Cyclopedia

Like every other special branch of study, the Theory and Practice of Accounts has its own special vocabulary of technical terms. In all literature of accounting and business methods in general, these terms are frequently employed; and the student will find it not only advantageous, but in fact absolutely necessary, to familiarize himself thoroughly with their use.

The commercial terms and definitions in the following list are the ones most commonly used in business. Great care has been exercised in preparing a list that is practical and in making the definitions clear.

DICTIONARY OF COMMERCIAL TERMS

Acceptance—When a draft or bill of exchange is presented to the payer, he writes across the face "Accepted" or "Accepted for payment at ..." and signs his name. It is then termed an acceptance.

Accommodation Note—A note given without consideration of value received; usually done to enable the payee to raise money.

Account—

(a) A statement of debits and credits.

(b) A record of transactions with a particular person or persons, or with respect to a particular object.

Account Books—Books in which records of business transactions or accounts are kept.

Account Current—An account of transactions during the present month, week, or other current period. An open account.

Account Sales—A statement in detail covering sales, expenses, and net proceeds made by a commission merchant to one who has consigned goods to him.

[12]

Accrued; Accrued Interest—

(a) Accumulated interest not payable until a specified date.

(b) Accumulated rent.

Acknowledgment—A certificate to the genuineness of a document signed and sworn to before an authorized official, as a Notary Public.

Administrator—One appointed by the court to settle an estate.

Ad Valorem—According to value. A term used to indicate that duties are payable on the value rather than on the weight or quantity of articles.

Adventure—As used in business, this term signifies a venture or speculation.

[13]

Advice—Information with reference to a business transaction; notice of shipment; notice of draft. Transmitted by letter or telegram.

Affidavit—A statement or declaration made under oath, before an authorized official.

Agent—One authorized to act or transact business for another.

Agreement—A mutual contract entered into by two or more persons.

Allowance—An abatement; a credit for inferior goods, error in quantity, etc.

Annual Statement—A yearly summary of the transactions of a business.

Annuity—An amount payable to or received from another each year for a term of years or for life.

Antedate—To date a document or paper ahead of the actual time of its execution.

[14]

Appraise—To place a value on goods or property. An estimate made for the purpose of assessing duties or taxes.

Appreciation—An increase in value. Real estate may increase in value on account of the demand for property in the immediate vicinity.

Approbation or Approval Sales. Goods delivered to customers with the understanding that if not found satisfactory they are to be returned within a definite period and without payment.

Articles—A collection of merchandise; parts of a written agreement, as "Articles of Association."

Arbitrate—To determine or settle disputes between two or more parties, as settlement of differences between employer and employees.

Assets—All of the property, goods, possessions of value of a person or persons in business.

Assign—To transfer or convey to another for the benefit of creditors.

Assignee—The person to whom the property or business is transferred. Usually acts as a trustee of the creditors.

Assignment—The debtor's transfer or conveyance of his property to a trustee.

Assignor—The debtor who makes an assignment, or transfers property for the benefit of creditors.

Association—A body organized for a common object.

Attachment—A legal seizure of goods to satisfy a debt or claim.

Auxiliary—Books of record other than books of original entry or principal books of account. Books used for purposes of distribution or the gathering of statistics are "auxiliary" books.

Audit—To verify the accuracy of accounts by examining or checking records pertaining thereto.

Average—As applied to accounts, the mean time which bills of different dates have to run, or an average due date for several accounts. Determining the due date is sometimes referred to as averaging accounts.

Balance—The difference between the debit and credit sides of an account. To close an account by entering the amount on the lesser side necessary to make the two sides balance.

Balance Sheet—A statement or summary in condensed form made for the purpose of showing the standing or condition of a business.

[15]

Balance of Trade—The balance or difference in value between the imports and exports of a country.

Bale—The form in which certain commodities are marketed. A bale of cotton, bale of hay, etc.

Bank Balance—The net amount to the credit of a depositor at the bank.

Bank Note—A note issued by a bank, payable on demand, which passes for money.

Bank Draft—An order drawn by one bank on another for the purpose of paying money.

Bank Pass-Book—A small book furnished to a depositor by his bank, in which are entered the amounts of deposits and sometimes the checks or withdrawals.

Bankrupt—A person, firm, or corporation whose liabilities exceed their assets; who are unable to meet their obligations.

Bill—A statement or record of goods bought or sold, or of services rendered.

[16]

Bill of Exchange—An order on a given person or bank to pay a specified amount to the person and at the time named in the bill. The term is more commonly used to apply to orders on another country, being made in triplicate.

Bill of Lading—A receipt issued by the representative of a common carrier, for goods accepted for transportation to a specified point and at a given rate. It is a contract, and, when transferred to a third party, becomes an absolute title to the goods.

Bill of Sale—A written document executed by the seller, transferring title to personal property.

Bill Head—The blank or form on which a bill is made. For illustration, see Bill.

[17]

[18]

Bills Payable—Promissory notes and acceptances which we are to pay.

Bills Receivable—Promissory notes and acceptances which are to be paid to us.

Blanks—Papers or books ruled or printed in suitable form for business records.

Blotter—A book in which are entered memoranda of transactions which are later copied into other books. Also known as a day book.

Bond—A written agreement binding a person to do or not to do certain things specified therein. A negotiable instrument secured by mortgage or other security, binding the maker to pay certain sums on specific dates.

Bonded Goods—Goods stored in a government warehouse, or in bonded cars, bonds having been given by the owner for the payment of import duties or internal revenue taxes when removed.

Bonus—An amount paid in excess of the sum originally agreed upon. A premium or gift—for example, a sum paid to a salesman as extra compensation for making a certain number of sales.

Book Account—A charge or evidence of indebtedness on the books of account not secured by note or other written promise.

Brand—A class of goods. A symbol or name used to designate a specific article. A trade mark.

Broker—One who acts as agent or middleman between buyer and seller.

Brokerage—The commissions or fees paid the broker for his services. Also a term used to designate his business.

Bullion—Uncoined gold or silver.

Call Loans—Loans made payable on demand or when called for.

Cancel—To render null and void; to annul.

Capital—Property or money invested in a business.

Capital Stock—A term used to indicate the subscriptions of all stockholders to the capital of a corporation.

Cartage—The charges made for hauling goods by wagon, or otherwise than by freight or express.

Cash Sales—Sales for which immediate payment is received in contradistinction to sales of goods on credit.

[19]

[20]

Certificate of Stock—A written statement or declaration of the purchase of a specified number of shares of the capital stock of a corporation. An evidence of ownership.

Certified Check—A check, the payment of which is guaranteed by the bank on which it is drawn.

Charges—The expense involved in handling goods or in performing a specific act—as, for example, charges for storage, freight charges, etc. Also a synonym for debits.

Chart—A classified exhibit of the components of a business organization, showing the authority and responsibilities of the members. Grouping of the accounts of a business with respect to their relation to one another.

Charter—To hire a car, ship, or other instrument of transportation. A document defining the rights and duties of a corporation.

Check—An order on a bank to pay to a certain person, or to the order of such person, a specified sum, which sum is to be charged to the account of the drawer of the check.

Clearing House—An exchange established by banks in cities, for their convenience in making daily settlements. The checks and drafts on the different banks are exchanged without the formality of presenting them personally at each bank. A balance is found, and this amount only is paid in cash.

Closing an Account—Making an entry that will balance the account.

Collateral—Pledges of security—as stocks, bonds, etc.—to protect an obligation or insure the payment of a loan.

Commission—A percentage or share of the proceeds allowed for the sale of merchandise—as the pay of a commission merchant for selling a car of flour.

Commission Merchant—One who sells goods on commission. Similar to a broker.

Commercial Paper—Negotiable paper used in business.

Common Law—Law based upon the precedent of usage, though not contained in the statutes.

Company—A corporation; also used to designate partners whose names are not known.

Compromise—To settle an account for less than the amount claimed. To agree upon a settlement.

[21]

[22]

Consideration—The price or money paid or to be paid which induces the entering into a contract by two or more persons.

Consignee—The party to whom goods are shipped. A person to whom goods are sent to be sold on commission is a consignee. The goods so sent are known as a consignment, and the sender is the consignor.

Consul—An agent of the Government, residing in a foreign part, who guards the interests of his own Government.

Contra—On the opposite side—as a contra account.

Contract—A written agreement between two or more persons to perform or not to perform some specified act or acts.

Contingent Assets and Liabilities—Resources or liabilities whose value depends upon certain conditions.

Contingent Fund—A sum put aside to provide for an anticipated obligation; a reserve fund.

Conveyance—A term used to describe certain forms of legal documents transferring from one person to another, title to property or collateral.

Copyright—A right granted to an author or publisher to control the publication of any writing, or the reproduction of a photograph, painting, etc.

Counterfeit—A spurious coin, or bank or treasury note.

