however, for there are +certain legal and accounting principles which they cannot neglect +without running the risk of injuring personal liability. Unless +there are profits, either current, or accumulated from previous +years, a dividend cannot be paid; hence, for to do so would +diminish the capital invested and to that extent reduce the re- +sources to which creditors might look for the satisfaction of their +debts in case of insolvency. To the above rule there are certain +exceptions, notably in case of those companies organized to +exploit wasting assets, such as mineral deposits, forest tracts, +and so on. The time during which such a company can continue +its operations is necessarily limited by the life of the resource +which it exploits. To remain profitable it must keep its original +capital intact and undiminished until the last bit of mineral has +been smelted or the last tree hewn down would not be good policy. +Consequently such companies may legitimately return something +in addition to profits in paying their dividends. This partly +accounts for the surprisingly large dividends sometimes paid. +One who invests money in such enterprises should not mistake +his dividends as pure profits, lest he find later on that in spending +them he has spent both his profits and his capital. + +150 +ACCOUNTS IN THEORY AND PRACTICE + +**Common and Preferred Stocks.**—Sometimes a corporation finds it advisable to issue stocks with varying qualities and privileges. When only one kind of stock is issued it is all common, but when two kinds are issued it is customary to classify them as preferred and common. In this case the preferred stock possesses some advantage not possessed by the common stock. This advantage may be in the form of a preference as to profits, or as to assets, or both. By a preference as to profits is meant that some specified dividend must be paid on the preferred stock before any can be paid on the common stock. Where the peak of a six per cent preferred stock we mean that the preferred stockholders will receive this dividend in full out of profits before the common stock will receive any consideration. Just what method will be pursued with the common stock after such prefer- red stock dividend has been paid will be determined by the conditions under which the two classes of stock are issued. Sometimes the common stock will receive dividends equal to that paid the preferred; sometimes it receives something more. Profits remaining for distribution after the initial requirements of both classes of stock have been met may be divided between the two classes of stock on some pre-arranged basis, or possibly they may be retained as an addition to working capital or be invested in extensions and improvements. + +**Cumulative Preferred Stock.**—If the preferred stock is cumula- tive, then it means that no payment is sent forth in any one year to satisfy its dividend requirement whatever remains unpaid becomes a lien on the profits of succeeding years. Some- times the unpaid dividends on the preferred stock accumulate to a very large amount, thus placing the common stockholders in a position where little hope exists of receiving any divi- dends for a very long time to come. For a long time preceding the outbreak of the European War in 1914, the International Mercantile Marine Company did not pay dividends on its cumulative preferred stock until these accumu- lated and unpaid dividends have since amounted to a sum almost equal to the par of the stock itself. + +**Factors Determining Market Values.**—When both preferred and common stock are outstanding the two kinds of stock will sell at prices which are determined by a number of factors, such as the value of the assets, the general prosperity of the company, the respective amounts of the stocks outstanding, the provisions + +THE CORPORATION—SPECIAL CONSIDERATION 151 + +regarding the dividends and any preferences that may affect the stocks, and the condition of the market and business generally. Quite frequently preferred stock is issued to an amount corresponding roughly in value to the cost price of the assets, while the common stock is issued on the presumption that it will be justified by future development, and that ultimately the increased earning power will make possible the payment of dividends thereon. Sometimes results do justify the act, but frequently they do not. In case of smaller companies it is usually best to issue only common stock, since the earnings of such enterprises must be determined upon the merits of the individual enterprise. Recently the directors of the New York, New Haven & Hartford Railroad Company considered the advisability of authorizing an issue of preferred stock, the company having only common stock outstanding. Preferred stock in this case would probably afford a safer means of obtaining additional funds than would bonds. + +Full Paid Stock.—Subscribers to the stock of a corporation may make payment in full at the time of subscription, or later, or they may make their payment on the installment plan. Moreover, payment may be made in cash, in property, or in services performed. When payment is made in cash there arises no question as to the value given for the stock. When, however, payment is made in property or services, these should be stated at their current values. Shares which are over-valued in stock charged for them would not be worth more than their face value to the holder because of having to make it full-paid later on. This requirement is intended for the protection of the creditors, who naturally assume that the stock has been sold for its full face value and that the funds so received are invested in the assets of the company. + +Bonded indebtedness.—Bonds represent stock as a means of securing capital. To some extent this is true; but it is not true that there are many corporations which have no outstanding bonds whatever; they are a popular and useful means of securing additional funds. The issue of bonds up to a certain point is a healthful manifestation of business activity; although the over-issue of bonds is accompanied by dangerous possibilities. Bonds are to corporations what mortgages are to sole proprietors and partners, and differ from them in detail more than in principle. The ordinary mortgage fails to secure enough capital for a large + +152 +ACCOUNTS IN THEORY AND PRACTICE + +concern for the same reason that a partnership fails to secure it, viz., lack of appeal to a sufficiently wide portion of the investing public. +When money is secured upon a mortgage the entire sum must generally be secured from a single person or institution. Individuals may easily be found who are willing to loan sums mounting up into the thousands of dollars; and some institutions, such as banks, sometimes loan very large sums of money to companies which provide valuable security. But when this is not the province of banks to provide capital for long term investments, and since they usually wish to loan on security other than real estate, it becomes desirable for companies possessing extensive holdings of real estate to find some suitable plan of borrowing large sums of money upon the security of these possessions. + +The Deed of Trust.—The idea of securities suggested above is largely realized by the use of bonds. The sale of bonds is usually accompanied with a mortgage, or, as it is frequently called, a deed of trust. But the deed of trust, not being divisible, and not, therefore, being capable of being de- +livered to a large number of creditors, is deposited with a trustee, usually a trust company, while the bonds, which are issued in denominations of $100, $500, or $1000, contain a sufficiently extended reference to the deed of trust to make their identity certain. The trustee acts as a representative of all the creditors scattered among scores of persons all dependent ultimately for protection upon a single mortgage or deed of trust. Several considerations serve to commend this arrangement. In the first place, it would be extremely awkward to issue separate mortgages to each of the persons who might care to become investors in the bonds. Then, in case of the financial embarrassment of the company, there would be many creditors hastening to fore-lose their mortgages and to secure their share of the spoils. This would make unnecessary the presence of a trustee. When one single mortgage is placed in the hands of a trustee, the trustee acts as the representative of all the bondholders of a particular issue, thus securing their support and insuring a strong and united front. + +Stockholders and Bondholders Compared.—The chief dis- +tinction between a stockholder and a bondholder is that the +stockholder is a proprietor while the bondholder is a creditor. The stockholder receives dividends only when profits are earned; nor can the stockholder compel the board of directors to declare + +THE CORPORATION—SPECIAL CONSIDERATION 153 + +a dividend even when profits exist from which it might be paid. +The declaration of a dividend is a question of policy. The pay- +ment of income on bonds, which is called interest, is a question +not of policy but of necessity. Dividends may, but interest +must, be paid. If the corporation does not pay the interest on its +bonds, which is the principal of the bonds due, it cannot +pay that, the usual procedure is foreclosed by the trust deed +according to its terms and the sale of the company's assets for +the satisfaction of the creditors' claims. + +Since, from the character of their lien, bonds must be secured +before stock, it is natural to assume that they are safer for in- +vestment purposes than are stocks. As a rule this is true, and +within a given corporation it appears inevitable. Nevertheless, +the bondholder's claim is not as absolute as the investment +as are the stocks of other companies, so that the question of +safety is entirely relative. + +Variations in Bonds.—Bonds differ widely in the character +of the assets upon which they are lien, in the interest they bear, +in the time they run, and in the method by which they are ulti- +mately redeemed. To discuss these qualities here is beyond our +purpose. + +Advisability of Issuing Bonds.—Bonds may be issued largely +as a matter of necessity after the possibilities of stock issues are exhausted. Usually, however, their issue is a matter of policy. +If money can be borrowed at 5% and so invested as to yield +10%, the transaction is a profitable one. Such procedure is +known as trading on the equity. The question which a corpora- +tion is frequently compelled to answer is, whether it is better +to continue its present operations or to borrow and redeploy secure +the best results, or to issue bonds and thus secure funds needed to +bring the plant to the highest state of efficiency. If money thus +borrowed can be invested so that it will return an income well +above the interest paid for it, the stockholders will reap larger +dividends without having invested any additional capital of +their own. + +Accounting for Stock and Bond Issues.—The books of a corporation provide adequate records for the issue and transfer of stocks and bonds, and for the payment of dividends and interest therewith. All facts in connection with each issue must be clearly and indubitably stated. If bonds are sold below or above par, this must be indicated, and the premium or discount + +154 +ACCOUNTS IN THEORY AND PRACTICE + +must be taken into consideration. As interest accrues from month to month its effect upon profits must be carefully shown. Any actions of the board of directors definitely affecting the assets or liabilities of the company must be shown by proper entries in the books. In brief, the accounting principles already learned must be applied to those conditions which are peculiar to corporate organization. + +CHAPTER XXIV + +THE CORPORATION—OPENING CORPORATION BOOKS + +Work of the Promoter.—Before a corporation can be organized it must be promoted. It is beyond our province to discuss the work of the promoter here except to say that it is his duty to present the prospective enterprise to his friends or to the public in order to secure their subscriptions to the stock of the new company. When enough stock has been subscribed the company is organized and the subscriptions become contracts between the subscribers and the corporation. + +The Opening Entries—Book Authorized.—As soon as the company is organized the books of account should be opened and entry made of whatever information of a financial character may be necessary to show clearly the status of the company. The Minute Book, in which a record is kept of all proceedings at the meetings of the stockholders and board of directors, may be consulted in order to obtain whatever information in this respect historical development, purposes, etc., it may be desirable to have before opening the journal. Normally the only assets of a newly organized corporation are the subscriptions to its stock, and its only liability is its obligation to the subscribers for their subscriptions. The opening entry should therefore show this incipient condition. Sometimes, however, it is not merely desirable to show the actual amount of subscriptions secured but also to indicate the amount of capital stock authorized by the charter, that is, the full amount of the stock which was authorized by the charter and subscribed according to the charter. If the amount of stock authorized is to be made the subject of a formal journal entry, then this entry should precede the entry of the actual subscriptions. If it is not thought desirable to show the amount of stock authorized, in the balance sheet, then its amount may be given in the preliminary statement which it is customary to insert on the first page of the Journal—chiefly for explanatory purposes. In this case the first formal entry will be for the amount of stock actually subscribed. + +155 + +156 +ACCOUNTS IN THEORY AND PRACTICE + +Proceeding on the assumption that the authorized stock is to be journalized, the opening paragraph and first journal entry should appear somewhat as follows: + +The Brown-Allen Company organized under the laws of the State of Connecticut, for the purpose of engaging in the retail grocery business, begins operations this first day of July, 1916, with an authorized Capital Stock of $100,000, divided into One Thousand Shares of a par value of One Hundred Dollars ($100.00). + + + + + + + + + + + + + + + + + + + + + + +
July 1
Unissued Stock.$100,000.00
To Authorized Stock.$100,000.00
Being the total authorized stock of the Brown-Allen Company.$100,000.00
+ +In case of small corporations it is not customary to have more than one kind of stock, hence it is all common. If, as is frequently done among larger enterprises, permission is secured to issue both common and preferred stock, the journal entry required is: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Unissued Common Stock.
Unissued Preferred Stock.
To Authorized Common Stock.
To Authorized Preferred Stock.
Authorized Preferred Stock.
Being the total authorized stock, preferred and common, of the Company.
+ +The Opening Entry—Stock Subscribed.—As explained, the above entries may be omitted, being more or less a matter of form. Their presence in the journal neither hinders nor makes easier the entry which they represent. The following is an entry which brings into the books a record of the liability to the subscribers on the stock which they agree to purchase. The general form of this entry is as follows: + +(a) When the preceding entry, showing the amount authorized, is made: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Subscribers (or Subscriptions)$85,000.00
To Unissued Stock.$85,000.00
To enter upon the records the liabilities of the sundry subscribers to the stock of this company, as per the following schedule:
A. A. Brown.150 shares
M. L. Allen.300 shares
R. T. Prince.50 shares
L. O. Gordon.40 shares
O. S. Smith.15 shares
+ +THE CORPORATION—OPENING CORPORATION BOOKS 157 + +If there are both common and preferred stock subscriptions, the entry, which should be followed by suitable explanations, the names of the subscribers and the amount and kind of stock subscribed by each, is: + + + + + + + + + + + + + + + + + + +
Subscribers to Common Stock
Subscribers to Preferred Stock
To Unissued Common Stock
Unissued Preferred Stock
+ +(b) When no formal journal entry is made to record the amount of stock authorized: + + + + + + + + + + + + + + +
Subscribers (or Subscriptions)
To Capital Stock.
(Explanation as in (6) above.)
+ +**Payment of Subscriptions.—** Before the corporation can begin operations it must in some way secure the cash and other working and fixed assets which are necessary. Naturally these will be provided by the subscribers to the capital stock, for they are to become owners of the corporation. They will provide the necessary assets by paying their subscriptions to the capital stock of the company. Subscriptions to capital stock may be paid in cash, property or services. The simplest procedure possible would be to have all subscribers pay the full amount of their subscriptions, at one time, and in cash only. If the various subscribers to the stock of the Brown-Allen Company should make one cash payment in full for their liability on their subscriptions, this transaction could be journalized thus: + +Cash.................................................. $75,000.00 +To Subscribers........................................ $75,000.00 +To record the payment in full for their subscriptions to the stock of the Brown-Allen Company, of the following: (Names of subscribers and number of shares bought by each.) + +Payments other than Cash.— In many instances it is not intended to have all or even a major portion of the stock subscriptions paid in cash. Frequently corporations are organized to take over enterprises which have been established under partnership organization. In such cases it is almost always the desire and intention of the partners to pay for their subscriptions to the + +158 ACCOUNTS IN THEORY AND PRACTICE + +stock of the new company by transferring to it their partnership interest in the old firm. Usually, too, it is good policy to pay some of the expenses incident to promotion and organization by means of stock. This is a legitimate procedure since pro- +motion and organization, being necessary preliminary operations, are looked upon as investments and become a portion of the assets of the company. Where, therefore, property or services are received in payment of stock subscriptions these must be charged, instead of cash, and the subscribers' account credited. + +**Payments in Instalments.**—Sometimes, especially in the case of those who agree to pay for their subscriptions in cash, it is not desirable, either from the standpoint of the company or the subscribers, to require them to pay all at once the entire cost of the subscriptions. Not only do subscribers find it more convenient to pay in instalments, but the company does not usually need all the cash at once. Hence the payments are usually made, in part when the company commences operations, and the balance in a given number of instalments. If the subscribers to the stock of the Brown-Allen Company agree to make payment in four instalments, one when operations are begun and the balance in three equal monthly payments, the following entry will be sufficient to make formal record of the agreement: + + + + + + + + + + + + + + + + + + +
Instalment Number 1
Instalment Number 2
Instalment Number 3
Instalment Number 4
+ +To Subscribers: +To charge instalments Nos. 1, 2, 3 and 4, due respectively on the day when the Brown -Allen Company begins operations, and on the same day of the three succeeding months. + +As the instalments fall due cash account or other proper ac- +count is charged and the instalment account is credited. Thus, if +Instalment Number 1 is paid in cash, the entry is: + +Cash $17,500.00 +To Instalment Number 1 $17,500.00 + +Similar entries must be made for succeeding instalments as they fall due and are paid. + +CHAPTER XXV + +PROPRIETORSHIP AND PARTNERSHIP INCORPORATED + +As has been noted, corporations are frequently organized to continue a business hitherto run by a sole proprietor or by partners. When this is the situation the assets owned by the individual proprietor or partners have become the assets of the corporation, or at least a portion of the assets of the corporation. The corporation in turn assumes the debts of the organization which it supplants. This is oftentimes the plan followed by individuals and partners who do not possess the requisite amount of capital to make needed improvements or extensions, and who can, by this agency, appeal to a large number of investors. + +**Valuation of Assets.** When this is done it is necessary for the proprietors or partners to give some indication they wish to place on their business when transferring it to the corporation, for they will desire to obtain their fair proportion of interest in this organization. Probably the real estate, fixtures, stocks of goods, and so on, have been kept on the books at cost price less whatever deductions may have been allowed for depreciation, bad debts, etc. Perhaps the owners will not be content to transfer their assets to the corporation without receiving some indication for the goodwill which they have created through their diligence and industry. It is even possible, though it may not be probable, that the goodwill may exceed in value all of the tangible assets. On the other hand goodwill may be overvalued with less likelihood of the overvaluation being detected than in case of tangible assets. Consequently the valuation of the assets preparatory to any exchange for the stock of the corporation should seriously engage attention as regards the old proprietors. + +If the proprietors place too great a valuation upon their interests their action will operate against the future welfare of the company by making difficult the disposition of the stock to others. The solution of the question may perhaps best be found by using as a basis for estimating the value of goodwill the earning power of the old organization and the probable earning power of the new one. If these organizations earn 15% on the capital of its proprietors and if the investing public are securing only 6%, 139 + +160 ACCOUNTS IN THEORY AND PRACTICE + +on money which they invest in stocks of companies doing a similar kind of business and affording about the same degree of security, then the difference between 15 and 6, or 9%, represents roughly the earning power of the goodwill. If, for example, the profits of a partnership amount to $100,000, thus $15,000 capitalized on a 6% basis, or $250,000, represents the value of the partners' interests. The difference between $250,000 and $100,000, or $150,000, represents the value of the partners' goodwill. + +The above is an assumption; yet in practice some such plan of valuing goodwill is pursued. There may be reason to believe that under the corporate form of organization, with more capital invested, wider markets, etc., the earning power of each dollar invested will be greater than under the partnership form. It may be justified in increasing the valuation of the goodwill to an even greater figure. Experience shows, however, that the anticipations of greatly increased profits, under the conditions suggested, are frequently over-optimistic. + +**Statement of Assets and Liabilities.**—When the time arrives to make the transfer of the partnership or proprietary interests to the company, an accurate statement of the assets and liabilities is to be made by the old concern. If this concern has been properly kept the closing balance sheet of the old concern will afford the necessary information. This statement is now used as a basis for closing the books of the old enterprise and for bringing into the corporation's books the assets which it receives and the liabilities which it assumes. + +**Goodwill.**—Before the closing entries can be made in the old books, however, an account must be opened in them for goodwill, if it is desired to charge any amount in then charged with an amount which, found by some such method as we have already suggested, is deemed proper, and a corresponding credit is made in one or more capital accounts. To illustrate, assume that the firm of Brown and Allen, before goodwill is brought into its books, has assets and liabilities as shown in the following balance sheet: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance SheetBrown and Allen:
Real Estate.$27,600Brown Capital.$30,000
Merchandise.6,000Allen Capital.20,000
Accounts Receivable.16,000Accounts Payable.6,000
Cash.7,500
$58,100$56,000
+ +A table showing a balance sheet for Brown and Allen. + +PROPRIETORSHIP AND PARTNERSHIP INCORPORATED 161 + +If Brown and Allen conclude that their profits justify them in placing a valuation of $25,000 on their goodwill, the following journal entry will serve to charge goodwill and credit their respective capital accounts, which we assume are to be credited in proportion to their respective interests: + + + + + + + + + + + + + + +
Goodwill.$25,000.00
To Brown, Capital.$15,000.00
Allen, Capital.10,000.00
+ +After these entries are posted a balance sheet will show: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Brown and Allen:
Real Estate.$27,000Brown, Capital.$45,000
Goodwill.25,000Allen, Capital.30,000
Merchandise.6,000Accounts Payable.6,000
Accounts Receivable.8,100
Cash.7,000
$81,100$81,100
+ +The balance sheet now presents the net worth at the figure at which the partners are willing to exchange it for the stock of the corporation, which, when we assume, will continue the business under the title The Brown-Allen Company. This title will preserve to the corporation whatever goodwill attaches to the names of the partners, while the latter, owing to their large interest in the corporation, are likely to become directors or officers. + +**Factors Determining Capitalization.**—Before proceeding with the entries required to close the partners' accounts, and all other accounts in the old books, providing new books are to be in- stalled, let us consider the factors which will determine the capi- talization of the corporation. Two principal considerations: (a) present requirements and (b) future requirements. Allowance must be made for both of these when determining what shall be the capitalization. Authorized capital must be sufficiently large to permit all desirable expansion. On the other hand if made unnecessarily large it will cause the taxes which the state levies on the authorized stock to become an unnecessary burden. Prob- ably the best solution will depend upon a proper combination by becoming owners of a majority not only of all issued stock but of all issuable stock as well. This they can do by fixing the capi- talization of the corporation at such a figure that their original + +11 + +162 ACCOUNTS IN THEORY AND PRACTICE + +purchase of stock will give them such controlling interest. +We must not forget, however, that the chief factor to be con- +sidered in determining the proper amount at which to capitalize +is the need for funds, present and future. + +In the example we have assumed that $100,000 would appear to +be a reasonable authorized capitalization. Since Brown and +Allen are to receive together $75,000 of the stock they will control +the corporation, while there will remain $25,000 authorized stock +which may be issued later. We shall assume that only common stock will be authorized. +In addition to the stock subscribed by Brown and Allen, R. T. Prince subscribes +for 50 shares, L. O. Gordon, 40 shares, and O. S. Smith, 10 shares, +to be paid in cash in four equal instalments, the first at which the +company begins operations and the remaining three at intervals +of one, two and three months, respectively, thereafter. + +Entries Necessary to Record Changes. The opening entry +in the journal of the corporation is shown on page 156, as shown +on page 156, with some possible variations in the introductory +paragraph, mentioning the purposes of the corporation, and +going into whatever detail may be necessary to state fully the +conditions under which the purchase of the business of Brown +and Allen is made. +Either of the two methods described on page 156, +may be pursued, accordingly as it is desired to have both the +authorized and the issued stock shown in the balance sheet, or +merely the actual stock outstanding. If method (a) is followed +the full amount of the authorized stock will be shown in the +ledger and consequently in the balance sheet. If method (b) +is followed only the actual stock outstanding will be shown. + +Since the subscription of the firm of Brown and Allen will be +paid in full when its assets and liabilities are transferred to the +Brown-Allen Company, while the other subscriptions will be +paid in installments it will be well to make separate entries for +these two classes of subscriptions. The entry necessary to show +the four instalments is:¹ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Instalment Number$ Amount
Instalment Number 1$2,500.00
Instalment Number 2$2,500.00
Instalment Number 3$2,500.00
Instalment Number 4$2,500.00
To Subscribers.$10,000.00
+ +¹ A variation from this procedure is to charge each instalment and credit subscribers account as each instalment falls due and is paid. + +PROPRIETORSHIP AND PARTNERSHIP INCORPORATED 163 + +**Old Books Continued.**—Suitable explanation should follow this entry, stating the time when the instalments fall due and giving any other information the circumstances may make desirable. The entries necessary to bring into the company's books the assets and liabilities of the firm of Brown and Allen will vary according to conditions. If the old books of Brown and Allen are to be closed and a new set of books opened for the Brown-Allen Company a different procedure will be required than if the old books are to be kept open. In either case all of the accounts in the old books will be closed and new accounts will be opened in the new ledger of the Brown-Allen Company for the sundry assets purchased and liabilities assumed. In the latter case only the partners' capital accounts will be closed in the old ledger and such new accounts opened as are peculiar to corporation accounting. As the retention of the old books requires the simple procedure let us first consider the adjustments necessary when they are kept open. + +When Brown and Allen subscribed to the stock of the Brown-Allen Company they were charged as subscribers in the journal. Since the capital accounts of Brown and Allen, respectively, are the same in amount as their subscriptions, and since their interest in the old concern is measured by their capital accounts, the following entry will close their individual capital accounts, and at the same time cancel their liability as subscribers: + +Capital, Brown $45,000.00 +Capital, Allen 30,000.00 + +To Subscribers $75,000.00 + +The Subscribers Account in the ledger should now appear thus: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Subscribers Account
To Unissued Stock.$85,000
By Instalment No. 1....$ 2,500
By Instalment No. 2....2,500
By Instalment No. 3....2,500
By Instalment No. 4....2,500
By Capital, Brown....45,000
By Capital, Allen....30,000
Total$85,000
+ +The subscriptions remaining unpaid at any time are shown by the debit balances of the Instalments Accounts. + +**New Books Opened.**—If new books are installed for the corporation it will be necessary to close not only the partners' + +164 +ACCOUNTS IN THEORY AND PRACTICE + +accounts in the old books, but all others as well. At the same time that the asset and liability accounts in the old books are closed they are opened in the new books of the corporation. In the partnership books the Brown-Allen Company is charged with the value of the assets which are to be turned over to it and credited with the amount of the liabilities which it is to assume, thus: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Journal, Brown and Allen
The Brown-Allen Company:$81,000.00
To Real Estate:$27,000.00
Goodwill:25,000.00
Merchandise:6,000.00
Accounts Receivable:3,500.00
Cash:7,000.00
To charge The Brown-Allen Company for the value of the assets of the firm of Brown and Allen, as provided by the terms of the agreement made between the firm of Brown and Allen and the Brown-Allen Company, which latter is to receive the assets and assume the liabilities of the firm of Brown and Allen.
Accounts Payable:$6,000.00
To The Brown-Allen Company:6,000.00
To credit The Brown-Allen Company with the liabilities of the firm of Brown and Allen, these accounts being assumed by the Brown-Allen Company as per agreement.
+ +As a result of the above entries the Brown-Allen Company is charged in the books of Brown and Allen with the net amount of $75,000. This amount is offset by $6,000 being offset to the extent of $6,000, the credit for liabilities assumed. As $75,000 is also the amount of the stock of the Brown-Allen Company subscribed by Brown and Allen, upon receipt of the stock by Brown and Al len the following journal entry is made: + + + + + + + + + + + + + + +
Capital Stock of the Brown-Allen Company:$75,000.00
To The Brown-Allen Company:$75,000.00
To charge capital stock of The Brown-Allen Company for the cash received, $75,000, this being the consideration for which Brown and Allen agree to sell their interests to The Brown-Allen Company.
+ +The only accounts now remaining open on the books of Brown and Allen are: + + + ; +Note: This table represents a simplified version of a journal entry for a partnership dissolution under U.S. GAAP. It assumes that The Brown-Allen Company has assets worth $81,000 (including goodwill), liabilities worth $6,000 (including accounts receivable), and capital stock worth $75,000 (including cash). The partnership's assets are transferred to The Brown-Allen Company in exchange for its capital stock. The journal entries reflect these transactions.; + +PROPRIETORSHIP AND PARTNERSHIP INCORPORATED 165 + +Capital Stock of The Brown-Allen Company charged with $75,000.00 +Capital, Brown credited with 45,000.00 +Capital, Allen credited with 30,000.00 + +When the stock is transferred to Brown and Allen, respectively, as individuals, the following entry is required to close their capital accounts as well as the account with the stock of the Brown-Allen Company: + +Capital, Brown $45,000.00 +Capital, Allen 30,000.00 +To Capital Stock of The Brown-Allen Co. $75,000.00 + +In the books of the Brown-Allen Company entry must be made to charge the assets taken over from Brown and Allen as well as to credit the liabilities assumed. This is accomplished thus: + +
To charge capital stock of The Brown-Allen Company for the cash received, $75,000, this being the consideration for which Brown and Allen agree to sell their interests to The Brown-Allen Company.
The only accounts now remaining open on the books of Brown and Allen are:
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Journal, the Brown-Allen Company
Real Estate.$27,000.00
Goodwill.25,000.00
Merchandise.6,000.00
Accounts Receivable.16,000.00
Cash.7,300.00
To Subscribers.$75,000.00
Accounts Payable.6,000.00
+ +To charge the assets purchased from the firm of Brown and Allen and to credit the liabilities of Brown and Allen which are assumed, also to credit Subscribers Account with the excess of assets purchased over liabilities assumed. + +The Trial Balance—After the above entries in the journal of the Brown-Allen Company are posted to the ledger a trial balance (not essential, but desirable to prove the correctness of the work) appears thus: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Trial Balance, the Brown-Allen Company:
Instalment No. 1.$2,590Capital Stock.$85,099
Instalment No. 2.2,590Accounts Payable.6,699
Instalment No. 3.2,599
Instalment No. 4.2,599
Real Estate.27,999
Goodwill.25,999
Merchandise.6,999
Accounts Receivable.16,999
Cash.7,999
Total.$81,999.99
To $11,999.99$81,111.11
Subscriptions.$11,111.11
To $11,111.11$81,111.11
Subscriptions.$81,111.11
To $81,111.11$81,111.11
Subscriptions.$81,111.11
To $81,111.11$81,111.11
Subscriptions.$81,111.11
To $81,111.11$81, + +166 +ACCOUNTS IN THEORY AND PRACTICE + +If ledger accounts are opened for Unissued Stock and Authorized Stock, the trial balance will appear slightly different. In the one shown above Unissued Stock would appear charged with $15,000 and Authorized Stock would show a credit balance of $100,000, while Capital Stock, $85,000, would not appear on the credit side. + +The procedure in case of a corporation which does not purchase an established business, but secures funds for the construction of its plant, etc., entirely through the sale of stock for cash differs only in detail the instalments and cash being charged in place of the real estate, merchandise, etc., taken over. + +CHAPTER XXVI + +THE CORPORATION—ACCOUNTING FOR BOND ISSUES + +General Considerations.—The advisability of issuing bonds was discussed in Chapter XXIII. When the management has determined upon an issue of bonds entries must be made recording the transactions incident to their sale, also, later on, to record interest accruals and payments thereon, the correct distribution of discount on the bonds when they are sold at a discount, and the premiums on the bonds when they are sold at a premium. The specification of the deed of trust for the establishment of sinking funds for ultimate payment of the bonds must be observed. Money placed in sinking funds is oftentimes invested in interest-bearing securities, or in some other form of profitable investment. All facts incident to the establishment of such funds must be recorded and careful record kept of interest earned by the funds and of its disposition according to the provisions of the deed of trust. + +Marketing Bonds.—The price at which a corporation is able to market its bonds is a variable depending on several factors. Among the things which determine bond prices are the general credit of the corporation, the protection afforded the bonds by the provisions of the deed of trust, the rate of interest which the bonds bear, as well as business conditions generally and the situation of the money market when the sale is made. An old and firmly established company, able to offer abundant protection, may find it possible to sell its bonds at a reasonable price. New bonds, bearing 5 per cent interest, above par, i.e., above the face value of the bonds. A new and untried company, on the other hand, might have great difficulty in marketing a similar issue at par. Again, when money is scarce, investors shy, and conditions in general are unfavorable, the most firmly established concern may find it impossible to market bonds at what it considers a reasonable price. Following the panic of 1907 many companies found that their banking and transportation corporations chose to issue notes running only a few years rather + +167 + +168 +ACCOUNTS IN THEORY AND PRACTICE + +than yoke themselves to long term bonds bearing high rates of interest. Such recourse to short term securities is frequently had in the expectation that the near future will bring better opportunities for market profits by selling them. + +**Bonds Sold at Par.**—From an accounting point of view, the simplest situation is that which occurs when bonds are sold at par. There is no premium or discount, since the cash received is equal to the face of the bonds. Cash is charged and the bond account is credited as follows: + +Cash................................................. +To Bonds............................................... +____________........................................ +To charge cash and credit bonds for the amount sold at par. + +If the following balance sheet of The Atlas Company indicates the situation before the sale of bonds + +Balance Sheet, The Atlas Company: + + + + + + + + + + + + + + + + + + + + + + + + + + +
Fixed Assets$15,000Capital Stock$25,000
Current Assets (including cash)5,000Accounts Payable5,000
Goodwill10,000
$30,000$30,000
+ +then after the sale at par, of an issue of bonds amounting to $10,000, the balance sheet appears thus: + +Balance Sheet, The Atlas Company: + + + + + + + + + + + + + + + + + + + + + + + + + + +
Fixed Assets$15,000Capital Stock$25,000
Current Assets (including cash)15,000Bonds10,000
Goodwill10,000Accounts Payable5,000
$40,000$40,000
+ +**Bonds Sold at Discount or Premium.**—When, however, the bonds are disposed of either above or below par, as is very likely to happen, the situation is more complicated. If sold below par the amount received is less than the face value of the bonds. The difference must therefore be charged to some other account. This account is usually called the "discount on bonds" account. If we assume that The Atlas Company markets its bonds at 90 per cent. of their par value, thus receiving $9,000 in cash instead of $10,000, the following entry is made: + +
Cash$9,000Bonds at Discount$1,000
+ +THE CORPORATION—ACCOUNTING FOR BOND ISSUES 169 + + + + + + + + + + + + + + +
Cash$9,000.00
Discount on Bonds$1,000.00
To Bonds$10,000.00
+ +The balance sheet now becomes: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, The Atlas Company:
Fixed Assets.$15,000Capital Stock.$25,000
Current Assets (including cash).14,000Bonds.10,000
Discount on Bonds.1,000Accounts Payable.5,000
Goodwill.10,000
$40,000$40,000
+ +If, on the contrary, the bonds sell at a premium of 10 per cent instead of a discount, the following entry is required to record the sale: + + + + + + + + + + + + + + +
Cash.$11,000.00
To Bonds.$10,00.00
Premium on Bonds.1,000.00
+ +**Effective Interest Rate—Bonds Sold at Discount.—** The accounts thus set up to record the premium and discount on bond issues deserve careful consideration. First, let us consider the situation where bonds are sold at a discount. The reasons for such a situation have already been discussed. Since the amount of cash received when bonds are sold below par is less than the par value of the bonds, the interest rate paid on the part of the bonds is less than the stated rate of interest. A "discount" or effective interest charge is found by adding together the actual amount paid out yearly as interest and such a portion of the $1,000 discount on bonds as one year is a part of the whole number of years the issue runs. If the above mentioned issue of bonds runs twenty years and bears the nominal rate of interest of 5%, that is, 5% on the par of the bonds, then the effective inter- est rate paid is $(1/2) \times (1/2) = $1,875. Thus we find that the effective rate of interest is $(1/2) \times (1/2) = $1,875 or $6.1%. This means that $6.1% is $55.0 per annum. + +Thus to find the effective rate of interest we find the ratio of the cost per year to the actual amount of cash received for the bonds and not to the par value of the bonds. In this instance the actual cash received is $9,000. Moreover, it is clear that the interest cost per annum is $55. ($55/1875) plus one-twentieth of the discount on the bonds, which is $(3/2) \times (1/2) = $6.1%. + +A table showing fixed assets, current assets including cash, discount on bonds, goodwill, and total assets for The Atlas Company. + +170 +ACCOUNTS IN THEORY AND PRACTICE + +**Recording Interest Charge.—As most progressive concerns find their profit and loss monthly the accounting procedure required to bring into the books the real interest charge for each month is:** + + + + + + + + + + + + + + +
Profit and Loss$45.83
To Interest Accrued.$41.67
Discount on Bonds4.16
+ +To charge Profit and Loss with the month's burden of interest accruing on bonds, and to credit Interest Accrued with the nominal rate of interest, and Dis- +count on Bonds with the difference between that expense, the same being a charge to Profit and Loss. + +Later when the interest falls due and is paid, presumably at the end of a six months' period, Interest Accrued is charged and Cash is credited, thus: + + + + + + + + + + + + + + +
Interest Accrued$250.00
To Cash.$250.00
For payment of interest accrued on bonds during six months' period closed.