Coupon—A certificate detached from a bond, which entitles the holder to the payment of interest.

Coupon Bond—Bonds to which are attached coupons calling for the payment of interest. The coupons, when detached, become negotiable paper.

Credentials—Letters or testimonials conveying authority.

Creditor—One whom we owe; one who gives credit.

Currency—The coin or paper money constituting the circulating medium of a country.

Debenture—A certified evidence of debt. See Bond.

Debit—To charge; to record an amount due.

Deed—A written document or contract transferring title to real estate.

Defalcation—The appropriating to one's own use, of money intrusted to him by another; embezzlement.

[23]

Deferred Bonds—Bonds which are to be paid when some condition is fulfilled in the future.

Delivery Receipt—An acknowledgment of the delivery of goods. Largely used by merchants in the delivery of goods to customers.

Demand Note—A promissory note or acceptance payable on presentation or on demand.

[24]

Deposit—The money placed in custody of the bank, subject to order.

Depreciation—A reduction in the value of property. In a manufacturing plant, buildings and machinery depreciate in value through wear and tear; a residence property may depreciate owing to the nature of a nearby building.

Discount—An allowance or abatement made for the payment of a bill within a specified period. The interest paid in advance on money borrowed from a bank.

Dishonor—Refusal to accept a draft, or failure to pay a written obligation when due.

Dividend—The profits which are distributed among the stockholders of a corporation.

Draft—A written order for the payment of money—usually made through some bank.

[25]

Drawer—The person by whom the draft is made; the one who requested the payment of money by the drawee.

Drayage—Synonymous with cartage.

Due Bill—A written acknowledgment of an amount due; of the same effect as a demand note.

Dunning—Soliciting or urgently pressing the payment of a debt.

Duplicate—A copy of a paper or document; the act of making a copy.

Duty—The tax paid on imported goods.

Doubtful—Of questionable value. We refer to an account as "doubtful" when we question the likelihood of its payment.

Earnest—An advance payment, applying on the purchase price, made to bind an oral bargain.

Embezzlement—See Defalcation.

Exchange—The charge made by a bank for the collection of drafts or checks.

Exports—Commodities sent to another country.

Extend—To set a later date for payment; to add several items and carry the totals to the proper column.

Face Value—The amount for which a commercial paper is drawn.

Facsimile—An exact duplicate or exact copy.

Financial Statement—A term used in the same sense as balance sheet or annual statement.

Fiscal—A financial or business year, in contradistinction to a calendar year. The fiscal year of a business may commence and end on any date—usually on the date on which it was started.

Fixed Assets—Permanent assets acquired by a firm or corporation to enable them to conduct a business. Includes real estate, building, machinery, horses and wagons, etc.

[26]

Fixed Charges—Those charges in connection with the operation of a business which occur at regular intervals, such as rent, taxes, etc.

Fixtures—A fixed asset represented by that part of the furniture not readily removable, such as gas and electric light fixtures.

Folio—A column provided in account books, in which to enter the page numbers of other books from or to which records are transferred.

Footing—The sum or amount of a column of figures.

Foreign Exchange—Drafts on foreign cities.

Freight—The charges paid for the transportation of goods.

Gain—The increase in value of assets or profit resulting from a transaction or transactions.

Gauging—Measuring the liquid contents of casks or barrels.

Going Business—A term used to designate a business in actual operation. Goodwill or the reputation of a business has a value so long as the business is in operation, or keeps going. When a business is discontinued, only the physical assets or actual properties owned by the business are of value.

Good Will—The monetary value of the reputation of a business over and above its visible assets; the value of a business name.

Gross—The entire amount in contradistinction to the net amount—as gross weight or gross profit.

Guarantee or Guaranty—Surety for the maintenance of quality or the performance of contracts.

Honor—To pay a promissory note when due; to accept or pay a draft.

Hypothecate—To deposit as collateral security for a loan.

Import—To bring goods into the country.

Income—The receipts of a business.

Income Bonds—Bonds on which the payment of interest is contingent on profits earned. If the interest is passed on account of lack of funds, the holder of the bond has no claim.

Indemnity—Security against a form of loss which has occurred or may occur—as fire insurance, against loss by fire.

Indorse—To guarantee the payment of commercial paper by writing one's name on the back.

Indorsee—The person to whom a paper is indorsed.

[27]

[28]

Indorser—The person who guarantees payment; the one who indorses.

Infringe; Infringement—To trespass upon another's rights—as infringement of a patent or copyright.

Installment—An account or note the payment of which is to be made in several parts, at stated intervals.

Insolvent—Unable to pay one's obligations.

Instant—Principally used in correspondence to indicate the present month.

Insurance Policy—A contract between an insurance company and the insured.

Interest—The sum or premium paid for the use of money; one's share in a business or a particular property.

Inventory—An itemized schedule of the property or goods belonging to a business.

Investment—Money paid for goods or property to be held; not for speculation.

Invoice—A list of goods bought or sold. See Bill.

Jobber—One who buys from manufacturers and sells to retailers; a middleman.

Job Lot—An incomplete assortment of goods to be disposed of in a lump. Usually indicates small portions or remnants of a stock, the bulk of which has been sold.

Joint Stock—Property owned in common by several individuals known as stockholders.

Leakage—An allowance for waste of liquids in transit; refers particularly to liquids shipped in casks.

Lease—A written agreement covering the use of property during a specified period, at a stated rental.

Legal Tender—The lawful amount to be offered in payment of an obligation. Bank notes or other currency which passes for money.

Lessee—One who receives a lease. The lessor makes it.

Letter of Advice—A letter giving notice of some act in which the one receiving the advice has an interest—as making a shipment, notice of draft, etc.

Letter of Credit—A letter which authorizes the receiving, by the holder, of credit to a stated amount. Principally used by travelers to secure credit from foreign bankers.

[29]

Liabilities—The obligations or debts of a firm, corporation, or individual.

License—Permission, usually granted by a municipality, to conduct a specified business.

Liquidation—The closing-out of a business or an estate.

Loss and Gain—The amount of profits or losses of a business.

Maker—One who signs a note.

Manifest—A list or schedule of the articles in a ship's cargo, or of the goods comprising a shipment.

Maturity—The time when an obligation or an account is due.

Mercantile Agency—A company which obtains and keeps for the use of its customers information showing the standing of business firms.

Merchandise—The stock in trade, or goods bought to be sold again.

Money Order—An order instructing a third party to pay money to the person named. A form in which money is transmitted.

Monopoly—The exclusive control of the manufacture or sale of an article.

Mortgage—A temporary transfer of title to land, goods, or chattels to secure payment of a debt.

[30]

Mortgagor—One who gives a mortgage. The one to whom the mortgage is given is the mortgagee.

Negotiable—An agreement or any commercial paper which can be transferred by delivery or endorsement—as a bank note or promissory note.

Net—Less all charges or deductions. Gross assets less liabilities leaves net capital; gross income less all expenses leaves net profit; etc.

Nominal—Having no actual existence; exists in name only.

Obligation—Indebtedness.

Open Account—An account which has not been paid.

Opening Entries—The entries made in the books when it is desired to open the accounts of a business.

Option—The right to be the first purchaser; a privilege.

Orders—Requests for the shipment of goods.

Original Entry—The first record made of a charge or credit which becomes the basis of proof of the account.

Overdraw—To draw a check for a greater amount than the drawer has on deposit in a bank.

Par—Face value.

Partnership—A firm; a union of two or more persons for the transaction of business or the ownership of property.

Payee—The one to whom money is to be paid. The one who pays the money is the payer.

Per Annum—By the year.

Per Cent or Per Centum—By the hundred.

Per Diem—By the day.

Personal Account—Any account with an individual, firm, or corporation.

Personal Property—All property other than real estate.

Petty Cash—A term used to signify small expenditures in actual cash.

Postdate—To date ahead; after the real date.

Post—To transfer amounts from books of entry to the ledger, which is the book of final record.

Power of Attorney—Authority to act for and in the name of another in business transactions.

Preferred Stock—Stock which participates in the profits before any dividend can be paid on the common or ordinary stock.

[31]

Premium—The amount paid above par value; the amount paid to an insurance company for insurance against loss.

Present Worth—The net capital of an individual.

Proceeds—The amount realized from a sale of property.

Profit and Loss—Synonymous with loss and gain.

Promissory Note—A promise, signed by the maker or makers, to pay a stated sum at a specified time and place.

Pro Rata—A distribution of money or goods in proportionate parts.

Protest—A formal notice acknowledged before a notary that a note or draft was not paid at maturity, and that the maker will be held responsible for the payment.

Quotation—A price named for a given article or for services.

Ratify—To approve; to sanction the acts of an agent.

Raw Material—Material to be manufactured into other products—as iron ore, pig iron, lumber, etc.

Real Estate—Primarily refers to land, although buildings are frequently included.

Rebate—An allowance or deduction. See Allowance.