+ +**Small Discrepancies in Interest Calculations.—Since, in business transactions, it is not customary to carry figures representing interest to more than one decimal place, thus rounding off the sum to the nearest cent, some slight discrepancies arise in the above figures, not sufficiently great, however, to vitiate the results to any material degree. Thus the amount credited each month to Discount on Bonds, if multiplied by 12, the number of months in a year, and in turn by 20, the number of years the bonds run, should give a product of 1,000, the original amount in dollars of the Discount on Bonds account. But $4.16 × 12 × 20 = $896.40, or $1.89 less than it should be. +If $4.17 × 12 × 20 = $1,008.00, then $4.17 × 12 × 20 = $1,000.80, which shows an excess of $0.80. +A discrepancy as small as this may be ignored until the bonds mature and then be added or deducted from the last monthly credit to Discount on Bonds account, thus closing this account. + +A similar discrepancy will exist at the end of each six months' period between the credit balance in the Interest Accrued account, which will be $6 = $41.67, or $250.02, and the actual amount of interest due. $250.82. This will show an excess charge to Profit and Loss which may be credited to that account at the end of each six months, thus: + +THE CORPORATION—ACCOUNTING FOR BOND ISSUES 171 + +Interest Accrued. $250.02 +To Cash. $250.00 +Profit and Loss. 0.02 + +For payment of accrued interest on bonds, and to carry excess interest charge of $.02 to Profit and Loss. + +Similarly when the bonds mature, any slight discrepancy in the balance of the Discount on Bonds account, such as was indicated above, can be carried to Profit and Loss. + +**Effective Interest Rate—Bonds Sold at Premium.—When bonds are sold at a premium the same principles apply as when they are sold at a discount, but the effective rate of interest is less than the nominal rate. Suppose that the issue of bonds had sold at 110 instead of 96. The entry recording the sale follows:** + +Cash. $11,000.00 +To Bonds. $10,000.00 +Premium on Bonds. 1,000.00 +Full explanation here. + +The nominal rate of interest, that is, the rate paid on the par value of the bonds, is 5%. But the actual interest cost per annum is ($350-1/20 of $1,000) = $11,000, or 4.99% reckoned on $1,000, or $459.99 reckoned on $350. The first factor is the premium on which the nominal rate, 5%, ignores. The first factor is the $11,000 actually received for the bonds; the second factor is the premium on the bonds, of which 1/20 should be written off each year to reduce the amount of interest charged to Profit and Loss. +The entries required are similar to those given above, with such alterations as may be seen by an examination of the following: + + + + + + + + + + + + + + +
Profit and Loss.$37.50
Premium on Bonds.4.16
+ +To Interest Accrued. +To charge the Profit and Loss and Premium on Bonds accounts with the month's portion of interest accrued, and to credit the Interest Accrued account with the nominal rate of interest. + +If interest is paid semianually, at the end of each six months' period, Interest Accrued is charged and Cash is credited with $250, as shown above. Any slight discrepancy existing in the Interest Accrued account can be carried to Profit and Loss, as already explained. + +172 +ACCOUNTS IN THEORY AND PRACTICE + +Premium or Discount Affects Profit and Loss.—From the foregoing discussion we see that if either a bond premium or a bond discount account is raised on the books when bonds are sold at other than par value, the amount of interest to be charged must be considered as a factor aiding in the determination of the actual interest charge to be made to Profit and Loss. If the bonds sell at a discount, the amount of the discount should be prorated over the time the bonds run, the amount applicable to each period being added to the actual interest paid, i.e., the nominal interest, to determine the amount to be charged to Profit and Loss. If the bonds sell at a premium, the amount of the premium should be prorated over the time they run, the amount applicable to each period should be subtracted from the actual interest paid to determine the amount to be charged as interest to Profit and Loss. + +When bond discount and premium are considered in connection with redemption prices above or below par, or when the situation is complicated by the redemption of bonds before the date of maturity, complications arise. The student is referred to works listed on page 183 for a discussion of these questions. + +CHAPTER XXVII + +THE CORPORATION—REDEMPTION OF BONDS + +Redemption of Bonds.—An issue of bonds may be redeemed serially, that is, a given number of the outstanding bonds may be drawn each year by lot and purchased by the issuing company, being redeemed at par or some other figure. On the other hand, the whole issue may remain outstanding until the expiration of the period prescribed and then be redeemed in toto. Accordingly bonds are classified as serial and sinking fund, depending upon the mode of payment. A third classification includes those bonds which are issued with the expectation of paying them out of profits thereof, but of refunding the whole or part of them over a certain period. That is, new bonds are issued in exchange for the old ones. The advisability of issuing a given kind of bonds must be determined by the character of the issuing company and the purpose of the issue. + +Bonds Issued in Perpetuity.—We have learned that it is frequently of advantage to a company to trade on the equity of borrowed funds. Consequently it may be desirable for a company to establish a permanent bonded indebtedness, within certain limits. This being true, it might be desirable to sell bonds not having a maturity date and which, therefore, would remain the permanent obligations of the company. This plan is followed extensively in England, but in the United States it has not been popular. However, some of our corporations have issued bonds maturing at such a distant period that they may be regarded as perpetual bonds, and consequently as safe investments. When interest rates are high, as they tend to be in a new country where capital is scarce, short term issues are naturally preferred because of the expectation that interest rates will be lower later on. + +Sources of Redemption Funds.—Whether bonds be sinking fund or serial, there are but two possible sources from which the means for their redemption can be secured, viz: (a) capital and (b) profits. If all the bonds be sold at par, viz., $100 each at par and the receipts from the sale invested in the business, the net proprietorship will remain the same or be increased by $1,000,- + +173 + +174 +**ACCGUNTNS IN THEORY AND PRACTICE** + +000 accordingly as these bonds are ultimately redeemed out of capital or out of profits, assuming that the assets purchased with the $1,000,000 are preserved at their original value. To illustrate, let us assume that The Royal Manufacturing Company, before the sale of $1,000,000 of bonds, has the following balance sheet: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Royal Manufacturing Company:
Fixed Assets$3,000,000Capital Stock$2,000,000
Accounts Receivable.200,000Bonds.1,000,000
Cash.110,000Accounts Payable.310,000
$3,210,000$3,210,000
+ +If the bonds are sold at par and the returns invested in land or other fixed assets, the balance sheet becomes: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Royal Manufacturing Company:
Fixed Assets$3,000,000Capital Stock$2,000,000
Accounts Receivable.200,000Bonds.1,000,000
Cash.110,000Accounts Payable.316,568
$3,316,568$3,316,568
+ +If the bonds run ten years, then, disregarding interest, it will be necessary to lay aside $181,568 each year for ten years in order, after ten years, to have a fund of $1,815,688 with which to redeem the bonds. Where shall the $181,568 be secured each year? Shall we retain that much of the profits each year until we have saved $1,815,688 profit? Or shall we wait until the expiration of ten years, meanwhile distributing profits to stockholders, and then use this fund to redeem them may be pay to off the bonds? If we reserve $181,568 of our profits when at the end of ten years but before the bonds are redeemed the balance sheet will appear essentially as follows: + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet Royal Manufacturing Company:
Fixed Assets$3,295,136Capital Stock$2,995,136
Accounts Receivable.229,568Bonds.229,568
Cash.118,568Accounts Payable.349,568
Profit and Loss.$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,568$4,349,$4,$,
+ +When the bonds are paid the following entry is made: +Bonds +To Cash. +$181.568 +$1.815.688 +after which the balance sheet becomes: + +THE CORPORATION—REDEMPTION OF BONDS 175 + +**Balance Sheet, Royal Manufacturing Company:** + +| Fixed Assets | $3,000,000 | Capital Stock | $2,000,000 | +|---|---|---|---| +| Accounts Receivable | 200,000 | Accounts Payable | 310,000 | +| Cash | 110,000 | Profit and Loss | 1,000,000 | +| | **$3,310,000** | | **$3,310,000** | + +An examination of this balance sheet shows that whereas the liabilities of The Royal Manufacturing Company are no greater than before the bonds were issued, its assets have increased in value $1,000,000. This is due to the fact that the bonds have been paid out of profits. Had no profits been retained, it would have been necessary to convert enough of the fixed assets into cash to make the $1,000,000 required for the payment. If this is done the balance sheet appears thus: + +**Balance Sheet, Royal Manufacturing Company:** + +| Fixed Assets | $2,110,000 | Capital Stock | $2,000,000 | +|---|---|---|---| +| Accounts Receivable | 200,000 | Bonds | 1,000,000 | +| Cash | 110,000 | Accounts Payable | 310,000 | +| | **$3,310,000** | | **$3,310,000** | + +providing the conversion of fixed assets into cash is made without loss. Then, after the bonds are redeemed, the balance sheet becomes: + +**Balance Sheet, Royal Manufacturing Company:** + +| Fixed Assets | $2,110,000 | Capital Stock | $2,000,000 | +|---|---|---|---| +| Accounts Receivable | 200,000 | Accounts Payable | 310,00 | +| | **$2,318,666** | | **$2,318,666** | + +which leaves the company with assets of the same value as before the bonds were issued—the consequence of redeeming bonds out of capital. + +**Comparison of These Plans.—Which plan is best to follow circumstances must determine. A company is not under obligation to use profits to pay bonds, the sale of which is made to secure purchase money for permanent additions and betterments. But while theoretically, a company invests the returns from its operations in such things as valuable real estate happens, in practice that the money derived from bond sales is spent for improvements the value of which is by no means permanent. Suppose that the Royal Manufacturing Company + +176 +ACCOUNTS IN THEORY AND PRACTICE + +invests the $1,000,000 secured by the sale of bonds, in machinery possessing a useful lifetime of ten years. Then, if no reservations are made to cover depreciation, the balance sheet, after the bonds are paid, becomes: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Royal Manufacturing Company:
Fixed Assets.$1,100,000Capital Stock.$2,000,000
Accounts Receivable.200,000Accounts Payable.310,000
Deficit.1,000,000
$2,310,000$2,310,000
+ +Depreciation a Factor.—In this instance $1,000,000 of the capital has been paid out as dividends, an illegal procedure in most cases for which the directors of the company may be held personally responsible. Had proper allowances been made for depreciation this situation would not have arisen. A depreciation reserve would have been set up on the credit side of the ledger and credited each year with, say, $100,000, and a corresponding charge against profits. Had such a reserve been made during the ten year period, a showing of $1,000,000 less in profits would have been made; so that essentially the same situation would have resulted as when the assets do not depreciate and no reserve for depreciation is set up. In reality, of course, the profits are $1,000,000 less. + +These illustrations indicate the principles to be followed in determining whether a sinking fund ought to be set aside out of profits or out of capital. If adequate depreciation allowances are made it is not necessary or even advisable, as a rule, to adopt the ultraconservative policy of paying bonds out of profits. + +The Sinking Fund.—We must not conclude from the foregoing that it is not necessary to make actual cash-reservations for the sinking fund, which is an altogether different matter. This is a procedure quite independent of the question whether bonds ought to be redeemed out of capital or out of profits. If proper reserves are made for depreciation it will be sufficient to pay off the bonds are retained, the presumption is that cash will be forthcoming to make the payment when the time for it arrives. But there is no guaranty that this will be the case other than the general policy of the management. Usually such a guaranty does not satisfy the requirements of investors. + +The customary procedure is to require the company that issues + +THE CORPORATION—REDEMPTION OF BONDS 177 + +the bonds to make periodic payments, annual or otherwise, to a trustee, whose duty it is to invest them as profitably as is consistent with security, and thus to hold them for the protection of the bondholders, so as for the ultimate redemption of the bonds. The earnings of this trust fund may be added to it, or not, according to arrangements. If the earnings are turned back into the fund the instalments needed to bring the fund to the required amount in a given time are smaller than if the earnings are turned over into the general fund of the company. If, to illustrate, we ignore interest considerations, it will require ten yearly instalments of $100,000 each to create a sinking fund of $1,000,000 in ten years. The following entry records the transfer of the periodic instalment to the trustee: + +Sinking Fund Trustee $100,000.00 +To Cash $100,000.00 +To record payment of cash to the trustee accord- ing to provisions of the deed of trust. + +As a consequence of this annual transfer of cash to the sinking fund trustee there appears on the balance sheet an asset account under the title, Sinking Fund, which after ten years amounts to $1,000,000 and the balance sheet becomes: + +Balance Sheet, Royal Manufacturing Company: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Fixed Assets$3,000,000Capital Stock$2,000,000
Accounts Receivable.200,000Bonds1,000,000
Sinking Fund in Truste- esDebts Payable310,000
of Trustee1,000,000Profit and Loss1,000,666
Cash110,666
$4,318,666$4,318,666
+ +When the bonds are redeemed the following entry is made: + +Bonds $1,000,000.00 +To Sinking Fund $1,000,666.66 + +which, when posted, leaves the balance sheet as shown at the top of page 175. + +Interest on Bonds.—Although there is room for dispute as to the proper origin of funds to be employed in payment of the principal of bonds there is no question as to the proper source of the means needed to satisfy interest requirements. Interest is an + +12 + +178 +ACCOUNTS IN THEORY AND PRACTICE + +expense which must be paid out of income, not out of capital. It is one of the deductions which must be made from gross income to arrive at net profits. Since interest is paid annually or semi-annually, it is necessary, when closing the nominal accounts into Profit and Loss, to charge Profit and Loss with the period's proper burden of interest, even though it may be not yet due. Thus if the $1,000,000 loan bears 5% interest, payable monthly, Company bears 5% interest, payable semiannually on June 30 and December 31, and if an income statement is set up monthly, each month's interest charge must be entered although interest is paid only twice during the year. One month's interest at 5% on $1,000,000 is $4,166.67 The following entry is necessary to charge Profit and Loss and credit the liability account, Interest Accrued. + +Interest: $4,166.67 +To Interest Accrued: $4,166.67 + +Interest is in turn charged to Profit and Loss, but Interest Accrued is a real account which appears in the balance sheet for January 31st as a current liability. Similarly, each month Profit and Loss is charged with the month's quota of interest and the Interest Accrued account is credited, until at the close of the half year Interest Accrued stands credited with six months' interest—$25,000, which is then due and payable. When paid the following entry is made: + +Interest Accrued: $25,000.00 +To Cash: $25,000.00 + +Thus the Interest Accrued account is closed, and the current liability which has been accruing for six months is liquidated. The same process is repeated during the next six months, and so on. + +Interest on Sinking Fund.—Interest earned by the sinking fund may be (a) added to the fund, or (b) turned back into the business. Entries must be made to record this interest. If it is added to the sinking fund the following entry is made monthly: + +Accrued Income on Sinking Fund: +To Income on Sinking Fund: +To record interest accrued during the month +on sinking fund interest. +When the sinking fund trustee receives cash in payment of the accrued interest on the sinking fund the following entry is made + +THE CORPORATION—REDEMPTION OF BONDS 179 + +Sinking Fund Trustee ____________ To Accrued Income on Sinking Fund ____________ To charge with cash received by him on sinking fund investments. + +If the sinking fund trustee retains the interest received this entry is sufficient. If he pays it over to the company cash is charged and the trustee credited, thus: + +Cash ____________ To Sinking Fund Trustee ____________ To credit the sinking fund trustee with the amount of interest received by him on sinking fund investments and now paid over to the company. + +CHAPTER XXVIII + +THE CORPORATION—ROUTINE ACCOUNTING PROCEDURE + +Use of the Surplus Account.—In general, the routine procedure involved in corporation accounting is not different from that required for proprietorships or partnerships. The chief peculiarities in corporate procedure are the result of the method employed to utilize surplus, which is usually retained as profits. The amount of the capital stock is fixed by the charter and cannot be readily changed. Moreover, capital stock is usually shown at par in the accounts while its real value may be either above or below par value. Capital is constantly changing as the result of the losses and gains incident to operations while capital stock remains stationary. Therefore it becomes necessary to establish a separate account whose purpose is to show these changes. This is the Surplus or Deficit account, the balance of which is greater or less than the amount shown by the Capital Stock accounts—assuming that capital stock is full paid. + +In case of sole proprietorships and partnerships it is customary to carry the undistributed part of net profits to the capital accounts in accordance with some prescribed procedure, but in corporation accounting separate capital accounts are not kept or the capital stock is not shown on the face of the books. There is the Capital Stock account (or accounts) which is sometimes a controlling account for the individual stockholders' accounts kept in the subordinate Stock Ledger. These individual accounts are altered only when stock is transferred from one party to another or when new stock is issued, neither of which transactions are related to the determination, recording, or distribution of profits. + +For this reason it is necessary to carry profits to a Surplus account. This account plays a significant part in corporation accounting. When a corporation increases its surplus by bringing into it each year a portion of the current profits it is said to pursue a conservative policy, while one which accumulates no surplus is not likely to be found well prepared to weather a + +180 + +ROUTINE ACCOUNTING PROCEDURE 181 + +period of hard times Such a statement is a mere generalization, however, and subject to many qualifications and limitations in individual instances. The amount of surplus which it may be desirable to accumulate will depend upon the character of the enterprise and the peculiar conditions surrounding it. + +**Surplus Account Illustrated.—** Let the following statement represent the condition of the Smith-Alling Company as at Dec. 31, 1919: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Smith-Alling Company, as at Dec. 31, 1919:
Factory Building.$100,000Capital Stock$150,000
Inventories55,000Other Liabilities12,000
Current Assets12,000Reserve for Depreciation5,000
$167,000$167,000
+ +During the year 1920 various operations are engaged in, resulting in a net profit of $10,000 which is carried to Surplus. The balance sheet as at Dec. 31, 1920 is as follows: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Smith-Alling Company, as at Dec. 31, 1920:
Factory Building.$100,000Capital Stock$150,000
Inventories60,000Other Liabilities10,000
Current Assets20,000Reserve for Depreciation10,000
Surplus10,000
$180,000$180,000
+ +The entry by which net profits is carried to Surplus is: + +Profit and Loss ... $10,000 +To Surplus ... $18,000 + +To carry net profit for the year ending Dec. 31, 1920, to the Surplus account and to close the Profit and Loss account. + +**Disposition of Surplus.—** The disposition of the surplus rests in the power of the board of directors. It is they who decide what portion of it shall be used to pay dividends, what portion shall be retained in the Surplus account, and what portions shall be set up as special reserves. We have learned that reserves are of two kinds, profit and valuation. Reserves established out of surplus are reserves of profit because they represent value over and above the original investment. Among such + +182 +ACCOUNTS IN THEORY AND PRACTICE + +special reservations are those made to finance additions and bet-terments, to meet contingencies, and to provide for the liquidation of bonded indebtedness out of profits. + +Sources of Surplus.—Surplus does not always represent ac-cumulated profits, however. There are various ways in which it may be increased or diminished other than through profits or losses arising from operations. One important element of this is by the sale of capital stock above par. Thus if 100 shares of capital stock having a par value of $100 per share is sold at a premium of 10 we have the following: + + + + + + + + + + + + + + + + + + +
Cash$11,000
To Capital Stock$10,000
Surplus1,000
Total Capital Stock11,000
+ +Evidently surplus which originates at occasional intervals by sale of stock above par or as the result of other more or less fortuitous circumstances should be distinguished from that which represents accumulated profits. This has led in some instances to a subdivision of the surplus account to show capital surplus distinct from surplus representing accumulated profits. Note to what extent the surplus account prescribed by the Interstate Commerce Commission for railroad companies is subdivided: + +Corporate Surplus + +Additional property through income and surplus. +Funded debt retired through income and surplus. +Sinking fund reserves. +Miscellaneous fund reserves. +Appropriated surplus not specifically invested. +Total appropriated surplus. +Profit and loss—Balance. +Total corporate surplus. + +The first five items in this statement represent appropriations of surplus for specific purposes. The first four represent specific investments. Unappropriated surplus is represented by the balance of Profit and Loss. By combining appropriated and unappropriated surplus we secure total corporate surplus. This arrangement does not show the division between earned and unearned surplus, but only total. + +That surplus arising from sale of capital stock at a premium should be segregated will appear from the following considera-tions: + +ROUTINE ACCOUNTING PROCEDURE 183 + +tions. The total amount received for a share of stock sold at a premium represents what the purchaser considers such a share to be worth. It in no way represents profits but is rather in the nature of an original investment of capital. To employ such surplus for purposes of paying dividends would be to impair the original investment and therefore reduce the value of outstanding stock. + +**Dividends.**—The profits accruing to a corporation may be distributed in whole or in part to the stockholders in the form of dividends. How much of the profits shall be retained to strengthen the concern and how much shall be distributed is a question of financial policy which the board of directors must decide. Banks make especially large reservations of profits, so that we frequently find their surplus accounts in excess of their capital stock accounts. + +**Dividend Defined.**—A dividend is a distribution of accumulated profits to a given class of stockholders. If but one class of stock is outstanding the distribution is made on a pro rata basis among all stockholders. When, however, there are two or more classes of stock outstanding a different procedure may be followed for each class. Thus if there are preferred and common stocks, and the preferred is, let us say, 6% cumulative stock, then the preferred stock dividend must be paid in full before anything can be paid on the common, and if in any given year profits are insufficient to pay the stated amount of the dividend on the preferred stock, then it must be paid in the next year, or later, before anything can be paid to the common stockholders. + +**Kinds of Dividends.**—Dividends are of several kinds in accordance with the medium of payment. Cash dividends are most frequent and consist in payment by check, or, in exceptional cases, actual delivery of money. Stock dividends are shares of promissory notes of the company, which are at a later period redeemable in cash or other form of property. Stock dividends are paid by issuing capital stock, either treasury or unissued, in payment. Other forms less frequently used are property and bond dividends, the former being paid by an actual distribution of property and the latter by issuing bonds. + +**Declaration of Dividends.**—The board of directors can rightfully declare a dividend only when sufficient profits exist. It is unlawful to pay a dividend out of capital and the directors + +184 +ACCOUNTS IN THEORY AND PRACTICE + +authorizing such a dividend may be held personally for damage resulting to creditors of a corporation. There are, of course, various ways in which fictitious profits may be shown, so that it is not always easy to determine whether profits shown are real profits. The board of directors will protect itself by securing the services of a competent firm of public accountants to audit the accounts. + +As soon as a dividend is declared it becomes the direct liability of the corporation. The routine procedure necessary to show this liability is to charge Profit and Loss and credit Dividends Payable, thus: + +Profit and Loss +To Dividends Payable No. — +To show liability for dividends declared in accordance with vote of the board of directors. + +Instead of Profit and Loss the Surplus account may be charged. In this case, however, a distinction should be made between capital Surplus arising out of sale of stock at a premium and Surplus derived from operating profits. It is wrong to use capital surplus to pay dividends. This distinction has been recognized by the courts in the United States by recognizing a distinct account for "Premium on capital stock" which is shown, not as a subdivision of Corporate Surplus, but as a subdivision of the stock account. When the dividend is paid, if in cash, the following entry is made: + +Dividend Payable No. — +To Cash +In payment of Dividend No. — + +If there are a large number of stockholders it is customary to draw a single check for the total amount of the dividend. This is placed in a separate account, possibly in a different bank. The dividends received are then drawn on this account. This plan segregates the work of paying dividends so that it can be readily performed by subordinates. If, however, the dividend is paid in stock the entry is: + +Dividend Payable No. — +To Capital Stock +It should be noted that when a cash dividend is paid the corporation reduces its assets by the amount of the dividend, whereas + +**ROUTINE ACCOUNTING PROCEDURE** 185 + +no reduction in assets occurs when a stock dividend is paid. +This is the principle which has led the courts to declare that the +receipt of a stock dividend does not constitute income to the +recipient. + +**Records Peculiar to Corporations.—** There are certain books +employed in corporate finance and accounting which are peculiar +to this form of organization. Some of these are required by state +laws while the use of others is voluntary. The size of the cor- +poration and the manner in which its stock is held are two of the +factors which determine whether special records are es- +sary. Since some of these records are secretarial in character +and all are strictly subordinate to the accounting records proper, +it is sufficient here to give a brief outline of their uses. They +are concerned with the recording of minutes of stockholders, +and directors’ meetings, the subscriptions for stock and the pay- +ment thereof, and the transfer and recording of capital stock +sold on the market. Chief among these are: + +* **Minute Book** + * Record of Subscriptions + * Stock Certificate Book + * Register of Transfers + * Stock Ledger + +The minute book is employed to record the proceedings at +stockholders’ and directors’ meetings. The subscription record contains the names and addresses of the subscribers to the capital +stock, and the number and value of shares subscribed by each. +The stock certificate book contains the certificates issued +issued to purchasers of stock. Each certificate contains the +name of the company, capitalization, total number of shares +represented by the certificate, and whether they are full paid. +The register of transfers record all transfers of stock between +buyers and sellers. The stock ledger, which must agree with +the capital stock account, when the par value of holdings is given, +shows the name and address of all stockholders and the amount +of stock standing to the credit of each. + +CHAPTER XXIX + +THE CORPORATION—PRACTICE + +Problem 1.—A corporation issues 20-year first mortgage bonds on January 1, 1919, bearing 5½% interest, payable semi-annually, January 1 and July 1. The trust deed provides that yearly contributions are to be made to a sinking fund which earns 3% compounded interest on the bonds at a premium, as of January 1, 1919. Show pro forma entries in journal form necessary on the following dates: + + + + + + + + + +
Jan. 1, 1919July 1, 1919Jan. 1, 1920Jan. 1, 1929
+ +Note.—Pro forma entries are those with amounts omitted. + +Solution, Problem 1.— + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Cash....Jan. 1, 1919
To First Mortgage Bonds.
Premium on Bonds.
For sale of 20-year first mortgage bonds, bearing interest at 6%, due 1938, interest payable semi-annually.
Interest on Bonds.July 1, 1919
To Cash....
For interest on bonds, due July 1, 1919.
Premium on Bonds.
To Profit and Loss....
One-fourth of premium on bonds applicable to income.
+
Jan. 1, 1920
Interest on Bonds.Jan. 1, 1920
To Cash....Jan. 1, 1920
For interest on bonds, due Jan. 1, 1920.
Premium on Bonds.
To Profit and Loss....
One-fourth of premium on bonds, applicable to income.
\end{table}\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table>\end{table}\end{table}\end{table}\end{table}\end{table}\end{table}\end{table}\end{table}\end{table}\end{table}\end{table}\end{table}\end{document} + +THE CORPORATION—PRACTICE +187 + +
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Surplus.Jan. 1, 1920
To Sinking Fund Reserve.
Reservation of surplus for sinking fund.
Sinking Fund Trustees.Jan. 1, 1920
To Cash.
Annual payment to sinking fund trustee.Jan. 1, 1939
Premium on Bonds.
To Profit and Loss.
One-fourth of premium on bonds attributable to income.
Surplus.Jan. 1, 1929
To Sinking Fund Reserve.
Reservation of surplus for sinking fund.
Sinking Fund Trustees.Jan. 1, 1939
To Cash.
Annual payment to sinking fund trustee.Jan. 1, 1939
Sinking Fund Trustees.
To Sinking Fund Reserve.
For interest allowed by sinking fund trustee.Jan. 1, 1939
+ + +
First Mortgage Bonds
To Sinking Fund Trustees.
For retirement by trustee of the 20-year $3\%;
first mortgage bonds; due this date.
Sinking Fund ReserveJan. 1, 1939
To Surplus
To credit surplus with amount reserved therefrom
To retire bonds; now cancelled.