Receipt—An acknowledgment that money or something of value has been received.

Receiver—One appointed to take charge of the affairs of a corporation, either solvent or insolvent, and administer its affairs under orders of the court.

Remittance—Money or funds of any character transmitted from one place to another.

[32]

[33]

Renewal Note—A new note given to take the place of a note that is due.

Rent—A payment for the use of property owned by another.

Resources—Synonymous with assets.

Revenue—Income of a business.

Revoke—To recall authority of another to act as agent.

Royalty—A stipulated amount paid to the owner of a mine, patent, copyright, etc., usually based on sales. The owner of a copyright receives a royalty based on the number of books sold.

Schedule—Inventory of goods or statement of prices.

Sight Draft—A draft payable on presentation or at sight.

Solvent—Able to pay one's debts.

Statement—Commonly used to designate a list of bills to customers during a stated period. Also used to designate a financial summary showing profits and losses of a business.

Stockholder—An owner of stock in a corporation or joint stock company.

Storage—The charge for keeping goods in a store or warehouse.

Surety—One who has guaranteed or made himself responsible for the acts of another.

Syndicate—A combination of capitalists, usually temporary, for the conduct of some financial enterprise.

Tare—The amount deducted from gross weights to cover weight of packages—as crates, boxes, barrels, etc.

Tariff—A schedule of prices, as freight tariff. The duties imposed on imports or exports.

Terms—The conditions governing a given sale. "Terms cash" means that payment is to be made as soon as goods are delivered.

[34]

Tickler—Memoranda of matters requiring attention in the future, arranged according to dates.

Time Draft—A draft which matures at some future date.

Trade Discount—The discount allowed by a manufacturer to a jobber or by a jobber to a retailer.

Trade Mark—See Brand.

Ultimo—Principally used in correspondence to designate last month.

Valid—Legal or binding; usually applied to a properly executed contract.

Value Received—Used in notes to indicate that value has been given.

[35]

Void—Without legal force; not binding.

Voucher—A receipt; a document which proves the accuracy of an account or the authority for an expenditure.

Warehouse—A building used for storage purposes.

Warehouse Receipt—A document acknowledging the receipt of goods for storage in a warehouse.

Warranty—An agreement to assume responsibility if certain facts do not prove as represented.

Way Bill—A document containing a list of goods shipped by a railroad.

Wholesale—A business which sells goods in large quantities, usually in original packages and to the trade only.

Working Capital—The capital actually used in the active operations of a business.

COMMERCIAL ABBREVIATIONS

The commercial abbreviations in the following list are in constant[36] use in the various lines of trade, and should be thoroughly understood by the student of accounting.

COMMERCIAL SIGNS AND CHARACTERS

The signs and characters most commonly used in business are the following:

DEFINITION AND OBJECTS OF BOOKKEEPING

1. Bookkeeping is the art of recording the transactions of a business in a manner that makes it possible to determine the accuracy of the records.

The objects of bookkeeping are:

(a) To exhibit a record of the separate transactions of a business.

(b) To furnish statistical information in respect to any particular class of transactions.

(c) To exhibit the financial standing or condition of a business.

[38]

When properly assembled the bookkeeping records become accounts (for definition, see Dictionary of Commercial Terms).

If correct methods are used, the bookkeeping records will be assembled or grouped in a manner to show their exact nature and their bearing on the status of the business, or the standing of the account.

2. Debit. The term debit designates those items in an account representing values with which we have parted, or transferred to another person or account. Debits are always placed on the left side (or in the left-hand column) of an account. Debits to persons are of the following classes:

(a) The transfer of merchandise.
(b) The rendering of services.
(c) The use of something of value.

Examples—

(a) We sell to John Doe two tons of coal at $7.50 per ton. We debit his account with the amount.

(b) We render services to Thos. Ryan for which he is to pay us a stated fee. We debit his account with the amount of the fee.

(c) We are to pay rent for the use of our offices. Our landlord debits us with the amount.

3. Credit. The term credit designates those items in an account representing value which we have received or which has been transferred to us. Credits are always placed on the right side (or in the right-hand column) of an account. Credits to persons are of the following classes:

(a) The receipt of merchandise or money.
(b) The rendering of services.
(c) The use of something of value.

Examples—

(a) John Doe pays us $10.00 on account. We credit his account with the amount.

(b) Our attorney makes a charge for legal services. We credit his account with the amount.

(c) We rent or lease property to another; and when payment is made, we credit his account.

4. Rules for Debit and Credit. Debit and credit are the fundamental principles of bookkeeping. The general rules to be followed in debits and credits are:

[39]

Debit cash when you receive it.
Debit a person when you trust him.
Debit a person when you pay him.
Credit cash when you pay it out.
Credit a person when he trusts you.
Credit a person when he pays you.

5. Balance. When the two sides of an account differ in amount, it is said to show a balance. If the debit side of the account is the larger, the difference is a debit balance. If the credit side of the account is the larger, the difference is a credit balance.

Example—If we debit John Doe's account for two tons of coal at $7.50 a ton, or $15.00 (see Example (a), Article 2), and credit his account with $10.00 paid (see Example (a), Article 3), the debit side of the account is $5.00 greater than the credit side. Therefore it shows a debit balance.

METHODS OF BOOKKEEPING

6. There are but two methods or systems of bookkeeping, and they are known as single entry and double entry. No matter in what form bookkeeping records are kept, the method must be either single or double entry.

Single entry is used only in very small businesses or by those who do not understand the advantages of double entry.

SINGLE ENTRY

7. As the name indicates, single entry is a single record of the transaction—that is, a record of one phase of the transaction only.

Example—John Doe's account would show that he received two tons of coal, but there would be no corresponding account to show that our supply of coal had been diminished.

Single entry fails to fulfil the object of bookkeeping, as it does not exhibit the true financial condition of the business, and is incapable of proof of accuracy.

DOUBLE ENTRY

8. Double entry is a system of making two entries (or a double record) of every transaction. In every business transaction, two distinct factors are involved—namely, that which is received, and that which is parted with. If we sell a given quantity of a commodity, we part with it, and the sale takes from or decreases the value of that particular commodity in our possession. If we sell for cash, the[40] transaction adds to our cash possessions; while if the value of the commodity is debited or charged to the account of a customer, it adds to the amount we are to receive from that customer.

9. Principle of Double Entry. Double entry is a system of debits and credits. One writer expresses it as a system of opposing contra things.

The fundamental principle of double entry is that there must be a corresponding credit for every debit.

Example—When we sell John Doe two tons of coal, we debit his account; but we have decreased the value of our stock of coal, and to complete the double entry, we credit coal account (or Merchandise, as the account representing our stock in trade is sometimes known). When he pays us money, we credit his account, and debit cash.

10. Advantages of Double Entry. The principal advantages of double entry bookkeeping are that the system permits of making an accurate exhibit of the standing of the business; it exhibits the profits and losses; it shows the sources of profits and the causes of losses; it permits of proof of the accuracy of the records.

11. Account books are ruled with special forms which adapt them to bookkeeping records. The forms of ruling are many and varied to suit the requirements of different classes of business. Rulings for double entry bookkeeping do not differ materially from those used in single entry. For double entry, at least two amount columns must be provided—one for debits, and one for credits.

The most common form of ruling is known as journal ruling. A book with this ruling is also known as a journal ledger.

The words in parentheses explain the purpose of the different columns. The abbreviations Dr. (debit) and Cr. (credit) are sometimes[41] written at the head of the amount column; but most bookkeepers omit them, as the position of the columns indicates their purpose.

DEMONSTRATION

To illustrate the manner of entering transactions in accounts, we show in the accompanying diagrams how the transactions used in the foregoing examples would appear in the proper accounts.

[42]

EXAMPLES FOR PRACTICE

1. On journal ruled paper, which can be procured at any stationer's, write up the account of John Doe as per example given in Articles 2 and 3.

2. Write up the account of John Doe, showing also the accounts necessary to complete the double entry, as per example in Article 11.

3. Write up the accounts covering the following transactions, by the single entry method:

Nov. 16. Sold to James Stevenson 4 cords of wood, at $4.75 per cord. Sold to Andrew White 2½ tons of coal, at $6.00 a ton.

Nov. 17. Sold to Wm. Johnson 1 ton of coal, at $7.00 a ton.

Nov. 19. Received from James Stevenson $12.00 cash, to apply on account.

Nov. 20. Received from Wm. Johnson $7.00 in payment of account.

4. Write up the same accounts by the double entry method, using a merchandise account to represent all classes of merchandise sold.

CLASSES OF ACCOUNT BOOKS

12. Account books are of two classes: (a) those in which complete records of transactions, or complete accounts, are kept; (b) those which contain particulars of individual transactions which must afterward be transferred to books of the (a) class.

Books of the (a) class are known as principal books or books of record; that is, they contain the final or permanent record of an account.