+ +Note.—The problem does not state whether the bonds are to be paid from surplus or from income. We may assume, therefore, that they are to be paid from surplus. Interest, however, is charged to income. The proportion of the premium on bonds credited each six months to Profit and Loss is in the nature of interest, being an offset to the interest charged, so that the true interest cost is something less than $5\%$. This might have been carried to Profit and Loss indirectly by first being credited a + +188 +ACCOUNTS IN THEORY AND PRACTICE + +nominal account, as, Amortization of Premium on Debt, which is in turn closed into Profit and Loss by a closing journal entry. + +**Problem 2—** A corporation issues 10-year second mortgage bonds on March 1, 1918 bearing interest at 5%, payable semi-annually, to the Acme Savings Bank. The trust deed states that annual contributions are to be made to the Acme Trust Co., sinking fund trustees, to establish a sinking fund for the extinguishment of the bonds when they fall due. This sinking fund earns 2½%, compound interest. The bonds sell at a discount. Show *pro forma* entries in journal form necessary on the following dates: + +March 1, 1918 +Sept. 1, 1918 +March 1, 1919 +March 1, 1928 + +**Note.—** This problem differs from the preceding chiefly in the fact that the bonds were issued at a discount. + +**Problem 3—** A company under its articles of incorporation is required to set aside a certain percentage of its profits at the close of each year to provide a sinking fund for retiring its bonded indebtedness when it matures. + +(a) Give necessary entries to be made in the books setting up the reserve at the close of each year. +(b) Give entries required when the bonds are paid off at maturity. +(c) What relation has the sinking fund provision to depreciation? + +BIBLIOGRAPHY + +Part IV. Corporation Accounting + +BENNETT, B. J. Corporation Accounting. New York, 1916. +BENTLEY, H. C. Corporate Finance and Accounting. New York, 1911. +BENTLEY, H. C. The Science of Accounts. New York, 1911. +COLLINS, W. Accounting Their Construction and Interpretation. Boston, 1915. Appendix I. +CONINGTON, T. Corporation Organization and Management. New York, 1917. + +COOPER, F. Financing an Enterprise. New York, 1915. +DICKINSON, A. L. Accounting Practice and Procedure. New York, 1913., Chapter VIII. +ESQUERRETTA, J. Applied Theory of Accounts. New York, 1914. Chap- +ters II-IV. + +THE CORPORATION—PRACTICE +189 + +GERSTEINBERG, C. W. Materials of Corporation Finance. New York, 1915. + +GILMAN, S. Principles of Accounting. Chicago, 1916. Chapter X. + +GREENDLINGER, L. Accountancy Problems, Vols. I and II. New York, 1911. + +KEISTER, D. A. Corporation Accounting and Auditing. Cleveland, 1905. + +KEISTER, R. B. Accounting Theory and Practice. New York, 1917. +Vol. I, Chapters I-XVII; Vol. II, 1918. + +KLEIN, J. J. Elements of Accounting. New York, 1912. Chapter VI. + +LOUGH, W. H. Business Finance. New York, 1917. + +LYONS, H. Corporation Finance. Boston, 1916. + +MADISON, F. E., Jr. The Corporation. New York, 1903 . + +MEADE, E. S. Corporation Finance. New York, 1915. + +PATON, W. A. and STEVENSON, R. A. Principles of Accounting. New York, 1918. Chapters XI-XIV + +SULLIVAN, J., and HENRY, J., Business Corporations. New York, 1910. + +WOOD, W. A. Modern Business Corporations. Indianapolis, 1906. + +--- + +PART V +FINANCIAL STATEMENTS + +CHAPTER XXX +CONSTRUCTION AND INTERPRETATION OF THE INCOME STATEMENT + +Use of Income Statement.—On page 42 was presented a simple form of income or profit and loss statement. The income statement is a popular form of presentation of the facts which are given in more technical form in the profit and loss account. +For some purposes the account form is entirely adequate; but for one unskilled in the technique of accounts it is generally better to present the information in more legible form. This is accomplished by the use of the income statement. + +An examination of the published reports of corporations will indicate how widely the statement form has been adopted. Such an examination shows that many companies publish these reports to furnish adequate information, and how much they fall short of completeness. Some companies publish income statements that are wholly inadequate for any purpose except that which can be satisfied by the most superficial examination. Much that is essential is purposely omitted, either from fear of disclosing to competitors information which might be of aid to them, or because unfavorable conditions would be shown, or for some other reason. The determination of what is proper and what is a question which must be decided on the merits of each case. + +Contents and Arrangement of Income Account.—The contents of the profit and loss account depend upon the character of the business in question and the subdivision of the nominal accounts in the General Ledger. A manufacturer will be obliged to keep some accounts for which there can be no occasion in case of a concern engaged in merchandising. The accounts of a trans- 191 + +192 +ACCOUNTS IN THEORY AND PRACTICE + +portation company differ from both of the above. It is custom- +ary to separate the general profit and loss account into sections, +into each of which are brought those items which affect, or are +incidental to, a particular branch of the work. Thus for a manu- +facturing concern the general profit and loss account permits of a +subdivision into not less than four sections, possibly more. +These may be termed: + +1. Manufacturing Section +2. Trading Section +3. Administrative Section +4. Distribution Section + +If instead of making such a sectional subdivision of the profit +and loss account, all items are entered in one account, some +obscurity results. Below is given such a profit and loss account +for the Acme Manufacturing Company, for the month ending +June 30, 1916: + +Profit and Loss Account, Acme Manufacturing Co., Month Ending June 30, +1916 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Raw Materials, May 30...$20,000Raw Materials, June 30...$21,000
Goods in Process, May 30...5,000Goods in Process, June 30...4,500
Finished Goods10,000Finished Goods, June 30...9,000
Labor5,000Sales20,000
Fuel...1,000Discount on Purchases...500
Freight In...200Rent of Steam Power...700

+ +Depreciation (factory)............180
+ +Taxes (factory)..................40
+ +Purchases (raw materials).........9,000
+ +Advertising.......................520
+ +Salesmen's Salaries..............1,000
+ +Discount on Sales..............200
+ +Salaries of Officers.............600
+ +General Expense..................839
+ +Interest..........................627
+ +Bad Debts.........................20
+ +Rent...............................100
+ +Balance, net Profit..............2,563
+ +$55,200 + +The chief criticism to be passed upon this form of the profit +and loss account is its failure to disclose, at a glance, the essential +facts relative to the manufacturing and trading operations of the + +THE INCOME STATEMENT +193 + +company. It is desirable to know not merely the net profit earned during the month, but it is also desirable to know the cost of manufacture, also of selling. Consider the following arrangement: + +**Profit and Loss Account, Acme Manufacturing Co., Month Ending June 30, 19XX** + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Manufacturing Section
Raw Materials, May 31...$20,000Raw Materials, June 30...$21,000
Goods in Process, May 31...5,000Goods in Process, May 31...4,000
Finished Goods, May 31...10,000Finished Goods, May 31...9,000
Purchases (raw materials)...9,000Discount on Purchases....500
Labor...700
Fuel...1,000Balance carried to Trading Section
Freight In...200Sales Section, Cost to Manufacture
Depreciation (factory)...10014,140
Taxes (factory)...40
$49,340$49,340
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +194 +ACCOUNTS IN THEORY AND PRACTICE + +Variations in Usage.—In both terminology and arrangement of the profit and loss account, there is much variation in usage, among accountants. The arrangement presented above is meant to be suggestive rather than definitive. The division into sections is merely a matter of utility and convenience. Sometimes the administrative and distribution sections are united. Sometimes they are entitled differently than they are here. There is good ground for assuming that a particular item may with propriety appear in a certain section of the profit and loss account under certain conditions and in another section under different conditions, even in case of the same enterprise. + +Discount on Purchases.—For example, whether discount on purchases ought to appear in the manufacturing section, as a reduction of cost of goods purchased, or whether it ought to appear in the administrative section, as a profit resulting from good management, is an undecided question. Those who assert that the latter is the proper usage do so on the ground that the ability to observe cash discount privileges is due to (a) possession of sufficient cash to make the policy a feasible one, or else to the skillful management of such cash, or to an amount sufficient to permit such a policy. It is maintained that in either case the manufacturing department has nothing whatever to do with the securing of the discount, and that it is rightly shown in the administrative section as a premium for good management. + +The advocates of the contrary policy, that is, of showing the discount on purchases in the manufacturing section, maintain that the financial success of a concern is dependent as much if not more upon the efficiency attendant upon the manufacturing process as upon any other function and that the presence of sufficient cash to enable the observance of discounts is therefore a credit to the manufacturing department. The question appears to be one that might permit of an answer conditioned upon the peculiarities of the concern under consideration. What made possible the existence of such a combination? Efficient manu- +facturing, efficient trading, or efficient administration? May it not have been a combination of the three? It appears that the question is largely a theoretical one, which in practice must be decided more or less arbitrarily. To attempt to split up the amount of the discounts on purchases among the three sections + +THE INCOME STATEMENT 195 + +on the basis of their relative efficiency would prove a difficult task. + +Perhaps the best solution of the difficulty would be the abolition of all cash discounts. There is really very little justification for them. They are the outgrowth of the delinquent methods fostered by the antiquated system of open accounts. Their introduction did not represent a step in advance but merely a make-believe to fool a system which had proven unsuccessful. + +There can be little doubt that it would be an improvement to make sales net 10 days, or net 30 days, or for whatever time the nature of the trade makes desirable. It is to be hoped that the adoption of the trade acceptance will remedy the situation, although it is by no means necessary to abolish cash discounts in order to make use of the trade acceptance. But by making prompt payment of bills habit it may remove the necessity for cash discounts. Such discounts have given rise to a variety of abuses that may thus be ended. + +Arrangement of the Profit and Loss Statement.—With these remarks about the possibility of disagreement upon the location to be ascribed to individual items in the profit and loss account, let us now consider the rearrangement of the items of the profit and loss account required to form the profit and loss statement. The purpose of this statement is to give in one concise and technical form the information contained in the profit and loss account. A little reflection will show that the amount of sales in a profitable enterprise will be sufficient to cover all costs of manufacture, trading, and administration, and leave a balance representing net profits. Omitting details, this may be expressed as a *pro forma* statement, thus: + +
+ + + + + + + + + + + + + + + + + + + + +
Sales
Deduct: Cost to Manufacture
Cost of Selling
Cost of Administration
Net Profit
+ +This is all right as far as it goes, but it hides too much desirable information. It requires expanding and amplifying. Consider the following, which is merely a rearrangement of the items shown in the margin on page 189, expressed on page 193, with the costs of manufacture expressed as one item: + +This is all right as far as it goes, but it hides too much desirable information. It requires expanding and amplifying. Consider the following, which is merely a rearrangement of the items shown in the margin on page 189, expressed on page 193, with the costs of manufacture expressed as one item: + +196 +ACCOUNTS IN THEORY AND PRACTICE + +Profit and Loss Statement, The Acme Manufacturing Co., Month Ending June 30, 1916: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Sales$20,000100%
Less Cost of Goods Sold14,140
Gross Profit on Sales$5,860-%
Selling Expenses:
Advertising$320
Salesmen's Salaries1,000
Discount on Sales250 $1,520
Administrative Expenses:
Salaries of Office Staff$600
General Expense630
Interest427
Bank Discount20
Rent (offices)100 $1,7773,297 -%
Net Profit2,563 -%
Distribution of Net Profit:
+ + + +
Sales
+ + + +
Salesmen's Salaries
+ + + +
Discount on Sales
+ + + +
Administrative Expenses:
+ + + +
Salaries of Office Staff
+ + + +
General Expense
+ + + +
Interest
+ + + +
Bank Discount
+ + + +
Bank Discount
+ + + +
Rent (offices)
+ + + +
Rent (offices)
+ + + +
Net Profit
+ + + +
Distribution of Net Profit:
+ + + +
Salesmen's Salaries
+ + + +
Discount on Sales
+ + + +
Administrative Expenses:
+ + + +
Salaries of Office Staff
+ + + +
General Expense
+ + + +
Interest
+ + + +
Bank Discount
+ + + +
Rent (offices)
+ + + +
Rent (offices)
+ + + +
Net Profit
+ + + +
Distribution of Net Profit:
+ + + +
Salesmen's Salaries
+ + + +
Discount on Sales
+ + + +
Administrative Expenses:
+ + + +
Salaries of Office Staff
+ + + +
General Expense
+ + + +
Interest
+ + + +
Bank Discount
+ + + +
Rent (offices)
+ + + +
Rent (offices)
+ + + +
Net Profit
+ + + +
Distribution of Net Profit:
+ + + +
Salesmen's Salaries
+ + + +
Discount on Sales
+ + + +
Administrative Expenses:
+ + + +
Salaries of Office Staff
+ + + +
General Expense
+ + + +
Interest
+ + + +
Bank Discount
+ + + +
Rent (offices)
+ + + +
Rent (offices)
+ + + +
Net Profit
+ + + +
Distribution of Net Profit:
+ + + +
Salesmen's Salaries
+ + + +
Discount on Sales
+ + + +
Administrative Expenses:
+ + + +
Salaries of Office Staff
+ + + +
General Expense
+ + + +
Interest
+ + + +
Bank Discount
+ + + +
Rent (offices)
+ + + +
Rent (offices)
+ +
$1,063 -%
+
Surplus.
+
$1,063 -%
+
If it is desirable to show the costs of manufacture in detail, this may be done by substituting for the single item, "Cost of Goods Sold," the detailed costs of manufacture, in the above statement, which then becomes:
+
Profit and Loss Statement, The Acme Manufacturing Co., Month Ending June 30, 1916:
+
Sales.
+
$20,000 100%
+
Less Cost of Goods Sold.
+
Raw Materials, May 31...
+
$20,000.
+
Goods in Process, May 31...
+
5,000.
+
Finished Goods, May 31...
+
10,000 $35,000.
+
Raw Materials, June 30...
+
$21,485.
+
Goods in Process, June 30...
+
4,000.
+
Finished Goods, June 30...
+
6,000 $41,485.
+
Purchases (raw materials).
+
$1,000.
+
Labor.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$9,995.
+
Fuel... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...... $1,995.
+
Freight in.
+
299.
+
Depreciation (factory).
+
100.
+
Taxes (factory).
+
40.
+
$15,340..
+ +A bar graph showing the distribution of net profit for different categories. The x-axis represents the categories and the y-axis represents the percentage. The categories are "Salesmen's Salaries" at approximately 2%, "Discount on Sales" at approximately 2%, "Administrative Expenses" at approximately 2%, "Salaries of Office Staff" at approximately 2%, "General Expense" at approximately 2%, "Interest" at approximately 2%, "Bank Discount" at approximately 2%, "Rent (offices)" at approximately 2%, "Net Profit" at approximately 2%, "Distribution of Net Profit" at approximately 2%, "Salesmen's Salaries" at approximately 2%, "Discount on Sales" at approximately 2%, "Administrative Expenses" at approximately 2%, "Salaries of Office Staff" at approximately 2%, "General Expense" at approximately 2%, "Interest" at approximately 2%, "Bank Discount" at approximately 2%, "Rent (offices)" at approximately 2%, "Net Profit" at approximately 2%, "Distribution of Net Profit" at approximately 2%, "Salesmen's Salaries" at approximately 2%, "Discount on Sales" at approximately 2%, "Administrative Expenses" at approximately 2%, "Salaries of Office Staff" at approximately 2%, "General Expense" at approximately 2%, "Interest" at approximately 2%, "Bank Discount" at approximately 2%, "Rent (offices)" at approximately 2%, "Net Profit" at approximately 2%, "Distribution of Net Profit" at approximately 2%, "Salesmen's Salaries" at approximately 2%, "Discount on Sales" at approximately 2%, "Administrative Expenses" at approximately 2%, "Salaries of Office Staff" at approximately 2%, "General Expense" at approximately 2%, "Interest" at approximately 2%, "Bank Discount" at approximately 2%, "Rent (offices)" at approximately 2%, "Net Profit" at approximately 2%, "Distribution of Net Profit" at approximately 2%, "Salesmen's Salaries" at approximately 2%, "Discount on Sales" at approximately 2%, "Administrative Expenses" at approximately + +THE INCOME STATEMENT +197 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Less:
Discount on Purchases.$ 500
Rent of Steam Power.700$1,200$14,140-%
Gross Profit on Sales$5,86024.3%
Selling Expenses:
Advertising.$320
Salmon's Salaries1,000
Discount on Sales200$1,520
Administrative Expenses:
Salaries of Officers$600
General Expense.630
Interest...427
Bad debts.20
Rent (offices).100$1,777$3,297 + + + + + + + +The possibilities of variation from the above form are very great. It merely illustrates a type of statement that is widely used. Such statements differ much in both terminology and construction. It is improbable that complete standardization of the form of the income account will be adopted, even we e it desirable. The peculiarities of different kinds of enterprises require variations in the forms of such statements. However, it is undesirable that standardization in a given line of business is desirable; for only through standardization is it possible to arrive at comparisons between concerns upon an exact and intelligible basis. + +**Net Sales an Important Statistical Base.**—In the above statement no "returned sales and allowances" are indicated. When there is such an item it must be deducted from sales to arrive at net sales. The figure for net sales is very important because it is the best basis from which to figure the percentage of the various items of cost, expense, etc. If net sales is taken as 100 per cent, then all following items in the income statement can be figured as a percentage thereof. This makes the gross profit figures in the way of comparison and interpretation. In the above statement the gross profit on sales is $5,860, or 24.3 per cent of + +198 +ACCOUNTS IN THEORY AND PRACTICE + +net sales. The net profit is 12.315 per cent of net sales. Simi- +larly any or all other items may be expressed as a percentage of +net sales. For comparisons, either between different accounting +periods or between different business enterprises, or even between +horoeneous periods in the history of different concerns, the expression +of all significant items in the income statement as percentages +on net sales at once reduces all to one basis. Relationship thus +expressed is much more intelligible than when the items compared +are expressed absolutely in dollars and cents. + +**Significance of Income Statement—Deductions from Assets.—** +The full significance and bearing of an income statement can be comprehended only by considering the significant component parts +in their relation to one another and in their bearing upon the +assets and liabilities as presented in the balance sheet. Thus +there are certain items of expense found in the income statement +which represent deductions from asset values, sloughings-off, so +to say, in the form depreciation and bad debts. The amount of +the taxes depends upon the valuation of the assets. Fuel +expense represents the consumption of an asset. The income +statement measures changes in assets and liabilities during the +period covered. + +**The Inventories.—Again,** the income statement renders it +possible, at least to a degree, to determine the normality or +abnormality of assets and liabilities when considered in their +relative positions. Thus the relative size, and the increases and +decreases in the inventories are shown with special clearness +when they are expressed as percentages of net sales. A consi- +derable increase in the inventories indicates that on the other +hand it may indicate overbuying, and possibly stagnation. Any +unnecessary increase in the inventories requires the useless tying +up of working capital. It also means added interest cost. Simi- +larly, the various manufacturing costs, labor, fuel, and so on, +may be expressed both in dollars and as percentages, and their +tendencies shown. Changes in selling expenses may be noted +and studied. + +**The Fixed Charges.—Among most important classes of** +items shown in the income statement are the fixed charges. +These do not fluctuate (or if so, but little) with fluctuations in +the amount of business transacted. Among them are included +taxes, rents, interest, and so on. They represent the low water +mark beneath which the income of the business should not be + +THE INCOME STATEMENT 109 + +permitted to fall. When income is insufficient to cover all ordinary expenses, operating and fixed, it may be possible to curtail on the operating expenses, such as labor, fuel, and advertising, and possibly, too, on some of the administrative expenses, such as salaries, but up to a certain point only, while it is unlikely that the fixed charges can be reduced at all. They must be met. Hence, the margin of profit is within the variable basis. + +**Margin of Profits.—**The margin of profits remaining after all fixed charges have been accounted for is one of the most important indices of the financial condition of an enterprise. If this margin is a narrow one the enterprise stands in jeopardy of having all of its income consumed by its expenses, and of being unable to meet its fixed charges, or else of being able to meet them only with difficulty. This difficulty may arise from operation and administration. The possibility of a concern's failing to meet its fixed charges is dependent not only upon the amount of those charges but also upon the fluctuations of its gross income from sales or services. If gross income continues quite uniform from year to year the concern's ability to assume and meet fixed charges can be accurately gauged. But if its gross income fluctuates greatly from year to year, its ability to carry a burden of fixed charges is correspondingly reduced. The poorer years become more serious because the enterprise can have to do in the way of carrying fixed charges. + +**Steadiness of Income.—**Steadiness and uniformity of income vary somewhat between enterprises engaged in the same line of business—due to location, management, and so on. In different lines of business there exists great disparity in this respect. In some income remains steady month after month and year after year. In other cases it is irregular but nevertheless one year returns greater income almost equal to that of another year. In still other lines of business there exist great variations in income from year to year, depending in large measure, perhaps, on events the future occurrence of which remains in uncertainty. + +An example of steady uniform income is furnished by many public utility companies. A street car company is quite certain of enjoying a steady and uninterrupted demand for transportation. The same cannot be said about water transportation. As a consequence, such companies can safely operate with a narrower margin of profits than can concerns engaged in more hazardous undertakings. The opposite extreme is illustrated by + +A bar graph showing two lines representing "Fixed Charges" and "Gross Income." The x-axis represents years (e.g., 1900-1930). The y-axis represents values (e.g., $500,000). The "Fixed Charges" line starts high and gradually decreases over time. The "Gross Income" line starts low and increases slightly over time. + +200 +ACCOUNTS IN THEORY AND PRACTICE + +the so-called industrial and mining companies. Here market fluctuations, both in prices of raw materials and finished products, are great. General business conditions are very influential factors. Various factors conspire to make the incomes of even the greatest of such enterprises changeable and uncertain. + +Steamship companies also fall into this class. Rates for ocean transportation fluctuate greatly from season to season and from year to year. Rate agreements are difficult to secure and still more difficult to maintain. A poor harvest on one continent lies entirely beyond the control of a trans-Atlantic ship company, yet it may affect its profits after all. + +**Need of Reserving Profits.**—Such being the conditions, each kind of business must recognize that there are certain maxima and minima which experience has shown are likely to occur in the income of an enterprise engaged in that business. These must be considered in determining what amount may safely be depended upon for meeting fixed charges, year after year. Moreover, to add to the difficulty of taxation, a concern ought to preserve a certain portion of its profits as surplus, so that taxes should be large in proportion to the uncertainty of the income. If this policy is consistently pursued, an enterprise engaged in an undertaking the income of which is subject to considerable changes may place itself in a position of comparative safety, compensating for occasional reductions in income by encroachments upon the surplus account. Such a policy cannot be pursued, of course, unless in prosperous years there is earned enough, over and above ordinary earnings, to establish a surplus fund. With this can be done, immunity from those disturbances that so adversely affect poor concerns of a like character is secured, and correspondingly larger fixed charges can be assumed. + +**Relation of Question to Borrowing.**—This theoretical discussion receives practical application in the establishment of a bonded indebtedness. What proportion of its capital a corporation ought to raise by means of capital stock and what by the sale of bonds depend upon various considerations which are likely to be peculiar to the individual company. However, some general principles apply. Certainly a concern ought not to attempt to secure all of its capital by means of bond issues, for in such a case all invested capital would require the imposition of a fixed charge in the form of interest. This would permit no leeway whatever, no room for the expansion and + +THE INCOME STATEMENT 201 + +contraction that accompany all kinds of undertakings. Some corporations have no bonded indebtedness, and so corporations may be graded into classes which run all the way from those without any permanent indebtedness to those in which the funded indebtedness exceeds the outstanding capital stock. + +No ideal proportion for stocks and bonds exists. Even though one might be established theoretically it is not likely that it could be adhered to in practice. The proportion of stocks to bonds is not determined by any single consideration, but by a variety of factors, some of which cannot be measured. It would be desirable to increase the bonded indebtedness because fixed charges are already as large as the fluctuating income will safely carry. Yet they may be the only recourse. It may be impossible to market stocks satisfactorily. Statutory requirements must be observed. + +The student should distinguish between the monthly income statement, which is made up as quickly as possible after the close of the month, and the yearly income statement, which is intended for publication or at any rate for a permanent source of statistical data. The monthly income statement is necessarily inexact in certain respects owing to the fact that there are expenses, losses and gains which cannot be determined definitely until a considerable time after they occur. Certain readjustments may be necessary. Overlapping occurs from month to month which is difficult to allocate with exactness on a monthly basis. Another use of this sort may be mentioned the expenses incurred by traveling representatives, doubtful accounts receivable, and so on. + +For this reason the yearly income statement serves better as a permanent record of achievement than does a statement covering a shorter period. Varying seasonal influences which create wide differences in results are eliminated in annual statements, so that the only disturbing external factors are those of an irregular character to which all enterprises are more or less subject, such as depressions, interest rates, changes in labor costs, and the like. + +CHAPTER XXXI + +THE INCOME STATEMENT ILLUSTRATED + +Illustrative Statements.—As has been suggested, the form and contents of the income statement depend upon the character of the enterprise. Illustrative of this fact we shall reproduce two typical income accounts taken from the annual reports of the Delaware, Lackawanna & Western Railroad Company and the United States Steel Corporation, respectively. Below is the income statement of the Delaware, Lackawanna & Western Railroad Company for the year ending December 31, 1916. + +Comment on Above Illustration.—This is the form of income account prescribed by the Interstate Commerce Commission. +It became effective July 1, 1915. During the first year forms had become apparent through the investigations of certain railroad companies. By way of suggesting methods of interpretation Hooper, in his book on Railroad Accounting, says: +“Even a superficial study of the comparative income account would include a comparison of the increase or decrease in railway operating revenues with a normal increase or decrease and with the increases or decreases caused by other railroad companies in the same territory, the trend of their operating expenses to operating revenues, the trend of taxes and its ratio to operating revenues, the trend or changes in hire of freight cars and rent of other equipment, the trend of profit or loss from separately operated properties, the changes in interest on funded debt and on unfunded debt, dividend appropriations and appropriations for investment from income, and of course, the balance transferred to surplus.” + +If the income statement affords insufficient information on any point aid may be secured by using the balance sheet and the various supplementary statements which ordinarily accompany the income statement. Hooper says further: “Any considerable change in the balance for hire of freight cars or other equipment should be compared with the amount of business done and with the charges made to expenses for retirements of equipment and also with capital charges for new equipment as shown by the balance sheet. The reason why this was omitted in 1915, see 1 Hooper, Wm. E., Railroad Accounting, p. 225. + +A page from a book titled "Railroad Accounting" by Wm. E. Hooper. +202 + +THE INCOME STATEMENT ILLUSTRATED +203 +Annual Report of The Delaware, Lackawanna & Western Railroad Company for the Year Ending December 31, 1916: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
19161915Per cent
Revenues:
From Transportation of Coal.$147,524.09$13,804,000.99Inc. 8.32
From Transportation of Merchandise Freight.23,298.8415,742,616.06Inc. 23.94
From Transportation of Passenger.23,728.8921,766.24Inc. 11.32
From Transportation of Mail.
From Transportation of Milk.1,084,723.731,049,470.60Inc. 16
Other Revenue from Transportation.1,808,575.971,567,753.33Inc. 13.38
Total Revenues.$31,588,728.88$4,176,720.88Inc. 15.17
Expenses:
For Maintenance of Way and Structures.$4,359,252.28$2,663,301.10Inc. 3.38
For Maintenance of Equipment.$7,645,658.816,859,600.69Inc. 10.87
For Traffic and Operating Expenses.
For Transportation Expenses.17,104,742.3214,229,293.74Inc. 20.71
For Miscellaneous Operations.
From General and Other Operations.
Total Expenses for Investment-Cr.
39,205.70
Total Expenses for Investment-Cr.
$24,950,575.02
Net Revenue from Opera-
tion.
38.0%$
Less Railways Income.
$15,829,925.95
Less Unrecovered Railway Revenues.
$171,492,727
Operating Income.
$171,492,727
+ + + +
Add for Additional Items:
+ + + +
Joint Facility Real Income.
+ + + +
Miscellaneous Real Income.
+ + + +
Dividends on Stock.
+ + + +
Income from Funded Securities and Accounts...
+ + + +
Coal Department Earnings.
+ + + +
Profitability of Coal Department...
+ + + +
Sundry Additions and Deletions.
+ + + +
Total Income.
+ + + +
Deductions From Income:
+ + + +
Interest on Debt-Debit Balance.
+ + + +
Rent for Leased Buildings...
+ + + +
Gravels and Batterments...
+ + + +
Interest on Bonds Sold...
+ + + +
Discount on Bonds Sold...
+ + + +
Total Charges.
+ + + +
Less:
+ + + +
Tax Per Cent (16%) Dividends on Stock...
+ + + +
Tax Per Cent (16%) Extra Dividend Payable December 20, 1916...
+ + + +
Balance; Surplus.
+ + + + + + + + + + +
Description$ Amounts% Change from Last Year's Amounts% Change from Last Year's Percentages% Change from Last Year's Total Revenues and Expenses% Change from Last Year's Total Revenues and Expenses as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report% Change from Last Year's Total Revenues and Expenses as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage of Total Revenues and Expenses for the Same Period of the Previous Year's Report as a Percentage + +204 +ACCOUNTS IN THEORY AND PRACTICE + +Delaware, Lackawanna & Western had a credit balance of $22,- +439.94 in its "Hire of Equipment" account, in 1916 this changed to +a debit balance of $755,733.83. This increased use of rented +equipment is fully explained by the extraordinary increase of +traffic in 1916. The total traffic of the company increased 16 +per cent in tonnage while its cash expenditures decreased 26.15 +per cent., as fully set forth in the company's annual report. + +Under the head of "deductions from income," we note that in +1915 there was charged $1,289,700.00 for "discount on bonds +sold." In the company's report for 1915 it is explained that this +sum was charged against income to cover the discount on the 3½ +per cent bond issue of a subsidiary, the Morris & Essex Railroad +Company. It is stated that the company has been required to pay off +certain outstanding bonds of that subsidiary. The reason the +company chose to charge off the entire amount of the discount on +its bonds in a single year is explained below. + +The classification of revenue and of operating expenses re- +quired by the Interstate Commerce Commission should be noted. +The account, "Transportation for Investment—Cr," requires +explanation. A railroad company is constantly engaged in +transporting investments from point to point along its lines for the purpose of making investments in new construction work. The cost of such transportation is not +an expense, but an investment. Since, however, it cannot be +separated from the ordinary operating expenses when incurred, +it is deducted from them in the profit and loss statement and +of course is charged in the company's ledger to the appropriate +property investment accounts. + +The Operating Ratio shows that the ratio of operating ex- +penses to revenue from operation is 61.92 per cent. This ratio +is of considerable importance as an aid in the interpretation of +the income accounts of railroad companies as well as of other +enterprises. It is familiarly known as the operating ratio. +It must be employed with reservation and judgment, however. +It is easy to see that as between enterprises of essentially different +natures it does not afford a fair basis of comparison; while between enterprises which have similar operations it is supposed to have no differences which might in some degree invalidate the +worth of the comparison. Unquestionably, railroads afford one +of the best illustrations of an adequate basis for a legitimate +comparison of operating ratios, because railroad accounts are + +THE INCOME STATEMENT ILLUSTRATED 205 + +fully standardized. Not only does the operating ratio afford a basis of comparison between two or more companies over a given period, but it also affords a valuable check upon changes which occur at any one time. In railroad accounting all items in the income statement are expressed as percentages of revenue, so in the income statement of a trading of a manufacturing concern all items are expressed as percentages of net sales. + +**Other Income, etc.—** Frequently an income is derived from sources other than chief operations of the enterprise. Such income is known as “other income.” Thus any revenue that a railroad company derives from activities other than transporation is other income. In case of the Delaware, Lackawanna & Western other, or “additional,” income amounted to $7,532,565.08 in 1916 and to somewhat over $5,000,000.00 in 1915. When such additional income is added to income from operations the sum is “total income.” From total income are deducted various rentals and fixed charges—the desideratum of the expenditure of capital—such as depreciation. The property of charging “betterments” as an expense might be questioned. Theoretically betterments should be charged to capital and ought not to appear in the income account. “Renewals,” on the other hand, is a proper charge to income. Indeed, the charging of betterments to income is a variation from the requirements of the Interstate Commerce Commission; it makes no provision for charging betterments to income, unless we may assume that the betterment was made under the general head of “miscellaneous income charges.” + +As noted, the Delaware, Lackawanna & Western charged off, in a single year, the entire discount on its issue of 3½ per cent bonds. The usual procedure in such cases is to prorate the discount over the life of the bonds, charging off the proper amount each year. Under the rules of the Interstate Commerce Commission, however, a railroad company has the option of charging off at any time during its existence any item which it deems that there is sufficient surplus to permit it. The latter policy appears to have been adopted by the Delaware, Lackawanna & Western. + +A noticeable feature of the income statement of this company is the small interest charge on the funded debt. In 1916 the funded debt of the company was $320,000; its capital stock was $42,277,000. The funded debt amounted to less than 1 per cent + +206 ACCOUNTS IN THEORY AND PRACTICE + +of the outstanding stock—a situation not often found in railroad finance. After paying two dividends of 10 per cent, each in 1916, there remained out of current income $7,756,068.06, to carry to surplus, increasing the total surplus to $46,987,405.33, or more than the combined par value of outstanding stocks and bonds. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
19151914                                                        Increase or Decrease
Earnings—Before charging interest on Bonds and Mortgages of Subsidiary Companies.$15,082,300.30$20,450,988.60− 5,368,619.24
First Quarter30,536,442.7122,856,414.32+ 7,580,039.39
Second Quarter30,536,442.7122,856,414.32− 7,580,039.39
Third Quarter30,536,442.7122,856,414.32− 7,580,039.39
Fourth Quarter30,536,442.7122,856,414.32− 7,580,039.39
Total year.$180,250,066.33$38,741,547.86+ 593,503,548.47
Less Interest on outstanding Bonds and Mortgages of the Subsidiary Companies.9,554,654.0910,982,062.69− 228,808.90
Balance of Earnings.$180,250,066.33$
$180,250,066.33$
$180,250$
$180$
$18$
$1$
$-1$
$-2$
$-3$
$-4$
$-5$
$-6$
$-7$
$-8$
$-9$
$-10$
$-11$
$-12$
$-13$
$-14$
$-15$
$-16$
$-17$
$-18$
$-19$
$-20$
$-21$
$-22$
$-23$
$-24$
$-25$
$-26$
$-27$
$-28$
$-29$
$-30$
$-31$
$-32$
$-33$
$-34$
$-35$
$-36$
$-37$
$-38$
$-39$
$-40$
$-41$
$-42$
$-43$
$-44$
$-45$
$-46$
$-47$… + +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
+ +
Balance—Interest on Bonds and Mortgages of the Subsidiary Companies.
$71,663,615.17 + 758$, 372$, 266$, 47 + 7$, 58$, 0$, 39$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$, 9$. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
$$\begin{array}{rlr}&{}&{\text{Balance—Interest on Bonds and Mortgages of the Subsidiary Companies}}\\ {}&{}&{\text{via:}}\\ {}&{}&{\text{To Depreciation and Extraordinary Replacement Funds}}\\ {}&{}&{\text{To sinking funds on Bonds of Subsidiary Companies}}\\ {}&{}&{\text{To sinking funds on U.S. Steel Corporation Bonds}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}&{\text{Add: Net Income of the year}}\\ {}&{}& + +THE INCOME STATEMENT ILLUSTRATED 207 + +United States Steel Corporation.—Above is the comparative income statement of the United States Steel Corporation for the years ending Dec. 31, 1914 and 1915, respectively. + +Comment on Above Illustration.—The United States Steel Corporation is more liberal than most of the larger industrial companies in the matter of publicity. Nevertheless we find this income statement less satisfactory than the preceding one. Gross and net sales and operating expenses are not shown. Practically, the manufacturing and trading sections are omitted, and only the results of operations of the holding company are presented. Presumably the officials consider it inadvisable to present a fuller statement. The statement shows the remarkable fluctuations to which such enterprises are subjected by general financial and business conditions. In spite of the smaller deductions for depreciation made in 1914, there were not sufficient profits to meet the usual dividend requirements; and as a result the accumulated surplus was diminished by nearly $17,000,000. In 1915, on the other hand, the profits were three times as great as in 1914, making possible a substantial addition to surplus of over $44,000,000, although the common stock dividend was cut to 11½ per cent. + +These illustrations indicate the possible differences and variations in income statement construction. When enterprises are unlike, differences are necessary. When they are alike, uniformity is desirable. + +CHAPTER XXXII + +CONSTRUCTION AND INTERPRETATION OF THE BALANCE SHEET + +The balance sheet and the income statement are complementary business documents. They are the two most condensed and comprehensive sources of information that have been conceived for the presentation of facts concerning the progress and condition of an enterprise. The construction and interpretation of the income statement were discussed in the preceding chapters. + +In this chapter the balance sheet will be considered. + +**Arrangement of the Balance Sheet** A balance sheet should afford a clear picture of assets and liabilities. It indicates their condition at a given instant, and shows the changes that have taken place during the preceding accounting period, when a comparison is made with the preceding balance sheet. + +Since the purpose of the balance sheet is to show as nearly as possible the financial condition of an enterprise, its general form and arrangement should be determined upon this consideration. In this country we find that the balance sheet is most frequently listed as follows: on the left side and liabilities, capital, and surplus—on the right side, although we frequently meet with variations from this form. Perhaps the most notable is that in which the arrangement corresponds in a general way with the income statement. Here the assets are placed above and the liabilities and proprietary accounts below. In England the general arrangement is reversed, the liabilities and proprietary accounts being placed to the left and the assets to the right. These three forms of the balance sheet are illustrated below: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet of the A. B. Co.
AssetsLiabilities
Past:$10,000Capital Stock$14,000
Machinery:4,000Accounts Payable3,000
Merchandise:5,000Surplus1,000
Cash:1,000
$18,000$18,000
+ +208 + +THE BALANCE SHEET 209 + +Balance Sheet of the A. B. Co.: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Assets$10,000
Plant
Machinery4,000
Merchandise3,000
Cash1,000
$15,000
Capital Stock$14,000
Accounts Payable5,000
Surplus1,000
$18,000
+ +Balance Sheet of the A. B. Co.: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
LiquidityAssets
Capital Stock.$14,000Plant.$16,000
Accounts Payable.3,000Machinery.3,000
Surplus.1,000Merchandise.3,000
Cash.1,000
$18,000$18,000
+ +Classification of Assets.—The subdivision and classification of the assets, liabilities and proprietary accounts are important problems. Upon them the value of the balance sheet is largely dependent. The consideration of a going concern will disclose certain general principles which are essential to its valuation and perhaps some of a less essential character. First in amount and importance usually come the fixed assets, consisting of land, buildings, and permanent investments, if any. In general, the fixed assets are those of a permanent character with an expectation of a lifetime frequently of many years—possibly perpetual, as in case of land. In a sense, we cannot say that fixed assets are absolutely more important than those of a less permanent character, yet they usually constitute a large proportion of the entire investment, and necessitate a continuous and heavy upkeep expenditure. + +A. Lowes Dickinson¹ suggests a threefold subdivision of the more important forms of invested capital into (1) fixed assets, (2) permanent investments, and (3) investment of reserves. If such a detailed subdivision in the balance sheet is thought necessary the above classification is a good one. Fixed assets include the + +¹ Accounting Practice and Procedure, p. 38. +14 + +210 +ACCOUNTS IN THEORY AND PRACTICE + +various permanent tangible properties as well as goodwill, +franchises, and patent rights. By permanent investments is meant those which are held for the income produced by them or for purposes other than liquidation. They should be distinguished carefully from temporary investments made for the purpose of turning idle funds to some profit. Investment of reserves would include all funds set aside for specified purposes, such as bond sinking funds, funds intended for future extensions, and so on. + +**Working and Current Assets.**—Next, a suitable classification must be made of the assets of a less permanent character, such as cash, merchandise, accounts and notes and acceptances receivably, and other similar items. The most convenient classi- +fication of this division, namely, working and current, although the division line between these is not always distinct. As a consequence the word "current" has been employed by some to include working assets. Generally, however, a distinction ought to be made between working and current assets. Unlike cash or accounts receivable they are not free to be spent or liquidated, but they are to be used in the process of doing business. They include materials in process of manufacture, according to the authority of Dickinson, various expenses paid in advance of the time to which they are incident, such as insurance, taxes and royalties. + +Current assets, on the other hand, are cash and those assets convertible into cash in the near future without any significant alteration in their form or character. By a significant alteration in form or character is meant one which requires time and expense to perform. Thus the conversion of raw material into finished product is a significant alteration in form while the payment of a note for an open account is not a significant alteration. Working assets are permanent only as a class and thus are to be distinguished from fixed assets which are permanent as individual units. + +Current assets likewise are permanent only as a class, but they are to be distinguished from working assets by the fact that they are either in form of cash or else convertible into cash without first undergoing a significant alteration. The chief purpose of the working assets is to furnish the principal proceeds on the chief purpose of current assets is to provide a fund for the payment of liabilities when they fall due. If the working assets may be said to represent a stage in the business cycle then the current assets represent the next stage in the cycle. + +A pie chart showing different categories of assets. + +THE BALANCE SHEET 211 + +The distinction between working and current assets is not always an absolute one; nevertheless it is justified if it makes possible a better comprehension of the relative position and significance of the elements constituting these two groups. For instance, in interpreting the balance sheet we customarily make a comparison of the assets and the liabilities in order to determine not merely the absolute solvency of the concern, but also its relative ability to meet its accruing liabilities. In doing this we set the cash and assets that are easily liquidated over against the current liabilities, making due allowance for the time required to liquidate these assets and for the time that the various liabilities run. Evidently, for this purpose, it is desirable to make a distinction between those assets that are held with the object of employing them in the processes of production and those that are in a form which permits of their immediate or prospective use for payment of debts. + +Briefly, the functions of working and current assets are different, and in any case the division of the assets into one class or the other ought to be made arbitrarily but on the basis of the function they happen to perform. + +Deferred Charges.—With assets classified as fixed, working and current, it is still impossible to include under any of these three heads certain more or less common items. These are variously termed deferred charges, deferred assets, deferred charges to income, and suspense debits. However, these terms are not always employed synonymously, for they admit of two possible interpretations. Thus, when speaking of accumulation reserves and reserves of profit, so deferred charges represent either actual value or merely expense which is to be distributed over future accounting periods on some equitable basis. + +What is the function of this class of items? Klein¹ says deferred assets "consist of expense items not yet consumed or used up." Hatfield² says of deferred charges that they "indicate that payment has been made of expenses properly belonging to a period before it has expired." But Klein³ says that "suspense debits represent no value and must sooner or later be written off entirely as losses or expenses." A discrepancy exists between the contentions of Hatfield and Klein on the one + +--- + +¹ Elements of Accounting, p. 165. +² Modern Accounting, p. 113. +³ Accounting Practice and Procedure, p. 41. + +212 +ACCOUNTS IN THEORY AND PRACTICE + +hand and of Dickinson on the other. From the first two quotations cited we infer that this particular class of balance sheet accounts represents value because they represent expenses “prop- +erly balanced” with income, but not yet “used up” (see “Income +Sheet”) and because they are “not yet consumed or used up.” +In the last quotation cited we are told that they “represent no +value.” The only possibility of reconciling these statements is to +assume that Dickinson’s phrase, “suspending debits,” is employed +in a different sense than that attached to “deferred charges” by +Klein and Hatfield. + +Dickinson (p. 30) includes among working assets “insurance, +interest, taxes, royalties, etc.” paid in advance, thus greatly +narrowing the range of his charges to “suspending debits,” so +that about the only items that remain within the field covered +by his “suspending debits” are, discount on bond issues, organiza- +tion expenses, and certain other extraordinary expenses. Thus +limited, this account probably corresponds to Dickinson’s defini- +tion. In the more inclusive sense deferred charges represent real asset values—any kind of legitimate expense incurred in ad- +vance of their actual payment. + +Why should expenses paid in advance be considered working assets? Insurance, interest and taxes are expenses of a general +character and at most only a certain proportion of them enter into +the cost of the product. Moreover, they are distributed as +indirect cost or burden, not as direct elements of cost. There is +no assurance as to what proportion of them will ever be absorbed +as indirect and what part may ultimately find its way to profit +and loss as a charge against the product or as a depreciation +expense. The better way is to show such items as deferred assets +and then make their distribution to cost of product, or otherwise, +as they accrue. Sometimes payments are made in advance to +cover a very considerable period and the impr propriety of including +such charges in working assets is apparent. + +CAPITAL AND SURPLUS + +Capital and surplus together represent the proprietorship or +interest of the stockholders. The word capital here refers to the +par value of outstanding capital stock, although it is sometimes +used more comprehensively as including both capital stock and +surplus. The stockholders’ interests as measured by the market + +THE BALANCE SHEET 213 + +value of their stocks may not correspond to their interests meas- +ured in terms of the book accounts for capital stock and surplus. +Capital stock and surplus are considered separately for technical +and legal reasons although they represent one thing—the equity +of the stockholders. + +**Liability on Capital Stock.—By law, the purchaser of capital +stock at par is relieved of any further obligation upon it. In fact, +even when stock is full paid, certain possibilities accompany it +which, though they may not take the form of compulsory re- +quirements, do lead to further payments. For example, if a +corporation has issued stock which is the interest on its bonds, the +liability the stockholders may be given the choice of paying an +assessment of so much per share or of losing control of the company. + +**The Trust Fund Theory.—The law regards money or other +valuable consideration received for capital stock issued as a fund +held in trust for the protection of the corporation's creditors. +This fund must be zealously guarded and its disposition limited +to legitimate purposes. The law also provides that the payment of +dividends out of capital is prohibited and the directors held +personally responsible for them.¹ It has been held in Connecti- +cut that as the stock of a company is the only basis of credit, +its capital stock is to be regarded as a trust fund to which the +claims of creditors precede those of stockholders.² There are, +however, some exceptions to the rule which has prohibited the +payment of dividends out of capital. Moreover, additions to +surplus are sometimes made by corporations that it becomes a +question whether or not they represent profits distributable as +dividends. Let us consider some of these cases. + +**Capital Invested in Wasting Assets.—In the first place a dis- + distinction must be made between companies whose capital is in- + ¹ Crandall et al., Receivers, vs. Lincoln, 52 Conn. 73. Also, Bush, Trus- + tey, vs. Ross, 68 Conn. 29. + Section 5 of the corporation of Connecticut, provides: + "No corporation shall pay any dividend or make any other distribution + of its assets except from its net profits or actual surplus, unless in accord- + ance with the law allowing the reduction of stock, or upon the dissolution + of the corporation." If such payment or distribution renders a cor- + poration insolvent, the directors shall pay all debts due and owing to credi- + table, to the amount so paid or distributed, to any creditors existing at + the date of such vote who shall obtain judgment against such corporation + on which execution shall be returned unsatisfied." + + + +214 +ACCOUNTS IN THEORY AND PRACTICE + +vested in wasting assets and those whose capital is invested in permanent assets. In a sense, of course, all assets are wasting, but as here used the term refers only to a special class--those which may be expected to lose their value by reason of wear, such as iron ore beds, gold deposits, and so on. "Permanent," on the other hand, signifies assets which, even though they depreciate, can be repaired and replaced and thus be retained at something like their original value. A coal deposit cannot be replaced. It follows that the life of a concern engaged in the exploitation of a wasting asset is strictly limited by the quantity of that asset, while one whose work consists in manufacturing, transportation or trading with permanent assets will continue to exist until worn out in operation by making due allowance for repairs and replacement of plant. + +The question, then, is, must the same principle respecting the integrity of capital invested hold for both classes of companies, say, for a mining company as well for a manufacturing company? There is little doubt that, from a theoretical point of view, no distinction ought to be made. But certain practical considerations intervene. The mining company has to build up its plant and exploit it; the manufacturer or trader in permanent assets must pursue a somewhat different policy in the construction and maintenance of its plant than one which has the prospect of continuous existence. It may not be advisable to build as well or to continue making repairs and replacements beyond a point in time which will be determined by the prospective life of the wasting assets. As the time of exhaustion of a mineral deposit approaches it would be inadvisable to continue making repairs and replacements on buildings and machinery unless it would be required to keep operating efficiency to a normal point. To continue making repairs and replacements as if upon the assumption that the plant is to continue operating indefinitely would mean that when the point of exhaustion is reached a highly repaired and efficient plant would remain without any work to perform and therefore become a heavy loss; whereas if only such repairs are made as are absolutely essential the loss represented by the defunct establishment is much less. + +**Exhaustion of Wasting Assets.**—Even though the plant and machinery about a mine are kept in a high state of repair and their normal depreciation\textsuperscript{1} fully covered by reserves, the miner- + +\textsuperscript{1} See Salter's: Principles of Depreciation, p. 25, for a discussion of normal or average depreciation. + +THE BALANCE SHEET 215 + +als will be exhausted finally and the investment in the form of the purchase money paid for them as they lay in situ will have vanished—unless some provision for this depletion is made in the form of a sinking fund, which is invested at interest at the rate that the value of the mineral in situ decreases from exploitation. This is the only possible arrangement by which the capital can be kept in tact as a fund for the protection of creditors. + +The Sinking Fund.—The deed of trust securing the bonds of such companies usually makes provision to the effect that for each unit of product exploited, a given amount shall be made idle in the hands of a trustee until a similar sum is represented by existing assets. The amount of such deposit, however, is usually conditioned, not upon the total investment, but upon the portion of the investment represented by bonded indebtedness. It appears that so far as bondholders are concerned this plan offers them the desired protection. It does not appear, however, that it would be necessary to preserve in tact the whole original investment. That part represented by fully paid up stock might be permitted to deteriorate, while there is a process of dividend payment by which not only the current profit but also a part of capital would be returned to the stockholders.\(^1\) + +Unproductivity of Investments.—Nevertheless, capital must not be distributed in disregard of the rights of creditors. But when provision has been made for their protection the policy to be followed respecting a further retention of capital would appear to be a matter of expediency so long as its effect is not obscured by other considerations. The most common allocation of assets equivalent to the original investment, in the case of a concern whose original possessions consisted in part of wasting assets, is that these assets must take the form, to a considerable extent, of investments which are liable to prove to be rather unproductive. As cash accumulates in the fund established to compensate the loss resulting from exhaustion of wasting assets (or from other causes), it is used either to meet new demands for sinking funds. But sinking funds are notoriously unproductive, and to gradually transfer the capital invested in the more profitable field of active endeavor to the less profitable one of an invested + +1 See Hatfield: Modern Accounting, Chap. XI, for a consideration of court decisions on dividends paid from capital. + + + + + + +
The Balance Sheet215
+ +216 +ACCOUNTS IN THEORY AND PRACTICE + +fund does not appear to be a justifiable plan, except in so far as it is necessary for the protection of creditors. + +**Protection Required for Creditors.—Hence to say that the whole original investment must be kept in tact as a trust fund for the protection of creditors is imposing a restriction upon the stock-holders which may not be desirable. Creditors must be protected to the extent of their loan but not to the extent of twice or thrice its amount.¹ In Connecticut, by a two-thirds vote of the stockholders, the capital stock may be reduced as much as desirable so long as the company is not thereby rendered insolvent. If it is thus made possible to reduce the capital stock, then any favor of such reduction are held liable, jointly and severally, for all debts that may remain unsatisfied. From this we infer that the capital stock may be regarded as a trust fund for protection of creditors only to the extent of such indebtedness. Beyond this it rests with the stockholders themselves to say what they will do with their capital. + +**Permanent Corporations.—Outside the ranks of corporations engaged in the exploitation of wasting assets the question of the preservation of the invested capital is essentially different. A mining company is most prosperous when its assets are being most rapidly consumed. With a manufacturing company conditions are different. Its supply of raw material is continually replenished from without and ordinarily there is no question about the preservation of this supply. The raw materials are not usually bought up in large quantities in advance but as they are required, and they are largely imported into countries where raw materials are cheap. A mining company buys its raw material in advance. It is as if a manufacturer of shoes were to buy up enough leather to last for thirty years with the expectation of discontinuing business when this supply gives out. + +Instead, the shoe manufacturer purchases his raw materials as he needs them, and as the supply of them is continuous he has no intention of going out of business at all. His depreciation problem arises only when he has placed his manufacturing equipment must be made for its permanent upkeep. He makes repairs and replacements with the assurance that the money spent upon them will not be lost through the discontinuance of operations at some future time, but that it will be fully returned through the endless process of manufacture. + +¹ Not limited to corporations engaged in exploiting wasting assets. + +THE BALANCE SHEET +217 + +If wasting assets are being exploited the procedure will therefore consist in (a) preservation of capital to the extent that may be necessary for the protection of creditors, this capital preferably taking the form of special funds created on a basis of output, as so much per ton mined, etc.; (b) distribution of capital to stockholders when it can be more profitably employed by them than by the company, due allowance being made for (a) above and for the running requirements of the plant. + +CHAPTER XXXIII + +CONSTRUCTION AND INTERPRETATION OF THE BALANCE SHEET—(Continued) + +**Balance Sheet Illustrations.—** Any such diminution of the original investment as that suggested at the close of the preceeding chapter ought to be honestly and accurately reflected in the balance sheet. Not only must present creditors be protected but prospective creditors as well must not be misinformed about the worth of the company's assets. To illustrate, assume that the following balance sheet indicates accurately the condition of the Superior Mining Company on the day it begins business: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Superior Mining Company:
Wasting Assets...$100,000Capital Stock$100,000
Plant...50,000Bonds (20 years)35,000
Machinery...10,000
Cash...5,000
$153,000$153,000
+ +Assume, further, that at the end of ten years it is estimated that the wasting assets are one-half exhausted, and that a fund has been set aside to cover this exhaustion, that reserves have been set up to cover depreciation of plant and machinery, and that other accounts undergo no change. The balance sheet then appears thus: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet, Superior Mining Company:
Wasting Assets...$100,000Capital Stock....$100,000
Less Reserve for Depletion50,00050,000 Bonds (20 years)35,000
Plant...$25,000
Less Reserve for Deprecia- tion...8,00012,000
Machinery...$10,000
Less Reserve for Deprecia- tion...5,0005,000
+ +218 + +THE BALANCE SHEET +219 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Funds
For wasting Assets.$30,000
For Plant.8,000
For Machinery.5,00063,000
Cash.5,000
$135,000$135,000
+ +This balance sheet has been drawn up according to the assumption that the entire original investment must be preserved. No capital has been distributed as dividends. Suitable reserves have been made for depletion of wasting assets and for depreciation of plant and machinery. The amounts thus reserved have been set aside as special funds, as shown. An examination of this balance sheet discloses the fact that the assets are worth $135,000, or nearly four times the amount of the outstanding bonds. Must the total value of these assets be regarded as a trust fund for the protection of the bondholders? Would not this be possible under the "depletion" theory? Why should a larger trust fund be required for the protection of the bondholders than could reasonably be required for security on an ordinary loan? A bank would be willing to loan $35,000 upon collateral security consisting of about $40,000 first grade government bonds or about $45,000 in high grade rail-road bonds. + +If adequate security is afforded to all creditors, either in the form of sinking funds in the hands of trustees or of liens upon specific assets, this is all the protection that could reasonably be asked. Let us assume that the Superior Mining Company pursued a different plan than that outlined above, and that after making a due allowance per unit of mineral mined for the establishment of a bond sinking fund and due allowance for the depreciation of plant and machinery, it would pay out its share of revenues as dividends. Assume also that the allowance made for the establishment of a sinking fund now (at the end of ten years) amounts to $20,000, which is adequate since but one-half of the minerals are estimated to have been removed. As a consequence of this policy the balance sheet at the end of ten years appears thus: + +The word "depletion" is very properly employed to distinguish the exhaustion of wasting assets from the depreciation of plant, etc. + +220 +ACCOUNTS IN THEORY AND PRACTICE + +Balance Sheet, Superior Mining Company: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Wasting Assets$100,000Capital Stock$100,000
Less Depletion50,000Bonds (20 yrs.)35,000
Plant$20,000$50,000
Less Reserve for Depreciation8,00012,000
Machinery$10,000
Less Reserve for Depreciation5,0005,000
Funds For Plant$8,000
For Machinery5,000
For Bonds20,000$33,000
Cash5,000
Profit (due to payment of dividends from capital)35,000
Total:$135,000$135,000
+ +This balance sheet shows the results of the payment of dividends from capital. No provision has been made for the depletion of wasting assets. The only item which tends to compensate for the decrease in value of wasting assets, amounting to $56,000, is the bond sinking fund of $29,000, which has been reserved out of income. This gives adequate protection to the bondholders providing that the corporation is in a position to make the payments required. + +To require the corporation to retain the full original equity of its capital stock by reserving out of revenues an amount equal in value to the deposits that are exhausted would mean that the corporation would be gradually transformed from a mining to an investment institution, and as the last years of the company's existence as a mining corporation approached it would find a very large proportion of its capital tied up in investments which would either be unsafe in character or else unproductive. + +**Profits Distributable as Dividends.**—Aside from enterprises engaged in the exploitation of wasting assets, it is the rule to make full provision for all losses from depreciation. The continued efficiency of the concern requires this. But important questions arise concerning the nature of profits and increments + +THE BALANCE SHEET 221 + +of capital from various sources. It is generally acknowledged that *bona fide* profits resulting from ordinary operations are dis- +tributable as dividends. Owing to the complex nature of +business this matter frequently becomes complicated, and the following considerations will indicate: + +1. In determining whether there is a distributable surplus of +profits must we consider each year as a unit by itself or must any +losses incurred during previous years first be made up? A period of +inactivity might leave a corporation with a deficit of $50,000. +Then might it be advisable to make a profit of $50,000 and then use all of $50,000 is made. +Must this profit be employed to reduce the previously +accumulated deficit or may it be distributed as dividends? +2. Assets sometimes appreciate in value due to community +growth, and so on. Should such increments of wealth be con- +sidered as profits; if so, are such profits distributable as divi- +dends? +3. Shares of stock are sometimes sold at a premium. If a +corporation disposes of stock at a premium, is that premium to +be considered as profit distributable as dividends or is it a part +of capital and not distributable? + +Each Year not a Unit.—As to the first proposition, there is +little to justify the theory that each year is a unit to be consid- +ered without reference to the ones preceding it. To carry such +a plan to its logical conclusion would be equivalent to a denial of +the integrity of the invested capital and make uncertain its +amount at stated times. If every year's earnings are used up, +capital is permitted to make inroads into capital, and if nothing is reserved +during fat years to make up these deficits, then with every year +in which there occurs a deficit there will result a reduction of +the investment. An accumulation of such deficits would ulti- +mately lead to insolvency. + +Although some court decisions have thrown doubt upon the +narrative view that each year's earnings are units, yet, as above noted, the +general principle that should govern is clear, namely, that with +the exception of companies engaged in exploiting wasting assets, +capital must be kept in tact by making up the deficits of poor years from the gains of prosperous years. This rule must be +employed with reason, however. Good accounting "averages up" good and bad years and tries to make possible some consist- +ent kind of dividend payment. It might be better to remove an extraordinary deficit by writing it off over a series of years, + +A page from a financial report. + +222 ACCOUNTS IN THEORY AND PRACTICE + +rather than by a drastic revision of all dividend payments for a single year. + +**Profit on Appreciated Property.—As to the second proposition, whether appreciation of property due to influences beyond the control of the company may be made the basis of a distribution of profits, it is generally conceded that until such appreciated value is actually realized by sale it should not be considered as a profit and so cannot be distributed as such. When the profit is actually realized by sale there appears to be no objection to its distribution. The question then arises whether corporate management might retain it as a permanent addition to surplus.** + +**Premium on Capital Stock.—Proposition three.** When shares of stock are sold at a premium the excess received above the par of the shares is credited to an account usually known as the premium on stock account. Concerning the possible procedure here authorities differ greatly. Some maintain that this premium, even though it may be viewed as a profit, is one which ought not to be distributed as such because it is merely capital and it is not a profit at all and that to consider it as such places a corporation in a culpable situation. ¹ On the other hand authorities are not wanting who justify the distribution of such a premium on stock as a dividend. On July 14, 1914, the New York court of appeals, in the case of Equitable Life Assurance Society vs. Union Pacific Railroad Company² took this view. The Equitable Life Assurance Society sought to restrain the railroad company from paying an extraordinary dividend from surplus acquired in part by the sale of stock at a premium. Note the following quotation from this decision: + +**New York Case Cited.—It is said, because in the retirement of its convertible bonds defendant sold and issued its capital stock at $175 per share of $100 par value, that this entire sum was paid in as capital and must be held and distributed as such. That is not my interpre- tation of the transaction under the allegations of the complaint. The amount at per share paid for each share of stock undoubtedly became capital, without doubt, but what was paid for it did not remain in capital.** + +For a discussion of some English and American court decisions touching on this matter, see Hatfield: Modern Accounting, pp. 205-213. +¹ For various interpretations of this view see Hatfield: Modern Accounting, p. 206; and Applied Theory of Accounts p. 380; Bennett: Corporation Accounting, p. 85; and Montgomery: Auditing Theory and Practice, 2nd ed., 1916, p. 194. +² N. E. Rep. vol. 106, p. 92. + +A page from an accounting textbook discussing dividends and premiums. + +THE BALANCE SHEET +223 + +as against its liability on the outstanding share of stock which had been issued for it. Just as undoubtedly the extra $75 paid per share represented the amount of accumulated profits or surplus which it was supposed would be apportionable to each share of new stock after payment and issue as aforesaid. . . . When paid in this premium became part of such accumulations of profit and surplus and distributable as such. It was credited to profits and losses, and then distributed among the shares. +"When a corporation has a surplus, whether a dividend shall be made, and if made how much it shall be, and when and where it shall be payable, rest in the fair and honest discretion of the directors uncontrollable by the courts." + +Briefly, as stated, the premium is "for the purpose of equalizing as between new and old stockholders, their respective rights in accumulated profits which presumably are distributable as dividends." In other words, only that part of the premium for stock because there is a distributable surplus back of it cannot be attribu- to be prevented from the receipt of dividends out of such surplus. Ordinarily a stockholder is thought of as being liable only to the extent of the par value of his shares, in case of insolvency. If his shares are not full paid he can only be made to pay the difference between what he has already paid and the par of his shares. There is nothing to prevent the distribution of surplus accumulated during the life of a corporation however the company sees fit. To illustrate, let the following balance sheet represent the condition of a corporation at a given time: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Balance Sheet:
Fixed Assets.$100,000Stock.$100,000
Current Assets.50,000Bonds.25,000
Surplus.25,000
$150,000$150,000
+ +This surplus of $25,000 may or may not be distributed, according to the judgment of the board of directors. If it is distributed, the equity of each old shareholder will be reduced from $125 to $100 per share of stock. Consequently, were more stock to be sold it would be reasonable to assume that, under normal conditions, it would go for about par, and the old and new stockholders would remain on a parity. If it is not distributed the new stock would probably sell for about $125 per share, since the old stockholders would not wish new stockholders to get the advantage of the old equity over and above the par of the stock. Suppose + +224 +ACCOUNTS IN THEORY AND PRACTICE + +that $100,000 of new stock is sold at 125. This brings the sur- +plus to $50,000, $25,000 of which is accumulated profits and +$25,000 premium on stock. Suppose further that this $50,000 +is distributed as surplus to the stockholders. + +In what way is the condition of the company different from +what it would have been had the original surplus of $25,000 +been distributed to the old stockholders before the sale of the +new stock, which would then have been made at par or there- +abouts? In no way whatever. The whole affair is one of +policy in which the company has acted in accordance with its view +has already received the recognition of the Interstate Commerce +Commission, which has ruled that, “In case the accounting com- +pany is permitted and elects to distribute all or any part of the net +premium on its capital stock to its stockholders, the amount thus +distributed shall be charged to the premium account.”1 + +Conclusion.—A balance sheet should so be constructed that the +work of interpretation will be aided, as far as possible, by its +construction. It is only when we see clearly how it lies in the +relationship which the items in it bear to one another. That +relationship ought to be clarified, not obscured. Although very +much remains to be done in the way of systematization in bal- +ance sheet construction, much progress has been made toward +standardization in form and terminology. + +Part V. Financial Statements + +BENNETT, R. J. Corporation Accounting. New York, 1916. Chapter XXIV. + +COLE, W. M. Problems in the Principles of Accounting. Cambridge, 1915. +GILMAN, S. Principles of Accounting. Chicago, 1916. Chapter IV. +GREENDELINGE, L. Accountancy Problems. Vols. I and II. New York, +1911. +GREENDELINGE, L. Financial and Business Statements. New York, 1917. +HAYFIELD, H. R. Modern Accounting. New York, 1918. Chapter I-IX. +KLEIN, J., A. Elements of Accounting. New York, 1919. Chapter IX. +SALEMOR, E. K., A Textbook of Accounting Principles. New York, +1923. +WATSON, C. F., A Textbook of Accounting Principles. New York, +1924. + +Classification of Income, Profit and Loss and General Balance Sheet Accounts for Steam Roads, effective July 1, 1914, p. 30. See also Uniform System of Accounts for Electric Railways, effective July 1, 1914, p. 75, and Uniform System of Accounts for Express Companies, effective July 1, 1914, +p. 75. Applicable to all companies engaged in transportation business except those dealing in securities or stocks and bonds or in the retention of the premium on stock sold until offset (1) by discounts on sales of the same class of stock, or (2) by credits to profit and loss upon the reacquisition of the stock.” See references noted above. + +BIBLIOGRAPHY + +PART VI + +SPECIAL APPLICATIONS OF PRINCIPLES + +CHAPTER XXXIV + +DEPARTMENT ACCOUNTING + +Accounts Locate Responsibility.—One of the main objects of an accounting system is to enable the management to locate responsibility. This is difficult or impossible unless we have a proper kind of organization in charge of persons upon whom responsibility can be placed. Where the business activities ex- +pands beyond a certain point adequate organization is usually possible only as the result of the classification of its activities on a departmental basis. The size and character of the depart- +ments depend upon the nature of the business. In manufactur- +ing, departments are established for the performance of a certain process or the manufacture of certain classes of commodities. +In merchandising, departments are established to deal in certain classes of goods, such as groceries, dry goods, etc., or to store. + +Purpose of Departments.—As soon as a business is departmen- +talized it is no longer a single activity but a group of activities united by a single ownership and control. The manager of such an enterprise must be able not only to show what results are being accomplished by the concern as a whole; he must also be able to distinguish and compare the results accomplished by the different departments. He must be responsible for the purchase of ma- +terials and supplies, and must be charged with a reasonable propor- +tion of general expenses or overhead, such as result from salaries paid to general officers, taxes, depreciation, and so on. If a con- +cern is properly organized, and if its departments are definitely laid out and responsibility located, an adequate accounting sys- +tem can be set up. If, on the other hand, the organization is loose, departments without definite functions, and responsibility indefinite, it is impossible to install a system of accounts that will give valuable results. + +13 +225 + +226 +ACCOUNTS IN THEORY AND PRACTICE + +When the significance of departmentalization is fully grasped it will be seen that the only difference between an accounting system for a non-departmentalized concern and one for a departmentalized concern lies in the subdivision of the accounts. Thus if a merchant who has kept a general merchandise establishment wishes to organize a department store he can do so by classifying his merchandise into groups, making each group the basis of a department. For example, Department A might be the dry goods department, Department B the groceries depart- ment, Department C the notions department, and so on. Department D the notions department, and so on. Each department may be compared to a small single-line store. The number of departments will vary considerably with the conditions and the desires of the management in different instances. The depart- ments mentioned above might be further subdivided. Depart- ment A-1 might be men's clothing, Department A-2 women's clothing, Department A-3 children's clothing, and so on ad infinitum. + +How Accounts are Kept.—The systematization and coordination of the various departments are accomplished by the use of columnar Journals and controlling accounts with subordinate Ledgers. Such a system must be both accurate and practicable. A single Journal with two columns, one for charges and one for credits, might be accurate but it would be impracticable, for a department store. Likewise a single Ledger might be accurate but the cost of keeping such a Ledger would make it impracticable. Accounts must not only be correct in principle, they must also be adaptable to specific requirements. Such systems cannot be purchased ready made. They must be contrived to fit the peculiar conditions that characterize an enter- prise just as an architect draws up the plans for a building only after he consults both his customer's needs and the physical sur- roundings of the location. He then applies the general prin- ciples of accountancy to these conditions. + +Suppose a department store to have four departments. All purchases, sales, and expenses must then be accounted for on the basis of this subdivision. Each department is considered as a unit and the accounts are so kept that all purchases, sales, and expenses incident to that department may be ascertained. So far as possible, therefore, distinct accounts must be kept for each department, while those expenses which cannot be charged di- + +DEPARTMENT ACCOUNTING 227 + +rectly to the different departments must be distributed over the departments on an equitable basis. + +A purchases account is kept in the General Ledger for each department. Consequently the Purchases Journal should have a purchases column for each department, which may be headed Department A, Department B, and so on. At the end of the month the totals of these columns are posted to their corresponding purchases accounts in the General Ledger—Purchases, Department A, and so on. If the accounts payable are not so numerous but only those that may be recorded in the General Ledger, then the totals of the four departmental purchases columns will be posted to the credit of the accounts payable controlling account. A sundry column in the Purchases Book will provide for the reception of purchases which are not made on a departmental basis. Possibly it will be found desirable to provide a miscellaneous column for each department in which the purchases of things other than commodities may be recorded when necessary. + +Possibly, with the expansion of business, it may be desirable to provide a separate Purchases Journal for each department, with columns for expenses in addition to the one for merchandise purchases. The monthly postings from these would be made in the same way as if there were but one Purchases Journal, the proper accounts being charged in the General Ledger and the controlling accounts payable account being credited. If the Vouchers Book is used, this distribution can be provided in it for the distribution of purchases and expenses on a departmental basis, whenever such a direct distribution is possible. + +**Distribution of Indirect.**—Probably the most difficult problem in departmental accounting is the distribution of indirect, or general expenses, among the various departments on an equitable basis. These expenses, since they cannot be charged directly to the departmental expense accounts, must first be charged to "depreciation," "rent," "advertising," etc., on some basis for their distribution having been determined upon, the clearing accounts are credited and charges are made to the proper departmental accounts. Following are some examples of such general or overhead expenses: + + + + + + + + + + + + + + +
InsuranceSalaries of General Officers
LightRent
HeatAdvertising
+ +228 + +ACCOUNTS IN THEORY AND PRACTICE + +**Basic of Distribution.**—Possibly one or more of these may be charged directly to departmental expense accounts. Thus if the lighting arrangement is such as to permit the use of separate meters for the various departments light expense could be charged directly to departments, and so on. The accountant's problem is to find an equitable basis of distribution for these general expenses. This basis will vary with the nature of the expense. The following is suggested as showing the procedure to be followed: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Name of ExpenseValue of propertyBasis of Distribution
InsuranceValue of property
Interest on stock (if used)Candle power required
LightCandle feet of space
HeatSales
Salaries of General OfficialsFloor space, or desirability of location
RentSales, or space area
AdvertisingSales
General AdministrativeSales
+ +**Distribution Illustrated.**—These are suggestive rather than final. The best method to follow must be determined according to circumstances. To illustrate the procedure necessary to make the distribution of such a general expense as rent, assume that, on the basis of floor space occupied, the departments are chargeable as follows: + +Department A. $50 +Department B. $40 +Department C. $30 +Department D. $20 + +and that the light bill for the month is $50. This might be entered in the Voucher Register as follows: + +Light Expense—Clearing Account. $50.00 +To Vouchers Payable. $50.00 + +When the distribution is made to departments the clearing account, "Light Expense," is closed, as follows: + +Light Expense—Department A. $25.00 +Light Expense—Department B. 12.50 +Light Expense—Department C. 6.25 +Light Expense—Department D. 6.25 + +To Light Expense—Clearing Account. $50.00 + +1 See Moxey, E. P., Jr. and others: *Practical Accounting Methods*, p. 186. + +A table showing the distribution of a general expense, in this case "Light Expense," among four departments. + +DEPARTMENT ACCOUNTING 229 + +In this manner all expenses which it may be desirable to charge to a clearing account is in turn charged to the departmental accounts. When the above entries are posted the Light Expense-Clearing Account appears as follows: + + + + + + + + + + + + + + + + + + +
Light Expense-Clearing Account
To Vouchers Payable$50.00 By Light Expense—Dept. A… $25.00
By Light Expense—Dept. B… 12.50
By Light Expense—Dept. C… 6.25
By Light Expense—Dept. D… 37.25
$50.00
$50.00
+ +Results Secured.—When all general expenses have been thus distributed to the respective departments it is possible to set up profit and loss accounts for each department. By combining them a profit and loss account for the whole enterprise is also secured. In this way the relative efficiency of the different departments can be determined and the best methods for operating the whole establishment may be learned. Departmentalization may be carried as far as desirable; but ordinarily a practical limit will be suggested by the nature of the business. + +Transfers between Departments.—When transfers of merchandise are made from one department to another these must be accounted for either through the General Journal or through a special journal kept for that purpose. Transfer slips are made out charging the department receiving goods at cost price and authorizing the one surrendering them, at cost price. At the end of the month these are recapitulated and the proper journal entries formulated for making the proper debits and credits, thus: + + + + + + + + + + + + + + +
Purchase—Department A…$10.20
To Purchase—Department B…$10.20
To record transfer, at cost, of merchandise from Department B to Department A.