Books of the (b) class are of two kinds: (ba) books of original entry; (bb) auxiliary books.

Any book which contains the first (or original) record of a transaction is a book of original entry (ba).

[43]

Any book in which records contained in books of original entry (ba) are assembled, to be transferred later to principal books (a), is an auxiliary book.

Any book used for the purpose of assembling statistical information is an auxiliary book.

The books most commonly used in double entry bookkeeping are: Order Book, Day Book, Cash Book, Journal, Sales Book, Purchase Book, Ledger.

13. Order Book. An Order Book is a book of original entry in which is entered a record of each order or request for the shipment or delivery of merchandise. The record shows the name and address of the customer, the kinds and quantities of goods wanted, and the prices at which they are to be sold.

The ruling of the order book varies according to the nature of the business. A simple form of ruling is shown.

14. Day Book. A Day Book is a book of original entry in which are entered full particulars of each completed transaction. These records are afterwards assembled in auxiliary books, from which they are transferred to the principal books.

The use of the day book was formerly universal, but it has been discarded by modern bookkeepers as its use involves unnecessary labor. The records formerly kept in the day book are now made directly in certain books then known as auxiliary, which makes of them books of original entry. The ruling of the day book is shown.

15. Cash Book. A Cash Book is a book of original entry containing records of all transactions which involve either the receipt or payment of cash. The records in the cash book are in fact a complete account with cash. We debit cash for all money received, and credit cash with all money paid out; therefore, the difference between the[44] total footings of the debit and credit sides of the cash book shows the amount of cash which we should have on hand. Since we cannot pay out more than we receive, the debit side should be the larger, unless both sides are equal, which shows that we have paid out all the cash received.

The amounts entered on the debit side of the cash book are transferred (or posted) to the credit side of the account of the one from whom the cash is received.

The amounts entered on the credit side of the cash book are posted to the debit side of the account of the one to whom the cash is paid.

There are many special forms of ruling for cash books, with separate columns for entering certain classes of receipts and payments of a special nature. The ruling of the cash book should be made to meet the requirements of the business in which it is to be used. A simple form of ruling is shown.

It will be noted that the left-hand page is used for the debit side, while the right-hand page is used for credits. This is the only account kept with cash.

[45]

16. Journal. A Journal is a book in which separate transactions are entered in a manner to preserve the balance necessary in double entry—that is, showing the proper debit and credit for each transaction. The journal is used for making adjusting entries, and it was formerly the custom to copy into this book from the day book the particulars of every transaction. Records are now made in the journal directly, which makes it a book of original entry.

The records in the journal are transferred or posted to the debit and credit sides of the accounts which they represent.

The journal is frequently combined with the cash book, and is then called a cash journal. An ordinary form of journal ruling is shown in Article 11.

17. Sales Book. A Sales Book is an auxiliary book in which is kept a record of all goods sold, showing name of purchaser, quantity and kind of articles, prices, and amounts.

A sales book is a journal of sales. The amounts of individual sales are posted (transferred) to the debit side of the accounts of the purchasers. The footings of the sales book are carried forward until the end of the month, when the total amount is posted as one item to the credit side of the merchandise account, completing the double entry.

The merchandise account has been universally used in the past, all purchases being debited and all sales credited to this account. Certain other accounts (which will be explained later) are now recommended by leading accountants, to take the place of the merchandise account.

Sales books are usually ruled to meet the special needs of each business, separate columns being provided for a record of special classes of sales, or sales of special kinds of goods.

18. Purchase Book. A Purchase or Invoice Book is the opposite of the sales book, being used for a record of all purchases made. Like the sales book, the totals are carried forward to the end of the month, and posted as one item to the debit side of the merchandise account. The amounts of the separate transactions are posted daily to the credit of the persons from whom the goods are purchased.

[46]

The purchase book is a purchase journal, and the ruling is the same as that of other journals.

19. Ledger. The Ledger is the principal book, in which particulars of every transaction of every nature are summarized. It is, in fact, a transcript of all other books of the business except those used solely for statistical purposes.

The ledger is the book which contains the final or complete records of all dealings, either with an individual or with respect to a specific class of transactions—as expenditures for a certain purpose, or receipts of a given character, or sales of a given kind of goods.

A transcript of the ledger accounts exhibits the progress and standing of the business.

Like other books, ledgers are now made with special forms of ruling, depending on the purpose for which they are to be used. The old style or common form of ledger ruling is shown (p. 35).

20. Invoice or Bill. An Invoice or Bill is an itemized statement or record of goods sold by one person to another. The invoice or bill is used in every line of business. A conventional form of invoice is shown (p. 5).

RECORDING TRANSACTIONS

21. The records of transactions in the journal which show what accounts are debited and what accounts are credited are called journal entries. The act of making these entries is known as journalizing.

It was formerly the custom to journalize each individual transaction from the day book, but in modern bookkeeping the journal is used only for adjusting and special entries.

22. Posting. When the record of a transaction is transferred to the ledger from a book of Class (b), it is said to be posted. The act of making the transfer is called posting.

The original method was to itemize all transactions in the ledger, but the present custom is to post the totals only.

23. When a record is transferred from one book of Class (b) to another, or posted to the ledger, the page number of the book to or from which it is transferred or posted is entered in the column known[47] as the folio column. This is done that the transaction may be traced from one book to another. The presence of the page number also serves as a check to show that the item has been posted.

Example—An item is to be posted from page 1 of the sales book to page 10 of the ledger. In the folio column of the ledger will be entered "S 1" indicating that the item will be found on page 1 of the sales book. In the folio column of the sales book will be entered "10" indicating that the item has been posted to page 10 of the ledger.

24. Ledger Index. An index to the ledger is necessary to enable us to find the accounts. In small ledgers the index is placed in the front of the book itself, while for large ledgers a separate index book is used. There is a distinct advantage in this, as the index book can be kept open on the desk while posting is being done, and the names found much quicker than when it is necessary to turn the leaves of the ledger to find the index.

When an account is opened in the ledger, the name should be written in the index, followed by the page number. The names in the index are arranged in alphabetical order, each name being written under the letter of the alphabet corresponding to the first letter in the name. For example:

In a large index, one or more pages are used for a letter; while in a small index, several letters may be placed on the same page.

SAMPLE TRANSACTIONS

25. The following sample transactions are carried through the books described in this section, showing the proper entries and postings (see pp. 40-43). The day book has been omitted, as it is practically obsolete, not being used by progressive bookkeepers.

Muskegon, Mich., Nov. 1, 1907.

I, Robert B. Robinson, have this day commenced business as a wholesale dealer in groceries and provisions. I have rented the store located at 68 Pine St., from Geo. Baker, at $40.00 a month. My resources and liabilities are as follows:

[50]

[51]

[52]

[53]

[54]

PROMISSORY NOTES

26. A promissory note is a form of commercial paper much used in business. Goods are sold on specific terms—that is, to be paid for in a certain time after date. Profits are based on the supposition that the bills will be paid when due. When not so paid, the debtor is virtually borrowing money from the creditor, and should pay interest for the use of that money just as he would if he had borrowed it from a bank. To settle the account when it is not convenient to pay cash, it is customary to give a promissory note for the amount, plus interest, payable on a certain date. The promissory note is more convenient for the creditor; for when it bears his endorsement, his bankers will discount it, thus giving him the money for use in his business. Even though he may not discount it, the promissory note is better for the creditor, as it gives him a definite promise to pay, which he does not have when the debt is represented by an open account.

27. Bills Receivable and Bills Payable. The commercial term for promissory notes accepted by us is Bills Receivable. The commercial term for promissory notes given by us is Bills Payable. The term "bill" is used in this connection for the reason that a promissory note is a negotiable instrument, and when indorsed it becomes practically a bill of exchange. The accounts in the ledger which represent notes receivable and notes payable are called Bills Receivable Account and Bills Payable Account.

The bills receivable account is debited when a note is received, and credited when a note is paid. The balance of bills receivable account shows the amount of unpaid notes payable to us.

The bills payable account is credited when we give a note and debited when we pay a note. The balance of bills payable account shows the amount of the notes that we owe.

28. Bill Book. For the purpose of keeping a record of bills receivable and bills payable, a book known as a bill book is used. Any draft, note, due bill, or other written promise to pay a specified sum at a stated time, should be treated as a note or bill—receivable or payable, as the case may be. The bill book is an auxiliary book, and the record kept is usually treated as a memorandum only, records of each transaction being made in the journal. The form shown (p. 45) is one in common use.

[55]

[56]

29. Acceptances. A draft when accepted—that is, when it becomes an acceptance—has the same value as a promissory note, for it is a definite promise to pay on a specified date. Drafts are used for the collection of accounts in other cities than the one in which the creditor's place of business is located. A draft may call for payment a certain number of days after date, or it may call for payment at sight. The former is known as a time draft, while the latter is a sight draft.