+ +All interdepartmental transfers are similarly recorded. Instead of crediting the purchases account of the department surrendering the goods, ��sales” might be credited. This is not the best procedure, however, as no profit is made on such a “sale” because it is “at cost.” To credit this item to sales account increases the total of sales without increasing profits. It then becomes necessary to make deductions from sales for those transfers in + +230 +ACCOUNTS IN THEORY AND PRACTICE + +order to secure the correct percentage of profits on sales—an important statistical figure. + +**Manufacturing.—** The same principles apply to departmental accounting in manufacturing as in trading. A department of a factory is charged with raw material consumed and also with its proper proportion of indirect expense. These costs are charged to the departmental goods in process (or manufacturing) controlling account and at the same time are distributed over the various order numbers in the departmental cost ledger. Separate finished goods Ledgers may also be kept for the different departments. Each department thus becomes a unit, a factory within a factory—and its profits can be determined independently. + +Whether or not a factory can be thus completely depart- mentalized depends upon the nature of its operations. If its output is such that it requires a continuous operation, passing from stage to stage, and undergoing the different processes one after another, then it may be possible but a large amount. Separate raw materials, goods in process and finished goods Ledgers would not then be practicable. But in so far as definite departmental processes are distinguishable departments may be said to exist and to serve as convenient units of organization for the allocation of labor, material and indirect. In this case the output of a department is a portion of a process instead of a complete process. + +CHAPTER XXXV + +DEPARTMENT ACCOUNTING—PRACTICE + +Problem 1.—The General Retail Company is engaged in selling the following classes of merchandise: + +1. Men's clothing +2. Women's clothing +3. Children's clothing +4. House furnishings + +The store building, for which a monthly rental of $500 is paid, consists of two floors and the basement. The floor space is 60,000 square feet divided equally among the three levels, 20,000 square feet to each. The basement and the first floor are given over to house furnishings. The second floor is used as follows: 7,500 square feet for men's clothing; 7,500 square feet for women's clothing; and 5,000 square feet for children's clothing. + +All accounts are kept on a cash basis. + +There exist separate departments, A, B, C, and D, respectively, for each of the four classes of merchandise mentioned above. The following departmental accounts are to be kept: + +1. Sales +2. Purchases +3. Returned Sales +4. Returned Purchases +5. Wages +6. General Departmental Expense +7. Selling Expenses + +The general expenses are to be charged to the following general clearing accounts: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
AccountBase of Distribution
InsuranceValue of property
LightCandle power required
HeatCubic feet of space
Salaries—General OfficersNet Sales
HireFloor space
AdvertisingNet Sales
General AdministrativeNet Sales
Bat DeedsNet Sales
+ +231 + +232 +ACCOUNTS IN THEORY AND PRACTICE + +Required: +(a) To contrive a system of accounts adequate for this business. +(b) To set up a trial balance as of the close of the year 1919, +inserting assumed amounts for the various accounts; then +to set up departmental income statements, a general dis- +tribution statement, and a balance sheet. Assume that +the books were last closed as at Dec. 31, 1918. Also +assume all data necessary for transferring to departmental +accounts the amounts charged to overhead under the +respective clearing accounts. + +Under (a) above it is required that a complete voucher system +be installed. + +Solution, Problem I.—The following books are necessary: + +General Journal +Sales Journal +Returned Sales Journal +General Ledger +Accounts Receivable Ledger +Cash Journal +Voucher Register + +The rulings and headings of these books are shown below: + +DEPARTMENT ACCOUNTING—PRACTICE 233 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Act. Prc.Note BoxReoutlineFExplanationFScheduleFNote DayFAct. Rem.
General Journal
Sales Journal
Date
A round month income from sales of goods and services to customers in the current period.
TotalDate ADate BDate CDate D
Returned Sales Journal
Date
A round month income from sales of goods and services to customers in the current period.TotalDate ADate BDate CDate D +
+ +234 +ACCOUNTS IN THEORY AND PRACTICE + +The General Ledger and the Accounts Receivable Ledger have ordinary ledger rulings: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
DateDescriptionTNSCDTotal
AmountAmountAmountAmountAmount
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
+
+
+
+
+
+
+ +DEPARTMENT ACCOUNTING—PRACTICE 235 + + + + + + + + + + + + + + + + + + + + + + + + +
DateCreditorVoucher No.Voucher No.AmountPurchase Dept. CPurchase Dept. BPurchase Dept. CPurchase Dept. D
+ + + + + + + + + + + + + + + + + + + + + + + +
Wage Wage Wage WageGeneral ExpenseGeneral ExpenseGeneral ExpenseGeneral ExpenseSelling Selling Selling SellingOrder Order Order OrderInsurance Insurance Insurance InsuranceLight Light Light Light
A A A AB B B BC C C CD D D DE E E EF F F FG G G GH H H H
+ + + + + + + + + + + + + + + + + + + + + + + +
ItemVoucher Register (continued)
Receivables General OfficeAircrafts
Administrative Account Amount Time Method
ItemReceivables General Office Aircrafts Administrative Account Amount Time Method
+ +236 ACCOUNTS IN THEORY AND PRACTICE + +Trial Balance, General Retail Company, as at December 31, 1919 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +.. + +
Capital Stock Outstanding:$ 40,000
Surplus:5,400
Cash:$ 12,100
Petty Cash:200
Insurance Expense on Messe-Clearing a/c.600
Insurance Income a/c.240
Light Expense-Clearing a/c.300
Expense-Clearing a/c.2,300
Salaries General Officers-Clearing a/c.11,500
Bond Expense-Clearing a/c.6,000
Advertising Expense-Clearing a/c.700
General Administrative Expense-Clearing a/c.2,000
Bad Debt Expense-Clearing a/c.400
Sales: Dept. A.20,500
Dept. B.18,000
Dept. C.7,000
Dept. D.37,500
Purchases: Dept. A.17,900
Dept. B.14,000
Dept. C.4,000
Dept. D.35,500
Returned Sales: Dept. A.64Dept. B.200Dept. C.500Dept. D.40Returned Purchases: Dept. A.200Dept. B.500Dept. C.40Dept. D.199
+ + + +
Sales: Dept. A:
+ +$1,500 + +$1,250 + +$500 + +$2,999 + +$1,499 + +$759 + +$399 + +$1,499 + +$1,499 + +$889 + +$399 + +$1,499 + +$1,499 + +$889 + +$399 + +$1,499 + +$1,499 + +$889 + +$399 + +$1,499 + + + + + +
Selling Expenses: Dept. A:
+ +$889 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + + + + + +
Selling Expenses: Dept. B:
+ +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + +$68 + + + + + +
Selling Expenses: Dept. C:
+ +$68 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+ +
Account Receivable:$15,555;
> + + + +
Accounts Payable:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Reserve for Bad Debts:$11,777;
> + + + +
Account Receivable:
> + + + +
Accounts Payable:
> + + + +
Reserve for Bad Debts:
> + + + +
Reserve for Bad Debts:
> + + + +
Reserve for Bad Debts:
> + + + +
Reserve for Bad Debts:
> + + + +
Reserve for Bad Debts:
> + + + +
Reserve for Bad Debts:
> + + + +
Reserve for Bad Debts:
> + + + +
Reserve for Bad Debts:
> + + + + + +
ACCOUNTS IN THEORY AND PRACTICE Trial Balance, General Retail Company as at December 31, 1919 Capital Stock Outstanding $40,000 Surplus $5,400 Cash $12,100 Petty Cash $200 Insurance Expense on Messe-Clearing a/c $600 Insurance Income a/c $240 Light Expense-Clearing a/c $300 Expense-Clearing a/c $2,300 Salaries General Officers-Clearing a/c $11,500 Rent Expense-Clearing a/c $6,000 Advertising Expense-Clearing a/c $700 General Administrative Expense-Clearing a/c $2,000 Bad Debt Expense-Clearing a/c $400 Sales Dept. A $20,500 Dept. B $18,000 Dept. C $7,000 Dept. D $37,5 + +DEPARTMENT ACCOUNTING-PRACTICE 237 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Inventory, Dec. 31, 1918:
Dept. A...4,000
Dept. B...3,000
Dept. C...1,200
Dept. D...127,800
Furniture and Fixtures10,000
$160,880$160,880
+ + + + + + + + + + + + + + + + + + + + + + + + + + + +
Inventory, Dec. 31, 1919:
Dept. A...$ 5,000
Dept. B...5,100
Dept. C...500
Dept. D...16,000
+ +The following conditions are determined: + +(a) The relative candle power required by the basis of average inventory value, +that is, old plus new inventory divided by 2. These are: +Dept. A (4,000 + 5,000) ÷ 2 = 4,500 (17.96%) +Dept. B (3,000 + 3,100) ÷ 2 = 3,050 (12.18%) +Dept. C (2,500 + 2,650) ÷ 2 = 2,575 (13.8%) +Dept. D (17,300 + 16,500) ÷ 2 = 16,950 (66.47%) + +(b) The relative candle power required by the departments for lighting is as follows: +Dept. A $\frac{4}{5}$ of total +Dept. B $\frac{4}{5}$ of total +Dept. C $\frac{4}{5}$ of total +Dept. D $\frac{4}{5}$ of total + +(c) The relative heat consumption is as follows: +Dept. A $\frac{4}{5}$ of total +Dept. B $\frac{4}{5}$ of total +Dept. C $\frac{4}{5}$ of total +Dept. D $\frac{4}{5}$ of total + +(d) The amounts of net sales are as follows: +Dept. A $419,860$ (21.98%) +Dept. B $17,800$ (9.79%) +Dept. C $6,900$ (3.76%) +Dept. D $45,800$ (26.58%) + +Salaries of General Officers, Advertising, and General Administrative and Bad Debts Expense are allocated to departments on the basis of net sales. + +(e) The amount of floor space devoted to the different departments is as follows: +Dept. A .................................................. $7,500$ sq. ft. ($12.5\%$) +Dept. B .................................................. $7,500$ sq. ft. ($12.5\%$) +Dept. C .................................................. $5,000$ sq. ft. ($8.3\%$) +Dept. D .................................................. $40,667$ sq. ft. ($66.67\%$) + +Total .................................................. $60,067$ sq. ft. + +A table showing inventory values for four departments. + +238 ACCOUNTS IN THEORY AND PRACTICE + +Rent is allocated on the basis of floor space occupied. +The next step is to credit the clearing account and charge departmental expense account, the allocation being determined on the basis of the average inventory values of opening departmental expense accounts, however, we will carry the distribution direct to trading and profit and loss, as follows: + + + + + + + + + + + + + + + + + + + + + + +
Trading Account—Dept. A. (17.60 %)$107.76
Trading Account—Dept. B. (12.12 %)73.08
Trading Account—Dept. C. (3.39 %)29.34
Trading Account—Dept. D. (66.47 %)398.82
To Insurance Expired on Mise.—Clearing a/c.$600.00
+ +To carry insurance to departmental trading accounts, distribution being on basis of average inventory values in the departments. + + + + + + + + + + + + + + + + + + + + + + +
Trading Account—Dept. A. 1/4$50.00
Trading Account—Dept. B. 1/433.33
Trading Account—Dept. C. 1/410.67
Trading Account—Dept. D. 1/4200.00
To Light Expense—Clearing a/c.$300.00
+ +To carry light expense to departmental trading accounts, distribution being on basis of relative candle power required by departments. + + + + + + + + + + + + + + + + + + + + + + +
Trading Account—Dept. A. 1/4$287.50
Trading Account—Dept. B. 1/4287.50
Trading Account—Dept. C. 1/4191.67
Trading Account—Dept. D. 1/41,533.33
To Heat Expense—Clearing a/c.$2,300.00
+ +To carry heat expense to departmental trading accounts, distribution being on basis of cubic feet of space occupied by the departments. + + + + + + + + + + + + + + + + + + + + + + +
Trading Account—Dept. A.$750.00
Trading Account—Dept. B.750.00
Trading Account—Dept. C.499.80
Trading Account—Dept. D.4,060.20
To Rent Expense—Clearing a/c.$6,000.00
+ +To carry rent expense to departmental trading accounts, distribution being on basis of floor space devoted to departments. + + + + + + + + + + + + + + + + + + + +
Trading Account—Dept. A.$153.86
Trading Account—Dept. B.137.90
Trading Account—Dept. C.53.48
Trading Account—Dept. D.354.76
To Advertising Expense—Clearing a/c.$700.00
+ +DEPARTMENT ACCOUNTING—PRACTICE 239 + +To carry advertising expense to departmental trad- +ing accounts, distribution being on basis of net sales of +the departments. +Administrative Account—Dept. A. $ 83,527.70 +Administrative Account—Dept. B. 2,263.50 +Administrative Account—Dept. C. 878.60 +Administrative Account—Dept. D. 5,828.20 + +To Salaries General Officers—Clearing a/c. $11,300.00 + +To carry salaries of general officers to departmental +administrative accounts, distribution being on basis of +net sales of the departments. +Administrative Account—Dept. A. $ 435.60 +Administrative Account—Dept. B. 394.00 +Administrative Account—Dept. C. 152.80 +Administrative Account—Dept. D. 1,013.60 + +To General Administrative Expense—Clearing a/c. $2,000.00 + +To carry general administrative expense to depart- +mental administration accounts, distribution being on +basis of net sales of the departments. +Administrative Account—Dept. A. $ 87.92 +Administrative Account—Dept. B. 78.80 +Administrative Account—Dept. C. 30.56 +Administrative Account—Dept. D. 202.72 + +To Bad Debts—Clearing a/c. $400.00 + +To carry bad debts expense to departmental admin- +istration accounts, distribution being on basis of net +sales of the departments. + +This closes all clearing accounts into the departmental trading +and administrative accounts. Next the closing entries must be +made for the departmental accounts. These follow: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Trading Account, Dept. A.$ 4,000.00
Trading Account, Dept. B.3,000.00
Trading Account, Dept. C.1,200.00
Trading Account, Dept. D.17,300.00
To Dept., A., Inventory.$ 4,000.00
To Dept., B., Inventory.3,000.00
To Dept., C., Inventory.1,200.00
To Dept., D., Inventory.17,300.00
+ +To carry inventory (old) to trading accounts of +departmental accounts. + +Note that inventories, purchases, sales, etc., are carried direct to the +trading accounts. They are sometimes taken to a merchandise account, +but it is thought that the above procedure will here facilitate the construc- +tion and understanding of the trading and profit and loss statement. + +14 + +240 +ACCOUNTS IN THEORY AND PRACTICE + +Dept. A. Inventory.................. $ 5,000.00 +Dept. B. Inventory.................. 3,100.00 +Dept. C. Inventory.................. 500.00 +Dept. D. Inventory.................. 16,000.00 + +To Trading Account—Dept. A........... 5,000.00 +Trading Account—Dept. B.............. 3,100.00 +Trading Account—Dept. C.............. 500.00 +Trading Account—Dept. D.............. 16,000.00 + +To credit new inventories to trading accounts of the departments and charge the proper inventory accounts. +Sales—Dept. A........................ $20,500.00 +Sales—Dept. B........................ 18,000.00 +Sales—Dept. C........................ 7,000.00 +Sales—Dept. D........................ 51,500.00 + +To Trading Account—Dept. A........... $29,500.00 +Trading Account—Dept. B.............. 18,500.00 +Trading Account—Dept. C.............. 7,500.00 +Trading Account—Dept. D.............. 57,500.00 + +To carry sales to the trading accounts of the departments, clearing the department sales accounts. +Trading Account—Dept. A............. $17,500.00 +Trading Account—Dept. B.............. 14,500.00 +Trading Account—Dept. C.............. 8,500.00 +Trading Account—Dept. D.............. 35,500.00 + +To Purchases—Dept. A.................. $17,500.00 +Purchases—Dept. B.................... 14,500.00 +Purchases—Dept. C.................... 8,500.00 +Purchases—Dept. D.................... 35,500.00 + +To carry purchases to the trading accounts of the departments and to close the departmental purchases account. +Trading Account—Dept. A............. $ 645.66 +Trading Account—Dept. B.............. 299.99 +Trading Account—Dept. C.............. 199.99 +Trading Account—Dept. D.............. 1,299.99 + +To Return Sales—Dept. A............. $ 645.66 +Returned Sales—Dept. B.............. -299.99 +Returned Sales—Dept. C.............. -199.99 +Returned Sales—Dept. D.............. -1,299.99 + +To carry returned sales to trading accounts of the departments and to close the returned sales account. +Returned Sales—Dept. A............. $235.66 +Returned Sales—Dept. B.............. 149.99 +Returned Sales—Dept. C.............. 849.99 +Returned Sales—Dept. D.............. 1,249.99 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Dept.A.$Inventory$645.66
Dept.B.$Inventory$299.99
Dept.C.$Inventory$199.99
Dept.D.$Inventory$1,249.99
Total
Total Dept.A.$Inventory$645.66
Total Dept.B.$Inventory$299.99
Total Dept.C.$Inventory$199.99
Total Dept.D.$Inventory$1,249.99
+
DescriptionAmount (in $)
Sales—Dept.$235,66
Purchases—Dept.
A
Purchases—Dept.
B
Purchases—Dept.
C
Purchases—Dept.
D
Total Dept.
A
Total Dept.
B
Total Dept.
C
Total Dept.
D
Total Dept.
To Trading Account—Dept.
A
To Trading Account—Dept.
B
To Trading Account—Dept.
C
To Trading Account—
Dept.
D
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Account
-
To Trading Acco...
+ + +
DescriptionAmount (in $)
Sales—Dept.ASales—Dept.BSales—Dept.CSales—Dept.DTotal Dept.ATotal Dept.BTotal Dept.CTotal Dept.DTotal Dept.$235,66Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase>Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&Purchase&purchas...
Total Dept.$235,66
+ + +
DescriptionAmount (in $)
Sales—Dept.ASales—Dept.BSales—Dept.CSales—Dept.DTotal Dept.ATotal Dept.BTotal Dept.CTotal Dept.DTotal Dept.$235,66 + + +
DescriptionAmount (in $)
Sales—Dept.ASales—Dept.BSales—Dept.CSales—Dept.DTotal Dept.ATotal Dept.BTotal Dept.CTotal Dept.DTotal Dept.$235,66 + + +
DescriptionAmount (in $)
Sales—Dept.ASales—Dept.BSales—Dept.CSales—Dept.DTotal Dept.ATotal Dept.BTotal Dept.CTotal Dept.DTotal Dept.$235,66 + + +
DescriptionAmount (in $)
Sales—Dept.ASales—Dept.BSales—Dept.CSales—Dept.DTotal Dept.ATotal Dept.BTotal Dept.CTotal Dept.DTotal Dept.$235,66 + + +
DescriptionAmount (in $)
Sales—Dept.ASales—Dept.BSales—Dept.CSales—Dept.DTotal Dept.ATotal Dept.BTotal Dept.CTotal Dept.DTotal Dept.$235,66 + + +
DescriptionAmount (in $)
Sales—Dept.ASales—Dept.BSales—Dept.CSales—Dept.DTotal Dept.ATotal Dept.BTotal Dept.CTotal Dept.DTotal Dept.$235,66 + + +
DescriptionAmount (in $)
Sales—Dept.ASales—Dept.BSales—Dept.CSales—Dept.DTotal Dept.ATotal Dept.BTotal Dept.CTotal Dept.DTotal Dept.$235,66 + + +
DescriptionAmount (in $)
Sales—Dept.ASales—Dept.BSales—Dept.CSales—Dept.DTotal Dept.ATotal Dept.BTotal Dept.CTotal Dept.DTotal Dept.$235,66 + + +
DescriptionAmount (in $)
Sales—Dept..
+ + +Description:
+ + +Amount (in $):$:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:
+ + +Total:spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn >spn > sps n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p n s p ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns ns nsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnsnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssnssns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns sns

spspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspspsps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps ps

spppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp

sppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppsppoososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososososo sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos sos

sopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsopsops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops ops opsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoopsoop so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so so

soppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppoppopp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp opp op spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo spo po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po po

spospospospospospospospospospospospospospospospospospospospospospospospospospospospospospospospospos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos pos

sosposposposposposposposposposposposposposposposposposposposposposposposposposposposposposposposposposp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp osp

sossossossossossossossossossossossossossossossossossossossossossossossossossossossossossoss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss oss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss sssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:ss:s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s :s:

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s

s 24 + +DEPARTMENT ACCOUNTING—PRACTICE 241 + +

+ + + + + + + + + + + + + + + + +
To Trading Account—Dept. A$300.00
Trading Account—Dept. B500.00
Trading Account—Dept. C40.00
Trading Account—Dept. D100.00
+ +To carry returned purchases to trading accounts of the departments and to close the returned purchases accounts. + + + + + + + + + + + + + + + + + +
Trading Account—Dept. A$1,500.00
Trading Account—Dept. B1,200.00
Trading Account—Dept. C500.00
Trading Account—Dept. D2,000.00
+ + + + + + + + + + + + + + + + + + +
To Wages—Dept. A$1,500.00
Wages—Dept. B1,200.00
Wages—Dept. C500.00
Wages—Dept. D2,000.00
+ +To carry wages to department trading accounts and to close the wages accounts. + + + + + + + + + + + + + + + + + +
Trading Account—Dept. A$1,400.00
Trading Account—Dept. B700.00
Trading Account—Dept. C866.66
Trading Account—Dept. D2,066.66
+ + + + + + + + + + + + + + + + + + +
To General Dept. Exp.—Dept. A.$1,199.99
General Dept. Exp.—Dept. B.758.88
General Dept. Exp.—Dept. C.366.67
General Dept. Exp.—Dept. D.2,166.67
+ +To carry general dept. expense to dept. trading accounts and to close the general dept. expense accounts. + + Selling Expense—Dept.A$834. +
Trading Account—Dept.A $800.00
B $496.67
C $166.67
D $1,199.99
E $758.88
F $366.67
G $2,166.67
H $1,199.99
I $496.67
J $166.67
K $833.33
L $496.67
M $166.67
N $833.33
O $496.67
P $166.67
Q $833.33
R $496.67
S $166.67
T $833.33
U $496.67
V $166.67
X $833.33
Z $496.67
A $1,199.99
B $758.88
C $366.67
D $2,166.67
E $1,199.99
F $758.88
G $366.67
H $2,166.67
I $1,199.99
J $758.88
K $366.67
L $2,166.67
M $1,199.
N $758.
O $366.
P $2,166.
Q $1,199.
R $758.
S $366.
T $2,166.
U $1,199.
V $758.
X $366.
Z $2,166.
Selling Expense—Dept.A $800.
Selling Expense—Dept.B $495.
Selling Expense—Dept.C $155.
Selling Expense—Dept.D $1,199.
Selling Expense—Dept.E $758.
Selling Expense—Dept.F $355.
Selling Expense—Dept.G $2,155.
Selling Expense—Dept.H $1,199.
Selling Expense—Dept.I $758.
Selling Expense—Dept.J $355.
Selling Expense—Dept.K $834.
Selling Expense—Dept.L $495.
Selling Expense—Dept.M $155.
Selling Expense—Dept.N $834.
Selling Expense—Dept.O $495.
Selling Expense—Dept.P $155.
Selling Expense—Dept.Q $834.
Selling Expense—Dept.R $495.
Selling Expense—Dept.S $155.
Selling Expense—Dept.T $834.
Selling Expense—Dept.U $495.
Selling Expense—Dept.V $155.
Selling Expense—Dept.B$495. +Selling Expense—Dept.eth>C$155. +Selling Expense—Dept.eth>D$1,199. +Selling Expense—Dept.eth>E$758. +Selling Expense—Dept.eth>F$355. +Selling Expense—Dept.eth>G$2,155. +Selling Expense—Dept.eth>H$1,199. +Selling Expense—Dept.eth>I$758. +Selling Expense—Dept.eth>J$355. +Selling Expense—Dept.eth>K$834. +Selling Expense—Dept.eth>L$495. +Selling Expense—Dept.eth>M$155. +Selling Expense—Dept.eth>N$834. +Selling Expense—Dept.eth>O$495. +Selling Expense—Dept.eth>P$155. +Selling Expense—Dept.eth>Q$834. +Selling Expense—Dept.eth>R$495. +Selling Expense—Dept.eth>S$155. +Selling Expense—Dept.eth>T$834. +Selling Expense—Dept.eth>U$495. +Selling Expense—Dept.eth>V$155. + +To carry selling expense to the departmental trading accounts and to close the selling expense accounts. + +The income statements of the departments follows: + +14 + +242 +ACCOUNTS IN THEORY AND PRACTICE + +Income Statement, Department A, for year ending Dec. 31, 1919: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Inventory, Dec. 31, 1918$4,000.00Sales$20,500.00
Purchases17,000.00Less Returned Sales640.00
Less Inventory, Dec. 31, 191921,000.00Net Sales$19,860.00
5,000.00Balance, Gross Trading Loss989.12
Less Returned Purchases16,000.00
200.00
Cost of goods sold (turnover)$15,800.00
Wages1,586.00
General Departmental Expenses35.55
Selling Expense88.95
Insurance on Mules107.76
Lights Expense98.95
Heat Expense287.50
Rent Expense436.66
Advertising Expense153.86
+
$26,349.12$26,349.12
Administration Section
Balance, Gross Trading Loss.		989.12
$1,044.34
Distribution Section.
Salaries, General Officers.2,237.70
$1,044.34
Distribution Section.
General Administrative
penses.		438.99
$1,044.34
Distribution Section.
Bad Debts.87.92
$1,044.34
Distribution Section.
Total.$26,349.12
$1,044.34
Distribution Section.
+ + +
Balance, Gross Trading Loss.989.12
$1,044.34
Distribution Section.
Salaries, General Officers.2,237.70
$1,044.34
Distribution Section.
General Administrative
penses.		438.99
$1,044.34
Distribution Section.
Bad Debts.87.92
$1,044.34
Distribution Section.
Total.$26,349.12
$1,044.34
Distribution Section.
+ + +
Balance, Net Loss, carried to Distribution Section.$1,044.34
Distribution Section.
Salaries, General Officers.2,237.70
$1,044.34
Distribution Section.
General Administrative
penses.		438.99
$1,044.34
Distribution Section.
Bad Debts.87.92
$1,044.34
Distribution Section.
Total.$26,349.12
$1,044.34
Distribution Section.
+ + +
Balance,$1,044.34
Distribution Section.
Salaries,$1,044.34
Distribution Section.
General Administrative,
penses.
243 + +Income Statement, Department B, for year ending Dec. 31, 1919 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Trading Section
Inventory, Dec. 31, 1918 $3,000.00Sales$18,000.00
Purchases $14,000.00Less Returned Sales200.00
Net Sales$17,800.00
Less Inventory Dec. 31,
'19.3,100.00
Less Returned Purchases13,900.00
500.00
Cost of goods sold (turn-over)$13,490.00
Wages...1,200.00
General Departmental Expense
Pens.
Selling Expense:400.00
Insurance on Mds:73.08
Light Expense:33.33
Rent Expense:287.00
Advertising Expense:137.90
Ishance, Gross Trading Profit:818.19
Balance, Gross Trading Profit $17,800.00 $17,800.00 + + + +
Administration Section
+ + + +
Salaries, General Officers $2,265.50 Balance, Gross Trading Profit $818.19
+ + + +
General Administrative Expense Balance, Net Loss, carried to Distribution Section 1,920.11
+ + + +
Rud Debts.
+ + + +
$2,738.30 $2,738.30
+ + + +
$2,738.30 $2,738.30 + +244 +ACCOUNTS IN THEORY AND PRACTICE + +Income Statement, Department C, for year ending Dec. 31, 1919: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
InventoryDec. 31,$1,200.00Sales$7,000.00
1918Purchases4,000.00Less Returned Sales.100.00
Less Inventory Dec.31, 1919.$5,200.00Net Sales$6,900.00
Less Returned Pur-500.00
chases$4,700.00
+ + + +
Cost of Goods sold (turnover)$4,660.00$4,660.00
Wages.500.00500.00
General Departmen-300.00300.00
tal Expense.100.00100.00
Selling Expense.26.3426.34
Insurance.16.6716.67
Light Expense.191.67191.67
Rent Expense.499.86499.86
Advertising Expense.33.4533.45
Balance, Gross Trad-558.04558.04
ing Profit.$6,900.00$6,900.00
+ + +
Salaries, General Officers$878.60Balance, Gross Trading Ing Profit $558.94
General Administrative Expense.152.80Evidence, Net Ried to Distribution Section.
+ + +
Bad Debts.30.56
+ + +
Total.
+ + +
Total.
+ + + + + +
Administration Section
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
$878.60 Balance, Gross Trading Ing Profit $558.94 Evidence, Net Ried to Distribution Section.