30. Discount and Exchange. When a promissory note is taken to the bank for the purpose of raising money, it is customary for the banks to calculate the interest for the time the note is to run, and to deduct this from the principal, giving the borrower the net amount only. In other words, the interest is paid in advance, and such advance payment of interest is called discount.

When a draft is collected through a bank, a small fee is charged, and this fee is called exchange. Exchange is also charged for the collection of out-of-town checks, especially if they are drawn on banks in small towns and cities.

BANK DEPOSITS

31. When money is deposited in a bank, a list of the items in the deposit is made on a blank known as a deposit ticket or deposit slip. These deposit tickets are furnished by the bank for the convenience of its customers.

32. Signature Card. Money deposited in a bank can be withdrawn only by presenting a written order or check, signed by the one in whose name the money is deposited. That the bank may know that money is not paid on checks that do not bear the correct signature, each depositor is required to leave at the bank the signature or signatures which are to be honored. These signatures are written on a card, known as a signature card, which the bank keeps for reference.

33. Check Books. Blank checks are usually bound in book form, the checks themselves being perforated so that they can be easily removed. These check books are in most cases furnished by the bank. The number of checks on a page varies, but is seldom more than four. When a check is written, the number, date, name, and amount should be written on the face of the stub. To keep a convenient[57] record of the balance in the bank, it is well to enter a list of all checks and deposits on the back of the check stubs.

34. Pass Book. The bank pass-book should be taken to the bank whenever a deposit is made, as it contains the bank's receipt for all money deposited.

35. Indorsement of Checks. Before a check can be deposited in the bank, it must be indorsed by writing the name of the payee across the back. The indorsement should be on the back of the left end of the check—never on the right end. Several forms of indorsement are shown (p. 48). When the name only is written, it makes the check payable to the bearer, and is known as a blank indorsement. When the words "Pay to" are used, the check becomes payable to the one whose, name appears immediately under the words. It can only be paid to him in person or credited to his account at any bank at which he may deposit the check. A check indorsed with the words "Pay to the order of" permits of a further transfer, and provides a receipt from the one to whom it is so indorsed. When a check is to be deposited, the proper indorsement is "For deposit only." This is of special importance when deposits are sent by messenger. Such indorsements usually include the name of the bank, and are made with a rubber stamp.

36. Depositing Cash. It is a good plan to deposit all cash[58] received and to pay all bills by check, except such small items as are paid from petty cash. By doing this, all transactions pass through the bank, providing a receipt in every case in the form of a canceled check bearing the indorsement of the payee.

37. Treatment of Petty Cash. It is customary in business establishments to keep on hand a certain sum of cash out of which to pay items of expense such as office supplies, etc., when the amount is too small or it is not convenient to write a check.

The best way to handle this is to draw a check for a certain amount, and keep this money separate from the cash received from day to day. At the end of the month, or sooner if the fund is low, draw a check payable to cash for the amount paid out and charge it to expense. This will leave the fund intact.

Example—We shall suppose the amount of petty cash to be kept on hand to be $25.00; and the amount paid out, $15.60, leaving $9.40 on hand. A check will be made for $15.60, to be charged to expense through the regular cash book. The cash will be drawn from the bank, and the amount added to the $9.40, making a total of $25.00.

A record of petty cash is usually kept in a small book called a petty cash book. This book has the regular two-column journal ruling. In handling petty cash, great care should be taken to secure a receipt in some form for every payment.

[59]

SAMPLE TRANSACTIONS

38. The following sample transactions taken from the books of W. B. Clark, Ames, Ia., illustrate the use of the papers and accounts explained in this section, and show how the transactions would appear on the books.

Mr. Clark is a shipper of produce, and a retail dealer in coal. His assets and liabilities are as follows:

As he wishes to know how much business he is doing in each department of his business, he keeps accounts in the ledger with both produce and coal instead of one merchandise account. In the sales book, one column is used for coal sales, and one for produce sales. No purchase book is kept, all purchases being posted from the journal or cash book.

[61]

[62]

[63]

[64]

[65]

[66]

[67]
[68]

CLASSES OF ACCOUNTS

39. In double entry bookkeeping, the accounts used may be divided into the two general classes of personal and impersonal. For the purpose of more complete classification, the second class is further subdivided into real, representative, and nominal accounts.

40. Personal Accounts. A personal account is a record of transactions with a particular person or persons.

Examples—

A record of transactions with persons who buy goods from us.

A record of transactions with persons from whom we buy goods.

41. Real Account. A real account is a record of transactions with respect to a particular property. Properties which we possess are termed resources or assets; therefore all real accounts are also asset accounts.

[70]

Examples—

Real estate (land and buildings), Machinery, Furniture, Merchandise, etc.

42. Representative Account. A representative account is a summary of all debit or credit transactions of a particular class with respect to several personal accounts. The debit or credit to this account completes the double entry, and illustrates the rule that in double entry there must be a credit for every debit.

Example—

We sell goods to a number of customers, and the amounts of these sales are debited to their several accounts. To complete the double entry, we credit the total amount of these sales to an account called sales account. The total credits to this account during any given period represent the sales to all customers for the same period, and the sales account is a representative account.

The total debits to all customers' accounts for goods purchased in one month amount to $1,423.62. This amount is credited to the sales account. Likewise the purchases for the same period amount to $947.20, and the several amounts are credited to the personal accounts of those from whom the purchases were made, while a like amount is debited to a representative account known as a purchase account.

43. Nominal Account. A nominal account is a record of transactions having to do with profit and loss; a record of a particular class of expenditures from which no direct returns are expected;[71] any impersonal account which does not come under the classification of real or representative accounts.

Example—

We buy coal to be used in heating our building. The coal is not to be resold, but its use is necessary; it is one of the expenses of conducting the business, and we charge the amount to an expense account. Expense is a nominal account kept for the purpose of showing the total expenses of the business.

44. Merchandise Account. The merchandise account is a real account formerly much used, but discarded by modern accountants. When used, this account is debited with all purchases of merchandise and credited with all sales. The account is also charged with all goods returned by our customers, and credited with all goods which we return to those from whom we have purchased them. Goods returned by our customers are charged at the prices at which they were purchased by the customers; consequently the debit side of the merchandise account does not furnish a true exhibit of our purchases; neither is the credit side a true exhibit of our sales. Since the merchandise account furnished no valuable information, other accounts which exhibit more vital statistics have been substituted.

45. Purchase account is one of the accounts substituted for the merchandise account. This account is charged with all purchases as represented by the footings of the purchase book or purchase journal. This completes the double entry, the separate purchases having been credited to the personal accounts of those from whom the goods were purchased. All returns or other similar[72] deductions allowed on purchase invoices are charged to those from whom the purchases were made and credited to purchase account. The balance of the purchase account then shows the total net purchases.

46. Sales account takes the place of the credit side of the merchandise account. All sales as shown by the footings of the sales book are credited to the sales account, completing the double entry. All returns and allowances are likewise charged to the sales account. The balance of the sales account shows total net sales.

SAMPLE TRANSACTIONS

47. The following transactions, properly recorded in journal sales book, purchase book, and ledger, demonstrate the uses of the merchandise, purchase, and sales accounts explained in the preceding paragraphs:

In the first demonstration, the footings of the sales and purchase books, as well as the returns entered in the journal, are posted to a merchandise account. It will be noted that the debit side of the merchandise account does not represent the actual purchases, and the credit side does not represent the sales.

In the second demonstration, the purchase and sales accounts are used. Total sales are credited to sales account from purchase book, and returns credited from the journal. The balances of these accounts show actual net purchases and sales.

[74]

[75]

[76]

[77]

CLASSES OF ASSETS

48. Asset accounts are accounts representing resources or assets of the business. Assets are classified as Fixed; Active or Floating; Passive or Speculative; Fictitious.

Fixed assets are those permanent forms of property which are a necessary part of the equipment used for conducting the business—such as real estate, buildings, machinery, etc.

Active or floating assets are those forms of property of which the quantity in our possession varies from day to day—as merchandise, accounts, cash, etc.

Passive or speculative assets are those (a) whose values are not readily determined, or (b) whose values are subject to market fluctuations—as, for example, (a) franchises, copyrights, patents; (b) stocks, bonds, or other speculative securities.

Fictitious assets are those which are not represented by tangible property, or which are of value to a going business but would have no market value if the business were closed out or liquidated. These assets are frequently represented by an expense account on the books. The initial advertising expense necessary to launch the business successfully is frequently carried on the books as an asset. The amount of such advertising expense is spread over a stated period, a certain proportion being charged into the regular expense accounts each year until the entire amount is used.

49. Examples of Fixed Assets. The assets of an ordinary mercantile business are of the first two classes only—fixed and floating. The most common forms of fixed assets of such a business are:

Real Estate—generally understood to include land and buildings owned and used in the business.

Furniture and Fixtures—represented by office and store furniture, shelving, counters, stoves, furnaces or other heating appliances, lighting fixtures.