+ + + +
+ +DEPARTMENT ACCOUNTING—PRACTICE +245 + +Income Statement, Department D, for year ending Dec. 31, 1919: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Inventory, Dec. 31, 1918$17,300.00Sales$57,000.00
Purchases35,000.00Less Returned1,200.00
Sales
Less Inventory52,300.00Net Sales$55,800.00
Dec. 31, 1919.15,000.00
Less Returned Purchases36,300.00
Cost of Goods sold (turnover)$36,200.00
Wages2,000.00
General Depart- mental Expense2,000.00
Selling Expense1,000.00
Insurance MISC.398.82
Light Expense200.00
DescriptionAmount
Labor Expense1,553.33
Rental Expense4,698.26
Advertising Expense354.76
Total Expenses$7,866.25
+ +Balance: Gross Trading Profits $8,112.89 + +Administration Section: +Salarye, General Officers...$5828.20 Balance, Gross Trading Profits $8,112.89 +General Administrative Expense...1,013.60 +Real Estate...262.72 +Balance, Net Profit, car- ried to Distribution Sec- tion...1,068.37 +$8,112.89 + +$8,112.89 + +246 +ACCOUNTS IN THEORY AND PRACTICE + +Distribution Section (all Dep'ts.) + +Net Loss, Men's.............. $4,044.34 Net Profit, House Furnishings............. $1,068.37 +Net Loss, Women's............ 1,920.11 Balance, Net Loss all Depts., carried to Surplus........... 5,400.00 +Net Loss, Children's........... 503.92 +$6,468.37 +$6,468.37 + +Balance Sheet, General Retail Company, as at December 31, 1919: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
AssetsLiabilities and Capital
Cash$12,100.00Cash Stock Outstanding$40,000.00
Petty Cash200.00Accounts Payable11,640.00
Insurance Prepaid240.00Reserve for Bad Debts500.00
Accounts Receivable15,000.00
Inventory, Dec. 31, 1919.24,600.00
$52,140.00$52,140.00
+ +CHAPTER XXXVI + +DEPARTMENT ACCOUNTING—PRACTICE (Continued) + +Problem 2.—The Ashton-Noble Company began business on January 1, 1918. The company operates a department store consisting of five departments, as follows: + +Dept. A.—Toys +Dept. B.—Groceries +Dept. C.—House Furnishings +Dept. D.—Clothing, Women's and Children's +Dept. E.—Shoes + +The store building, which is owned by the Ashton-Noble Com- +pany, consists of three floors and a basement. The total floor space is 80,000 square feet divided equally among the four levels. +The basement is occupied by Depts. A and B, the former occupy- +ing 8,000 square feet of floor space and the latter 12,000 square feet. +The second floor is occupied by Depts. C and E, each 2,000 +square feet which is rented to a fruit dealer at a monthly rental +of $150. Dept. D occupies the entire second floor and Dept. +E the entire third floor. The basement ceiling is 8 feet above the +floor; all other ceilings are 9 feet high. + +The following departmental accounts are kept: + +1. Sales +2. Purchases +3. Returned Sales +4. Returned Purchases +5. Wages +6. Advertising +7. Miscellaneous Selling Expense. + +General expenses are to be charged to the following general +clearing accounts and distributed on the basis indicated: + +247 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
AccountsBase of Distribution
Insurance—BuildingFloor space
Insurance—Mds.Value of property
Repairs on BuildingFloor space
Depreciation of BuildingFloor space
Taxes on BuildingFloor space
LightCandle Power Required
HeatCubic Feet of Space
Salaries General OfficersNet Sales
General AdministrativeNet Sales
Bad DebtsNet Sales
+ +Following is the trial balance of the Ashton-Noble Company as at Dec. 31, 1919 (student will insert amounts in the two vacant places): + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Capital Stock Outstanding$ 30,000.00
Cash.8,700.00
Surplus.
Petty Cash.$ 300.00
Insurance expired in mds.-cleaning s/c.780.00
Insurance prepaid on mds.500.00
Insurance Expired on Building-cleaning s/c.1,100.00
Insurance Prepaid on Building.1,740.00
Repairs on Building.650.00
Depreciation of Building-cleaning s/c.500.00
Reserve for Depreciation of Building.
Taxes on Building.1,000.00
Building.21,000.00
Light Expense-cleaning s/c.400.00
Heat Expense-cleaning s/c.
Salaries General Officers-cleaning s/c.8,500.00
General Administrative Expense-cleaning s/c.1,290.00
Bad Debt Expense-cleaning s/c.300.00
Reserve for Bad Debts.
Space Rented.390.00
Sales Dept.1,985.00
Dept. B.5,055.00
Dept. C.49,555.00
Dept. D.45,555.00
Dept. E.41,555.00
Purchases: Dept. A.3,995.00
Dept. B.17,995.00
Dept. C.35,995.00
Dept. D.36,995.00
Dept. E.34,995.00
+ +A page from a financial ledger showing accounts and their respective bases of distribution and balances. + +**ACCOUNTS IN THEORY AND PRACTICE** + +DEPARTMENT ACCOUNTING-PRACTICE 249 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Advertising: + Dept. A. + Dept. B. + Dept. C. + Dept. D. + Dept. E. + Dept. A. + Dept. B. + Dept. C. + Dept. D. + Dept. E. + Dept. A. + Dept. B. + Dept. C. + Dept. D. + Dept. E. + $218,200.0 + $218,200.0 +
Returned Sales:Dept. A40.00
Dept. B350.00
Dept. C800.00
Dept. D500.00
Dept. E200.00
Returned Purchase:Dept. A500.00
Dept. B1,100.00
Dept. C600.00
Dept. D2,000.00
Dept. E700.00
Wages:Dept. A720.00
Dept. B1,600.00
Dept. C2,400.00
Dept. D2,400.00
Dept. E2,850.00
General Departmental Expense:Dept. A300.00
Dept. B.500.00
Dept. C.800.00
Dept. D.750.00
+ + +
DescriptionCash and Heat Expense-Clearing a/c must be such that their total is $3,593.$218,200.0
The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.$3,593.$218,287.
In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.$3,593.$218,287.
Note that the adjustment for depreciation for the year has been made.$3,593.$218,287.
The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.$3,593.$218,287.
In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.$3,593.$218,287.
Note that the adjustment for depreciation for the year has been made.$3,593.$218,287.
The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.$3,593.$218,287.
In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.$3,593.$218,287.
Note that the adjustment for depreciation for the year has been made.$3,593.$218,287.
+ + +
DescriptionCash and Heat Expense-Clearing a/c must be such that their total is $3,593.$218,287.
The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.$3,593.$218,287.
In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.$3,593.$218,287.
+ +Cash and Heat Expense-Clearing a/c must be such that their total is $3,593.
Description
+ + +The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.
+ + +In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.
+ + +Note that the adjustment for depreciation for the year has been made.
+ + +The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.
+ + +In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.
+ + +Note that the adjustment for depreciation for the year has been made.
+ + +The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.
+ + +In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.
+ + +Note that the adjustment for depreciation for the year has been made.
+ + +The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.
+ + +In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.
+ + +Note that the adjustment for depreciation for the year has been made.
+ + +The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.
+ + +In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.
+ + +Note that the adjustment for depreciation for the year has been made.
+ + +The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.
+ + +In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.
+ + +Note that the adjustment for depreciation for the year has been made.
+ + +The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.
+ + +In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.
+ + +Note that the adjustment for depreciation for the year has been made.
+ + +The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.
+ + +In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.
+ + +Note that the adjustment for depreciation for the year has been made.
+ + +The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.
+ + +In determining distribution of insurance on merchandise use inventory values as at Dec. 31, 1919.
+ + +Note that the adjustment for depreciation for the year has been made.
+ + +The following additional data is given to aid in determining the proper distribution of amounts charged to clearing account.
+ + + + +250 +ACCOUNTS IN THEORY AND PRACTICE + +The ratios of candle power required are as follows: + +Dept. A 8 +Dept. B 12 +Dept. C 12 +Dept. D 15 +Dept. E 15 +Space Rented 3 + +A proper portion of insurance on building, repairs on building, depreciation of building, taxes on building, light and heat should be charged to the account "Space Rented," so that the balance of this account will show net profit or loss from this source. This balance will be carried direct to the distribution section. + +Required: +(a) To contrive a system of accounts adequate to take care of this business. +(b) To set up departmental income statements, a general distribution statement, and a balance sheet. +Under (a) above it is required that the books be such as are necessary for a voucher system. + +CHAPTER XXXVII + +MANUFACTURING ACCOUNTING + +General Principles.—Manufacturing accounting consists in the adaptation of the principles of double entry to the processes of production. In Chapter XVI the methods of expanding and specializing accounting records were discussed and illustrated. The work of creating specialized records consists in applying accounting principles to the particular conditions under which those principles are concerned. Cost accounting does not differ from mercantile accounting. It consists in their application to different conditions. Were the general principles any different from those that govern other accounting, cost keeping would be a distinct science instead of a branch of accounting. + +Meaning of "Cost."—Fundamentally, all accounting is based on costs. But when, as is the case with trading concerns, cost means simply the purchase price of a commodity, the matter is so elementary that it need not be emphasized. We have already impressed upon our minds. Yet this is the germ of cost accounting. The simplest cost system is fully outlined in the following journal entry: + +
+ + + + + + + + +
Purchases$100.00
To Cash.$100.00
+ +To record "cost" of goods bought. + +When commodities are purchased in the same form in which they are ultimately sold, the determination of their cost is a simple task. It consists of the invoice price of the goods purchased less any discounts secured through prompt payment, plus the cost of placing them "on the shelves" ready for sale. The Purchases Journal or Voucher Register shows the bare cost of the goods purchased. Additional information required is found in the general ledger accounts. + +When, however, commodities are not sold in the same form in which they are purchased the situation is more complicated. The Purchases Journal and Cash Journal no longer constitute a complete cost system. They merely show the cost of commodi- + +251 + +252 +ACCOUNTS IN THEORY AND PRACTICE + +ties "as purchased." It is also necessary to show the cost of commodities "as sold." When commodities are purchased, not to be sold in the same form, but for the purpose of rearranging or altering them, they are said to undergo a process of manufacture differing more or less widely in appearance, value, and usefulness from the original commodities, they are said to undergo a process of manufacture. When products are manufactured into other products they incur increments of cost—the cost of manufacture. Evidently, then, for one engaged in manufacturing the cost of the commodities which he sells is not the cost of the commodities which he purchases nor the cost of the process of manufacture, but a combination of the two. Every manufactured article costs: + + + + + + + + + + +
1. Raw Material
2. Expense of Manufacture100%
+ +"Raw Materials" is a phrase of relative significance. It is that with which a given process of manufacture begins. What is raw material to one process is finished product to another. A bit of material may be successively raw material and finished product several times before it arrives at the ultimate form of a consumable commodity. An illustration is afforded by paint, screws, and the various materials entering into the construction of furniture. Paint is the finished product of the paint manufacturer as are screws of the hardware manufacturer, but to the furniture manufacturer paint and screws are raw materials. + +**Analysis of Cost.—The analysis of cost of a manufactured commodity may be carried still further. Cost of manufacture is like a chemical compound which can be broken up into its elements. One of these elements is labor, while the remaining ones consist of various expenses which are customarily considered *in toto* as burden or overhead. Revising our outline of the cost of a manufactured article we have, then:** + +1. Raw Materials +2. Expense of Manufacture + a. Labor + b. Indirect + +By labor cost is meant the cost of wages paid to workmen for time spent on a given commodity. If a workman receives 50 cents an hour and spends three hours of his time on an article + +MANUFACTURING ACCOUNTING 253 + +being manufactured, the labor cost applicable to that article, for this workman, is $1.50. By keeping a record of all labor spent on a commodity the total labor cost is secured. + +Indirect costs are those which cannot be easily accounted for and give rise to the most difficult cost problem. They include those costs that are not directly applicable to any given process, but which are incidental to and a part of, general operations; and without which the work of manufacturing could not be executed. Among the indirect costs are insurance, power, taxes, salaries of foremen and superintendents, certain kinds of labor that cannot be directly applied, such as janitor service and repair work on machinery. These indirect costs are for the benefit of the whole factory or a department thereof, rather than for that of any particular process. Nevertheless each commodity manufactured must be charged with its due proportion of these indirect costs. The proper basis for making such a distribution of indirect over manufactured commodities will be considered later in this chapter. + +**Trading vs. Manufacturing Accounts.—The chief difference between trading and manufacturing concerns and of an enterprise engaged in manufacturing consists of an extension of journals and ledgers in case of the manufacturing enterprise to supply an adequate record for its additional activities. These additional activities consist of the purchase and handling of the raw materials, the process of manufacture, and the transfer of manufactured articles from the factory to a finished goods department. From this point the work differs in no way from that of a trading concern. The records required do not correspond to the merchandise inventory of a trading enterprise. The additional work performed by the manufacturer requires the installation of such records as will furnish all necessary information regarding, (a) the kind, quantity, and cost of raw materials on hand, (b) the transfer of this raw material into the factory, (c) the increments of cost to the article being manufactured from raw materials, labor, and indirect, (d) the transfer of the completed article from the factory to the finished goods department. + +**Purchase of Raw Materials.—Raw materials are ordered by a purchasing agent upon requisition from the foreman of the factory, or department thereof. The order may be made out in triplicate, one copy being sent to the party which is to furnish** + +A page from a book titled "Manufacturing Accounting" with page number 253. + +254 +ACCOUNTS IN THEORY AND PRACTICE + +the raw materials, one to the receiving department, and one to the accounting department. If the purchasing agent also desires a copy of the order it should be made out in quadruplicate. When the invoice for the goods is received it is compared with the purchase order and then sent to the receiving department to be checked up with the goods when they arrive. If the goods are as ordered the invoice serves next as authority for an entry in the Purchases Journal or Voucher Register. The form of either the Purchases Journal or Voucher Register will vary with conditions. Columns should be provided for the different departments. In its simplest form the Purchases Journal would appear as an ordinary journal, but it should show the total character and quantity of raw materials purchased and one for the amount of the purchase. + +If a Purchases Journal is kept postings are made to two subordinate ledgers, namely, the Accounts Payable Ledger, in which accounts are kept with creditors the same as in an ordinary mercantile business, and the Raw Materials Ledger, in which accounts are kept with the various classes of raw material used. If materials are kept on a departmental basis, the Raw Materials Ledger may be divided into sections corresponding to departments, or separate Raw Materials Ledgers may be provided. Similarly separate Purchases Journals may be provided, if desirable. If the Voucher Register is used no subordinate Accounts Payable Ledger is required. + +In the Raw Materials Ledger accounts are kept with each class of raw material and prices are provided to show maximum and minimum prices. As the amounts received, the amounts sent into factory on requisition, etc. At the close of each month the total of purchases as shown by the Purchases Journal or Voucher Register is posted to the debit of the raw materials controlling account and to the credit either of the accounts payable or of the vouchers payable controlling account in the General Ledger. + +**Origin of Manufacturing Order.—The manner in which an order for the manufacture of a commodity originates varies with circumstances. Sometimes orders are placed before stock, that is, they are manufactured before a purchaser is secured for them. Sometimes they are manufactured to order only. Naturally the plan to be followed will depend upon the character of the output. If it is of a kind which meets with a continuous, wide, and steady demand, then manufacture for stock is possible since + +MANUFACTURING ACCOUNTING 255 + +it is not difficult to find a market. On the other hand, there may be such an exceedingly narrow market for certain classes of commodities that they are manufactured only to order. + +The Order Number.—Whatever the motive leading to the decision to manufacture a commodity, the actual work is started by a requisition which will specify the number of units required of a given piece of work. The order is given a number by which it is known from start to completion of the manufacturing process. Thus Order No. 420 will always refer to a given line of work in process of manufacture, and which was so designated before the work began on it. Such an order number may refer either to a single commodity, as a machine, or to a large number of like articles, as a batch of one thousand steel wrenches. Before work is begun on machinery, etc., the specifications must be made in the drafting department. + +Production or Plant Orders.—Sometimes work is done by way of an addition or a repair to plant. Orders for such work should be distinguished from orders manufactured for trade. This is accomplished by classifying all orders into production, plant, and repair, and prefixing the proper explanatory word to the number of the order. Thus "Production Order No. 150" refers to an order for making up a trade item; "Plant Order No. 475" refers to an order to be executed for the purpose of making some addition to plant. + +Requisition of Materials.—As soon as the foreman of the factory, or of the department in which the work is to be executed or begun, receives the order from headquarters to manufacture a given commodity, he issues stores requisitions upon the keeper of the raw materials for the kind of materials with which to begin work. All of these stores requisitions are numbered to correspond to the order number of the job to which they refer. The stores requisition may itself be used as a posting medium direct to the proper ledgers, or from its entry may be made in a "Materials to Factory Journal." Whichever method is followed, the principle is the same. + +Accounting Procedure, Labor, Materials, Indirect.—From the Materials Ledger, internal postings are made to the credit side of the various raw materials accounts in the Raw Materials Ledger and to the debit of the proper order number account in the Cost Ledger. The order number accounts in the Cost Ledger are charged with the various elements of cost—raw materials, + + + + + + + + + + + + + + + + + + + + + + + + + + +
Manufacturing Accounting255
It is not difficult to find a market. On the other hand, there may be such an exceedingly narrow market for certain classes of commodities that they are manufactured only to order.
The Order Number.—Whatever the motive leading to the decision to manufacture a commodity, the actual work is started by a requisition which will specify the number of units required of a given piece of work. The order is given a number by which it is known from start to completion of the manufacturing process. Thus Order No. 420 will always refer to a given line of work in process of manufacture, and which was so designated before the work began on it. Such an order number may refer either to a single commodity, as a machine, or to a large number of like articles, as a batch of one thousand steel wrenches. Before work is begun on machinery, etc., the specifications must be made in the drafting department.
Production or Plant Orders.—Sometimes work is done by way of an addition or a repair to plant. Orders for such work should be distinguished from orders manufactured for trade. This is accomplished by classifying all orders into production, plant, and repair, and prefixing the proper explanatory word to the number of the order. Thus "Production Order No. 150" refers to an order for making up a trade item; "Plant Order No. 475" refers to an order to be executed for the purpose of making some addition to plant.
Requisition of Materials.—As soon as the foreman of the factory, or of the department in which the work is to be executed or begun, receives the order from headquarters to manufacture a given commodity, he issues stores requisitions upon the keeper of the raw materials for the kind of materials with which to begin work. All of these stores requisitions are numbered to correspond to the order number of the job to which they refer. The stores requisition may itself be used as a posting medium direct to the proper ledgers, or from its entry may be made in a "Materials to Factory Journal." Whichever method is followed, the principle is the same.
Accounting Procedure, Labor, Materials, Indirect.—From the Materials Ledger, internal postings are made to the credit side of the various raw materials accounts in the Raw Materials Ledger and to the debit of the proper order number account in the Cost Ledger. The order number accounts in the Cost Ledger are charged with the various elements of cost—raw materials,
+ +256 ACCOUNTS IN THEORY AND PRACTICE + +labor, and indirect—as they accrue or as soon thereafter as is practicable. The total amount of the raw materials sent into factory on such requisitions is shown by the total of the Materials to Factory account. At the end of each month this total is posted to the credit side of the raw materials controlling account and to the debit side of the manufacturing account (controlling the Cost Ledger) in the General Ledger. + +As raw materials are but one of the three elements of cost, it is necessary to make provision for the charging of the various order numbers with their direct labor cost and proper proportion of indirect. An accurate record of the time spent by workmen on orders is required. For this purpose each workman is provided with a card upon which his name, number, and date of entry or more orders. The workman's name and number are entered upon the card, also his wage rate. Space is provided for such a description of the work performed as will facilitate making the charge to the proper order number. + +These time reports, when collected and assorted according to order numbers, furnish data for all charges to the various order numbers on account of productive labor. When assorted according to workmen, these data show how much time was spent at each job. + +At the end of the month when the total of productive labor is thus ascertained the following entry is made in the General Journal: + + + + + + + + + + +
Manufacturing.
To Payroll.
+ +or if the voucher system is used: + + + + + + + + + + +
Manufacturing.
To Payroll Vouchers Payable.
+ +The total of productive labor thus charged to manufacturing account is also distributed over the various order number accounts in the Manufacturing or Cost Ledger, which is controlled by the manufacturing account in the General Ledger. The proper distribution of the labor cost over the order numbers is obtained from the time reports referred to above. + +1 The student is referred to a series of articles by E. S. Clark, in the Dec., 1910, and following numbers of Industrial Management, on "Practical Costs." In the March, 1917, number, page 768, are found forms illustrating the workman's time record and showing how he can be credited with time spent on any particular job. These forms are also used in preparing the manufacturing cost sheet or cost ledger. This series discusses in detail the method of distributing indirect. + +A page from a book or journal, possibly an industrial management text, discussing accounting methods for labor costs and time records. + +MANUFACTURING ACCOUNTING 257 + +**Proration of Indirect Costs.**—Finally, the indirect costs must be prorated over the different accounts in the Cost Ledger on an approximately accurate basis. This distribution of the indirect costs is the most important part of the entire problem of cost accounting. Before considering the various methods of distributing indirect costs, let us secure a better understanding of what the component parts of indirect are. + +**Sources of Indirect Costs.**—The amount and character of indirect are dependent upon the nature of the plant in which they occur. In a broad sense it may be said that they arise out of (a) expenses incident to the upkeep and use of buildings and (b) expenses of power production. Incidents to the upkeep and use of buildings include insurance, depreciation, repairs, heating, lighting, and janitor and watchman's service. In case of rented buildings the rent charge takes the place of all or a part of the above. The amount of each of the above items is determined on some practical basis—taxes by the state, insurance by the management, depreciation by the character of the buildings, repairs, heating, lighting and janitor's and watchman's services by actual requirements. + +Indirect expenses production are insurance on boilers, pipes, etc., depreciation, fuel, supplies, maintenance, wages of engineers, firemen, etc., power purchased (if any), and such proportion of building expense, mentioned above, as is applicable to power production. This last would therefore represent a credit to building expense and a debit to power production expense. + +**General and Administrative Expenses.**—Not all expenses other than direct expenses should be treated as indirect to be distributed or prorated over the various jobs numbers. There are certain kinds of expense that are best handled as general or administrative expenses to be charged directly to profit and loss. Into this list falls the income tax. But property taxes should be prorated over the various component parts of plant in a way which will permit their being properly charged to plant. Some authorities claim rent as an expense not distributable as indirect. It is true that in many cases direct expenses incidental to direct ownership it is better to consider it as a cost of manufacture and therefore distribute it over the output. In brief, the key to the problem, whether a charge should be dis- +17 +1 E. S. Clark in *Industrial Management*, Jan., 1917, p. 329. +2 See Wildman: Principles of Accounting, pp. 63-4. + +258 ACCOUNTS IN THEORY AND PRACTICE + +tributed as indirect or charged direct to profit and loss as an expense of administration, is the answer to the question, is it a cost of manufacture or is it not? We shall recur to this problem later in this chapter. + +**Bases of Prorating Indirect Costs.—** We may now consider methods of distributing indirect expense. Several bases of doing this have been advocated. We shall consider the following: + + + + + + + + + + + + + + + + + + + + + + +
1. Direct Labor3. Prime Cost4. Machine Rate
(a) Time
(b) Cost(a) Old Rate
2. Raw Materials Cost(b) New Rate
+ +When the direct labor method is employed the indirect is distributed over the various jobs, either on the basis of the hours of labor expended upon the jobs or else upon the basis of the cost of labor expended upon them. When the raw materials method is employed the distribution is made on the basis of the cost of raw materials entering into the various jobs. When the prime cost method is used the basis is the combined labor and raw ma- +terials cost. Under the machine rate method the indirect is dis- +tributed by analyzing each machine its proper burden of +indirect and then distributing this indirect on the basis of +the time during which the machine is occupied on a piece of work. + +**The Direct Labor Method.—** For a detailed discussion of these methods the reader is referred to the treatises mentioned at the end of this chapter. It will suffice to mention here some of the advantages and defects of the various plans. The first two methods mentioned have some merit when they are applied to cases in which the comparative variances for distribution of indirect are not many. Certainly, in but few instances is it true that the proper amount of indirect applicable to an order is proportionate to either the cost or the duration of the direct labor expended on that order. Indeed, it is oftentimes the case that the com- +parative cost of labor on products requiring a great amount of machine work is much smaller than on those requiring much hand work, although the indirect applicable to such a job is naturally greater than that applicable to another. + +**The Raw Materials Method.—** Similar considerations invalidate the raw materials basis in most instances. In case of the highest grade products of our factories raw material frequently forms a rather small percentage of the total cost of the output; + +A table showing different bases for distributing indirect costs. + +MANUFACTURING ACCOUNTING 259 + +so that it may usually be said that the proportion of indirect applicable to work done is in no way proportionate to the cost of raw material entering into the work. + +The Prime Cost Method.—The same objections that are advanced against the direct labor and the raw materials methods of distribution are equally applicable against the plan which attempts to combine, with equal facility, the prime cost method. We need not conclude, of course, that in no instances are these methods practicable. Manufacturing processes are possible in which they would serve satisfactorily; but in most cases they do not. + +To illustrate, assume that two commodities are being manufactured. One is a simple form of any simple construction, the production of which requires a prime cost of $300 for labor and $200 of labor and $300 of raw material. The time required in construction is brief, little milling and machining being needed. The other commodity is of a more complex structure, the cost of which consists to a large degree of indirect, owing to the great amount of expensive machine work necessary. The raw material, however, costs but $100 and the labor, consisting mostly of at- tendance upon and supervision of the machine processes, $75. Clearly it will be seen that the proportion of indirect to these two commodities by the direct labor, raw materi- als, or prime cost method. The indirect cost, instead of being proportionate to these, is just the opposite, being large where labor and material costs are small and vice versa. + +CHAPTER XXXVIII + +MANUFACTURING ACCOUNTING—(Continued) + +The Machine Rate Method—Old Machine Rate.—When the machine rate is employed the distribution is first made to the various departments and is then distributed to the various machines in the departments. Under the old machine rate, the indirect for the department having been determined, it is divided by the actual number of machine hours for the department to determine the rate. Thus if the indirect for department A is $10,000 and the total number of machines in department A is 30, and each of these machines being full time 250 hours per given month, then the machine rate for department A, for this month, is $10,000/(20 × 250) = $2. Consequently, for each hour that a machine in department A operates on an order, that order is charged with $2 for indirect, and so on. + +A little reflection will serve to indicate that this plan is accurate only under more or less extraordinary circumstances; that is, when all of the machines in a department are uniform in size, cost, and power consuming, and when there is no irregularity in the process, such as bench work. + +The New Machine Rate.—The new machine rate plan obviates this difficulty by affording a still more definite and direct plan of allocating the indirect. As in the old rate plan, the indirect must be distributed first over the departments. But a step further is then taken. Each machine is considered as a unit, or "production center," and the indirect applicable to a department is then distributed uniformly among all machines in the department on an equitable basis, as, for example, that of space occupied.\(^1\) Each machine is then given a rate which is obtained by dividing the total indirect applicable to that machine by the total number of hours the machine runs during the month, no allowance being made for idle time. The charge to any given order is secured by multiplying the machine rate by the number of hours the machine operates on that order. + +\(^1\) The basis varies with the nature of the order and the character of the factory. For example, some orders may be distributed on a space basis or on the basis of the number of bulbs used. + +260 + +MANUFACTURING ACCOUNTING 261 + +Idle Machine Time.—However, it is seen that, owing to the impossibility of keeping all machines running full time, all of the burden will not be allocated to the various orders operated upon. The question arises, how shall the unallocated burden left over as the result of idle machine time be charged? Here two very definite and distinct theories have been developed. The one theory, of which the leading exponent and originator is A. Hamilton Church, advocates the distribution of this unapplied burden by means of a "supplementary rate" (secured by dividing the total cost of production during the month by the number of hours operated by all machines). This adds a cost to all orders proportionate to the machine hours spent on each, and dependent, absolutely, upon the amount of idle time. The other theory, advocated by Clinton H. Scovill, is to the effect that the undistributed balance of burden resulting from idle machinery is not an element of cost of manufacture, but rather a general expense or loss representing the penalty placed upon an organization which is unable to keep its machinery running up to standard full time. This undisbursed burden ought, therefore, to be charged direct to profit and loss.\(^1\) + +The indirect for any given month is determined by an estimate based upon the indirect cost of previous months. As a consequence, when the supplementary rate plan is employed and the whole of the estimated indirect is charged to the various orders through the primary machine rate and the supplementary rate, it may be possible to save money for the month from the estimated. Estimated overhead is employed because some little time may be required to ascertain actual overhead. When actual overhead is determined an adjustment must be made for it. This then gives rise to a second supplementary rate, by means of which the difference between the estimated and the actual indirects is either charged or credited to the various orders, accordingly as the actual indirect is greater or smaller than the estimated indirect.\(^2\) + +1 +See the works of Messrs. Church and Scovill listed at the end of this part. + +\(^1\) The difference between the actual and estimated indirect, if small, might be added to the indirect of the succeeding month; or if it is possible to delay distribution of indirect until actual indirect for the month is learned, no such undistributed balance occurs. What follows in this chapter is said subject to this qualification. + +\(^2\) + +262 ACCOUNTS IN THEORY AND PRACTICE + +To illustrate, assume that the total number of machine hours for a given machine, running full time, is 360 for a given month, and that the total indirect applicable to that machine is estimated to be $720 for that month. Its rate per hour is, therefore, $720 ÷ 360 or $2. But if idle time for the month for this machine amounts to 60 hours, the unapplied portion of the estimated burden will amount to 2 × 60 or $120. Further, let us assume that in due time the actual indirect for this month is ascertained to be $870, or $80 in excess of the estimated indirect. To simplify matters, we illustrate the application of this further truth which the machine's time during the month has been occupied exclusively upon four order numbers. Below is shown the appearance of the account for indirect and also the cost ledger accounts for the four orders, after the indirect has been distributed, first by the direct rate, secondly, by the first supplementary rate, and, thirdly, by the second supplementary rate: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
General Ledger
Indirect, Direct A.
Actual Indirect$780Direct Rate$600
1st Supplementary120
2nd Supplementary60
$780$780
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Cost Ledger
Order No. 231 (70 hrs.)
Direct Rate...$140.00
1st Supplementary...28.00
2nd Supplementary...14.00
Direct Rate...$140.00
1st Supplementary...28.00
2nd Supplementary...14.00
Direct Rate...$140.00
+
Order No. 233 (70 hrs.)Total Amount
Direc t Rate...$120.00
1st Supplementary...21.00
2nd Supplementary...12.00
                                                              +
+ +The hours indicated within the parentheses are the actual number of hours spent by the machine on the different orders. +The "direct rate" charge is made on the supposition that the machine operates full time. The "1st supplementary" charge distributes the balance of estimated indirect resulting from idle time. The "2nd supplementary" charge distributes the excess + +**MANUFACTURING ACCOUNTING** 263 + +of the actual over the estimated indirect. The "1st supplementary" rate is secured by dividing the unapplied burden resulting from idle time, $120, by the number of operating machine hours for the month, 300, which gives us the first supplementary rate per hour, $0.40. The "2nd supplementary" rate is secured by dividing the excess of the actual indirect over the estimated indirect, $60, by the number of operating machine hours for the month, 300, which gives us the second supplementary rate per hour, $0.20. The various distributions are shown in the above accounts. + +**Use of Clearing Accounts.—In actual practice the account for indirect would either be in the form of one general clearing account in the General Ledger, or else there would be set up separate accounts for indirect for the various departments. Since the estimated indirect is charged to the various order numbers before the actual indirect is determined the general ledger indirect account would be credited with the amount of the estimated indirect before being charged with the actual indirect. At the end of each month all entries made with their due proportion of indirect as determined by the direct cost ratio, an entry is made in the General Journal debiting manufacturing account (controlling the Cost Ledger) and crediting the account for indirect. Thus, for the example suggested above the entries are: + + + + + + + + + + +
Manufacturing$600.00
To Indirect, Dept. A$600.00
+ +When the amount of the first supplementary is determined the following entry is in order in the General Journal: + + + + + + + + + +
Manufacturing$120.00
To Indirect, Dept. A$120.00
+ +Finally, when the second supplementary is determined the following entry is made: + + + + + + + + + +
Manufacturing$60.00
To Indirect, Dept. A$30.00
+ +**Departmental Indirect.—Before the last entry above is made, however, the departmental indirect account is charged with the actual amount of indirect for the month. The procedure by which this actual charge for indirect finds its way to the various departmental indirect accounts is as follows. All indirect expenses which can be computed on a direct departmental + +264 ACCOUNTS IN THEORY AND PRACTICE + +basis are charged to proper departmental accounts. Thus we may assume that at the close of the month the departmental expense accounts of Department A show the following charges: + +Supplies, debited with ____________ +Maintenance, debited with ____________ +Wages of janitors, debited with ____________ +Lighting, debited with ____________ + +While accounts for the factory as a whole are charged as follows; + +Taxes, debited with ____________ +Insurance, debited with ____________ +Depreciation, debited with ____________ +Heating, debited with ____________ + +These are merely put down thus for illustrative purposes. The classification of such accounts on a departmental or a general factory basis varies with conditions. If, however, the above is the accepted basis, then to transfer these debit balances to the departmental indirect accounts the following journal entries are necessary: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Indirect, Dept. A.