Horses and Wagons or Trucks—including all horses, wagons, trucks, harness, or motor-cars used for hauling goods.

If the business is one in which these classes of property are dealt in, they become active assets. Land, for example, would[78] be one of the active assets of a business organized to buy and sell real estate.

50. Examples of Floating Assets. The active or floating assets of a mercantile business are:

Merchandise—meaning the stock in trade or goods dealt in.

Accounts—the open accounts of customers who owe for goods purchased.

Notes or Bills Receivable—all outstanding notes payable to the firm.

Cash—the amount of cash on hand and in the bank.

51. Examples of Passive Assets. Passive or speculative assets are more frequently found on the books of a manufacturing business, a corporation, or a business a part or whole of which has been sold by the original owners. Examples of these assets are:

Patents—A manufacturer owns a patent the value of which depends upon future profits resulting from the manufacture and sale of the article which it covers. It is customary to place a value on the patent, and to consider it an asset of the business.

Good-Will—A man has established a business which has become extremely profitable, and in selling the business he places a certain value on the reputation or goodwill which he has built up.

Speculative—A firm having a surplus not required in the business sometimes invests it outside of the business with the expectation of realizing a profit by selling at an advanced price. They buy grain or provisions, mining or railway stocks, etc. Or an investment may be made in the stock of some manufacturing business to be established in the town, because such an enterprise, if successful, will naturally result in an increase in their own business.

52. Examples of Fictitious Assets. Fictitious assets are seldom found on the books of other than corporations where a large initial promotion expense is involved. A good example of a fictitious asset is:

Advertising—A business house may decide on an average annual expenditure for advertising; but to be effective, the expenditures for the first two or three years may necessarily exceed this amount. The excess is considered as an investment since it is expected that as the business becomes firmly established the annual expenditure can be reduced to an amount even less than that estimated, gradually[79] reducing the amount carried on the books as an asset. To illustrate:

REVENUE ACCOUNTS

53. The term revenue (synonymous with income) is used to designate those items which, when brought together in an account, exhibit the profit or loss of the business.

Revenue receipts are the receipts which originate exclusively from the sale or exchange of the commodities or things of value for the handling of which the business has been organized.

Revenue expenditures are those expenditures connected with the expense of operation or administration of a business, including such items of expense as postage, printing, salaries, rent, etc.

Revenue accounts is a term used to designate those accounts that represent revenue receipts or revenue expenditures.

54. Revenue Receipts. The account representing revenue receipts in all lines of business (though it may sometimes be known by another name) is the sales account—a representative account showing net sales. Net sales, less cost of goods sold, represent gross profits. Gross profits, less cost of conducting the business (revenue expenditures) represent net profits.

55. Expense. The broad term expense account represents all revenue expenditures; but in modern bookkeeping the amounts of the different classes of expense are kept separate as far as possible.

Some of the most commonly used divisions of expense are: Rent; Insurance; Taxes, Interest and Discount; Out Freight and Express; Heat and Lights; Labor; Salaries, etc. It is customary to open one account in the name of General Expense, to care for expenditures not included in special accounts.

[81]

56. Insurance—A nominal account to which is charged all sums paid to insurance companies (called premiums), in consideration of which our property is insured against loss by fire, cyclones, or other disaster.

57. Rent—A nominal account to which is charged all sums paid for use of property which we rent or lease from others for the benefit of our business—usually the buildings in which our business is transacted or in which our goods are stored.

58. Taxes—A nominal account to which are charged all taxes and license fees paid on account of property owned or business transacted.

59. Interest—This is a nominal account which should include only interest charges paid or interest earned on account of capital. When we borrow money or discount a note, we do it because we need cash capital, and the interest paid is a capital expense or a direct source of loss. Exchange charged for the collection of notes and drafts belongs in the same class. All interest paid for the use of money, and exchange paid for the collection of notes, drafts, and checks, should be debited to interest account. When we save the discount by prepayment of bills, the discount is earned by the use of capital. All such earnings are a direct source of profit and should be credited to interest account. Discount paid on notes is interest paid in advance, and should not be confused with discounts allowed to customers for the prompt payment of bills; the latter is a reduction in the price received for our goods, and reduces trading profits. This question is discussed under the head of Cash Discounts.

60. Out Freight and Express—A nominal account which is debited with all transportation charges paid on goods that we ship, whether sales are made at delivered prices or freight is paid as an accommodation to the customer. When goods are sold at f. o. b. prices, and the freight is paid by us as an accommodation to the customer, out freight should be credited and the customer debited.

This should not be confused with in freight, or freight paid on goods received, as such charges add to the cost of the goods and should be charged to the account representing that particular class of goods.

61. Heat and Light—This account is debited with all sums paid for fuel, heating bills, lighting bills, and lighting supplies.

[82]

62. Labor—A nominal account which is debited with all sums paid as wages to mechanics or laborers employed by the business.

63. Salaries—A nominal account which is debited with all salaries paid to managers, salesmen, clerks, and others employed in the administration of the business.

RULES FOR JOURNALIZING

64. Journalizing is one of the most important operations in bookkeeping, since journalizing a transaction involves the selection of the proper accounts to be debited and credited completing the double entry. With the use of separate sales and purchase records, the journal itself is used principally for those entries involving a transfer of values from one account to another. These are frequently referred to as cross entries. The number of possible entries of this class is practically unlimited, and they require careful study on the part of the bookkeeper.

Rules for journalizing are frequently referred to in bookkeeping textbooks; but, since the custom of journalizing every transaction is now obsolete, the term is no longer sufficiently descriptive. A better term to use would be rules for debit and credit, for it is the rules of debit and credit that must be followed when a journal entry is to be made.

65. Three-Column Journal. A three-column journal suitable for a small business is shown above. The third column is used for sales only, while the first two columns are used for regular journal entries. The use of the column for sales answers the same purpose[83] as a sales book, and total sales are posted to the credit of sales account at the end of the month.

SAMPLE TRANSACTIONS

66. For the purpose of demonstrating the principles of debit and credit as exemplified in the journal, the following transactions except those involving cash are journalized in a three-column journal. The third column is used for sales, and it is to be understood that a cash account is kept in a separate cash book.

[85]

[86]

[87]

EXAMPLES FOR PRACTICE

1. After you become familiar with each entry and the nature of the accounts to be debited or credited, journalize the transactions given in Article 66, then compare with the model journal, and see if your work is correct.

2. Journalize the following transactions:

[88]

RULES FOR POSTING

67. The act of transferring all items from the journal, sales book, purchase book, cash book, or other books to the ledger is called posting. All items relating to one account are posted to that account in the ledger; thus all sales are posted to the sales account, and all transactions with a person are posted to the account of that person. Every debit must be posted to the debit side of the corresponding account in the ledger.

68. Routine. The first operation in posting is to open an account in the ledger by writing the name of the account on the line at the head of the ledger page. The month and day are then written in the date column; the page of the book from which the item is posted is written in the folio column, and the amount is placed in the money column. The final operation is to place the number of the ledger page in the folio column of the book from which the item was transferred, directly opposite the item posted.

Posting from Journal. In posting from the journal, all items in the left or debit columns are posted to the debit side of the corresponding ledger accounts, while all items in the credit column are posted to the credit side of the ledger accounts.

The first item in the journal in the preceding section is a debit to Hiram Watson, amount $1.15. It is necessary to open an account in the ledger, which is done by writing Hiram Watson's name at the head of the page, above the date column on the left side of the page; in the date column we write the date, April 2; in the folio column we write the journal page, 1: and in the money column we write the amount, $1.15. The number of the ledger page is now written in the folio column in the journal, directly opposite the name of Hiram Watson.

The second transaction recorded in the journal is a purchase which makes it necessary to open a purchase account in the ledger, to which is debited the amount of the purchase $18.75. The first transaction recorded in the journal is a sale, therefore the credit is to the sales account. Since we are placing all sales in a special column, the amount will not be posted until the end of the month, when the total sales will be posted to the credit of the sales account as one item. In the second transaction, the credit is to a personal[89] account, and we open an account in the ledger with Eureka Milling Co., following the same routine in posting as with debit items, except that the item is posted to the credit side of the account.

Posting from Cash Book. When posting from the cash book, it must be remembered that all items on the left-hand page (which debit cash) must be posted to the credit of some other account; and that all items on the right-hand page (which credit cash) must be posted to the debit of an account in the ledger.

Why cash received is entered on the left-hand page of the cash book, and cash paid out on the right-hand page, is a point not always clear to the bookkeeper. To obtain a clear view of this point, it should be remembered that the cash book is nothing more or less than a ledger account with cash, and cash received is entered on the left-hand page (or debit side) for the reason that any account is debited for what is received or is added to it.