To Supplies, Dept. A.
Maintenance, Dept. A.
Wages of Janitors, Dept. A
Lighting, Dept. A.
To carry the departmental expense charges to the clearing account for indirect.
Indirect, Dept. A., C. J.
Indirect, Dept. A., C. L.
Indirect, Dept. A., C. J.
To Taxes, whole factory.
Insurance, whole factory.
Depreciation, whole factory.
Heating, whole factory.
+ +To distribute the various general factory expenses to the proper departments. + +The various expenses are distributed on some proper basis; of course the different ones need not be distributed in the same proportion to the different departments. In this way each departmental indirect account is charged with the department's due proportion of such indirect, and this is in turn charged to manufacturing, as has already been shown. + +**Criticism of Supplementary Rate Plan.—** The attitude of those who criticize the supplementary rate plan may best be shown by the following quotation from Scovell: + +14 + +MANUFACTURING ACCOUNTING 265 + +"Under the old and familiar percentage-on-wages method, as usually applied, with the cumbersome and unsound supplementary rate, the costs seem low during periods of active production, while during periods of curtailed production, the costs appear high. The reason is dis- tributed over a greater or less volume of manufacture. Thus a varying production, which is entirely beyond the control of foremen and opera- tives apparently affects the cost of work done by them." Further, "contrary to the usual principle stated above, the fact is that only a part of the total burden is charged to the product made during periods of curtailed production, the part chargeable being the same percentage of the total burden, as the cur- tailed production is of the standard production." + +It is difficult to understand why the cost of a product should be increased by being charged with the cost of idle machine time. To do so establishes costs without a standard and which will continue to change, not with the rise and fall of labor and material, but with the changing amount of work in factory may be found in idle time. The products of lazy machines are penalized for the expense of upkeep of idle machines. The cost of idleness is shown as a cost of manufacture. If on the other hand, the unapplied indirect were charged direct to profit and loss as a general expense not distributable, it would at once serve as a convenient measure of the loss due to part time oper- ations and thus afford a useful index of manufacturing efficiency. + +Unapplied Indirect Charged to Profit and Loss.—Under this plan the distribution of the indirect in the example cited above is accomplished as follows: + +General Ledger + + + + + + + + + + + + + + + + + + + + +
Actual Indirect$780Direct Rate$600
Profit and Loss180
$780$780
+ +Cost Ledger + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Order No. 230 (7 hrs.)
Direct Rate..$200
Order No. 231 (100 hrs.)$200
Direct Rate..$140
Order No. 232 (70 hrs.)$140
Direct Rate..$120
Order No. 233 (60 hrs.)$120
+ +1 Cost Accounting and Burden Application, p. 70. + +266 ACCOUNTS IN THEORY AND PRACTICE + +According to this method each order is charged with only that proportion of indirect which would be applicable were there no idle machine time. As a consequence the cost of a manufactured article is reduced by the amount of profit and loss which would have been charged directly to profit and loss. This plan does not, of course, remove the discrepancy between estimated and actual burden, which may be distributed on a basis similar to that already suggested, or if it is small it may be carried to profit and loss direct or else added to the following month's indirect. It will be used of course in making the estimate of the next month's indirect. + +**Transfer to Finished Goods.**—When an order number in the Cost Ledger has been charged with direct labor, raw materials, and indirect for the month, its monthly record of cost is complete. When all elements of cost entering into its production, continuing over a more or less extended period of time, are entered in the Cost Ledger, a complete record of cost is furnished. The next step is to indicate the accounting procedure required to record the transfer of the finished product from the factory to the stock-room or finished goods department. + +As a result of finished goods being sold a Finished Goods Ledger should be kept, controlled by the finished goods controlling account in the General Ledger. When goods are transferred from the factory to the finished goods department the proper accounts in the Cost Ledger are credited and at the same time detailed charges are made in the Finished Goods Ledger, at cost price. For the total of goods thus transferred during the month a summary entry is made in the General Journal and posted to the proper controlling accounts, thus: + + + + + + + + + + +
Finished Goods (controlling account).________
To Manufacturing (controlling account).________
+ +**Sale of Goods.**—Finally, as the finished products are sold the detailed accounts in the Finished Goods Ledger are credited, while for the total monthly sales entries are made, crediting the finished goods controlling account and charging profit and loss with the cost of goods sold, thus: + + + + + + + + + + +
Profit and Loss.________
To Finished Goods.________
+ +MANUFACTURING ACCOUNTING 267 + +From this point the procedure is not different from that of the ordinary trading concern.¹ + +**Advantages of a Cost System.—1. As an Aid to Contract Work.** + +In determining the price at which it is willing to undertake work, the manufacturer will find that his cost of it of most value only when it can be shown that he has kept records. When such records are non-existent price-making is haphazard and liable to be conditioned more upon what a competitor may offer than upon a suitable margin of profit. Such procedure has nothing to recommend it. Sometimes it may be necessary to sell below cost, but it should be done only with a full comprehension of the facts. Perhaps a competitor may be selling below cost—such a case would be confirmed long enough, unless, distinguishes itself. There is but one adequate basis upon which to determine prices—accurate cost data. + +**2. As an Aid in Preparing Monthly Statements.—An adequate cost system necessitates the keeping of accurate book inventories. A book or perpetual inventory differs from a physical inventory. The latter is taken at the close of an accounting period by means of an actual count. A perpetual inventory, on the other hand, consists of a record showing the amount kept in stock at all times and furnishing the needed information as to the kind and quantity. Forms are provided upon which are entered the additions to and deductions from any given class of goods. In manufacturing accounting perpetual inventories should be kept for three classes of commodities—raw materials, goods in process, and finished goods. These book inventories do not dispense with the necessity of physical inventories, but they lessen the burden of taking them by enabling one to take them at times when work of other kinds is not pressing. + +When all postings from journals have been made the balances of the three controlling accounts, raw materials, manufacturing, and finished goods, represent the totals of the raw materials, goods in process, and finished goods inventories, respectively. Even were monthly physical inventories feasible the delay incurred would be considerable. Perpetual inventories avoid this. At intervals the book or perpetual inventory account is checked + +¹ In the income tax system it is customary to deduct the debits entering into cost—taxes, duties, insurance, charges, insurance, fuel, etc.; also to show the effect on earnings of changes in inventories of raw materials, goods in process, and finished goods. + +A page from a book about manufacturing accounting. + +268 +ACCOUNTS IN THEORY AND PRACTICE + +up by a physical inventory and errors adjusted. One of the most important qualities of the monthly income statement is its timeliness. To this perpetual inventories are essential. + +3. Keeping Zeal and Faith about Incomes.—Any discrepancy between book and physical inventories is investment in such a check on the keeper of the raw materials serves as an incentive to carefulness on his part. Sometimes unprofitable processes or departments are sustained by profitable ones. By learning costs with exactness these unprofitable lines are located and may be discontinued or made efficient by introducing needed changes. + +4. Moral Effect.—When a foreman knows that his department is being compared with other departments on an exact basis he employs all his energy to make his department the best in production. He economizes on raw materials and supplies. He returns all unused raw material to the storeroom for credit to his department. A scientific supervision is established and merit is rewarded. Favoritism is made impossible and endeavor profitable. + +CHAPTER XXXIX + +MANUFACTURING ACCOUNTING—PRACTICE + +**Problem 1—** + +Following is the trial balance of the Ironton Manufacturing Company as at Dec. 21, 1919: + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+                                                               <table> + <thead> + <tr> + <th>The inventories Dec. 31, 1919 are:</thead> + </thead> + <tbody> + <tr> + <td>Raw Materials</span></table> + <table> + <thead> + <tr> + <h>Raw Materials</h></thead> + </thead> + <tbody> + <tr> + <h>$> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $> $></table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + </table> + +The company has been operating for about three years. The books were last closed as of Dec. 31, 191S but nothing has been + +270 ACCOUNTS IN THEORY AND PRACTICE + +written off for depreciation of tools, drawings and models, and machinery. A reserve for bad debts of $100 should be set up. +Prepare such statements as are necessary to show the worth of the outstanding capital stock. + +Problem 3. Prepare statements to show clearly the progress made during the year and the present financial condition of the company it will be necessary to set up an income statement and a balance sheet. The amount of depreciation to be written off on tools, drawings and models, and machinery is optional. We shall assume that $1500 for tools, $700 for drawings and models, and $2000 for machinery, represent the depreciation for the past two and one-half years. Only one year's depreciation should be charged against the income for this year, and the remainder should be carried direct to surplus because it should have been charged off previously to the current year. + +The income statement follows: + +**Income Statement, Ironton Manufacturing Co.** +for year ending Dec. 31, 1918: + +
Purchases of Raw Materials$14,500.00
Inventories:
Raw Materials3,100.00
Goods in Process...1,900.00
Finished Goods...1,271.40
Sales$8,990.25
Wages
Expenses, factory.312.00
Discount on Purchases.
Allowances to Customers.348.00
Brontals.340.00
General Expense.411.41
Insurance (current).418.00
Cargo (current).147.60
Commissions.188.00
Notes Receivable.5,000.00
Accounts Receivable,5,890.15
Petty Cash.2,667.65
Cash in Bank.5,491.17
Factory: Tools.3,000.00
Drawing and Models.1,200.00
Machinery.6,500.00
Total Assets$8,252.78$58,252.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78$63,752.78
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Manufacturing SectionBalance, Cost to Manufacturer$15,239.15
Inventories Dec. 31, 1918:
Raw Materials...$ 2,100.00
Goods in Process...1,560.00
Finished Goods...4,460.00
Purchases....$ 5,271.69
Less Inventories Dec. 31, 1918:$19,771.40
Raw Materials...$ 2,121.50
Goods in Process...10,100.00
Finished Goods...4,540.00
Cost of Raw Materials...$ 3,599.90
Wages...
+ +Expense, factory... +14 + +Insurance... +14 + +Depreciation: +Tools... $600.00 +Drawings... $280.00 +Models... $88.00 +Machinery... $88.00 + +Cost of Raw Materials... $3,599.90 +Wages... $282.25 +Expense, factory... $312.00 +Returns... $36.86 +Insurance... $48.00 +Depreciation: Tools... $600.00 +Drawings... $280.00 +Models... $88.00 +Machinery... $88.00 + +$15,239.15 + +$15,239.15 + +MANUFACTURING ACCOUNTING-PRACTICE 271 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Trading Section
Balance, Cost to Manufacture:$15,250.15Sales$18,126.40
Allowances to Customers:
Cartage Out:144.00
Commission:380.00
Balance, Trading Profit:2,349.85
$19,128.40$18,126.40
Profit and Loss Section
General Expense:8,411.35Balance, Trading Profit:$2,097.85
Balance, Net Profit to Surplus:1,236.45Discount on Purchases:548.00
$10,676.85$2,607.85
+ +The balance sheet follows: + + + + + + + + + + + + + + + + + + $39,542.82$39,542.82 + $39,542.82$39,542.82 + +
Balance Sheet, Ironton Manufacturing Co.
as at Dec. 31, 1919:
Note Receivable:$5,000.00 Capital Stock Outstanding:$0.00.00
Accounts Receivable:5,890.15 Net Sales:9,700.00
Petty Cash:100.00 Surplus Dec. 31, 1919: $1076.38
Cash in Bank:5,491.75 Less Depreciation (1/2)2520.00
Inventories:Poor...
Raw Materials:2,321.507356.38
Goods in Process:10,108.00 Add Net Profit, 1919: $2866.489,842.82
Finished Goods:4,046.00
Total Inventories:14,976.50
Less Res for Dep:1,500.001,500.00
Drawings:1,236.45
Last Res for Dep:
+ +The wasting assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $1% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from the data available, is the value of the stock per share. + +The wastage assets have been written down to a conservative basis and all proper expenses have been charged against the current year's costs of operation. As a result the net profits for the current year are something over $% on the capital stock outstanding which is averaging over $% on net capital invested, +i.e., capital stock outstanding is valued at less than its par value. +For each share of outstanding stock (par value $10) there exists a net investment of $177.7s which, as nearly as can be ascertained from + +272 ACCOUNTS IN THEORY AND PRACTICE + +**Problem 2.—The trial balance of the Williams-Allen Manufacturing Company, as at Dec. 31, 1919, is as follows:** + +| Account | Amount | +|---|---| +| Raw Materials, 12/31/18... | $ 90,000.00 | +| Goods in Process 12/31/18... | 30,000.00 | +| Finished Goods 12/31/18... | 25,000.00 | +| Factory Wages... | 75,000.00 | +| Sales... | 500,000.00 | +| Purchases (raw materials)... | 160,000.00 | +| Factory Expense... | 50,000.00 | +| Purchases (office space)... | 6,000.00 | +| Rentals (office space)... | 2,000.00 | +| Factory Insurance (current)... | 3,000.00 | +| Freight Out... | 1,000.00 | +| Selling Expenses... | 26,000.00 | +| Investments... | 66,000.00 | +| Accounts Receivable... | 42,000.00 | +| Cash... | 5,555.67 | +| Factory Building... | 235,000.00 | +| Machinery... | 135,555.67 | +| Tools... | 26,666.67 | +| Capital Stock Common... | 266,666.67 | +| Capital Stock Preferred (6% cumulative)... | 166,666.67 | +| Surplus... | 35,555.67 | +| Bonds (first mortgage) ... | 144,444.44 | + +**Inventory Dec. 31, 1919:** +Raw Materials: $116,666.67 +Goods in Process: $25,555.67 +Finished Goods: $31,555.67 + +$944,444.44 + +The company began operations two and one-half years ago and, except for the current year, adequate depreciation allowances have been made on all wasting assets. Instead of being credited to depreciation reserves these allowances were credited directly to the asset accounts so that the amounts shown indicate cost less depreciation. You are requested to submit an opinion upon the value of the preferred stock which is a par value of $1 per share. Show how you arrive at this opinion. Submit an income statement and a balance sheet. + +A page from an accounting book showing a trial balance. + +CHAPTER XL + +**RELATION OF ACCOUNTING TO MANAGEMENT** + +**Purpose of Accounts.—The chief usefulness of accounts begins where the routine work of creating them ends. Too frequently the accounts are regarded as an end in themselves rather than as a means of promoting more efficient management. An accounting system must afford not only a complete record of details regarding accounts receivable and payable, inventories, uncollectible accounts, and all other pertinent financial data which compose the history of a concern's operations; it must also supply live information to the manager of such a character as will enable him to deal efficiently with present and future problems.** + +**Information the Manager Needs.—The problems which confront the manager are, roughly, those which refer to strictly internal conditions—departmental efficiency, waste, amount of turnover, and so on; and those which arise in connection with the outer world—price-making, contracts, taxation, and so on. He requires this information, which will aid him in arriving at an accurate and business-like judgment on these problems. Much of this information must be furnished by the accountant, who, if he makes the most of his opportunities, will find his services in constant demand for supplying this useful information to the executive department.** + +**The Balance Sheet and Income Statement.—Much information can be obtained from the study of the current balance sheet and the income statement. Moreover, the usefulness of these statements is greatly increased if they are presented in such form as will enable the making of comparisons between periods. This is emphatically true of the income statement. Many corporation reports present these in comparative arrangement. Sometimes balance sheets for successive periods are also presented in comparative form. Forms of comparative income statements are shown on pages 208 and 209. + +The usefulness of comparative statements is limited. They do not show all of the information that the manager requires.** + +18 +273 + +274 +ACCOUNTS IN THEORY AND PRACTICE + +and they do not emphasize vital tendencies. It becomes neces- +sary, therefore, to contrive means not only of presenting all +figures and facts needed by the manager or executive, but of +prescribing the order in which the various tendencies are +emphasized and that the greatest amount of information may +be secured with the least expenditure of time and effort. + +Character of Reports.—Cost systems sometimes fail because +cordial cooperation is lacking between the accountant and the +manager. Without this such reports lose much in value. The +skillful manager will regard them as a means of control over +departments and processes. His attitude must determine, +largely, to what degree the cost system is to be an instrument of +control. + +Reports to the manager may be either statistical and tabular +in form, or graphic, or the two methods may be combined. +Ordinarily the graphic method will be found less satisfactory +than the tabular method, for routine purposes, although there +may be exceptions to this rule. The manager should be suffi- +ciently familiar with conditions and tendencies to interpret sta- +tistics, and the presentation of many graphs might lead to +unpleasant results. The explanation of tendencies may be limited to +the explanation of the more important tendencies of business which +necessitate the consideration of considerable periods of time; +such, for example, as the amount of net sales from month to +month, the relationship between sales and net profits in different +periods, and the variations, from period to period, of purchases, +sales, and inventories. By proper planning such graphs may be +made continuing in character, additions being made as the latest +results of each month are reported. + +Expression by Percentages.—Within certain limitations per- +centages may be employed to bring significant relationships and +changes before the mind. Being related to a common base of +100 they afford a better mode of comparison than do sums ex- +pressed in quantities of dollars, or other concrete units of measure- +ment. Thus, if we try to distinguish the relative significance of +two sums of money, $1728.40 and $1423.80, we are aided by +being informed that one sum is 63.1% larger than the other, +or 12,000 tons burden is 63.1% larger than 19,000 tons burden. +Or if we wish to compare a ship of 19,000 tons burden with one of 12,000 tons burden we are aided in making the com- +parison by knowing that the smaller tonnage is 63.1% % of +the larger. That percentages must be carefully related to a + +RELATION OF ACCOUNTING TO MANAGEMENT 275 + +common base, however, will appear from the considerations which follow. + +**Problem of Price-making.—One of the most important duties of the executive is to fix prices that will enable him to meet competition and still make a suitable profit. Haphazard price-making is almost a common cause of insolence and bankruptcy, especially when competition is keen and fierce. Various factors—business customs, changing fashions, credit conditions, and so on—enter to complicate the problem of price-making. These external factors do not enter directly into the accounts but they do affect materially the use which can be made of the results which the accountant secures. + +Even when all these factors are kept in mind, the method of fixing the selling price is often misunderstood. It has been estimated that out of every one hundred individuals who engage in the retail business only five succeed. This great proportion of failures is unquestionably due in part to ignorance of capital requirements and of correct methods of calculating profits on the capital invested. + +The real cost of doing business is apt to be overlooked by the small enterprise because of his failure to possess accurate information as to the true magnitude of expenses. For example, contingencies and depreciation. Items of expense for which immediate payment must be made, such as rent, heat, light, wages, advertising, insurance, and freight are usually accounted for with a fair degree of accuracy; but not so those of a less definite character such as the unavoidable depreciation of stock, fixtures and real estate, as well as depreciation of stock resulting from overbuying or errors in buying, losses caused by dishonest employees, bad debts, losses on special sales and so forth. + +**Profits Based on Selling Price.—Not only is there a likelihood that the merchant will underestimate costs of doing business; he frequently adopts the erroneous policy of calculating his profits on cost instead of selling price, with the result that a policy which is wrong in itself is aggravated by underestimation of costs upon which the profits are figured. Having established his cost at an amount which would have been greater care would have determined, the merchant proceeds to find the selling price which will afford him the desired percentage of profit. + +To illustrate, let us assume that the true cost of a commodity + +276 +ACCOUNTS IN THEORY AND PRACTICE + +is $10 and that the merchant decides to sell it for $12.50. This is an increase of 25 per cent on the cost price but only 20 per cent on the selling price. This means that if the merchant reckons his operating expenses as a percentage of gross sales, which is customary practice, while he at the same time figures his profits as a percentage of gross sales, he will work with two different standards with financial difficulties for his reward. + +Thus, if the income statement shows that the expenses of operation amount to 20 per cent of sales and the merchant concludes that a net profit of 3 per cent will be satisfactory and so proceeds to write up his goods 25 per cent above cost, he is ultimately surprised to find that he has made no profit at all. He discovers that by writing up his goods 25 per cent above cost to $125, the selling price, which is just sufficient to cover costs of operating. He errs by reckoning his percentage of profit on cost and his percentage of operating expense on selling price. + +The Problem Illustrated. A merchant buys a commodity for $1. His operating expenses are 20 per cent of gross sales. He wishes to make a net profit of 8 per cent. What should be the selling price of the commodity? + +Solution: +$$100 - (20 + 8) = 72$$ +$$\frac{1}{72} + 72 = \boxed{1.39}$$ + +All problems of a similar character may be solved by the following rule: To the operating expense add the net profit desired, both expressed as percentage figures. Deduct this sum from 100 per cent. Divide the cost of the article by the difference. + +**Selling Price Price Basis:** The common error lies in the failure to estimate the selling price as a basis upon which to base all percentages of expense and profit; so that sometimes an attempt is made to work both from the sales basis and the cost basis. As has been well said, "many business men seem to have persistently refused to acknowledge that any percent of a smaller sum is a smaller per cent of a larger sum... or to put it concisely, that if 25% of $100 is only 20% of $125 and 25% increase over cost is 20% profit on the selling price." + +This leads us to a determination of what is meant by selling sales instead of costs as a basis upon which to figure profits. Re- + +Note that per cent, of net profit here refers to cost or to selling price, not to investment of capital. + +A page from an accounting textbook discussing percentages and profit calculations. + +**RELATION OF ACCOUNTING TO MANAGEMENT** 277 + +flection will reveal that no other single item bears such a significant relationship to the various activities of an enterprise. Upon the amount of the sales depend all other functions and activities. When sales are of satisfactory volume, with a duly large margin of income over expenditure, the goal of all the many activities is reached. The profit on the sale of the goods of an enterprise is made by various calculations. Net sales determines the amount of revenue applicable to payment of costs, expenses, and a suitable return for investment and management. The remuneration of salesmen, for example, is figured as a percentage of sales. Why, then, consider profit as a percentage of cost? + +The significance of this is the emphasis it throws on the method employed in fixing selling prices. To illustrate, assume that a grocer finds that the cost of doing business amounts to 18 per cent of net sales. He wishes to learn whether he can make a profit of 10 per cent on a given commodity and sell at the market price. He reasons as follows: + +The cost of the article is $1.50. To this he must add 18 + 10 or 28 per cent to cover cost of doing business and provide the desired profit. To $1.50 he adds 28 per cent of $1.50, or $0.42, which gives $1.92. + +Note the error in this calculation. The cost of doing business is 18 per cent of net sales, but 18 per cent of $1.92 is $0.35, which deducted from the selling price, $1.92, leaves $1.57 to cover cost and provide the net profit desired. The excess of $0.07 above cost does not give the merchant a profit of 10 per cent—not even on cost. The confusion arose from a failure to employ net sales as the basis from which to compute all percentages. + +Employing net sales as the basis for computing correct selling price to provide 10 per cent net profit and cover expenses of 18 per cent is: + +$$\frac{100 - (18 + 10)}{18} = \frac{72}{18} = 4$$ + +$$\frac{1.50}{4} = \$2.08$$ + +Answer. + +Whether the grocer can sell at this price may be questionable, but he has the satisfaction of knowing the truth regarding profits. + +**Limitations of Interpretation by Percentages.—** When the data to be compared are not too numerous the plan of expressing their relationship by the percentage method is effective. When, + +A bar graph showing two bars representing different percentages. + +278 +ACCOUNTS IN THEORY AND PRACTICE + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Comparative Income Statement Iron Manufacturing Company, for Six Year Period Ending Dec. 31, 1919
Items1914191519161917
Net Sales$100,000$125,000$125,000$125,000
Cost of Manufacture44,50044,50044,50044,500
Cost of Distribution23,50023,50023,50023,500
Gross Profit32,50032,50032,50032,500
Net Profit before Taxation27,50027,50027,50027,500
Taxation Paid on Net Profit before Taxation3,1253,1253,1253,125
Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxation and Total Cost of Manufacture and Distribution and Net Profit before Taxation and Taxation Paid on Net Profit before Taxion + +**RELATION OF ACCOUNTING TO MANAGEMENT** + + + + + + + + + + + + + + + + + + +
Inventory 12/31/19$6,000
Purchases20,000
Less Inventory 12/31/20$26,000
Turnover$22,000
+ +then assuming that the average stock of merchandise is ($6,000 + $4,000) ÷ 2 or $5,000, the rate of turnover is $22,000 ÷ $5,000, or 4.4. + +Nothing deserves more careful attention on the part of the manager than the rate of turnover. If the rate of turnover is below that for similar concerns being run on an efficient basis then either sales are lagging or there is being carried an excessive stock of merchandise. This same principle applies also to manufacturing. One of the best means of avoiding the tying up of capital in excessive stocks of merchandise is by keeping a record of the keeping of book or running inventories. A large part of the average merchant's capital is invested in merchandise. Anything which abridges the time that elapses between his purchase and his sale of any given commodity to that extent reduces the amount of capital necessary to carry the required quantity of merchandise, or enables the merchant with a given amount of capital to expand his activities by taking on additional kinds of goods. + +Some business men hesitate to sell anything below cost and in consequence accumulate quantities of stock which not only grow less and less salable as time passes but tie up a quantity of capital from which no return is secured. If capital properly employed is worth or $ per cent, it follows that holding articles over long periods of time is disastrous policy. Not only do the articles become less salable but they become obsolete and does not circulate and thus ceases to earn a return, so that ultimately there is incurred both loss of capital and of profit which that capital should normally have earned. It is better to take a partial capital loss, if necessary, to dispose of such goods quickly. + +**Preparation of the Budget.—** The purpose of the budget is to enable the manager to make an intelligent estimate of, and to provide for, all customers' requirements during the next necessary period of the coming year. In a well thought out plan the budget affords a thoroughgoing survey of future requirements. If the accounts + +280 +ACCOUNTS IN THEORY AND PRACTICE + +have been well kept they provide a storehouse of information which the manager can use to aid in constructing a budget, making allowance for such changes from the past program as may be necessary. Accounts permit the study of expenditures after they are made. The budget permits the study of expenditures before they are made. Scientific budget-making is an important step in the direction of economy. + +**Making Contracts.—** The manager can make contracts for future work on an intelligent basis only when accurate costs of past work have been kept. Moreover, it is always desirable to know what the outlay will be for undertakings. This cannot be determined by estimation; only a cost system adapted to the needs of the business will serve. It is necessary to compile costs as work proceeds, especially when the contract covers an extensive undertaking, in order to locate waste and leaks, and to prevent unnecessary or extravagant expenditure. Work accomplished is compared with costs incurred in order to keep the trend of these such that the anticipated profit will result when the work is finished. + +**Reports on Internal Affairs—Manufacturing.—** These reports should take the form of prompt periodical analyses covering: + +1. Waste which occur daily, also with reference to any given lot or order manufactured. +2. Operating costs, daily in relation to orders. +3. Complete cost of orders finished, either daily or weekly. +4. Production accomplished by the day, run, or week, according to nature of the work. +5. Payroll, according to time of payment of wages. +6. Special and general expenses. + +v + +CHAPTER XLI + +GRAPHIC CHARTS + +Use of Graphs.—Statistical data may sometimes be interpreted to advantage by the use of graphic charts. Graphs serve to emphasize tendencies and relationships and to make them more vivid than do tables of figures. Statistical tables are sometimes so detailed and so complicated that only the most experienced can interpret them adequately. Important tendencies are apt to be overlooked, and we have found that expressed by percentages sometimes appear preferably in expression of quantities of dollars and cents; this is especially true when all items to be considered are referable to a common base. When, however, there are two variables instead of one it becomes necessary to contrive some other means of conveying an idea of the significance of their constantly varying relationship to each other. Thus we frequently find that we must interpret numerous quantities relating (to) successive periods of time. We desire to show their relative weight and tendencies. Graphs are especially suited to this purpose. + +Fundamentals of Graphic Presentation.—Graphs are generally employed to indicate the relationship existing between sets of data. One set of data usually refers to an independent variable and the other set of data to a dependent variable. The dependent variable is to be interpreted in terms of the independent variable. This means say that the dependent variable rises 100 per cent over a period of five years. The price of food is the dependent variable and time is the independent variable. + +In interpreting accounting data time is usually the independent variable, because most important tendencies of a financial character are measured in terms of days, weeks, months, or years. For example, we say that in one year net profits amount to 5% on invested capital and in the next year to 6%. Here the dependent variable is the sum of money invested capital and time, expressed in years, the independent variable. + +Principles of Graph Construction.—For a detailed discussion of graphic presentation the student is referred to works treating + +281 + +282 +ACCOUNTS IN THEORY AND PRACTICE + +of that subject.¹ It will be possible here merely to state the more general rules which must be followed. Presumably, the student is familiar with the common coordinate paper used by statisticians and chartographers. An examination of the charts shown in this chapter will indicate its nature. In general, this paper must be chosen on which the plane of the graph is best suited for the presentation of the data to be charted. If the scale is unnecessarily small it will tend to obscure the curve. The following rules may be studied with reference to the charts which follow: + +1. The general arrangement of a diagram should proceed from left to right, i.e., so that it can be read from left to right. + +2. When areas or volumes are represented by linear magnitudes as areas or volumes are more likely to be misinterpreted. Areas and volumes are not used in this chapter. + +3. For a curve the vertical scale, whenever practicable, should be so selected that the zero line will appear on the diagram. + +4. The zero lines of the scales for a curve should be sharply distinguished from the other coordinate lines. + +5. It is advisable not to show any more coordinate lines than necessary to guide the eye in reading the diagram. + +6. The rulings of a diagram should be sharply distinguished from the ruling. + +7. The horizontal scale for curves should usually read from left to right and the vertical scale from bottom to top. + +8. Figures for the scales of a diagram should be placed at the left and at the bottom. + +9. It is often desirable to include in the diagram the numerical data presented. + +10. If numerical data are not included in the diagram it is desirable to give the data in tabular form accompanying the diagram. + +11. All lettering and all figures on a diagram should be placed so as to be easily read from the base as the bottom, or from the right-hand edge of the diagram as the bottom. + +12. The title of a diagram should be made as clear and com- + +--- + +¹ See Britton, W. C.: Graphic Methods for Presenting Facts; also Warne, F. J.: Chartography in Ten Lessons. +² Adaptation of this paragraph was made by Committee on Standards for Graphic Presentation. Copies may be had from The American Society of Mechanical Engineers, 29 West 39th St., New York: Price 10 cents. + +GRAPHIC CHARTS +283 + +plete as possible. Sub-titles or descriptions should be added if necessary to insure clearness. + +**Data for Graphic Presentation.—The following are suggestions as to accounting data which afford subject matter for graphic presentation:** + +1. Comparative sales, for two or more years, by months, also cumulative totals of sales by months. +2. The same by years. +3. Sales, cost of sales and expenses, and net profits by months. +4. Purchases and sales by months. +5. Significant trial balance items, by months. +6. Undistributed indirect and total indirect, by months. +7. Departmental sales, purchases, profits, wages, etc., by months. +8. Advertising expenses and sales, by months. +9. Raw materials purchased, raw materials on hand, goods in process, finished goods, and orders received, by months. +10. Net profits, dividends, and amount carried to surplus, by years. + +The charts which follow should be studied with reference both to the data presented, the significance of the relations expressed, and the plan and arrangement of the diagrams.¹ + +Following are four diagrams presented here to illustrate the method and possibilities of graphic interpretation of accounting data. Plate I shows the trend of monthly sales of a department for two successive years. This brings before the mind more clearly and more definitely the relative volume and tendency of sales during these periods than any other single statement likely to do. For example, the fluctuations were somewhat more marked in 1918 than in 1919. Sales in 1919 are greater than in 1918 with the exception of one month, April, which shows a remarkable increase in sales, in 1918. Are the tendencies such as would be likely to occur in a general merchandise business? For instance, would sales be likely to fall from a high mark in December to a low point in January? + +Plate II shows the trends of sales and purchases during a given year. Note that in October the purchases are nearly as great as the sales, and that in the succeeding months there is a falling off in purchases. Such a diagram might serve to bring before the + +¹For the use of graphs in studying depreciation methods see Sales- +Principles of Depreciation, chapters XI-XV. + +A graph showing the trend of monthly sales of a department for two successive years. +A graph showing the trends of sales and purchases during a given year. + +284 +ACCOUNTS IN THEORY AND PRACTICE + +manager the fact that overbuying exists. Of course he might learn this from other sources, but in no other way could it be presented so emphatically and so simply. Naturally every graphic illustration must be made with reference to actual conditions. What is overbuying in one business, or under given circumstances, might not be overbuying under other conditions. Purchases are made in advance for the rush seasons in some lines of business. Graphs will serve to emphasize this relationship between purchases and sales. + +A line graph showing monthly sales of department B for the years 1918 and 1919, in thousands of dollars. +The x-axis represents months from January to December (1-12). +The y-axis represents thousands of dollars (0-60). +The line shows fluctuations in sales over time. +Legend: +- Monthly Sales for 1918 +- Monthly Sales for 1919 + + +Plate I.-Monthly sales of department B for the years 1918 and 1919, in thousands of dollars. + +Plate III shows the status of the indirect costs of manufacture in Department A of the Falls Manufacturing Company, for the year 1919. Note the progressive relationship existing between distributed and undistributed indirect. It is the desire of the manager to keep total indirect cost as low as possible minimum because it is the result of idle machine time. Why does not total indirect increase as rapidly as distributed indirect, after the low point in May? What would be the operating condition if the curve for undistributed indirect reached that for + +GRAPHIC CHARTS +285 + +total indirect? If it reached the zero line? What would then be the position of the curve for distributed indirect? + +Plate IV shows in graphic form the information given in the table on page 283. By means of this diagram, instead of a number of curves, this method is a distinct aid in bringing the situation clearly before the mind. Certain interesting relations and tendencies are brought out. Note that when production declines, net sales and net profits decline still more rapidly. The dividend rate + + +A graph showing monthly purchases (in thousands) over time. +The x-axis represents months from 1 to 12. +The y-axis represents thousands of dollars. +The data points show: +- Month 1: Approximately 20 +- Month 2: Approximately 25 +- Month 3: Approximately 30 +- Month 4: Approximately 35 +- Month 5: Approximately 40 +- Month 6: Approximately 45 +- Month 7: Approximately 50 +- Month 8: Approximately 55 +- Month 9: Approximately 60 +- Month 10: Approximately 65 +- Month 11: Approximately 70 +- Month 12: Approximately 75 + +There is a general upward trend in the data points. + + +Plate II.—Monthly purchases, S. T. Alling, for the year 1919. + +remains constant. General expenses increase but slightly with increasing business. The same is true of selling expenses. Note that in the years in which a deficit occurred the curve showing the amount carried to surplus falls before the zero line. As sales increase net profits increase still more rapidly. + +**BIBLIOGRAPHY** + +Part VI. Special Applications of Principles + +Manufacturing Accounting +Curran, A. H. The Proper Distribution of Expense Burden. New York, 1912. + +286 +ACCOUNTS IN THEORY AND PRACTICE + +CHURCH, A. H. Production Factors. New York, 4910. +CHURCH, A. H. Manufacturing Costs and Accounts. New York, 1917. +CLARK, E. S. Productive Costs. In Industrial Management, Dec., 1916 +and following numbers. +COLE, W. M. Accounts: Their Construction and Interpretation. Boston, +1914. Chapter XIX. +DICKINSON, A. W. Accounting Practice and Procedure. New York, 1913. +Chapter IX. + +EVANS, H. A. Cash Keeping and Scientific Management. New York, 1911. +GARVEE, E. and FELLS, J. Factory Accounts. London, 1911. +GOOGE, C. B. Principles of Industrial Engineering. New York, 1911. + +Line graph showing Total Indirect, Distributed Indirect and Undistributed Indirect for department A, Falls Manufacturing Company, in the year 1919. +Plate III—Total indirect, distributed indirect and undistributed indirect for department A, Falls Manufacturing Company, in the year 1919. + +HATFIELD, H. R. Modern Accounting. New York, 1906. Chapter XVI. +KLEIN, J. J. Elements of Accounting. New York, 1913. Chapters XIII and XIV. +LEWIS, P., Jr., Eds. Efficient Cost Keeping. Detroit, 1914. +MONEY, E. P., Eds. Principles of Factory Cost Keeping. New York, 1913. +NICHOLSON, J. L. Cost Accounting: Theory and Practice. New York, +1918. +SCOVELL, A. H. Cost Accounting and Burden Application. New York, +1916. +WEBERNS, F. E. Factory Costs. New York, 1911. + +PLATE IV—Cost of Goods Sold by Department for the Year Ending June 30th, 1920 +Bar chart showing cost of goods sold by department for the year ending June 30th, 1920. +Department A +Department B +Department C +Department D +Department E + +GRAPHIC CHARTS +287 + +WILDMAN, J. R. Principles of Cost Accounting. New York, 1911. +WOODS, C. H. Accounting Methods for Industries. New York, 1917. + +Management: +Curtiss, H. The Science and Practice of Management. New York, 1911. +ENNIS, W. D. Works Management. New York, 1911. +FRANKLIN, B. Cost Reports for Executives. + + +A line graph showing cost behavior over time. +The x-axis represents years from 1904 to 1919. +The y-axis represents thousands of dollars. +Key points on the graph: +- 1904: Cost Behavior +- 1905: Cost Behavior +- 1906: Cost Behavior +- 1907: Cost Behavior +- 1908: Cost Behavior +- 1909: Cost Behavior +- 1910: Cost Behavior +- 1911: Cost Behavior +- 1912: Cost Behavior +- 1913: Cost Behavior +- 1914: Cost Behavior +- 1915: Cost Behavior +- 1916: Cost Behavior +- 1917: Cost Behavior +- 1918: Cost Behavior +- 1919: Cost Behavior + +Legend: +Cost Behavior (top) +Dividends Declared (middle left) +Salaries Expense (middle right) +General Expense (bottom) + +Plate IV—Comparative income statement, the Iron Manufacturing Company, for the six year period ending Dec. 31, 1919. See table page 278. + +Graphic Charts: +BRINTON, W. C. Graphic Methods for Representing Facts. New York, 1914. +SECRECY, HORACE. Business Statistics. New York, 1920. +WARNE, F. J. Cartography in Ten Lessons. Washington, 1919. + +Department Accounting: +MOXIE, E. P. and others Practical Accounting Methods. New York, 1913. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
YearsCost BehaviorDividends DeclaredSalaries ExpenseGeneral Expense
1904
1905
1906
1907
1908
1909
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
+ +APPENDIX A + +REVIEW QUESTIONS + +Chapter I + +1. Show why accounting is a branch of economic science. +2. Why do modern industrial methods require carefully compiled records? +3. How are price-making and competition related to accounts? +4. How do adequate records improve credit conditions? +5. In what way is efficient management related to accounting? +6. What is the difference between cash and bank transactions? +7. How is income taxation dependent on accounts? +8. Why should an investor understand accounting? +9. How does correct determination of profits affect the interests of various claimants? + +Chapter II + +1. Distinguish between cash and credit transactions. +2. How are cash and credit transactions recorded? +3. What is the function of the Journal? +4. Explain the meaning of the words, debit and credit. +5. Give three rules for debits. +6. Give three rules for credits. +7. Distinguish between losses and expenses. + +Chapter III + +1. How should the journal be subdivided? Why? +2. What is the function of the Cash Journal? +3. Why are losses or gains not shown for each sale? +4. What is meant by "record"? +5. What is an "account"? +6. What is the function of the Ledger? +7. Distinguish between "real" and "nominal" accounts. +8. What are "functional" accounts. +9. Explain the difference between chronological and functional records. +10. Define "posting." +11. What is the "folio" column? + +Chapter IV + +1. What is meant by the interpretation of accounts? +2. How do losses and gains affect liabilities and assets? +3. Define "capital". +4. What statement should be made up preliminary to opening a set of books? +5. What is the purpose of the opening journal entry? + +288 + +APPENDIX 289 + +6. Suggest how the ledger accounts may be arranged and classified. +7. How should cash be treated in the opening entry? +8. What is meant by the analysis of an account? +9. To what extent should accounts be subdivided? + +Chapter V + +1. Distinguish between the functions of the Cash Journal and the General Journal. +2. What is the purpose of the purchases account? The sales account? The capital account? The nominal accounts? The accounts payable? The accounts receivable? + +Chapter VI + +1. What is a trial balance? +2. Show why the trial balance is really a trial balance of balances. +3. What are the two principal objects of a trial balance? +4. Explain the nature of purchases and inventory accounts in the trial balance. +5. What is the purpose of a closing entries? +6. Why are the nominal accounts closed? +7. What is the purpose of the profit and loss account? +8. Why is net profit carried to capital? +9. How does the final trial balance differ from the first trial balance? +From this point on... +10. How does the profit and loss account differ from the profit and loss statement? +11. What are the six steps in the process of ledger interpretation? +12. What is the relation of the balance sheet and the profit and loss statement? Why is their value largely comparative? +13. What is the accounting period? + +Chapter VII + +1. What is the purpose of practice work? +2. What materials are required for this chapter? +3. What is a diary of events? +4. Why do we say that "goods" bought to "Purchases?" +5. What is a "sterotyped phrase?" +6. What is the purpose of the notes receivable account? +7. When, in practice, is posting done? +8. Is closing entries made at each balance in the withdrawals account? +9. Why is discount on purchases a credit nominal account? +10. Distinguish between the "new" and "old" inventories. + +Chapter VIII + +1. Why is "mortgage" a real account? +2. Why is "had debt" a nominal account? +3. Why does not the new inventory appear in the trial balance? +4. Distinguish between interest and interest accrued. + +19 + +290 +ACCOUNTS IN THEORY AND PRACTICE + +Chapter IX + +1. What is an accrual? A deferred charge? +2. Define interest. How may interest periods differ from accounting periods? +3. Explain the use of the interest accrued account. +4. When is the interest accrued account closed? When is the interest account closed? +5. How does the principle of accruals apply to wages and salaries? To taxes? +6. What is a deferred charge? Give an illustration not found in the text? +7. Are buildings and machinery deferred charges? Why? + +Chapter X + +1. When is advertising a deferred charge? +2. What are adjustment entries? +3. When are adjustments for wages accrued required? + +Chapter XI + +1. State three causes of depreciation. +2. How does capital in the economic sense differ from capital in the accounting sense? +3. Distinguish between fixed and working capital. +4. How may depreciation cause financial trouble? +5. Why does it sometimes cause bankruptcy? +6. How may depreciation be charged without using a valuation reserve? +7. What is a valuation reserve? +8. How may depreciation be charged without using a valuation reserve account? +9. Should the reserve be kept in cash? Explain. +10. Why is the depreciation reserve a clearing account? +11. What is normal depreciation? How is it related to efficiency? +12. Explain the use of valuation reserves for bad debts. + +Chapter XII + +1. What would an increase in the reserve for bad debts from year to year indicate, providing business is not growing? +2. Why do some businesses have no reserve for bad debts? +3. Why is the depreciation reserve called a valuation account? +4. Why should depreciation reserves be deducted from corresponding assets in the balance sheet? +5. Why is the year ordinarily too long as an accounting period? +6. Why cannot bad debts be credited directly to the accounts receivable accounts? + +Chapter XIII + +1. When is the partnership form of organization desirable? +2. What is a personal service corporation? + +APPENDIX 291 + +3. What are the leading features of common law partnerships? +4. How may limited partnerships be established? +5. May all partners be limited as to liability? +6. How does the English Partnership Act of 1890 define a partnership? +The New York law + +7. What provisions should appear in the articles of agreement? +8. What cause leads to partnership dissolution? +9. How are assets distributed at dissolution? + +Chapter XIV + +1. How does accounting for partnerships differ from accounting for a sole proprietor? +2. When is goodwill brought in to adjust partners' capital accounts? +3. How does the interest question arise in partnership accounting? +4. Why distribute interest on investments when profits are distributed in proportion to investments? +5. What is meant by the average investment for a given period? How is it found? +6. In closing, how are the partners' withdrawals accounted for? +7. How is a deficit treated when a partnership is liquidated? +8. No provision to the contrary, how are profits divided among partners? + +Chapter XV + +1. Give reason why Gray and Smith credit their capital accounts with 5 per cent on their investments. +2. Why are not withdrawals carried to profit and loss? + +Chapter XVI + +1. What changes in the system of accounts does expanding business necessitate? +2. What is the purpose of controlling accounts and subordinate ledgers? +3. When are special journals needed? +4. What are the uses of special journals in journals? +5. When are postings to the controlling accounts ordinarily made? Why? +6. How do controlling accounts facilitate the work of finding errors? +7. How should returned sales and returned purchases be treated? + +Chapter XVII + +1. What is the purpose of a bank account? +2. Why should all cash receipts be deposited in bank? +3. Describe the procedure for handling petty cash. +4. When is petty cash account charged in the ledger? +5. What advantages has the imprest system? + +Chapter XVIII + +1. Name the books ordinarily required in a system of accounts for a trading concern with numerous accounts payable and receivable. +2. What is the significance of a "Salaries Prepaid" account? + +292 +ACCOUNTS IN THEORY AND PRACTICE + +3. When the petty cash is replenished what accounts are charged? +4. How distinguish between items to be paid from petty cash and by check? +5. Why cannot a purchase of furniture be entered in the purchases journal? How might this be remedied? +6. What is meant by accrued interest? + +Chapter XIX + +1. What is the purpose of the voucher register? +2. What is a voucher system? +3. What is a voucher? +4. Explain use of paid and unpaid vouchers' files? +5. What charges are made through the voucher register? + +Chapter XX + +1. What books does the voucher register display? +2. How are vouchers numbered in the voucher system? +3. What columns should a voucher register contain? +4. How should vouchers be numbered? Why? +5. Why are adjustments and closing entries made in the general journal? + +Chapter XXI + +1. When is a private ledger desirable? +2. What is the function of the private journal? +3. What accounts are ordinarily kept in the private ledger? + +Chapter XXII + +1. How is the private ledger related to the general ledger? +2. What transactions require entries in the private ledger? +3. Is it usually desirable to open the profit and loss account in the private ledger? Why? +4. When does the corporate form of organization become desirable? +5. How are corporate policies determined? +6. What is meant by limited liability? Double liability? +7. What principle determines the desirable ratio of stocks to bonds? +8. What is the status of a stockholder in a corporation? +9. How is capital of a company transferred? +10. What is cumulative preference stock? +11. What is the deed of trust? +12. What is stock full paid? + +Chapter XXIII + +1. Should unissued stock be shown in the opening entry? Why? +2. What accounting procedure is necessary when subscriptions are paid in instalments? +3. What may be received in payment of subscriptions? +4. What explanations are desirable in the opening entry? + +Chapter XXIV + +APPENDIX 293 + +Chapter XXV + +1. How does the valuation question arise when a proprietorship or a partnership is incorporated? +2. Should goodwill ever be capitalized? Why? +3. What factors determine the desirable amount of authorized capital stock? +4. Describe the process of conversion to the corporate form (a) when the old books are continued; (b) when new books are opened. + +Chapter XXVI + +1. What is the deed of trust? +2. What factors determine the interest rate of bonds? +3. Describe the accounting procedure (a) when bonds are sold at par; (b) what are the effects on the balance sheet? +4. What is meant by the effective interest rate? +5. How is the effective interest rate determined? +6. When and how should interest charges be recorded? +7. When is the interest accrued account closed? +8. What is the relation of the premium or discount on bonds to current profit and loss. + +Chapter XXVII + +1. What are bonds issued in perpetuity? +2. What are the two sources of funds for redemption of bonds? +3. How are bond discounts and premiums related to depreciation? +4. What is a sinking fund? A sinking fund trustee? +5. Why should not interest on bonds be paid out of capital? +6. What should be done with interest earned by the sinking fund? + +Chapter XXVIII + +1. Why is a surplus or deficit account required in corporation accounting? +2. Who determines the disposition of the surplus? +3. For what objects are special reservations of surplus made? +4. What is meant by a conservative dividend policy? +5. Describe a dividend policy. +6. What is a declaration of dividends? +7. What is the accounting procedure when dividends are declared? When they are paid? +8. Describe five books peculiar to corporations. + +Chapter XXIX + +1. What are pre-forma journal entries? +2. What is the relation of premium on bonds to interest? +3. What is the purpose of a sinking fund reserve? +4. What is the relation of discount on bonds to interest? + +294 +ACCOUNTS IN THEORY AND PRACTICE + +Chapter XXX + +1. How is the income account frequently subdivided? +2. What are the advantages of such subdivisions? +3. How may discount on purchases be treated in the income account? +4. How does a statement differ from an account? +5. Why is the statement form usually preferable to the account form in published profit statements? +6. Why is “net sales” an important statistical base? +7. How can the income statement be studied with reference to the assets? +8. What are some of the most important items in the income statement that deserve study? +9. What is the relationship between fixed charges and the margin of profits? +10. How does uniformity in income vary in different kinds of enterprises? +11. How is the preceding question related to the question of reserving profits in the form of surplus? +12. What portion of its funds may a concern safely secure by selling bonds? + +Chapter XXXI + +1. What is a comparative income statement? How should increases and decreases as between years be expressed? +2. How does Hooper suggest that an income statement should be studied? +3. By what governmental body are railroad accounts prescribed? +4. What is the significance of the operating ratio? +5. What is meant by “railroad accounting?” +6. Why is “renewals” a charge to income? +7. How did the Delaware, Lackawanna & Western charge off discount on bonds? Why is this unusual? +8. What was meant about the funded debt of the D. L. & W. +9. How may the income statement of the U. S. Steel Corporation be criticized? +10. How did the years 1914 and 1915 compare in prosperity for this company? + +Chapter XXXII + +1. Why are the balance sheet and the income statement complementary business documents? +2. Describe three possible forms of the balance sheet. +3. How should items be arranged in the balance sheet? + - How does A. Loren Dickson classify invented capital? + - How do working and current assets differ? + - Why separate working and current assets in the balance sheet? Would this be advisable? +4. What two interpretations apply to deferred charges? +5. Are expenses paid in advance working assets? +6. How does surplus differ from capital stock? + +APPENDIX 295 + +10. How is liability on capital stock limited? +11. What is the trust fund theory of capital stock? +12. What is the meaning of "capital stock"? +13. Does the usual rule of preservation of capital apply in case of wasting assets? +14. How, in such a case, are the bondholders protected? +15. What objection may be raised against the use of a sinking fund for this purpose? +16. How may capital stock be reduced in Connecticut? + +Chapter XXXIII + +1. What does a reasonable interpretation of the trust fund theory require for protection of bondholders? +2. When is it permissible to pay dividends from capital? +3. Should all profits be subject to dividend distribution? +4. Why, in determining profits subject to distribution, is not each year a unit? +5. What is meant by "integrity of invested capital"? +6. When does a profit result from appreciation of property? +7. What is the nature of a premium on capital stock? + +Chapter XXXIV + +1. How do accounts locate responsibility? +2. What are the objects to be secured by departmentalization? +3. What rules should govern in fixing the number of the departments? +4. How are heating accounts used in departmental accounting? +5. On what basis should heat, rent, and advertising be distributed to departments? + +Chapter XXXV + +1. Why, in departmental account, is it necessary to take careful account of space occupied by each department? +2. What accounts should be kept for each department? What ones should be general clearing accounts? +3. In general, what rules govern in determining the necessary columns in the voucher book? +4. Why must inventories be kept by departments? +5. What statements should be declared at closing, for a department store? +6. What is the purpose of the trading section? The administrative section? +7. Why is not a balance sheet prepared for each department? + +Chapter XXXVI + +1. How should space rented be accounted for? +2. Suggest another base than candle power for distribution of light expense. + +A page from a book with text about financial accounting principles. + +296 +ACCOUNTS IN THEORY AND PRACTICE + +Chapter XXXVII +1. What is the meaning of "cost," in trade, in manufacture? +2. When is finished product for one concern raw material for another? +3. What is meant by "manufacturing cost"? +4. How does manufacturing accounting differ from trading accounting? +5. Describe the procedure when materials are purchased. +6. What is a manufacturer's bill of materials? +7. What is a purchase order? Plant order? +8. What is the purpose of a cost ledger? By what account is it con- +trolled? +9. What are the chief sources of indirect costs? +10. Why are not certain general and administrative expenses charged to +manufacture? +11. What is the direct labor basis of expense distribution? The raw +materials basis? The prime cost method? + +Chapter XXXVIII +1. What is the old machine rate? The new machine rate? +2. Describe two methods of accounting for idle time costs. +3. How does the secondary supplementary rate differ from the first +supplementary rate? +4. What does Scovell advocate doing with idle time cost? Why? +5. Give four advantages of a cost system. + +Chapter XXXIX +1. Why are three inventory accounts required in manufacturing ac- +counting? +2. Why should drawings and models usually be depreciated rapidly? +3. In general, what determines the value of a share of stock? +4. Why is depreciation an important factor in the determination of stock +values? + +Chapter XL +1. What information does the manager need? Where does he secure it? +2. In what form should reports to the manager be given? +3. How do we determine the efficiency of a plant? What are its limitations? +4. Why should profits be reckoned on the selling price? +5. What is turnover? How does rate of turnover serve as an index of +efficiency? +6. What is a budget? How is it related to the accounts? +7. How does a knowledge of costs aid in making contracts? +8. In reporting to the manager on internal conditions, what points should +be covered? + +Chapter XLI +1. Why are graphs sometimes used to interpret statistics? +2. In graphics, what is the independent variable? The dependent +variable? +3. What should be the general arrangement of the diagram? +4. Suggest kinds of data which submit to graphic presentation. + +A pie chart showing different categories of costs. + +INDEX + +"Account," defined, 16 +Accounting; function of, 22; relation to management, Ch. XI. +Accounting; illustrated, 43 +Accounts; a branch of economics, 1; and credit system, 4; and management, 4; arrangement in ledger, 20; 27; price quotation, 3; as aid in price making, 3; functional classification of, 17; interpretation of, fedded interpretation of, Ch. VI; mixed, defined, 19; nominal, defined, 18; real, defined, 18; relation to taxation, 5; profit. 6; relation to taxation, 5; relation to valuation, 5; subdivision of, 28; two classes of, 18 +Accruals; practice work, Ch. X; +theory of, Ch. IX +Account; definition, 60-61 +Accounts payable; controlling account, 111 +Accounts Payable; defined, 27 +Accounts Receivable; defined, 27 +Accounts receivable; controlling account, 111 +Administrative expenses; in manufacture, 227 +Appreciation; used to pay dividends, +Articles of agreement; partnership, +Assets class of, 209-212; valuation of, +Bad debts; accounting for losses from, +79-80; nature of, 79-79; +practice, Ch. XI; theory of, +Balance sheet, Chs. XXXII, +XXXIII; arrangement of, 208; +and management, 273; exam- +ples of use of, 41, 42; +illustrated, Ch. XXXIII +Bank account; use of 114 +Bibliographies: The Corporation Ac- +counting Records, 144; Fi- +nancial Statements, 224; Func- +tional Principles Accounting, +255-56; +Partnership Accounting., 164; +Special Applications of Princi- +ples, 280 +Bondholders: compared with stock- +holders, 152 +Bonds: advisability of issuing, 153; +use for payment of debt, Ch. +XXVI: how classified (35); +interest on, 177-8: issued in perpetuity, 178; marketing, +recovery of principal and interest, +179-80; redemption of, Ch. XXVII; +relation to stock, 151-2: sold at discount or premium, 168-9; +taxation on income from issue in, +153: vs. mortgages, 131-2 +Bookkeeping: function of, 22 +Budgets: preparation of, 279 +Capital account; illustrated, 41 +Capital: and surplus, 212-13: bonds paid out of, 173-5: defined, 25; +fixed, defined, 79: invested, +nature of., 60-70 +Capitalization: factors determining, +161-63 +Capital stock: liability on, 253: pro- +motion on used to pay dividends, +297 +A page from an index or table of contents. + +298 INDEX + +Capital stock account; use of, 180 +Capital; working; defined, 70 +Cash book or journal; function of, 14-15 + +Cash discounts; handling of, 194 +"Cash"; in opening entry, 26-27 +Cash journal; illustrated, 31, 46, +48, 50 +Cash; petty, Ch. XVII +Certificate, stock; defined, 148 +"Chalked up"; meaning of, 9 +Changes; meaning of, 9 +Closing accounts; depreciation re- +serves as to, 76 +Closing entries; partnership ac- +counts as to, 193 +Columnar journals, Ch. XVI; illus- +trated, 109 +Common stock; defined, 150 +Compendia; relation to accounts, 9 +Controlled accounts; function of, +Ch. XVII; practice, Ch. XVIII +Corporation accounting. Chs. +XXIII, XXIV, XXV, XXVI, XVII +Corporation; accounting for bond issues, Ch. XXVI; advantages of, +145; defined, 145; dividends, +149; open and closed accounts of, +149-150; opening entries, bonds of, +XXIV; opening entry, 153-57; +ownership transferred, 148-149; +possibilities of transfer of records peculiar to, 185; re- +demption of bonds, Ch. XXVII + +Court; meaning of, 26-26 +Cost systems; definition of, 267-8 +Credit elements in, 4 +"Credit"; meaning of, 10, 22; rules for, +7 +Credit System; advantages of, 8; +relation to accounts, 4 +Cumulative preferred stock, 150 +Current assets; defined, 210 + +Debit; meaning of, 10, 22; rules for, +11 + +Deed of trust; defined, 152 + +Deferred charges; practice work. Ch. +X; defined, 211; defined and +illustrated, 63-64; theory of, +Ch. IX; wide application of, +Ch. XI + +Deficiency account use of, 180 +Delaware; Lockwaukman & Western; +income statement of, 203 + +Depreciation reserves as to. Ch. +XXXIV-XLV; purpose of, 225 +Departmenta; transfers between, 229 +Depreciation: a cause of bankruptcy, +77-78; a cause of loss in value, +78-79; cost basis and efficiency, +78; average normality and efficiency, +78; average normality and efficiency, +78-79; illustrated, 79-83; practice, +Ch. XIX + +Depreciation: theory of. Ch. XI +Depreciation reserves: as clearing house, +76; growth of, use of, +75-77 + +Deductible income: profit and loss, +172 +Double taxes at said rate. +108-9 +Discounts on purchases: handling of, +194 + +Dissolution: partnership account. +defined. + +Dividend: defined, 149, 183; +accounting for, 184 and surplus, +183; declaration of, 183-84; +kinds of, 183; profits distribu- +tion (see Dividends), 200-204; +relation to profits, 149 + +Economics: relation of to accounts, +1-2 + +Effective interest rate, 169-172 + +Efficiency and depreciation, 78 + +Earned capital: definition of, +111 + +Executive: reports to, 3, 4 + +Expense: distinguished from loss, + +12-35; significance of, + +Final trial balance: explained, + +41, + +42 + +Fixed assets: transfers to, 266 + +Fixed capital: defined, + +70 + +Fixed charges: and income state- +ment, + +198 + +Folio; meaning of, + +21 + +INDEX + +Functional classifications of trans- +actions, 22; illustrated, Ch. V +Gains; significance of, 23; how ac- +counted for, 15, 17 +General expenses; in manufacturing, +237 +General journal; illustrated, 45, +48 +Goodwill; in incorporation, 159–60; +in partnership accounts, 93, +90–100; in partnerships in- +corporated, 101 +Graphic charts, Ch. XLI + +Idle machines time, 261-63 +Imprint system, Ch. XVII; advan- +tages of, 171–118 +Imprint system; practice, Ch. XVIII +Inadequacy of accounting methods, +Income Statement, Cha. XXX, +XXXI; and management, 273; +contents and arrangement, 191- +7; illustration of significance of, +of 198; use of, 191 +Incorporation; advantages of, of 145; +of partnership, Ch. XXV; valuation +of assets, 159–60 +Indirect; bases of prepayment, 258; +distribution rates, 227–8; premon- +tion by machine rates, 200; premon- +tion on basis of prime cost, 256; premon- +tion on basis of direct labor, premon- +tion on basis of direct labor, 258; +sources of, 257; unjustified charges to profit and loss, 265 +Installments; subscriptions paid in, +158 +Interest; as an accrual, 50–60; de- +fined, 59; effective rate, 160–172; +on bonds, 177–8; on partners' +investments, 179–80; on sinking fund, +179–80 +Interest accrued; defined, 60-61; on bonds, 179 +Interest calculations; discrepancies +in, 170-174 + +International Mercantile Marine Co.; accumulated dividends, +150 +Interpretation of ledger accounts, +108 +Inventory (new); significance of, 37– +38 +Inventory (old); significance of, +37–38 +Investments; relation to accounts, +5 + +Journal; cash; function of, 14-15; +columnar; function of, Ch. +XVII; illustration of, illustrated, +10; function of, 10; general; +illustrated, 30; illustrated, 233 +Notes payable, 112; notes re- +ceived in bearer form of, +subdivision of, 14 +Journal entry; opening, 24-25 + +Labor; accounting procedure, 255 +Ledger accounts; interpretation of, +Ch. VI + +Ledger entries of I., illustrated, +19-20, 25, 36–37, 42; +interpretation of, 42 +Losses distinguished from expense, +12–13 +Losses; how accounted for, 15, 17; +significance of, 23 + +Management; relation of to ac- +counts; relation of accounting to manage- +ment procedures + +Managers; reports to, 274 +Materials; accounting procedure, +255; purchase of, 258 + +Manufacturing account statement, +Cha. XXXVI. XXXVII. XXXVIII. +Merchandise account; use of, 38, +40 +Minute book; use of, 185 +Mixed accounts: defined, 19'; ex- +plained, 37-38 + +Net profit; disposition of, 40-41 + +300 +INDEX + +Net sales; importance of, 107 +New York, New Haven & Hart- +ford R. R. Co.; considers issue +of securities, 151 +Nominal value defined, 18; 23; +analysis of, 27; closing of, 39; +number of, 27; significance of, +19 +Normal depreciation, 78 +Notes payable journal, 112 +Notes receivable journal, 112 + +Obsolescence; defined, 69 +Opening entries; for partnerships, +92-94 +Operating ratio; significance of, 204 +Orders; production and plants, 255 +Other foregone meaning of, 205 +Overheads; Indirect + +Petty cash; illustrated, 116. +122, 131 +"Posting;" defined, 20 +Preferred stock; cumulative, 150; +premium; assets profit and loss, +172; bonds sold at, 168-172 +Price-making; problem of, 275; +no profit on account; illustrated, +Private ledger; Ch. XXI: practice, +Ch. XXII +Production; modern methods des- +cribed, 36 +Profit and loss account; explained, +37-38; illustrated, 40 +Profit and loss statement; illus- +trated, 42 +Profit and loss subdivisions of, +47-29 + +Profit tax; disposition of, 40; 41; +bonds paid out of, 173-5; how ac- +counted for, 15; how as- +certained and distributed, 80; +methods of use, 199; need of re- +serving, 200 +Promoter; work of, 155 +Partnership; in corporation, 212 +Partners' accounts; illustrated, +37-39 +Purchases journal; illustrated, 107 + +Raw materials; purchase of, 253 +Real account; defined, 18; signi- +ficance of, 19 +Record of subscriptions; use of, +46 +Register of transfers; use of, 185 +Rent expense account; illustrated, +46 + +Reports to executive; in Bethle- +hem Steel Co.; necessity of, + requisition; use of, 255 +Reserves; depreciation, use of, 73-77 +Returned purchases, 112 +Returned sales, 112 + +Sales journal; illustrated, 107 +Salaries accrued; illustrated, 62 + +Petty cash; Ch. XVII + +INDEX +301 + +Sales; net, importance of, 197 +Selling price; profit based on, 275 +Single entry; no nominal accounts +in, 19 +Sinking fund; and bond redemption, 176-7; +and wasting assets, 215; +interest on, 178-9 +Smith, Adam; on division of labor, +Specialized ledgers; described, Ch. +XVI +Specified ledgers; described, 108 +Statement of assets and liabilities, +160 +Statement of assets, liabilities and capital; illustrated, 24 +Stock authorized; opening entry, 135-4 +Stock certificate; defined, 148 +Stock certificate book; use of, 185 +Stock; common vs. preferred, 150 +Stock; defined, 146; factors determining values of 134-141; full-paid, 151 +Stockholder; status of, 147; company's board members, 152 +Stock ledger; use of, 185 +Stock subscribed; opening entry, 156-7 +Subordinate ledgers; function of, Ch. XVI +Subscriptions; payment of, 157; +payments in installments, 158; +payments other than cash, 157- +Supplementary rate plan, 261-64; +criticism of, 264-65 +Surplus account; illustrated, 181; +use of, 180 + +Surplus and capital, 221-3; approximated, 182; disposition of, 182-1; sources of, 182; subdivision of, 182; unappropriated surplus, 220-2 +Taxation; relation to accounts, 5 Transactions; cash and credits, 8; functional classification of, 22; functional classification of, illus- +trated by V.; income tax commen- +cially; recording financial Ch., III, +III'; recording practice, Ch. XVI, +VII', VIII' +Total balance illustrated, 36; na- +ture and purpose of, 35-36; +purpose of trust fund (trust) +Trust deed (trust); Trust sinking fund, 177-179 +Trust fund theory, 213 +Turnover; importance of, 278-279 +United States Steel Corp.; income statement of, 206; shareholders in it, 148 + +Valuation; relation to accounts, 5 Valuation of a new business enterprise, Ch. XI: theory of, Ch. XI: use of +73-77 + +Voucher register. Ch. XXI: illus- +trated by V., 255: 127: 134 +Voucher register; practice. Ch. XX +Voucher system, 126-128 + +Wages accrued; illustrated, 62 Wasting assets: treatment of, 214-15 Working capital: illustrated by W., Working assets; defined, 210 Working capital; defined, 70 + +. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . + +- + +UNIVERSITY OF CALIFORNIA LIBRARY +Los Angeles + +This book is DUE on the last date stamped below. + +Form LB-32c A 58(38764)444 + +UCLA-GSM LIBRARY +HF 5625 S16 + +barcode L 005 041 549 6 + +SOUTHERN REGIONAL LIBRARY FACILITY +barcode A 001 232 000 8 + +SOUTHERN BRANCH, +UNIVERSITY OF CALIFORNIA, +LIBRARY, +LOS ANGELES, CALIF. + +A black and white image of a textured surface, possibly paper or fabric. \ No newline at end of file