We sell merchandise, for example, and the person is debited because he receives it. We buy real estate; the real estate account is debited because our real estate possessions are added to. Broadly speaking, we (the business) receive the real estate; but, instead of charging the amount to ourselves (the person), we charge it to Real Estate, that we may know the amount of our real estate investment.

A customer pays us cash; cash is debited because our cash possessions are added to. We might charge the amount to our account; but we prefer to charge it to a cash account that we may know how much cash we have on hand. We pay out cash; cash is credited because cash has gone out of our possession. The main point of difference is that we post to other ledger accounts direct from the cash book, which is itself a ledger account, instead of journalizing cash transactions.

If cash transactions were journalized—

Cash

To Person

Person

To Cash

the amounts would be posted to the debit or credits of the cash account in the ledger; but for convenience we keep the cash accounts in a separate book. Journalizing a few of the transactions given will clearly demonstrate the point.

[90]

TRIAL BALANCE

69. A trial balance is a list of the balances of all accounts remaining open in the ledger, together with the balance shown by the cash account. On journal paper, all open accounts are listed by name; the debit balances are placed in the debit column, and credit balances are placed in the credit column; the pages of the ledger are placed in the folio column, opposite the names of the account. Both debit and credit columns are footed, and the footings of the two columns should agree.

A trial balance is taken for the purpose of testing the accuracy of the postings to the ledger; to find out if the ledger is in balance. The trial balance can be taken without considering the balances, by taking the total debit and credit items posted to all open accounts.

While the trial balance shows that for every debit posted to the ledger a corresponding credit has also been posted (double entry principle), it does not absolutely prove the accuracy of the work. If a debit item of $100.00 were posted to the debit of the wrong account, it would not affect the balance of the ledger; but if the item were posted to the credit instead of to the debit of the account, the ledger would be out of balance and the amount that it was outwould be shown by the trial balance.

CLASSIFICATION OF ACCOUNTS

70. The arrangement of the accounts in the ledger is of considerable importance. Since one of the objects of bookkeeping is to exhibit the standing or condition of the business, the accounts should be classified in a manner that will make easiest the assembling of important statistics.

The accounts in the ledger represent either Assets (resources), Liabilities, Profits (gains), or Losses. Every account having a debit balance represents either (a) an asset or (b) a loss. (a) A personal account having a debit balance represents an asset; (b) any expense account having a debit balance represents a loss, as it reduces the chance for profit.

Every account having a credit balance represents either (c) a liability or (d) a profit. (c) A personal account having a credit balance represents a liability—that is, something we owe; (d) a sales account having a credit balance represents a profit because it increases our chance of gain.

[91]

71. Arrangement in Ledger. The foregoing classifications should be kept in mind in arranging the accounts in the ledger. First provide space for the asset and liability accounts; then follow with the profit and loss (or revenue) accounts. As far as possible, keep all asset accounts together, following the same plan with liability and profit and loss accounts.

The accounts are arranged in the trial balance in exactly the same order as they appear in the ledger; and if correctly classified they will show at a glance the assets (except inventories of merchandise) and liabilities of the business. Likewise the profit and loss accounts (also known as revenue accounts—see Article 53) will show total sales, purchases, and expense of conducting the business.

SAMPLE LEDGER ACCOUNTS

72. The ledger accounts shown on pages 80-81, representing the transactions given in the preceding set of sample transactions, demonstrate the proper arrangement of accounts, manner of posting, and the trial balance.

EXAMPLES FOR PRACTICE

1. From the copy of the journal (Article 66) which you have made, post the transactions to the ledger.

2. Post the transactions from the journal you have made (Exercise 2, preceding section) to the ledger.

3. Make a trial balance of the ledger accounts.

[92]

[93]

[94]

TREATMENT OF CASH DISCOUNTS

73. Cash discounts are discounts allowed for prepayment of bills. They are frequently confused with bank discounts (or interest collected in advance when notes are discounted), but are of an entirely different character.

When the price is made, the profits are calculated with the idea that the customer may take advantage of the cash discount; that is, the price after the discount is deducted includes a legitimate profit. We cannot debit the customer with the amount of the bill less the discount, for we do not know that he will take advantage of the discount; and so, the charge to the customer and credit to sales account is an amount which may never be received.

If the bill is paid less the discount, the amount deducted reduces our profit on the sale. It is not an allowance for the use of capital, for we can probably borrow money at 6 per cent, while the discount may be 5 per cent or more for anticipating payment 30 days or less. 74. Discounts Allowed. Cash discounts allowed must eventually come out of the profits arising from the sale of the commodities in which we are trading. There are two methods of charging cash discounts, either of which is considered correct:

(1) Open an account called Discounts on Sales, and charge to it all discounts allowed for the prepayment of bills. When the books are closed, the total will be charged against trading profits. This method is coming into general use, and may be considered standard.

(2) Charge to Sales Account directly all discounts allowed, treating them as allowances. The balance of the sales account will then represent net sales after returns, rebates, and cash discounts have been deducted. One feature to recommend this plan is that sales account does not show a fictitious volume of sales.

75. Entering Cash Discounts in Cash Book. When we receive payment from a customer who has deducted the cash discount, the discount must be taken account of in entering the payment, as the customer is to receive credit for the full amount. We might enter the cash payment in the cash book, and make a journal entry of the cash discount, but this would necessitate two postings from separate books.

[95]

A better method, and one which has become standard, is to provide a cash discount column in the cash book. When a column has not been provided for this purpose, a narrow column can be ruled in on the cash received or debit side of the cash book. This is carried as a memorandum until the end of the month, when the total is posted to the debit of discount on sales. Two ways of making the entry are shown (p. 84).

In Example No. 1, the cash discount is entered in the discount column, and the net cash received is entered in the cash column. When the payment is posted, two entries are made in the ledger. One advantage in this is that reference to the account of R. L. Brown & Co. shows at a glance whether they are taking advantage of cash discounts.

In Example No. 2, the cash discount is entered in the proper column, but the gross amount is entered in the cash column. The payment is then posted in one item, and reference to the ledger account does not show whether the payment of $100.00 is all cash or part discount. It is necessary, also, to deduct the footing of the discount column from the footing of the cash column to ascertain the amount of cash received. For these reasons the method shown in Example No. 1 is recommended.

76. Cash Discounts Earned. When we take advantage of the discount offered for the prepayment of bills, the discount earned can be considered a legitimate source of profit. Our own selling prices for goods purchased to be resold are based on the prices at which they are billed to us, without considering a possible saving by discounting our bills. Whether or not we discount our bills is largely a question of capital, and such earnings are legitimate profits entirely outside of regular trading profits. Discounts earned should be treated as interest earned and credited to interest account, from which they will find their way into profit and loss account.

[96]

[97]

PROFIT AND LOSS

77. The profit and loss account is a summary account made up of the balances of all income and expenditure (revenue) accounts in the ledger, the balance of this account representing the net loss or net gain of the business.

It is advisable to show the net profits for each year; and to accomplish this, it is customary to transfer the balance of profit and loss account at the end of the year. In single proprietorships and partnerships, the net gain is transferred to proprietor's or partner's investment accounts, while in a corporation it is usually transferred to a surplus account. A loss is transferred to a deficiency account.

78. Trading Account. This is a subdivision of profit and loss account intended to exhibit the gross profit derived from the manufacture or purchase and sale of goods in which the business is organized to trade. These profits are known as trading profits. Just what items of income and expenditure enter into trading profits or losses is an important question in the science of accounts. A safe rule to follow is to debit trading account with the cost of goods sold, including cost of preparing them for sale. In a manufacturing business the cost represents cost of raw materials and cost of manufacture. Credit the account with net income from sales, arrived at by deducting from gross sales all returns, allowances, rebates, and cash discounts.

All expenses incurred in selling the goods, and all expense of administration of the business, should be charged to profit and loss account proper. All profits arising from other transactions than trading should be credited to profit and loss. These include interest received on past due accounts, on notes, or for money loaned; discount earned by the prepayment of bills; profits from the sale of real estate or any property other than that in which the business is trading.

Trading Account, How Constructed. The trading account is made up by charging total inventory at the beginning of the year and purchases during the year; crediting net sales and inventory at the close of the year, the balance representing the gross profit.

[98]

Turnover. It is desirable to know the cost of goods sold. This is known as the turnover, on which percentages of profit are based. The turnover may be found by deducting the present inventory from the debit side of the trading account.

79. Manufacturing Account. In a manufacturing business it is very desirable to know the cost to produce the goods; and for this purpose a subdivision of profit and loss, called manufacturing account, is used. The manufacturing account is debited with inventory of materials at the beginning of the year; purchases of material; labor or wages in factory, and all other expenses of manufacture; and credited with inventory of materials at the close of the year. The balance represents cost of manufactured goods to the trading division.

The principal value of these subdivisions of profit and loss lies in the fact that they reveal not only the amount but the sources of profits and losses, which is one of the important functions of accounting.

[99]

The profit and loss account of a professional or other non-trading concern need not be subdivided as explained for a trading concern. In a non-trading business, all accounts representing revenue receipts or revenue expenditures are transferred direct to profit and loss account.

80. Transfer of Gross Profit. The gross profit from trading is now transferred to the credit of profit and loss account, and this account is debited with the balances of all revenue expenditure accounts. Continuing the illustration from Article 78, we have:

81. Transfer of Net Profit. The net gain is transferred to the credit of proprietor's account in a single proprietorship.

[100]

MERCHANDISE INVENTORY ACCOUNT

82. The accounts now open in the ledger, other than proprietor's account, exhibit all assets and liabilities of the business with the exception of the present inventory, which is included in the trading account. The amount of the inventory is transferred to the debit of a merchandise inventory account.

The books are now said to be closed, there being no open accounts except those representing assets or liabilities of the business.

BALANCE SHEET

83. A statement of the assets and liabilities of a business is called a balance sheet. If the assets exceed the liabilities, the difference is the present worth. If the liabilities exceed the assets, the business is insolvent, and the difference or balance shows the amount of insolvency.

The balance sheet is prepared from the ledger balances after the books have been closed. In arranging the accounts on a balance sheet, the assets should be listed first, followed by the liabilities. The balance will agree with the balance shown in the proprietor's or investment account.

For the business of a single proprietor, it is customary to list the accounts in the following general order:

First—Cash in bank and office.

Second—Open accounts and bills receivable.

Third—Merchandise per inventory, store fixtures, etc.

Fourth—Real estate.

The first two classes are termed active or quick assets, as they can be most readily converted into cash.

The liabilities represented by credit balances, are listed in the order of their urgency:

First—Open accounts due others.

Second—Bills payable.

Third—Mortgages or bonds payable.

[101]

The third class represents secured liabilities, while the first two represent unsecured liabilities.

Continuing the previous illustration, we find the balance sheet of our imaginary ledger to be as follows:

SAMPLE TRANSACTIONS

84. At the end of the first year, the trial balance of a single proprietorship was as follows:

The inventory at the end of the year was $4,962.30; at the beginning of the year, there was no merchandise in stock. The books are to be closed into trading and profit and loss, and a balance sheet prepared.

When closing the books, all entries necessary to adjust the balances of ledger accounts should be made through the journal. When an audit is made, it is difficult to trace the entries unless they are plainly stated in one group, which is provided when they are made in the journal. The making of entries in the ledger directly, also increases the opportunity for fraudulent entries. Never make original entries in the ledger.

EXAMPLE FOR PRACTICE

From the following trial balance prepare trading account; profit and loss account; and balance sheet.

[103]

[104]

[105]

[106]

[107]

JOURNALIZING NOTES

85. When a note is received by us or we give our note to another, it is necessary to make a journal entry in order that there may be a proper record of the transaction on our books. Careful study is sometimes necessary to determine just how the entry should be made, and the following illustrations will serve as a guide.

86. When Received. When we receive a note, we debit bills receivable and credit the maker—that is, the person who gives us the note.

We receive a note from Samuel Smart for $100.00 payable in 30 days. The journal entry is:

87. When Paid. When this note is paid, we debit cash and credit bills receivable. The entry is made in the cash book on the debit side which debits cash and credits bills receivable.

88. When Collected by Bank. Perhaps the note was collected through our bank; in that case, the bank, instead of sending us the cash, will credit the amount to our account. The bank may, also, charge a small fee for collecting the money; consequently the amount placed to our credit will be the sum collected, less their fee. The entry in the journal would then be:

89. When Discounted. At the time we received Samuel Smart's note, we may have needed the money for immediate use in our business. We would then take the note to the bank, endorse it payable to the bank, when they would discount it, giving us credit for the net proceeds. Since the money is advanced to us, the bank would charge us interest for its use, which amount would be deducted[108] from the whole amount, leaving the net proceeds. This amount would then be available for immediate use. The note is then the property of the bank; it has gone out of our possession and we have received the cash. The note is not paid, and in discounting it we have created a liability to the bank. Remembering that one of the functions of bookkeeping is to exhibit the true nature of our assets and liabilities, we open a Bills Discounted account in the ledger. The entry is:

90. When a Note Drawing Interest is Discounted. The above transaction presupposes that the note is given without interest; but if it were given with interest, the bank would simply add the interest to the principal and deduct the discount from the total. In the case the sum of the principal and interest ($100.00 + .50 = $100.50) is $100.50, and the discount $.50, which would leave $100.00 as the net proceeds. If the amount of the note were larger or the interest was figured for a longer time, it would make a difference. Suppose the amount of the note to be $2,000.00, time 30 days, interest 6% per annum.

Since the net amount realized is less than the face of the note, we need not consider the interest earned, but the entry would be:

91. When a Note Drawing Interest is Paid. But suppose Samuel Smart's note is $100.00 for 30 days, with 6% interest, and that the note is kept by us and the money is paid directly to[109] us when due. We shall then receive the interest, in addition to the face of the note, making a total of $100.50. The entry would then be made in the cash book on the debit side, and would be:

92. When a Discounted Note is Not Paid. When we discounted Samuel Smart's note of $100.00 for 30 days without interest at the bank, we were obliged to endorse it, which had the effect of a guarantee of payment. If not paid when due, the amount would be charged to our account at the bank. The note would again come into our possession, and the amount must be debited to some account, the credit being to the bank.

We have previously credited the amount to bills discounted, and our entry is:

But suppose the transaction to have been the one described in Article 90. The note returned to us is $2,010.00, that being the amount of principal and interest. Our bills receivable and bills discounted accounts show the item as $2,000.00 only. Therefore we must include the $10.00 in our adjusting entries which will be:

93. When a Note is Past Due. The above entries leave this unpaid item in the bills receivable account. If the business is one in which a large number of bills are discounted, it will be advantageous to show past due bills receivable by themselves, leaving bills receivable account to represent only paper not due. The entry for a bill unpaid at maturity would be:

[110]

94. When a Note is Renewed. We shall now suppose that Samuel Smart finds that he will be unable to pay his note when due. He comes to us and offers a new note for 30 days, which we accept. He prefers to add the interest due on the original note to the principal, and makes his note for $100.50. We then return the original note and the entry is:

The effect of this transaction is that we have received a new note for $100.50, and we debit bills receivable. This new note pays an older one which goes out of our possession, so we credit bills receivable. The amount of the new note includes the interest on the old, and we credit interest.

We might have gone about this in a roundabout way by making these entries:

These entries would leave the accounts in exactly the same condition as our first entry, and would serve no useful purpose. This is given as an illustration of how several entries may be made when the transaction could be as clearly explained in one.

95. When Renewed Note Has Been Discounted. If the note which Samuel Smart has renewed has been discounted at the bank, we must reimburse the bank in some manner before we can obtain possession of the original note. The most simple way to handle this transaction will be to give the bank our check to pay the note. The entry is:

[111]

We shall then treat the new note as previously explained. If, after getting it recorded on the books, we wish to discount this note, the entries will be exactly the same as when we discounted the original note.

96. When We Give or Pay a Note. When we give our note, the effect of the transaction is just the opposite of the receipt of a note. Instead of adding to one class of our resources we are increasing one class of our liabilities, in return for which we either receive something of value or reduce our liabilities of another class. When we give our note in payment of a loan, we receive cash; if we buy goods and give a note in payment, we receive merchandise; if we give a note in payment of an account, we simply reduce our liabilities of one class and add to those of another.

The entries necessary to properly record transactions involving notes given or bills payable, are not so complex as is the case with transactions involving bills receivable. The following illustrations cover transactions likely to arise in the average business:

We give our note for $100.00 payable in 30 days, without interest, to Western Grocer Co. in settlement of an account. The entry is:

When we pay the note the entry is:

97. When Our Note Has Been Discounted. The Western Grocer Co. has either discounted the note or placed it in the bank for collection, and it is presented for payment by the Merchants Bank. We give them a check in payment, and the entry is:

[112]

The entry in this case is the same as in the previous illustration, with the exception of the explanation.

98. When We Pay Our Note With Interest. We give our note to Western Grocer Co. for $100.00 payable in 30 days, with interest at 6%. We pay the note by check, and the entry is:

99. When We Discount Our Note. We wish to borrow $100.00 from the bank, and give our note for the amount, payable in 30 days. The bank discounts the note, placing the proceeds to our credit. The rate of interest charged is 6%. Our entry is:

100. When We Pay for Goods With Our Note. We buy goods from Michigan Milling Co. to the amount of $100.00, and tender our note at 30 days with interest, in payment. This makes it unnecessary for us to open an account with Michigan Milling Co. and the entry is:

101. When We Renew a Note. When this note is due, we find it inconvenient to pay, and give a new note for 30 days, adding the interest now due to the face of the original note. The amount of the new note is $100.50, and the entry is: