PART II

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_.

_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; 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 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:

--Sept. 20-- Bought from American Furniture Co., Grand Rapids 2 #four-drawer V F cabinets $11.00 $22.00 4 #35 card sections 4.20 16.80 1 #35 top 1.75 1 #35 base 1.25 $41.80 ------

--21-- Bought from Morgan Printing Co., Chicago 5,000 #1 plain ruled #35 cards .90 4.50 3,000 #1 ledger " #35 " 1.50 4.50 2,000 #1 " " #46 " 2.00 4.00 13.00 ------

--22-- Sold to Ackers & Co., 224 Randolph St. 4 #35 sections 5.50 22.00 1 #35 top 2.25 1 #35 base 1.75 26.00 ------

--23-- Sold to Thompson & Co., 94 Monroe St. 2,000 #1 plain ruled 35 cards 1.25 2.50

--24-- Received from Ackers & Co. 1 #35 section 5.50 (Damaged)

--25-- Shipped to American Furniture Co. 1 #35 section 4.20 (Received in bad order)

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.

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 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 reducing the amount carried on the books as an asset. To illustrate:

Annual advertising appropriation for ten years is $10,000.00.

Expended first year $18,000.00 Deduct appropriation 10,000.00 ---------- To advertising inventory 8,000.00

Expended second year 15,000.00 Deduct appropriation 10,000.00 ---------- To advertising inventory 5,000.00

Expended third year 10,000.00 Deduct appropriation 10,000.00 ---------- To advertising inventory 000.00

Appropriation fourth year 10,000.00 Expended " " 8,000.00 ---------- To credit advertising inventory 2,000.00

Appropriation fifth year 10,000.00 Expended " " 9,000.00 ---------- To credit advertising inventory 1,000.00

Appropriation sixth year 10,000.00 Expended " " 10,000.00 ---------- To advertising inventory 000.00

Appropriation seventh year 10,000.00 Expended " " 9,000.00 ---------- To credit advertising inventory 1,000.00

Appropriation eighth year 10,000.00 Expended " " 8,000.00 ---------- To credit advertising inventory 2,000.00

Appropriation ninth year 10,000.00 Expended " " 7,000.00 ---------- To credit advertising inventory 3,000.00

Appropriation tenth year 10,000.00 Expended " " 6,000.00 ---------- To credit advertising inventory 4,000.00 ---------- ---------- $13,000.00 $13,000.00

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.

=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.

=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 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.

--April 2--

Sold to Hiram Watson on account 10# gran. sugar 5½c. $.55 3 bars soap .25 2# starch 5 .10 2 cans corn .25 $1.15 ----

--2--

Paid electric light bill--cash 4.75

--2--

Sold for cash sundry merchandise 8.60

--3--

Bought from Eureka Milling Co. on account 5 bbls. XXX flour 3.75 18.75

--4--

Sold to J. L. Jarvis on account ¼ bbl. flour 1.25 2# butter .32 .64 1# coffee .30 10# lard .11 1.10 3.29 ----

--4--

Bought from J. L. Jarvis on account Fire Insurance on stock and fixtures, $3,000.00 for one year from date 18.00

--5--

Paid Eureka Milling Co. cash 18.75

--6--

Sold to J. L. Jarvis on account 1# cheese .16 1 doz. eggs .22 1# baking powder .50 3 bu. potatoes .65 1.95 2.83 ----

--6--

Bought from Atlas Safe Co. on account 1 office safe 50.00 Paid cash for repairs to door lock .40 Sold for cash sundry merchandise 16.70

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:

--April 10-- Bought from David Cole & Son on account 100 bbls. flour at $4.60 $460.00

--10-- Sold to L. H. Stebbins on account 20 bbls. flour at 5.10 102.00

--10-- Sold to Henry Waterbury on account 30 bu. beans 2.00 60.00 20 " oats .37 7.40

--11-- Paid to David Cole & Son Cash on account 160.00 Gave them my note for 30 days 300.00

--11-- Received note from L. H. Stebbins for 30 days to balance account 102.00

--12-- Paid cash for harness oil .35

--12-- Henry Waterbury paid cash on account 40.00

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 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.

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 _out_would 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.

=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.

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.

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.

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.

=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.

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.

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.

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:

DEBIT BALANCES Bank Account $ 764.20 Sundry Open Accounts Receivable 1,127.30 Bills Receivable 475.00 Furniture and Fixtures 325.00 Cash in Office 68.50 Purchases 9,571.40 Expense 675.00 Discount on Sales 96.75 Interest 72.10 -------- 13,175.25

CREDIT BALANCES

Proprietor (Investment) 2,500.00 Bills Payable 2,000.00 Sundry Accounts Payable 1,761.60 Sales 6,913.65 -------- $13,175.25

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.

TRIAL BALANCE

Proprietor (Investment) $7,600.00 Bills Payable 4,000.00 Accounts Payable 1,470.00 Bank $1,262.84 Accounts Receivable 2,693.11 Bills Receivable 4,360.00 Merchandise Inventory 6,277.76 Furniture and Fixtures 750.00 Purchases 7,105.78 Expense 1,416.30 Discount on Sales 112.65 Interest 44.20 Sales 10,985.70 Cash 121.46 ---------- ---------- $24,099.90 $24,099.90

Inventory at end of year $6,493.06.

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:

Bills Receivable $100.00 Samuel Smart $100.00 30-day note dated Sept. 10

=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.

Bills Receivable Samuel Smart's note $100.00 due Oct. 10th

=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:

Bank $99.85 Interest and Discount .15 Bills Receivable $100.00 Smart's note due Oct. 10th Collected by bank.

=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 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:

Bank $99.50 Interest .50 Bills Discounted $100.00 Discounted Smart's note due Oct. 10th.

=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.

Principal $2,000.00 Interest 30 days 10.00 Total $2,010.00 Less interest on $2,010.00 for 30 days 10.05 ---------- $1,999.95

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:

Bank $1,999.95 Interest and Discount .05 Bills Discounted $2,000.00

=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 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:

Bills Receivable $100.00 Interest and Discount .50 Samuel Smart's note due Oct. 10, paid to-day.

=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:

Bills Discounted $100.00 Bank $100.00 Samuel Smart's note not paid at maturity.

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:

Bills Receivable $10.00 Interest added to Smart's note not paid when due Bills Discounted $2,000.00 Bank $2,010.00 Smart's note not paid at maturity.

=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:

Bills Receivable Past Due $2,010.00 Bills Receivable $2,010.00 Smart's note past due.

=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:

Bills Receivable $100.50 Interest and Discount .50 Bills Receivable $100.00 New note given by Samuel Smart to cover note due Oct. 10, with interest.

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:

_To cancel the old note:_ Samuel Smart $100.50 Bills Receivable $100.00 Interest, and Discount .50 Note due Oct. 10th.

_To enter the new note:_ Bills Receivable $100.50 Samuel Smart $100.50 New note 30 days to take up note due Oct. 10th.

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:

Bills Discounted $100.00 Interest and Discount .50 To Bank $100.50 Gave check to take up Samuel Smart's note.

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:

Western Grocer Co. $100.00 Bills Payable $100.00 Note 30 days without interest

When we pay the note the entry is:

Bills Payable $100.00 Bank $100.00 Check to Western Grocer Co. to pay note due Oct. 10.

=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:

Bills Payable $100.00 Bank $100.00

Check to Merchants Bank to pay our note to Western Grocer Co., due Oct. 10.

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:

Bills Payable $100.00 Interest and Discount .50 Bank $100.50

Paid Western Grocer Co. note due Oct. 10, by check No. 10.

=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:

Bank $99.50 Interest and Discount .50 Bills Payable $100.00 Note for $100.00, 30 days discounted at bank.

=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:

Purchases $100.00 Bills Payable $100.00 Invoice #16 from Michigan Milling Co. Gave note for 30 days with interest at 6%.

=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:

Interest and Discount $ .50 Bills Payable 100.00 Bills Payable $100.50 New note given Michigan Grocer Co. to renew note due Oct. 10, $100.00, interest $.50, 30 days, with interest.

=102. When We Renew Our Discounted Note.= When our note given to the bank is due, we find it inconvenient to pay the entire amount. We give the bank a check for $50.00, and a new note at 30 days for the balance. The bank always collects interest in advance, so we shall be obliged to give them our note for $50.00 plus the interest, or $50.25. In effect, the bank discounts our note for $50.25, the proceeds, $50.00, paying the balance of our note now due. The entry is:

Bills Payable $100.00 Interest and Discount .25 Bank $50.00 Bills Payable 50.25 Gave check for $50.00 to apply on note due at bank to day. Discounted new note for $50.25, payable in 30 days.

JOURNALIZING DRAFTS

=103.= When a draft has been accepted, it should be treated the same as any other form of bill receivable or bill payable. If we make a draft on a customer, which he accepts, it becomes a bill receivable. If we accept a draft drawn on us, it becomes a bill payable.

Sight drafts are frequently made use of as a convenient means of collecting an account. Such drafts are taken to our bank for collection, but they do not give us credit for the amount until the draft is paid. Drafts of this kind, which are placed with the bank for collection only, are not treated as bills receivable, as we do not credit the account of the one on whom it is drawn until payment is received.

=104. When Our Sight Draft is Paid.= We draw on Samuel Smart at sight for $50.00 through our bank. When paid, we receive credit at the bank for the amount, less collection charges. The entry in our journal is:

Bank $49.90 Interest and Discount .10 Samuel Smart $50.00 Paid sight draft

=105. When Discounting Time Draft.= Samuel Smart owes us $100.00, and while the amount is not due for 30 days, we have reason to believe that he will accept a draft payable in 30 days. We accordingly draw on him through our bank. Our reason for doing this is that his acceptance will be a promise to pay, and our bank will then discount the draft. The draft is accepted, and our bank notifies us that the proceeds have been placed to our credit, the draft being discounted at 6%. The entries are:

Bills Receivable $100.00 Samuel Smart $100.00 Samuel Smart accepted our 30-day draft Bank 99.50 Interest and Discount .50 Bills Discounted $100.00 Discounted Samuel Smart's 30-day acceptance.

=106. When We Accept.= When we accept a draft payable at a future date, it immediately becomes a bill payable and should be so treated.

We accept the 30-day draft of the Western Grocer Co. for $200.00. Our journal entry is:

Western Grocer Co. $200.00 Bills Payable $200.00 Accepted 30-day draft.

=107. When We Pay an Acceptance.= When this draft is due, we pay it, giving our check to the bank. The entry is:

Bills Payable $200.00 Bank $200.00 Gave check to pay draft of Western Grocer Co.

=108. When We Pay a Sight Draft.= Instead of accepting a time draft, we pay a sight draft of Western Grocer Co. for $200.00. In this case it has not become a bill payable, and our entry is:

Western Grocer Co. $200.00 Bank $200.00 Check to Merchants Bank to pay sight draft.

=EXAMPLES FOR PRACTICE=

The following examples are to be journalized by the student after he has become thoroughly familiar with the transactions previously explained:

--Nov. 6--

Received from Jackson & Co. their note for $214.00 without interest, payable in 30 days, in full settlement of account.

--Nov. 6--

Received from David Newman his note for $650.00 with interest at 6%, payable in 30 days, in settlement of account. We discounted this note at First National Bank.

--Nov. 7--

Paid our note given Oct. 6, to National Spice Co., amount $150.00 with interest at 6%. This note was paid by check #11 to Mechanics Bank.

--Nov. 8--

Bought from Valley Mills on our note for 30 days with interest at 6%, 100 bbls. flour at $5.25 per bbl.

--Nov. 9--

Discounted our note for $1,000.00, 30 days, at First National Bank.

--Dec. 6--

Jackson & Co., paid their note due to-day, $214.00.

--Dec. 6--

David Newman paid $300.00 on his note due to-day. Gave new note for balance due, payable in 30 days with interest at 6%.

--Dec. 8--

Paid our note to Valley Mills by check #11.

--Dec. 9--

Paid $500.00 on our note to First National Bank by check #12. Gave new note for $500 payable in 30 days, interest at 6%.

--Dec. 9--

Andrew White paid sight draft, $42.60, through First National Bank, exchange $.10.

--Dec. 9--

J. D. Jenks accepted our 30-day draft for $140.00, which we discounted at First National Bank at 6%.

--Dec. 10--

Accepted a 30-day draft for $75.00 drawn by Eastern Woodenware Co.

--Dec. 11--

Gave First National Bank our check for $90.00 to pay 60-day draft of Farwell & Graves accepted by us Oct. 11.

--Dec. 12--

Gave First National Bank our check for $41.00 to pay sight draft of Dun & Co.

SINGLE PROPRIETOR'S AND PARTNER'S ACCOUNTS

RETAIL BUSINESS

=1.= In this section we demonstrate complete sets of books for a retail business, showing every necessary step in bookkeeping from the opening of the business. The first set represents a small business in which the simplest methods are adequate. The business is owned by a single proprietor who opens a retail grocery store.

=2. Opening the Books.= Remembering that bookkeeping is the art of recording the transactions of a business, the first thing to be done is to make the proper opening entry of the books. Being the opening entry, it should record the first fact of importance, which is that the business has been opened. Since bookkeeping should exhibit the exact financial standing of the business, the next step will be a complete statement of assets and liabilities.

It is customary to make this opening entry on the first page of the journal. The entry should be a plain statement of facts which can be readily understood by anyone.

=3. Books Used.= In this set, the books used are Journal, Cash Book, and Ledger. In addition a _counter book_ or _blotter_, corresponding to a day book, is used. This is a rough book in which are recorded sales on account, cash purchases, and sometimes payments on account. The entries are merely memoranda of transactions, made when they occur, to be later entered in the regular books. No bookkeeper being employed, it would be inconvenient for the proprietor or his clerk to go to the desk and make a detailed entry every time a sale is made, and so the transaction is entered in pencil in the blotter. Bookkeeping records must be permanent, and should always be made in ink; and it is advisable, when possible, to have all entries made in one handwriting.

A sample page of the blotter, which illustrates its use, is shown (p. 3). The marks // indicate that the item has been transferred to journal or cash book.

=4.= The ledger used is one with journal ruling. In posting, each item is entered in the ledger. This is a very satisfactory plan for a small business, as the items of which each charge is composed can be seen at a glance. More space is required for an account, but the saving in time in making statements is a distinct advantage, especially when the proprietor is his own bookkeeper. With the ordinary style of ledger, it is necessary to refer to books of original entry to find the items.

=5. Statements.= Customers frequently request detailed statements of account which will give full particulars of each transaction, including each item. At other times the proprietor sends statements to his customers, with a request for payment. When this is done, it is not necessary to enter each item, a statement of the balance due being sufficient unless an itemized statement is requested by the customer.

=6.= The business is opened by William Webster on the 21st day of November, 190-. He is to conduct a retail grocery business, and has rented a store from Wm. Bristol at a monthly rental of $30.00. His resources consist of cash $600.00; merchandise, consisting of a miscellaneous stock of groceries, $964.50; personal accounts due him as follows: Henry Norton, $25.00; L. B. Jenkins, $22.70. His liabilities consist of two accounts due for goods purchased, as follows: Brewster & Co., Rochester, N. Y., $115.20; Warsaw Milling Co., $64.00. The opening entry, which furnishes a permanent record of these facts, is shown (p. 4).

=7. Proprietor's Account.= The proprietor's account is an account representing capital when the business is owned by a single proprietor. When the business is started, this account is opened in the name of the proprietor (Wm. Webster, Proprietor), and to it is credited his net investment. From time to time the books are closed and the proprietor's account then receives credit for the net profits or is debited with the net losses of the business.

When the proprietor withdraws money or goods from the business for his personal use, the amount may be charged to his investment or proprietorship account, or to a personal account (Wm. Webster, Personal) opened in his name. The latter method is recommended by some writers for the reason that the proprietor's personal expenses, or those of his family, are then separated from the expenses or capital expenditures of the business. As a customer of the business, he is placed on the same basis as any other individual. But the personal account must be closed some time; he must pay it in cash, or close it into profit and loss so that it finally operates to reduce his net investment.

It appears, therefore, that the question whether withdrawals are charged to the investment or a personal account is largely a matter of personal preference.

=8.= The opening entries having been made, the books are now ready for the recording of the regular transactions of the business. The following transactions are shown in the model set, but the blotter is omitted, all transactions being entered in the journal and cash book. The sample page of the blotter described in Article 3 is sufficient to illustrate its use.

SAMPLE TRANSACTIONS

=9.= --Nov. 21-- Sold to Henry Norton on account, 10# sugar .05½ $.55 2 cans corn .25 1 can peas .15 3# rice .30 ------ 1.25

--Nov. 21-- Sold to John Smallwood on account, 5# butter 1.00 4# lard .50 1 doz. eggs .25 ------ 1.75

--Nov. 21-- Cash sales 14.10

--Nov. 22-- Sold to Harry Webster on account, 7 bars Lenox soap .25 1 pkg. gold dust .20 matches .15 ¼ bbl. flour 1.35 ------ 1.95

--Nov. 22-- Bought for cash 10 doz. eggs .21 2.10

--Nov. 22-- Cash sales 11.27

--Nov. 23-- Bought from H. Klink & Co., Buffalo, N.Y., on account, 278# hams .11 30.58 200# lard .07½ 15.00 ------ 45.58

--Nov. 23-- Sold to F. W. Bradley on account, 2 bu. potatoes 1.60

--Nov. 23-- Sold to C. D. Glover on account, 1 bbl. apples 3.25 5 gal. vinegar 1.25 ------ 4.50

--Nov. 23-- Cash sales 13.20

--Nov. 24-- Bought from John Smallwood on account, 100 bu. potatoes .60 60.00 Paid him cash 25.00

--Nov. 24-- Sold John Smallwood on account, 2# cheese .32 1 bottle vanilla ext. .35 1# coffee .35 1# tea .60 ------ 1.62

--Nov. 24-- Sold to A. C. Maybury on account, 1# royal baking powder .50 1# corn starch .10 1# soda .10 2 pkgs. jello .20 ------ .90

--Nov. 24-- Cash sales 15.10

--Nov. 25-- Paid Brewster & Co. Cash 115.20

--Nov. 25-- Sold to L. B. Jenkins on account, ½# pepper .20 ½# cloves .20 ¼ bbl. flour 1.35 ------ 1.75

Sold to D. E. Johnson on account, 12# ham .14 1.68

--Nov. 25-- Received from Henry Norton Cash 26.25

--Nov. 25-- Cash sales 13.00

--Nov. 26-- Sold to Wm. Bristol on account, 11# ham .14 1.54 1 qt. bottle olives .50 2# coffee .70 20# sugar .05½ 1.10 ------ 3.84

--Nov. 26-- Credit Wm. Bristol 1 month's rent 30.00

--Nov. 26-- Sold to C. D. Glover on account, ¼ bbl. flour 1.35 1# baking powder .50 7 cakes borax soap .25 ------ 2.10

--Nov. 26-- Paid clerk hire 8.00

--Nov. 26-- Cash sales 18.70

--Nov. 28-- Sold to H. N. Shaw on account, 1 bu. potatoes .80 1 doz. cans corn 1.50 ------ 2.30

--Nov. 28-- Sold to Watkins Hotel Co., on account, 10 bu. potatoes .75 7.50 50# lard .10 5.00 20# ham .13½ 2.70 ------ 15.20

--Nov. 28-- Cash sales 9.45

--Nov. 29-- Bought from Lowell & Sons 500# sugar .04¾ 23.75 50 gal. molasses .30 15.00 ------ 38.75

--Nov. 29-- Bought from Star Salt Co. 10 bbls. salt .80 8.00

--Nov. 29-- Sold to R. H. Sherman on account, 1# coffee .25 1# chocolate .45 1 qt. olive oil 1.35 ¼# ginger .15 ¼# pepper .15 1 pkg. mince meat .10 2# lard .25 ------ 2.70

--Nov. 29-- Cash sales 14.35

--Nov. 30-- Received from F. W. Bradley Cash 1.60

--Nov. 30-- Paid Warsaw Milling Co. Cash 64.00

--Nov. 30-- Sold to John Smallwood on account, 1 bbl. salt 1.10

--Nov. 30-- Sold to D. E. Johnson on account, 10# lard .10 1.00 1# baking powder .50 1 pk. apples .35 ------ 1.85

--Nov. 30-- Bought for cash 5 bu. apples 1.00 5.00

--Nov. 30-- Cash sales 17.90

At the close of business, Nov. 30, a trial balance of the ledger accounts is taken. No attention is paid to the accounts which are closed, the open accounts being only included in the trial balance.

The proprietor wishes to know whether the business has made or lost money, and what the gross and net profits (or the losses) have been. To obtain this information the books are to be closed. Before this process can be completed, it is necessary to know the value of goods now in stock--that is, to _take an inventory_.

INVENTORY

=10.= An inventory is taken by counting, measuring, or weighing all goods in stock. The stock is listed on journal paper or in a day book, listing first the quantity; second, the name of the article; third, the price; fourth, the value of each item.

=11. Pricing.= In taking an inventory, _all goods must be priced at cost--never at the selling price_. If selling prices are used, credit is being taken for profits which cannot be earned until the goods are sold. It may even be found advisable at times to list goods at less than cost. Some classes of goods deteriorate; at other times the stock may contain merchandise that was purchased on a high market, on which prices have been materially lowered. To price such goods at actual cost prices is creating fictitious values. Conservatism is necessary in pricing an inventory, for the taking of credit for unearned profits is wrong in principle.

This inventory shows the cost of goods in stock to be $1,042.77.

=12. Closing the Books.= This is the process of balancing all revenue accounts, and transferring the balances to the profit and loss account, the balance of the account being finally transferred or closed into the capital, surplus, or deficiency account, as the case may be. We have learned that in a single proprietorship, profit and loss is finally closed into capital or investment account.

This being a trading business, the first step is to open a _trading account_ for the purpose of finding the gross profit. The accounts now in the ledger to be closed into trading account are _merchandise_, _inventory_, and _purchases_, which are entered on the debit side; and _sales account_, which is entered on the credit side. The present inventory is now entered on the credit side; the two sides of the account are footed; and the difference or balance represents the gross gain or loss.

=13.= The trading account shows a credit balance or gross profit of $92.00. This balance is now closed into profit and loss, being entered on the credit side. The only revenue account now open is expense, which shows a debit balance of $38.00. This is a revenue expenditure, representing a loss, and is therefore transferred to the debit or loss side of profit and loss account.

Profit and loss shows a credit balance or net profit of $54.00. The balance closes into the account of the proprietor, where it is entered on the credit side increasing his net investment to $1,487.00.

NOTE--Complete postings from page 4 of the journal.

=14.= _A balance sheet_ should now be prepared; and if our work is correct in every particular, the present worth will correspond in amount with the net investment shown by the proprietor's account.

BALANCE SHEET, Nov. 30

_Assets_

Cash $535.62 Accounts Receivable 57.63 -------- $593.25

Merchandise Inventory 1,042.77 1,042.77 1,636.02 --------

_Liabilities_

Sundry Accounts Payable 149.02 149.02 -------- Present Worth $1,487.00

EXERCISE

=15.= On a certain date the assets and liabilities of John Noble are as follows:

ASSETS: cash, $450.00; inventory, $762.50; due from sundry debtors--John Lane $30.00, Henry Watson $17.60, D. B Olin $27.60.

LIABILITIES: due sundry creditors--Perkins & Co. $90.00, F. C. Watkins $54.00.

The following transactions take place:

April 1: Sold to Wm. Aultman on account, 1 bbl. apples $4.50; 10 bu. corn @ 48c. Bought from Mills & Sweet, 114# cheese at 11c.

April 2. Sold to Henry Watson on account, 10 bu. potatoes @ 75c; D. B. Olin paid his account in cash; sold for cash, miscellaneous merchandise $17.20.

April 3. Sold to Andrew Nevin on account, 20# lard at 11c, 14-1/2# ham at 15c; sold to Homer Miller on account, 1/4 bbl. flour, $1.55, 3 doz. eggs @ 26c, 20# sugar @ 5-1/4c; sold for cash, miscellaneous merchandise $18.60.

April 4. Paid Perkins & Co., cash 90.00; sold Marvin Stetson 1 bbl. apples $4.50, 2# coffee @ 40c, 1# tea @ 60c; Wm. Aultman paid his account in full; sold for cash, miscellaneous merchandise $16.30.

April 5. Bought from Geneva Milling Co. 100 bbls. flour @ $3.25; sold to D. Wiseman 2 bbls. salt @ $1.10, 10# sugar @ 5-1/2c; sold for cash, miscellaneous merchandise $14.90.

April 6. Sold F. C. Watkins 20 bu. corn @ 35c, 10# butter @ 30c, 1 vinegar cask $1.50; paid F. C. Watkins cash $42.50; Henry Watson paid his account in full; paid 1 month's rent $35.00; paid clerk hire $7.00; sold for cash, merchandise $27.90.

At the close of business, the merchandise inventory was $987.75.

Using journal, cash book, and ledger, open the books, enter and post these transactions Make a trial balance and a balance sheet, showing present worth. Does the business show a profit or a loss, and how much? How is the amount determined from the balance sheet?

Close the books into the proper accounts, showing gross and net profit and loss. To what account is the profit or loss transferred?

RETAIL COAL BOOKS

=16.= The proprietor wishes to retire from the grocery business, and, having an opportunity to sell the stock at inventory value, does so, receiving $1,042.77 in cash. He immediately pays sundry accounts payable, $149.02. He collects all accounts receivable except the amount due from L. B. Jenkins, $24.45. This leaves him with assets consisting of cash $1,462.55; due from L. B. Jenkins, $24.45; and no liabilities.

He next engages in the retail coal business, investing his entire assets. He rents an office and yards at $40.00 per month, and engages a teamster who owns a team and wagon, paying him $24.00 per week.

=17.= In this business there are introduced a sales book, with which the student is familiar, and a form of ledger known as _center ruled_ (p. 25). This form at first appears slightly confusing; but there is considerable advantage in having the debit and credit columns side by side, as balances can be calculated more readily.

=18.= The cash book used is one having three columns. On the debit side the third column is used for cash sales. The footing is carried forward until the end of the month, or any other time when a trial balance is desired, when the amount is posted in one item. All bills are paid by check, the money received being deposited in the bank.

=19.= An auxiliary book used in this business is a _scale book_, in which are recorded the weight of wagon, gross and net weights. Weighing the delivery wagons used by the business each morning is sufficient; this weight can be used on each load hauled for the day. And on deliveries made by the regular wagons, it is not necessary to record the weight of each load in the scale book; knowing the tare, the net weight can be recorded in the sales book.

The principal use of the scale book is to record the weights of coal sold at the yards and hauled by the purchaser. When a wagon comes to the yard for a load of coal, it is of course necessary to obtain first the weight of the empty wagon; and it is important that both this and the gross weight be permanently recorded to prevent later disputes. The scale or weight book is usually made with sheets of from four to six weight tickets, perforated, having stubs which are exact duplicates of the tickets. The perforated ticket is given to the customer and the stub remains in the book as a permanent record.

Since it is necessary to enter the weights in two places, and because this duplication of work is liable to result in errors, a better plan would be to omit the stub and make the book with carbon duplicate tickets. Even with the old style of book a sheet of carbon paper can be placed between two sheets and two copies of the ticket made at one writing; the record sheet to remain in the book. See illustration, p. 26.

=20. Uncollectable Accounts.= In the closing entries of the last model set, we have shown that the gross trading profits are represented by the balance of trading account. All profits from other sources are credited directly to profit and loss account; likewise all other losses are charged directly to profit and loss. One such source of loss is _uncollectable accounts_. To charge the loss resulting from an uncollectable account against trading profits would create a false showing in respect to the trading profits during the current period, for the reason that the account may represent sales made during a former period.

SAMPLE TRANSACTION

=21.= The transactions which follow represent the business for the period covered:

--Dec. 10-- Commenced business with the following assets: Cash $1,415.55 Due from L. B. Jenkins 24.45

--Dec. 10-- Bought from Lehigh Coal Co., on account, 25 tons nut coal $4.25 106.25

--Dec. 10-- Bought from Reading Coal Co., on account, 25 tons egg coal 4.25 106.25 15 tons pea coal 3.75 56.25 -------- 162.50

--Dec. 10-- Deposited cash 1,400.00

--Dec. 11-- Sold to Henry Newton 2,000# nut 5.25 5.25

--Dec. 11-- Sold to D. H. Kennedy 6,000# egg 5.75 17.25 4,000# nut 5.75 11.50 -------- 28.75

--Dec. 11-- Sold for cash 1,000# nut 5.25 2.63

--Dec. 12-- Sold to Andrew White 4,000# egg 5.75 11.50 1,000# pea 5.25 2.63 -------- 14.13

--Dec. 12-- Sold to F. W. Francis 6,000# nut 5.75 17.25 1,500# pea 5.25 3.94 -------- 21.19

--Dec. 12-- Sold for cash 4,000# nut 5.75 11.50

--Dec. 13-- Bought from Lackawanna Coal Co. 50 tons run of mine 3.25 162.50

--Dec. 13-- Sold to Eastern Foundry Co. 25 tons run of mine 3.75 93.75

--Dec. 13-- Sold to Geo. Miller 8,000# egg 5.75 23.00

--Dec. 13-- Sold for cash 2,000# nut 5.75 5.75 4,000# nut 5.25 10.50 2,000# pea 4.75 4.75 -------- 21.00

--Dec. 13-- Deposited all cash on hand

--Dec. 14-- Bought from Lehigh Coal Co. 30 tons nut 4.25 127.50

--Dec. 14-- Sold to Lotus Club 10 tons nut 5.75 57.50

--Dec. 14-- Sold to David Meyer 4,000# pea 5.25 10.50

--Dec. 14-- Sold to City Wagon Co. 10,000# run of mine 4.50 22.50

--Dec. 14-- Sold for cash 6,000# egg 5.25 15.75

--Dec. 15-- Paid Lehigh Coal Co. Check# 1 106.25

--Dec. 15-- Received from D. H. Kennedy Cash in full payment of his account.

--Dec. 15-- Sold to Samuel Hartley 1,000# pea 4.75 2.38 2,000# nut 5.25 5.25 -------- 7.63

--Dec. 15-- Sold for cash 2,000# pea 5.25 5.25 5,000# nut 5.25 13.13 4,000# egg 5.25 10.50 2,500# run of mine 4.25 6.38 -------- 35.26

--Dec. 15-- Paid Henry Wiggins, teamster Check #2 24.00

--Dec. 15-- Paid D. H. Tuttle 1 month's rent, check #3 40.00

--Dec. 15-- Deposited all cash on hand

--Dec. 15-- Charged L. B. Jenkins account to profit and loss

EXERCISE

=22.= Open the books, using cash book, sales book, journal, and ledger. Enter each transaction, and make all postings to ledger. Take off a trial balance of the ledger accounts.

At the close of business, Dec. 15, the inventory is taken, and shows the following quantities on hand:

38 tons nut @ 4.25 14 " egg @ 4.25 9 " pea @ 3.75 18½ " run of mine @ 3.25

Close all accounts representing trading transactions into a trading account, and find the gross trading profit or loss.

Close trading and revenue expenditure accounts into profit and loss account.

Close net profits into proprietor's account.

Bring down the balances in the ledger and take a new trial balance.

SALES TICKETS

=23.= In a retail business it is necessary for the sales person to record purchases at the time the goods are selected by the customer. When but one or two clerks are employed, it is possible to record these sales in a counter book or blotter; but in a larger business employing several clerks, this method would be extremely inconvenient. The bookkeeper would be obliged to wait for the books; and even if two sets of counter books were provided for use on alternate days, the work would always be at least one day behind.

The increase in the volume of business transacted, and the multiplicity of transactions in a retail store, have been responsible for the introduction of many labor-saving methods and devices. One of these now used in all large stores and in many small ones, is the _sales ticket_.

The sales ticket is to all intents and purposes a small invoice blank. Sales tickets are put up in pads or in book form, and are numbered in duplicate. The number is prefixed by a letter--as _H 10_--which is intended to indicate either the department or the sales person. When a sale is made, the ticket or bill is made in duplicate by means of carbon paper; one copy is given to the customer, and the other retained. If it is a cash sale, the copy retained goes to the cashier with the money; if a sale on account, to the bookkeeper to be charged.

These sales tickets are also used for taking orders for future delivery, both copies being retained until the order is filled. When delivery is made, one copy goes to the customer as a bill. Aside from the time saved, the sales ticket is a great convenience, as its use gives the customer a bill for every purchase.

DEPARTMENTAL RECORDS

=24.= When the goods sold are divided into departments, it is here customary to record carefully the purchases and sales for each department. These records are provided for by the use of purchase and sales books having as many columns as there are departments. Let us suppose that the business under consideration is a single proprietorship, and that the goods sold are clothing, shoes, and furnishings. Each class of goods is kept in a separate department, sales and purchases being recorded by departments.

=25.= Purchase and sales books of a special design are used, each having three special columns. It will be noted that neither purchases nor sales are recorded in detail, but that both purchase invoices and sales tickets are recorded by number, and only the totals extended in the proper column. The charges and credits are posted to personal accounts from the purchase and sales books. All purchase invoices are filed in numerical order. The sales tickets are kept in bundles, each day's tickets by themselves. The tickets of each department and each sales person are also kept by themselves. If it becomes necessary at any time to know the items of an invoice or sales ticket, it is an easy matter to refer to the files under the proper date and number for the desired information.

The combined totals of the three department columns must equal the footing of the total column. All footings are carried forward until the end of the month, when the totals are posted directly to purchase and sales accounts, completing the double entry. In the ledger, purchase and sales accounts are kept with each department; but when the books are closed, the results from all departments are combined in the trading account. Instead of recording cash sales in a special column in the cash book, all receipts of this kind are entered in the regular _cash received_ column. These sales are not posted from the cash book, but are entered in the sales book daily. Thus they are carried forward in the footings, and at the end of the month the totals of the sales book represent all sales, both on account and for cash.

=26.= The cash book in this set presents some new features. Instead of using both pages of the book, one page is used for both debit and credit. The bank account is also kept in the cash book, debit and credit columns being provided for this purpose. Deposits are entered in the bank debit column and in the cash credit column. Checks are entered in the bank credit column and posted to individual accounts.

The other books used are the journal and ledger. The journal is used only for adjusting entries which cannot be made through the other books.

SAMPLE TRANSACTIONS

=27.= The business is opened by C. D. Walker, who invests $3,500.00 cash, which he deposits in the bank. The following transactions are recorded:

--Jan. 12-- Bought from Hart, Schaffner & Marx, Chicago 50 suits $13.50 $675.00 15 " 16.50 247.50 -------- $912.50 Net; 2% 10. Invoice #1.

--Jan. 12-- Bought from Hamilton Brown Shoe Co., St. Louis 30 pr. shoes 2.25 67.50 30 " " 4.25 127.50 10 " " 1.50 15.00 -------- 210.00 Net 60; 2% 10. Invoice #2.

--Jan. 14-- Bought from Farwell & Co., Chicago 1 doz. shirts 13.50 13.50 2 " " 9.00 18.00 4 " " 6.25 25.00 2 " sox 1.50 3.00 1 " " 2.00 2.00 10 " underwear 6.50 65.00 5 " hdkfs. 1.10 5.50 -------- 132.00 Net 60; 2% 10. Invoice #3.

--Jan. 14-- Bought from Barr Dry Goods Co., St. Louis 12 doz. collars .75 9.00 12 " " 1.10 13.20 -------- 22.20 Net 30. Invoice #3.

--Jan. 15-- Sold to S. W. Martin, 842 3d Av., on account Sales ticket A4. 25.00 S.T. B6 4.50 S.T. C18 6.00 -------- 35.50

--Jan. 15-- Sold for cash Clothing 148.70 Furnishings 26.50 Shoes 54.00 -------- 229.20

--Jan. 15-- Paid Hart, Schaffner & Marx account Check #1 894.25 Discount 18.25 -------- 912.50

--Jan. 16-- Sold to A. R. Crane, 1162 Baker St., on account S.T. B7 3.00

--Jan. 17-- Sold to D. H. Whipple, 476 Lake St., on account S.T. A12 27.50 Paid cash on account 10.00

--Jan. 17-- Received from S. W. Martin 1 shirt, for exchange 1.50 Sold him on account 1 shirt 2.00 S.T. B9

--Jan. 17-- Sold for cash Department A 200.00 " B 64.00 " C 87.50 -------- 351.50

--Jan. 19-- Sold to C. D. Lewis, 64 Ferry Av., on account S.T. B11 6.50 S.T. C23 3.50 -------- 10.00

--Jan. 19-- Paid Hamilton Brown Shoe Co., on account Check #2 205.80 Discount 4.20 -------- 210.00

--Jan. 19-- Paid clerk hire, cash 12.00

--Jan. 19-- Paid store rent to D. C. Watson Check #3 50.00

--Jan. 19-- Sold for cash Department B 37.50 " C 35.00 -------- 72.50

--Jan. 19-- Deposited in bank 550.00

--Jan. 20-- Sold to B. E Johnson, 92 King St., on account S.T. A15 20.00

--Jan. 20-- Sold for cash Department A 75.00 " B 21.25 -------- 96.25

--Jan. 20-- Deposited in bank 100.00

--Jan. 20-- Paid freight bills Department A 8.75 " B 3.42 " C 4.20 -------- Check #4 to C. D. Jenks, Agt. 16.37 The inventory on Jan. 20 is: Clothing $487.00 Furnishings 30.50 Shoes 64.50

BALANCE SHEET, JAN. 20 _Assets_ Cash Bank $2,983.58 Office 97.45 -------- $3,081.03 Accounts Receivable Martin 36.00 Crane 3.00 Whipple 17.50 Lewis 10.00 Johnson 20.00 -------- 86.50 Merchandise (Inventory) 582.00 -------- $3,749.53

_Liabilities_

Accounts Payable Farwell 132.00 Barr 22.20 154.20 154.20 -------- -------- -------- Present Worth $3,595.33

EXERCISE

=28.= Take a trial balance of the ledger accounts as they appear after the books are closed Jan. 20.

At the close of business, Feb. 28, we find that the following transactions have been recorded:

Purchased clothing from Hart, Schaffner & Marx, $1,500.00; from Brokau Bros., $720.00.

Purchased furnishings from Barr Dry Goods Co., $60.00, from Rosenthal & Co., $437.50.

Purchased shoes from Brown Shoe Co., $460.00.

Sold on account, clothing, $600.00; furnishings, $224.40; shoes, $112.00.

Sold for cash, clothing, $789.50; furnishings, $302.90; shoes, $447.25.

Received cash on account, $672.20.

Received returned goods: clothing, $15.00; shoes, $7.00.

Deposited cash in bank, $2,230.00.

Paid cash for expenses, $10.00.

Gave checks as follows: Hart, Schaffner & Marx, $1,176.00; Brokau Bros., $705.60; Brown Shoe Co., $294.00; Farwell & Co., $132.00; Barr Dry Goods Co., $22.20; Rosenthal & Co., $428.75; rent, $50.00; expenses, $100.00.

Cash discounts earned on accounts paid as follows: Hart, Schaffner & Marx, $24.00; Brokau Bros., $14.40; Brown Shoe Co., $6.00; Rosenthal & Co., $8.75.

Take a new trial balance as the ledger accounts appear after posting these transactions.

The inventory, Feb. 28, is:

Clothing $1,790.50 Furnishings 176.40 Shoes 136.25 -------- $2,103.15

Close the books, make statement of trading and profit and loss account. Make a balance sheet.

What were the gross profits for this period?

What were the net profits?

What is the proprietor's present worth?

PARTNERSHIP

=29.= Legal authorities define a partnership as a combination by two or more persons, of capital, labor, or skill, for the transaction of business for their common profit.

Partnerships may be formed for the purpose of conducting any legitimate business or undertaking, and are created by contract, expressed or implied, between the parties. Partnership agreements need not be in writing, but may be made by oral assent of the parties. Even though they are legal if made orally, partnership agreements should always be made in writing.

=30. Partnership Agreements.= These should state the date on which the agreement is entered into, the name of the contracting parties, the name by which the partnership is to be known, and the address of the place of business. Following should be a statement of the nature of the business, the amount and form of investment of each partner, the duration of the partnership, the basis of division of profits, provisions for the dissolution of the partnership, definition of the duties of active partners, and a provision for the division of the assets in the event of dissolution or at the termination of the partnership.

=31. Kinds of Partners.= Partners are of different kinds, depending on the nature of the partnership agreement and the extent of their liability, expressed or implied, as between themselves or in respect to third persons. The usual classification of partners is as follows: _ostensible_, _secret_, _nominal_, _silent_, and _dormant_.

Ostensible partners are those whose names are disclosed to the public as actual partners.

Secret partners are those whose names are not disclosed to the public, though participating in the profits.

Nominal partners are those who allow their names to be used as partners, though they may have no actual interest in the business. The fact of their being known as partners makes them liable to third parties.

Silent partners are those who, while sharing in the profits, take no active part in the management of the business. Their names may or may not be known. Silent partners may also be secret partners,

Dormant partners are those, who are both silent and secret partners. They are usually included in a general term like _Company_, _Sons_, or _Brothers_.

=32. Participation in Profits.= The most simple partnership from an accounting standpoint is one in which the investments of the several partners are equal, and profits are to be divided equally.

This condition does not exist in all partnerships. The members of the partnership may invest unequal amounts and share in the profits on the basis of their investment. The investment may be equal, but one partner may receive an extra share of the profits in return for work performed in lieu of a salary. The investment may be unequal, but the one with the smaller investment may share equally in the profits in return for work performed. It is not unusual for a silent partner to furnish all of the capital and share equally in the profits with an ostensible partner who assumes full responsibility for the management of the business.

=33. Interest on Investment.= When the investment of the partners is unequal, it is customary to allow interest on the capital invested and to charge interest on all withdrawals. The interest on capital must be credited, and the interest on withdrawals must be charged, before profits can be distributed.

=34. Capital and Personal Accounts.= In a partnership a special account should be opened in the name of each partner to represent his investment (for example, John Smith, Capital). To this account is credited his net investment. When the books are closed, the account is credited with his share of the profits, and debited with his withdrawals.

A personal account should be opened in the name of each partner, to which is debited all withdrawals, either of money or goods. Even when the capital invested is equal, some partnership agreements provide that interest shall be charged on all withdrawals, particularly when the business is of such a nature that goods traded in are likely to be withdrawn by the partners, or when, for any reason, withdrawals are likely to be unequal. The balance of the partner's personal account is closed into his capital account when the books are closed. Before closing this account, it should be credited with interest on capital account and charged with the interest provided on withdrawals.

=35. Opening the Books.= When the books of a partnership are opened, the essential features of the partnership agreement should be written at the top of the first page of the journal. Next following the partnership agreement, are the entries showing the nature and amount of the investment of each partner, the amounts being posted to the credit of partners' capital accounts.

=36. Closing the Books.= When the books of a partnership are to be closed, the revenue accounts are closed into trading and profit and loss, the same as in any other form of business organization. The net profit is then apportioned according to agreement, the share of each partner being credited to his capital account. The balance of his personal account is then carried to his capital account; the balance of that account will then show his net investment.

=Illustration of Closing Entries.= A, B, and C form a partnership, each investing $1,000.00, profits to be shared equally. When the books are closed, the net profits are found to be $909.60. A's personal account shows a debit balance of $46.50; B's personal account shows a credit balance of $100.00; C's personal account shows a credit balance of $52.00. The entries are as follows:

Profit and Loss $909.60 To A, Capital _a/c_ $303.20 " B, " " 303.20 " C, " " 303.20 A, Capital _a/c_ 46.50 A, Personal _a/c_ 46.50 B, Personal _a/c_ 100.00 B, Capital _a/c_ 100.00 C, Personal _a/c_ 52.00 C, Capital _a/c_ 52.00

The capital accounts after closing are:

A, CAPITAL _a/c_

Dec. 31, Bal. personal _a/c_ $46.50 $1,000.00 Jan. 1 Balance 1,256.70 303.20 (1/3 profits) Dec. 31 -------- -------- $1,303.20 $1,303.20 ========= ========= $1,256.70 net invest. Dec. 31

B, CAPITAL _a/c_

Dec. 31, Balance $1,403.20 $1,000.00 Jan. 1 303.20 (1/3 profits) Dec. 31 100.00 pers. _a/c_ Dec. 31 -------- -------- $1,403.20 $1,403.20 ========= ========= $1,403.20 net invest. Dec. 31

C, CAPITAL _a/c_

Dec. 31, Balance $1,355.20 $1,000.00 Jan. 1 303.20 (1/3 profits) Dec. 31 52.00 pers. _a/c_ Dec. 31 -------- -------- $1,355.20 $1,355.20 ========= ========= $1,355.20 net invest. Dec. 31

SAMPLE TRANSACTION

=37.= The first business taken up for consideration under the head of partnerships is a retail shoe business. The stock is kept in three classes: men's, women's, and children's shoes. Purchase and sales books, ruled to segregate transactions of each class, are used. The bank account is kept in the cash book, which is also provided with two columns for discount. All sales, whether for cash or on account, are recorded on sales tickets.

James Benton, Horace Douglas, and Henry Kemp form a partnership under the firm name of Benton, Douglas & Kemp, for the purpose of conducting a retail shoe business in Buffalo, N. Y. The date of the agreement, which is to continue for ten years, is March 1, 1908. James Benton invests $1,000.00 in cash and a stock of shoes inventorying $2,000.00 as follows: men's, $800.00; women's, $700.00; children's, $500.00. Horace Douglas and Henry Kemp each invest $3,000.00 in cash. The three partners are to share equally in the profits and each is to receive a salary of $100.00 per month. The books are to be closed and net profits divided at the end of each three months' period counting from January 1, which brings the first distribution on March 31.

The following transactions are recorded during the month of March:

--March 1-- Deposited in Second National Bank $7,000.00

--March 1-- Bought from National Fixture Co. Store fixtures 2,000.00 Invoice #1

--March 1-- Bought from John C. Morrison, Buffalo Men's shoes 135.00 Invoice #2

--March 1-- Bought from Hoyt & Co., Rochester, N. Y. Women's shoes 127.50 Children's shoes 84.00 ------ 211.50 Net 60; 2% 10. Invoice #3

--March 2-- Sold to R. H. Wallace, 842 Delaware Av. 1 pr. men's shoes 6.00 1 pr. men's slippers 2.50 ------ 8.50

--March 2-- Sold to D. H. Lyon, 416 Niagara St. 1 pr. women's 3.50 1 pr. women's 4.00 1 pr. children's 2.00 ------ 9.50

--March 2-- Sold to Henry Norris, 297 Madison Av. 1 pr. men's 5.00 1 pr. children's 1.25 1 pr. children's 1.50 ------ 7.75

--March 2-- Sold to R. H. Homans, 427 Lafayette Av. 1 pr. women's 5.00

--March 2-- Sold for cash Men's 44.00 Women's 37.50 Children's 22.00 ------ 103.50

--March 3-- Sold to H. J. Watson, 197 Locust St. 2 pr. men's 15.00 1 pr. women's 5.50 ------ 20.50

--March 3-- Sold to H. J. Meyer, 82 Bennett St. 1 pr. children's 1.50 1 pr. children's 2.00 1 pr. women's 3.50 ------ 7.00

--March 3-- Paid Hoyt & Co. bill by check Less cash discount.

--March 3-- Deposited in Second National Bank 75.00

--March 3-- Paid freight on shoes in cash 2.60

--March 3-- Sold for cash Men's 30.00 Women's 24.00 Children's 15.00 ------ 69.00

--March 4-- Bought from Lee & Co., Rochester Women's shoes 140.00 Net 30. Invoice #4

--March 4-- Sold to D. Andrews, 84 Peck St. 1 pr. men's 3.50 1 pr. men's 5.00 1 pr. women's 4.00 ------ 12.50

--March 4-- Sold to Jas. Hayes, 519 Washington St. 1 pr. women's 3.50 1 pr. children's 2.00 1 pr. children's 1.25 ------ 6.75

--March 4-- Sold for cash Men's 27.00 Women's 32.00 Children's 12.50 ------ 71.50

--March 5-- Sold to R. D. Nelson, 842 Niagara St. 1 pr. men's 6.00 1 pr. women's 5.00 ------ 11.00

--March 5-- Sold to D. Needham, 47 Ames St. 1 pr. men's 3.50 1 pr. women's 2.50 1 pr. children's 1.50 ------ 7.50

--March 5-- Sold for cash Men's 31.50 Women's 26.00 Children's 11.00 ------ 68.50

--March 6-- Deposited in Second National Bank 200.00

--March 6-- Sold to D. B. Wright, 47 Andrews St. 1 pr. men's 5.00

--March 6-- Sold to H. N. Hoyt, 821 Delaware Av. 1 pr. women's 5.00 1 pr. children's 2.50 ------ 7.50

--March 6-- Sold to Amos Wiggins, 92 Prospect St. 1 pr. men's 5.00 1 pr. women's 3.50 ------ 8.50

--March 6-- Sold for cash Men's 52.00 Women's 36.50 Children's 18.25 ------ 106.75

--March 6-- Paid clerk hire, cash 9.00

--March 6-- Gave checks as follows: Horace Douglas 20.00 Henry Kemp 25.00

--March 8-- Sold to D. Altman, 127 Wright St. 1 pr. men's 6.00 Gave him check 44.00 Credited his account for 1 mo.'s rent 50.00

--March 8-- Sold to R. H. Homans, 427 Lafayette Av. 1 pr. men's 6.00

--March 8-- R. H. Wallace paid his account in full.

--March 8-- Paid account of John C. Morrison by check

--March 8-- Sold for cash Men's 25.00 Women's 18.00 Children's 10.50 ------ 53.50

--March 9-- Sold to Walter Jenks, 87 South Av. 1 pr. men's 6.00 1 pr. women's 4.00 1 pr. children's 2.00 ------ 12.00

--March 9-- Sold to D. W. Mantel, 419 Delaware Av. 1 pr. women's 5.00 1 pr. children's 2.50 ------ 7.50

--March 9-- Sold to D. C. White, 1160 Main St. 1 pr. men's 5.00 1 pr. men's 3.50 ------ 8.50

--March 9-- Sold to A. R. Crows, 40 Shaw St. 1 pr. women's 3.50

--March 9-- Sold for cash Men's 54.00 Women's 41.50 Children's 20.50 ------ 116.00

--March 9-- Deposited in Second National Bank 275.00

--March 10-- Sold to Henry Brown, 87 Douglas St. 1 pr. men's 6.00 1 pr. women's 4.00 ------ 10.00

--March 10-- Sold to D. L. Benedict, 80 Adams St. 1 pr. women's 3.50 1 pr. children's 2.00 1 pr. children's 1.50 ------ 7.00

--March 10-- Sold for cash Men's 48.50 Women's 39.00 Children's 16.50 ------ 104.00

--March 11-- Sold to D. H. Lyon, 416 Niagara St. 1 pr. men's 6.00

--March 11-- Received from Henry Norris, cash 7.75

--March 11-- Sold to D. B. Wright, 47 Andrews St. 1 pr. women's 3.50 1 pr. children's 2.00 ------ 5.50

--March 11-- Sold to H. J. Meyer, 82 Bennett St. 1 pr. men's 3.50

--March 11-- Sold for cash Men's 42.00 Women's 39.50 Children's 11.00 ------ 92.50

--March 12-- Deposited in Second National Bank 195.00

--March 12-- Sold to D. L. Benedict, 80 Adams St. 1 pr. men's 5.00

--March 12-- Sold to H. A. Fisher, 42 Lyons St. 1 pr. women's 4.00 1 pr. children's 1.50 ------ 5.50

--March 12-- Sold to Andrew Winters, 476 Delaware Av. 1 pr. men's 6.00 1 pr. children's 2.50 ------ 8.50

--March 12-- Sold for cash Men's 51.50 Women's 43.00 Children's 17.75 ------ 112.25

--March 13-- Bought from Rochester Shoe Co., Rochester Men's shoes 265.00 Women's " 220.00 Children's " 98.50 ------ 583.50 Net 30; 2% 10.

--March 13-- Sold to D. Altman, 127 Wright St. 1 pr. women's 4.00 1 pr. children's 2.50 1 pr. children's 2.00 ------ 8.50

--March 13-- Sold to D. Alton, 46 Eastern Av. 1 pr. men's 5.00 1 pr. women's 3.50 ------ 8.50

--March 13-- Sold for cash Men's 67.00 Women's 52.00 Children's 29.00 ------ 148.00

--March 13-- Paid clerk hire 9.00

Henry Kemp wishes to retire from the business. His partners, Benton and Douglas, agree to pay him cash for his interest. To close the books, each partner is credited with one-half a month's salary, and the amount is charged to expense. The inventory shows the stock to be:

INVENTORY

Men's shoes $759.75 Women's 835.75 Children's 519.00 -------- $2,114.50

EXERCISE

=38.= 1. Submit a trading and a profit and loss account as shown by the books at the close of business March 13.

2. What errors do you find in these books?

3. Submit a balance sheet.

4. Submit the journal entries to be used in apportioning the profits, and in closing partner's personal account. Show partners' capital accounts after final closing.

5. Submit proper entries when Kemp's interest is purchased, assuming that he is paid by check from the funds in hand.

6. Submit trial balance of ledger of Benton & Douglas as the accounts appear after the purchase of Kemp's interest. Remember that no additional capital is invested.

=39. Sale of Partnership.= When the business of a partnership is sold, the net assets must be divided among the partners according to agreement, unless the partnership is to continue for the transaction of the same or some other class of business. As a rule, the liabilities are paid (if possible), from the cash funds on hand, leaving the net assets for division.

In the division of assets, one partner will frequently agree to accept a certain class of assets in lieu of cash, but at a discount. To illustrate, one partner might accept fixtures, which cost $1,000.00, at 10% discount. Deducting 10% from the cost price of the fixtures reduces the assets just that amount, and it is necessary to debit profit and loss and to credit fixture account, with the loss.

If any class of assets, other than the goods in which the firm is trading, bring a price above cost, it is necessary to debit the purchaser and credit profit and loss with the profit. If the stock regularly traded in is sold at a profit, no special entry is required; the sale is recorded in the regular way and credited to sales account, from which it finds its way into profit and loss in the final closing of the books.

This class of transactions involves but one of the many kinds of adjusting entries, all of which necessitate careful study on the part of the bookkeeper. In making adjusting entries, full explanations should be given that their meaning or intent may not be misunderstood by one who later refers to them. It is better to err on the side of what may appear as too detailed explanation, than to leave anything to be taken for granted.

Following is an illustration of the entry involving the sale of fixtures at 10% discount:

Profit and Loss $100.00 Fixture Account $100.00 10% discount allowed on fixtures taken by A in part payment of his share of assets A's Capital _a/c_ $900.00 Fixture Account $900.00 Fixtures taken at 10% discount in part payment of his share of assets.

=40.= Benton and Douglas agree to continue the business and to share profits equally. At the close of business, Dec. 31, their balance sheet showed the following:

BALANCE SHEET, DEC. 31 _Assets_ Cash In office $144.60 In bank 1,287.20 $1,431.80 -------- Accounts Receivable 810.00 Inventory, Merchandise 3,769.50 4,579.50 -------- Inventory, Fixtures 2,000.00 2,000.00 -------- Total Assets $8,011.30

_Liabilities_ Accounts Payable 925.20 -------- Present Worth $7,086.10 Benton's present worth $3,543.05 Douglas's present worth 3,543.05

They accept an opportunity to sell for cash the stock and fixtures, the buyer agreeing to pay 15% above cost price for the merchandise, and cost price for the fixtures. The money received from this transaction, and the money in the office at time of sale, are deposited in the bank. Checks are drawn to settle all accounts payable, $7.22 discount being earned. In liquidating the business of the firm, Benton agrees to accept the accounts receivable in part payment of his share, on condition that 10% be first charged off to cover uncollectable accounts.

EXERCISE

1. Show all entries required to complete the liquidation of this business.

2. At the final settlement, how much cash does each partner receive?

=41. Division of Profits.= When the investment of the several partners is unequal, the partnership agreement usually provides for the crediting of interest on capital, and the charging of interest on withdrawals.

A and B form a partnership, and commence business Oct. 1. A invests $7,000.00, and B invests $3,000.00. The agreement provides that interest at 6% shall be credited on capital and charged on withdrawals at the time of closing the books, profits to be shared on the basis of their investments.

The books were closed Oct. 31, with the following results:

The adjustment is made as follows:

A's investment, $7,000.00 Interest for 30 days (1 month) $35.00 A's withdrawals 200.00 Interest for 15 days .50 -------- Net interest to be credited to A $34.50 B's investment, $3,000.00 Interest for 30 days $15.00 B's withdrawals, 100.00 Interest for 10 days .17 -------- Net interest to be credited to B $14.83

The journal entry is:

Interest $49.33 A's personal _a/c_ $34.50 B's personal _a/c_ 14.83 Net interest credited on capital accounts.

After posting the entry, our interest account shows the following:

Interest on capital $49.33

This account is, of course, closed into profit and loss, leaving net profits to be divided, $954.67, of which A receives 70%, and B 30%.

For the final closing of the books, we would close the personal accounts of A and B into their capital accounts, and close profit and loss account into their capital accounts. In actual practice the interest on withdrawals and investment would be entered and charged to profit and loss through interest account, before the net profit is brought down. In our illustration we have first brought down what appears to be the net profit, for the purpose of emphasizing the fact that the interest must be considered before profits are divided.

EXERCISE

=42.= C, D, and E formed a partnership Nov. 1. C invested $9,000.00 cash; D invested $7,000.00 cash; E invested $4,000.00 cash. The partnership agreement provided that profits should be shared on the basis of the capital invested by each; interest at 6% to be credited on capital and charged on withdrawals.

At the close of business the following statistics are gathered from the books:

C's Capital _a/c_ Cr. $9,000.00 D's Capital _a/c_ Cr. 7,000.00 E's Capital _a/c_ Cr. 4,000.00 Purchases Dr. 15,000.00 Sales Cr. 12,000.00 Expense Dr. 160.00 Rent Dr. 150.00 Salaries Dr. 700.00 Bank Dr. 7,250.00 Bills Receivable Dr. 6,000.00 Accounts Receivable Dr. 7,220.00 Bills Payable Cr. 3,000.00 Accounts Payable Cr. 2,820.00

C's personal _a/c_ Dr. Nov. 15 $300.00 D's personal _a/c_ Dr. Dec. 1 200.00 E's personal _a/c_ Dr. Nov. 20 100.00 Inventory Dec. 31 7,000.00

Make trading account, profit and loss account, and journal entries to adjust interest.

Make balance sheet, and show partners' capital accounts after final closing of the books.

CORPORATION ACCOUNTS

CORPORATIONS

=1.= A corporation is an artificial body created by statute law and vested with power to act in many respects as an individual--in particular to acquire, hold, and dispose of property, real or personal; to make contracts; to sue and be sued, and the like.

It is a legal entity apart from its members. It may sue without joining its members, and may be sued by others without the necessity of joining its members. It may transfer property and transact all business, not inconsistent with the rights granted by its charter, in its own name. In the transaction of business it is regarded as an individual.

CLASSIFICATION OF CORPORATIONS

=2.= Corporations may be divided into two general classes--public and private. A _public_ corporation is a political entity organized for the purposes of government--as a city, county, or village. A _private_ corporation is one organized to further the interests of its members. These may be divided into two classes--stock corporations and non-stock corporations.

A _stock_ corporation is one organized for the pecuniary gain of its members.

A _non-stock_ corporation is one organized to further a particular object--as clubs, charitable associations, societies for scientific research, etc.

Stock or business corporations are the ones with which we are chiefly concerned. Such corporations are organized to enable several persons to unite their capital to conduct a legitimate business enterprise and such organization accomplishes two important results; the rights of the members to transfer their interest without affecting the standing of the business, and exemption from personal liability for contracts or acts of the corporation.

In a partnership, each individual partner is liable for the debts of the partnership, and any partner can make contracts in the name of the partnership, such contracts becoming obligations of net only the partnership but of each individual partner.

A member or stock holder in a corporation is, as a rule, liable only for the amount of his subscription to the capital stock of the corporation. The exception to this is the organization of certain classes of corporations in which it is provided that a stockholder shall be liable for twice the amount of his stock subscription. National Banks are examples of this class. No stockholder, as such, has the right to make contracts in the name of the corporation, and any contracts he may make are not binding on the corporation. Contracts made in the name of the corporation, to be binding, must be executed by an officer duly authorized to make such contracts.

=3. Joint Stock Companies.= _How distinguished from corporations._ A joint stock company is a large partnership in which the capital is divided into shares which are distributed among the partners in proportion to their interests. Joint stock companies differ from corporations and are like partnerships in the following respects:

Each member is liable for the debts of the company, and if he sells his shares he is still liable for the debts which were contracted while he was a shareholder.

Except when otherwise provided by statute, all members must join in any action at law by the company, and if another brings an action against the company he must join as many shareholders as he wishes to hold. In some states the law provides that an action against a joint stock company may be brought in the name of its president or other designated officer representing all the members.

=4. Joint Stock Companies.= _How like Corporations._ A joint stock company is like a corporation and differs from a partnership in the following respects:

The shares may be transferred. If a member dies his shares pass to his estate; if bankrupt they pass to his assignee; if he sells his shares they pass to the purchaser. Partners may withdraw and new partners may be admitted without the dissolution of the company. A partnership is dissolved by the withdrawal by death or otherwise of a single partner.

The shareholders do not manage the affairs of the company but elect directors or other officers in whom the management of the business is vested. Members, as such, have no authority to bind the company.

CREATION OF CORPORATIONS

=5.= A corporation is created by legislative act. Formerly each corporation received a special charter from the legislature of the state, but as the advantages of corporations began to receive universal recognition it was seen that the delays incident to the granting of special charters were bound to work a hardship on those desiring to incorporate. Partly to overcome this, but more particularly to insure uniformity in the rights and privileges of corporations, and to prevent the conferring of special privileges through special charters, the legislature of most states has enacted uniform corporation laws. These statutes prescribe uniform regulations for the organization of corporations. State constitutions now very generally prohibit the granting of special charters to private corporations.

=6. Requirements.= While every state has its own corporation laws, the requirements of corporations are in many respects uniform. The law usually provides that a certificate of incorporation shall be filed with the secretary of state, or some other designated officer. This certificate must as a rule state:

The name of the corporation;

The place of business, where its principal office is located;

The objects of the corporation, including a statement of the business in which it is to engage;

The amount of the capital stock, and the number and par value of the shares into which it is to be divided;

The period for which the corporation is organized;

The number of its directors and the names of those who are to serve at the outset;

The names and addresses of the original incorporators with the number of shares of the capital stock subscribed for by each.

The form of the certificate required in the state of Illinois is shown in the illustration, p. 4.

STOCKHOLDERS

=7.= The members of a business corporation are known as stockholders or shareholders. At the time of organization the members subscribe for the shares of the capital stock agreeing to take and pay for them when issued. When the stock has been delivered and paid for, the stockholder is under no further obligation, unless the stock is by statute or contract subject to assessment.

=8. Stock Certificate.= When a stockholder has paid for his shares a certificate, known as a stock certificate, is issued to him. This certificate is the written evidence issued by the corporation that the person whose name appears therein is registered on the company's books as the owner of shares of the number and par value named.

The owner of a stock certificate can transfer it, and the one to whom it is transferred becomes a stockholder. Such transfers are not complete, however, until registered on the books of the company. A stock certificate is not, strictly speaking, a negotiable instrument, but it is the custom among business men to indorse stock certificates in blank and transfer them from hand to hand as negotiable instruments, until some one inserts his own name and has the transfer registered on the books of the company.

Such indorsement does not make a stock certificate a negotiable instrument, and the purchaser can acquire no better title than is possessed by the seller. Courts have held that the fact that a certificate of stock is not payable to bearer makes it non-negotiable.

CAPITALIZATION

=9.= This is the term commonly used to designate the amount of stock which the company is authorized to issue. It may have little reference to the amount subscribed or paid in, for most states authorize corporations to begin business as soon as a certain number of shares have been subscribed for, or even when only a small part of the subscriptions have been paid. For instance, a company with an authorized capitalization of $100,000 may be permitted to commence business as soon as $10,000 has been subscribed and $1,000 is actually paid in.

=10. Capital and Capital Stock.= The _capital_ of a corporation is usually understood to mean its assets, and is a general term covering all of its property of every nature. It has no connection with the capital stock authorized or the number of shares subscribed.

_Capital Stock_ is a term used in many ways each of which implies a different meaning. It may mean the amount which must be paid in before it can transact business as a corporation; it may mean the capital which the corporation is authorized to issue; it may mean the amount subscribed regardless of the amount actually paid in; or it may mean the amount actually paid in regardless of the amount subscribed.

=11. Kinds of Stock.= As a rule the capital stock of a corporation is of two classes--common and preferred--though not all corporations issue both classes.

_Common Stock_ is the stock of a corporation issued to all stockholders under the same conditions, and which is to share equally in the dividends.

_Preferred Stock_ is stock which gives its owner certain preferences over the owners of common stock. This preference usually consists of a provision for the payment of certain dividends out of the net earnings of the business before any dividends can be paid on common stock. The officers of a corporation have no power to issue preferred stock unless it is provided for in the charter. Preferred stock may, however, be issued with the consent of all common stockholders. Preferred stock falls into subdivisions depending upon its provisions as follows:

_Cumulative_ preferred stock is stock on which the payment of dividends is not dependent upon the earnings of one year. If a dividend is passed in one year or if not paid in full, it must be paid from future earnings before common stock can draw dividends.

_Non-cumulative_ preferred stock is stock which carries a dividend preference only in respect to the earnings of the current year. While dividends are payable prior to dividends on common stock, no liability attaches to the corporation if earnings in any year are insufficient to pay dividends.

_Guaranteed Stock_ is another name for cumulative or non-cumulative preferred stock--any stock on which the payment of dividends is guaranteed.

A corporation may issue more than one series of preferred stock, as _first preferred_, _second preferred_, etc. These issues take preference in the payment of dividends in the order of their priority. Dividends must be paid on _first preferred_ before any surplus is available for the payment of dividends on _second preferred_.

=12. Treasury Stock.= This is stock subscribed for and issued which has been acquired by the corporation either by purchase or donation. The term is often erroneously applied to that part of the authorized capital stock which has never been issued, and the error has even been made of referring to it as unsubscribed stock. Treasury stock is an asset and should be so treated on the books of the corporation. Unsubscribed or unissued stock is in no sense an asset; or as one writer puts it, no more an asset than the power of a person to issue notes is an asset.

=13. Watered Stock.= Any stock which is not represented by actual assets is called watered stock. It is usually represented by fictitious assets--as patents, copyrights, franchises, promotion expense, goodwill, etc.

STOCK SUBSCRIPTIONS

=14.= It is customary for the first board of directors to state by resolution in what manner the stock is to be disposed of; if subscriptions are to be received; if subscriptions are to be paid immediately or in installments. When the certificate of incorporation has been filed the subscription list is opened. This may be in book form, or a written or printed list. The following is a common form of stock subscription:--

We, the undersigned, do hereby subscribe to the capital stock of the --------company, organized under the laws of the state of --------in the amount set forth below, and severally agree to pay the amount of such subscription as follows:

When the board of directors shall, through its secretary or treasurer, certify that there has been subscribed----% of the authorized capital of $--------, then we severally agree to pay----% of said subscriptions, and to pay a further----% on the----day of each month thereafter, until the full amount of such subscriptions shall have been paid.

MANAGEMENT OF CORPORATIONS

=15.= The affairs of a corporation are managed by its directors who are elected by the stockholders. A director has no authority individually to bind the company. He can only act in conjunction with other directors in regular meeting as provided by the by-laws. The acts of the board are effected by orders or resolutions passed at such meetings. The number of directors constituting the board and the number required to form a quorum is specified in the by-laws. Directors must attend meetings in person to be entitled to vote. They cannot be represented by proxy. Since it is not practicable for the directors to attend to all of the details, they usually delegate to their officers authority to transact all of the every day business of the company. In larger corporations the directors organize themselves into subcommittees as executive committee, finance committee, etc. In small corporations these committees are unnecessary, their acts being performed by the board of directors.

=16. Powers of Directors and Officers.= The powers of the directors are extensive and are prescribed by the charter and by-laws. The directors have the power to bind the corporation in all its dealings with other persons or corporations. The powers of the stockholders are limited to the election of the directors; but as the directors are elected by a majority of the stockholders, the power to control the corporation through the election of a board of directors who will respect their wishes is thus conveyed to a majority of the stockholders.

Being representatives of the stockholders as a body, the directors must at all times be governed by what they honestly consider the wishes of the majority. Directors have the power to make contracts with the corporation only when they are manifestly fair contracts. For example, when not otherwise provided for, they may fix a fair compensation for their services and for the services of their officers. Except in cases of actual fraud, it is for the majority of stockholders to complain of such contracts, and they have the power to remove offending directors.

Officers of a corporation are its agents and have limited powers, usually prescribed by the by-laws. When not so specified, they are prescribed by the directors. It is not always necessary that all of the powers of an officer be specified in detail. If an officer has been accustomed to perform certain acts with the knowledge and consent of the directors, his acts become binding on the corporation. The title of an office does not necessarily convey any special powers. For example, while it is customary for the directors to confer special powers on the president, his title does not make him, in the corporation's dealings with the public, an agent of higher grade than the secretary, treasurer, or any other officer.

=17. Powers of Corporations.= As such, a corporation possesses certain necessary powers, and such other special powers as may be conferred by its charter.

To have a corporate name which can only be changed by law.

To sue and be sued.

To possess a corporate seal.

To appoint the necessary officers for the conduct of its business.

To enact by-laws necessary for the management of its business, for transferring of its stock, for calling of meetings, etc.

To acquire and dispose of such property as may be necessary for the conduct of the business for which it is organized.

To make contracts necessary for the carrying out of its purposes.

In general a corporation can engage in no other business than that specified in its charter, but it is granted certain incidental powers necessary to carry out its original purpose.

=18. Stockholder's Rights.= Each stockholder has the right to have a certificate of stock issued to him; to vote at meetings of stockholders; to inspect the books of the company; to participate in dividends; to invoke the aid of the courts in restraining the directors from committing a breach of trust.

DIVIDENDS

=19.= Every business corporation is conducted with a view to earning profits. When such profits are distributed to its stockholders they are called dividends, but stockholders cannot participate in the profits until a dividend has been declared by the directors. The law specifies that dividends must be paid out of the net surplus of the company, and provides a penalty for their payment out of capital. Therefore, before declaring a dividend, the directors must be provided with a balance sheet and use every care to determine that a surplus actually exists. For dividend purposes, surplus is usually considered that part of the profits remaining after paying expenses and providing the necessary reserve to cover depreciation of machinery and buildings and losses from uncollectable accounts. Sometimes a further provision is made in the by-laws for the creation of a sinking fund for the payment of bonds.

The times for the payment of dividends are fixed in the certificate of incorporation or the by-laws. Provision is usually made for the payment of dividends either quarterly, semi-annually, or annually.

Directors have full discretion in the declaration of dividends and, so long as they are acting in good faith, may add profits to capital instead of declaring a dividend. When the directors have, by proper resolution, stated that the surplus, or a part of the surplus, shall be distributed to the stockholders, a dividend is said to have been declared. When declared, a dividend becomes a debt of the corporation to its stockholders. It is not necessary that the directors declare dividends of all the surplus or net profits. Frequently the by-laws provide that a certain amount be reserved as working capital, and under any circumstances the questions of the advisability of declaring a dividend rests with the directors. They cannot be compelled to declare a dividend unless it can be shown that, in declining to do so, they are acting in bad faith.

=20. Stock Dividends.= At their discretion, the directors may, instead of paying a dividend in cash, declare what is known as a stock dividend. When there remains certain unsubscribed stock, or when the corporation is in possession of treasury stock, this stock may be issued to stockholders in payment of dividends. A stock dividend cannot, however, be declared when it would not be proper to declare a cash dividend. The assets must exceed all liabilities, and in determining the existence of a surplus available for dividends, all capital stock that has been issued must be considered as a liability.

CLOSING TRANSFER BOOKS

=21.= In large companies it is customary for the board of directors to close the stock transfer books a certain number of days prior to the date of payment of a dividend, for the purpose of obtaining the names and addresses of all stockholders. Notices are then sent to all stockholders that a dividend will be paid on a certain date and that the transfer books will be closed for a stated period. Transfer books are also frequently closed for a certain period prior to the annual meeting of the stockholders. The laws of some states provide that only those stockholders whose names have appeared as stockholders on the books of the company for at least thirty days prior to the date of the annual meeting, shall be entitled to vote at said meeting.

STOCKHOLDERS' MEETINGS

=22.= Meetings of stockholders are, as a rule, held annually, and the date of such meeting is usually specified in the charter. At the annual meeting the board of directors presents, through its president or other officer, a report of the business for the year, accompanied by a financial statement. At this meeting the stockholders elect directors to take the place of those whose terms of office have expired. A stockholder may vote at stockholders' meetings either in person or by proxy, and is entitled to one vote for each share of stock registered in his name at the time of the meeting. Notice of a stockholders' meeting must in all cases be mailed to each stockholder at his last known address, a certain number of days prior to the date of the meeting. This notice is mailed by the secretary of the company.

SALE OF STOCK BELOW PAR

=23.= Many corporations formed to carry on business of a speculative nature find it difficult to sell stock at par. This is especially true when the assets consist largely of patents, an undeveloped mine, or property of a similar nature. It has become the custom for corporations to take over such properties, issuing in payment for the same full paid stock greatly in excess of its value. The original owners of the property will in turn donate a certain portion of the stock to the corporation to be sold to provide working capital. This stock then becomes treasury stock and is offered for sale at a liberal discount. The selling of property to a corporation at an inflated value is called the process of watering the stock. It can only be justified when an uncertainty exists as to the actual value of the property acquired. In the purchase of a going business, the real value of the goodwill is largely a matter of opinion, and the judgment of the board of directors of a corporation making such a purchase must be considered as final.

CORPORATION BOOKKEEPING

=24.= Bookkeeping for a corporation as a record of its business transactions with the public is not different than bookkeeping for a single proprietorship or a partnership. There are, however, certain necessary records peculiar to a corporation, including accounts of a financial nature between the corporation and its stockholders. It is with these records and accounts that we are concerned in this discussion of corporation bookkeeping.

=25. Books Required.= The books required for corporation records are, _Stock Certificate Book_, _Stock Transfer Book_, _Stock Ledger_, _Minute Book_, (and in certain cases, _Installment Book_, _Stock Register_, and _Dividend Book_). These are auxiliary books and are known as _stock_ books.

_Stock Certificate Book._ This is a book of stock certificates, with stubs giving full particulars of each certificate issued. When a stock register is used, the record is posted to it from the stub, otherwise posting is made direct from the stub to the stock ledger.

_Stock Transfer Book._ This is a book in which is kept a record of all transfers of stock. Each entry is practically a copy of the form of assignment found on the back of the stock certificate. It is supposed that each transfer will be signed by the one transferring the stock, but frequently when certificates are presented with the proper endorsement, the transfer is signed by the one making the transfer as _attorney in fact_. The transfer book is made with two, and sometimes three, transfers to a page. Transfers are posted to the stock register, when used, or direct to the stock ledger.

_Stock Ledger._ This is the book in which an account is kept with each stockholder showing the number of shares held by him. Sometimes the amount is included. When a stockholder receives a certificate of stock it is posted to the credit side of his account in the stock ledger. When he transfers a certificate it is posted to the debit side of his account. A trial balance of the stock ledger should be taken at stated periods, for the stock standing to the credit of the stockholders should equal the total stock outstanding. The stock ledger is supposed to show only the stock issued and the names of its holders. For example, if the authorized stock of a corporation is 1,000 shares and there remains 300 shares unsubscribed, the stock ledger will show 700 shares--the total issued--to the credit of individual stockholders. An account should be opened in the stock ledger with _Capital Stock_, which account will be debited with all stock issued. This is in effect a representative account since it represents the total stock that should stand to the credit of other accounts in the stock ledger.

_Minute Book._ This is a record book in which the secretary keeps records or minutes of the proceedings of all stockholders' and directors' meetings. This is an official record of the acts of the corporation, and is frequently called for to be introduced in court as evidence. The secretary is custodian of the minute book and should see that it is carefully preserved.

_Installment Book._ When stock subscriptions are payable in installments, a form of receipt called a scrip or installment certificate is issued. As payments are made they are endorsed on the back of this certificate, and when all payments have been made the scrip is exchanged for a regular stock certificate. These scrip certificates are bound in book form similar to stock certificates.

Sometimes the scrip certificate takes the form of an installment receipt for the amount paid, all receipts being surrendered to the company when payments have been completed.

_Stock Register._ Some large corporations keep, in addition to the stock ledger and transfer books, a stock register which is a complete register of all stock issued. This book is kept by the _registrar_--usually a trust company or bank. All certificates are entered in the register in numerical order and full particulars of each are given. When a transfer is made both the old and new certificates must be taken to the registrar, who cancels the old and places his indorsement on the new, certifying that it has been registered.

One purpose of having a registrar is to prevent an over-issue of stock. The number of shares shown on the register must not exceed the number of shares which the corporation is authorized to issue.

_Dividend Book._ When the directors declare a dividend it is necessary to make a list of stockholders entitled to receive a dividend. Large corporations use a special form similar to the one illustrated. It is made either in a book or on loose sheets which are placed in a binder.

Some stockholders issue written orders to pay all dividends to some other person, which makes it necessary to record on this list the name of the person to whom this dividend is payable, as well as the name of the stockholder.

OPENING ENTRIES

=26.= In opening the books of a corporation it is necessary to first get the capital entered. In a proprietorship, the capital is credited to the owner; in a partnership it is credited to the individual partners. On the books of a corporation an account called capital stock is opened, to which capital is credited. This account is opened in the general ledger and original entries are made in the journal. The manner of making the opening entries depends upon the method of disposing of the capital stock.

_If stock is sold for cash only_ and the entire amount is subscribed and paid for, the entry is simply

Cash $100,000 To capital Stock $100,000 Stock subscribed and paid for by the following: John Doe $50,000 Richard Roe 25,000 Henry Snow 25,000 as per subscription list dated--------190----.

_If only a part of the authorized stock is subscribed_, there are two methods of entering the transaction.

First: Debit cash and credit capital stock as above, only as fast as stock is subscribed and paid for.

Second: Debit cash and credit capital stock for the amount actually subscribed and paid for. Debit a new account called _unsubscribed stock_ and credit capital stock for the balance of the total authorized issue of stock.

Illustrating the above, we will suppose that the National Manufacturing Co. is organized with a capitalization of $100,000, of which $50,000 is subscribed and paid for in cash. The entries would be:--

Cash $50,000 To capital stock $50,000 Stock subscribed and paid for by the following: John Doe $25,000 Richard Roe 15,000 Henry Snow 10,000 -------- Unsubscribed stock 50,000 To capital stock 50,000

_If stock is not paid for when subscribed_ or if it is payable in installments the entry is:

John Doe 25,000 Richard Roe 15,000 Henry Snow 10,000 To capital stock 50,000 For subscription to stock as per subscription list.

Or if it is not desired to enter the names of the subscribers an account is opened in the name of _subscriptions_, and the entry is:

Subscriptions 50,000 To capital stock 50,000

The above entries at once place the entire authorized capital stock on the books. When further subscriptions are made, subscription account is debited and unsubscribed stock is credited. When subscriptions are paid, cash is debited and subscriptions credited.

When subscriptions are payable in regular installments, payments may be credited to subscriptions. The plan is sometimes followed, however, of opening an account for each installment, as Installment No. 1, to which payments are credited. When the installment is fully paid this account would be closed into subscription account.

Or still another formula--when stock has been sold _subject to assessments to be made by the board of directors_, and an assessment has been called the entry is:

Assessment No. 1. $10,000 To subscriptions $10,000 An assessment of 20% as per resolution of the board of directors John Doe 5,000 Richard Roe 3,000 Henry Snow 2,000

When paid, cash is debited and assessment No. 1 is credited. When the next assessment is called an account is opened with assessment No. 2.

=27. When a Part of the Stock is Paid for in Property and the Balance in Money.= A corporation known as The National Manufacturing Company is formed to take over a manufacturing business owned by John Doe. The capital stock is $100,000 of which Mr. Doe is to receive $50,000 for the assets and goodwill of his business, the company agreeing to assume his liabilities. His statement of affairs shows the following:

_Assets_ Cash in bank $2,264.00 Accounts receivable 4,650.50 Machinery 9,000.00 Manufactured goods 2,100.00 Material and supplies 3,780.00 Furniture and fixtures 700.00 $22,494.50 -------- _Liabilities_ Accounts payable 864.20 864.20 -------- -------- 21,630.30

Since the net assets are $21,630.30, and the stock to be issued to John Doe is $50,000 the difference, or $28,369.70, represents the amount paid for the goodwill of the business.

The transaction is entered as follows:--

Property and Goodwill of the business of John Doe, transferred to this company as per resolution of the board of directors, Dec. 21st, 1908.

Goodwill $28,369.70 Cash 2,264.00 Accounts receivable 4,650.50 Machinery 9,000.00 Manufactured goods 2,100.00 Material and supplies 3,780.00 Furniture and fixtures 700.00 Accounts payable $864.20 Capital stock 50,000.00

One half of the capital stock is thus accounted for. The balance is to be subscribed, and when subscribed the entries will be as explained in Art. 26, depending upon whether subscriptions are paid in full or in installments.

=28. When Stock is Issued in Payment of Property and a Part of the Stock is to be Donated to the Company.= John Doe owns a valuable patent on an automobile attachment and desires to secure capital to carry on its manufacture. He interests Richard Roe and Henry Snow, who agree to assist him to form the National Manufacturing Company to take over his patent and manufacture the attachment. The company is incorporated with an authorized capitalization of $150,000. Roe and Snow agree that Doe shall receive $100,000 full paid stock for his patent, and to subscribe $25,000 each, payable in cash to be used for the purchase of the necessary machinery. John Doe, in turn, agrees to donate $50,000 of his stock to provide working capital. The entries are:

Patents $100,000 Capital stock $100,000 Full paid stock issued to John Doe to pay for patents transferred to the Company by bill of sale dated Dec. 2, 1908.

Subscriptions $50,000 Capital stock $50,000 Subscriptions to capital stock as follows:-- Richard Roe $25,000 Henry Snow 25,000 -------- Treasury stock 50,000 Working capital 50,000 Full paid stock donated by John Doe to provide working capital.

When subscriptions are paid:--

Cash 50,000 Subscriptions 50,000

It is decided to sell $30,000 of the treasury stock at 50% of its face value, and subscriptions are received for this amount.

Subscription to treasury stock 30,000 Treasury stock 30,000

Subscription account is debited and treasury stock credited for the full amount since this is the amount of full paid stock to be issued, regardless of the price at which it is sold.

When this stock is paid for, the entry in the cash book on the debit side is:

Subscriptions to treasury stock 15,000

This leaves a debit balance of $15,000 in the account _subscriptions to treasury stock_, which represents a discount on the stock sold.

The manner of disposing of this discount depends upon the provisions made by the directors in respect to the creating of working capital.

If their resolution provides that the fund maintained for working capital shall be only such an amount as may be realized from the sale of treasury stock, the discount is disposed of by the following entry:

Working capital 15,000 Subscriptions to treasury stock 15,000 Discount on 30,000 treasury stock sold.

Suppose, however, that the directors have provided by resolution for the maintaining of a working capital of $50,000. In that case the liability for the full $50,000 must remain on the books until such time as other provision is made. The entry would then be:

Bonus $15,000 Subscriptions to treasury stock $15,000

The discount is, to all intents, a bonus given to the purchasers, and if, as frequently happens, purchasers are promised a bonus of a share of stock for every share purchased, it would be proper to make the following entry in the first place.

Subscriptions to treasury stock 15,000 Bonus 15,000 Treasury stock 30,000 Sold 30,000 treasury stock at 50% of face value.

In any dividend distribution the purchasers are entitled to draw dividends on the face value of their stock, since it was issued to them as full paid. It would be manifestly unfair to charge the discount or bonus against profits for the current year, and it is customary to spread it over a period of several years, charging off a certain per cent each year. The bonus account is, in the meantime, carried on the books as an asset, and belongs in the class known as _fictitious_ assets.

Treasury stock is an asset, its real value being the market value of the stock represented. In the event of liquidation of the company, treasury stock would off-set the liability on account of capital stock. When all of the treasury stock is sold the account closes itself; or if it is issued to stockholders in the form of stock dividends, it is closed into profit and loss.

Working capital is a liability, which may be termed an _assumed_ or _nominal_ liability. Like capital stock it is a liability only as between the company and its stockholders. It off-sets whatever form of asset--cash or otherwise--that represents proceeds from the sale of treasury stock. The real position of working capital in the balance sheet is that of a capital liability which must be considered before any surplus available for dividends can be said to exist. Power is usually given the directors to reserve a certain amount for working capital, and even though an actual surplus may exist they have the right to off-set this with a working capital liability instead of declaring a dividend.

=29. Premium on Stock.= The stocks of many well-managed enterprises sell at a premium. In all such cases the amount received above the par or face value is credited to an account called _premium on stock_. At the end of the year this account is closed into surplus account. If any such items are standing on the books it can be used to off-set bonus account or organization expenses. It is not proper to close premium account into the current profit and loss account, for while it represents a profit, it is not earned in the regular operations of the business.

=30. Reduction of Working Capital.= As before stated, so long as working capital remains on the books it must be treated as a liability. Having the right to create working capital, the directors also have the right to reduce it whenever, in their judgment, the necessities of the business no longer require its maintenance in the original amount.

A reduction of working capital has the effect of increasing surplus, since surplus is increased by an increase of assets or a decrease of liabilities. To reduce working capital, the account is closed into surplus. It is perhaps necessary to say that the account should not be closed into profit and loss, since it does not represent current profits.

Suppose that in the case of the National Manufacturing Co., it is desired to reduce working capital from $50,000 to $25,000; the entry would be:

Working capital $25,000 Surplus $25,000 Working capital reduced by resolution of the board of directors, January 15th, 1909.

ENTRIES IN STOCK BOOKS

=31.= The entries in the stock books are very simple and are just the opposite of stock entries in the general or financial books of the company. When certificates of stock are issued, an account is opened in the stock ledger with each stockholder, to which is credited the stock issued to him. At the same time an account is opened in this ledger with capital stock which is debited with all stock issued, thus preserving the balance of the stock ledger. Taking the example in Art. 26, when stock is issued--

We debit-- Capital stock $150,000 We credit-- John Doe $100,000 Richard Roe 25,000 Henry Snow 25,000

When the $50,000 stock is donated to the treasury to provide working capital--

We debit John Doe 50,000 We credit Treasury stock 50,000

and open an account with treasury stock in the stock ledger.

When treasury stock is sold--

We debit Treasury stock 30,000 We credit Subscribers 30,000

When a stockholder sells a part or all of his shares to another it has no effect on capital stock or treasury stock accounts in the stock ledger. The only change takes place in the accounts of the individual stockholders involved. The stock transferred is debited to the account of the _transferor_, and credited to the account of the _transferee_.

Supposing that $30,000 treasury stock was purchased by Henry Benson, George Dennis, and Richard Carpenter, each purchasing $10,000, the stock ledger and stock register--if one is used--would appear as shown in the illustration. Footing the two sides of the stock register we find a balance of 1,300 shares which is the actual amount outstanding, the balance of 200 shares remaining in the treasury. A trial balance also shows that the stock ledger balances with a credit of $20,000 treasury stock.

EXERCISES

1. A corporation is organized with a capital of $50,000.00, divided into 500 shares of $100.00 each. The corporation begins business when 250 shares have been subscribed for. Of this amount _A_ subscribes for 100 shares, _B_ for 100 shares, and _C_ for 50 shares. These shares are paid for in cash within 30 days after the date of subscriptions.

Six months later the balance of the stock is subscribed for, subscriptions being received from _A_ for 50 shares, _B_, 50 shares, _D_, 100 shares, and _E_, 50 shares. _C_ sells 50 shares to _B_. These new shares are paid for in cash.

Make all entries in general books.

Make all entries in stock books.

2. _A_, _B_, and _C_ organize a corporation with an authorized capitalization of $100,000.00, divided into 1,000 shares of $100.00 each. _A_ subscribes for 400 shares, _B_, 300 shares, and _C_, 200 shares. The corporation buys from _D_ land and buildings for $20,000.00, paying him $10,000.00 in cash and issuing to him 100 shares of stock.

Subscriptions are paid as follows: _A_ pays $20,000.00 cash and gives his note due in 60 days for $20,000.00; _B_ pays $20,000.00 cash and gives his note for $10,000.00 payable in 30 days; _C_ pays $10,000.00 cash and gives his note for $10,000.00 payable in 10 days.

Make all entries in journal and cash book and post to ledger.

NOTE.--Land and buildings are grouped under the head of real estate.

3. John Davis and Daniel Greene own the La Belle mine, and to secure capital for its development they decide to organize a mining company and to sell shares. A corporation is organized with a capitalization of $1,000,000.00 in shares of $1.00 each. Of this stock 999,000 shares are issued to Davis and Greene, each receiving an equal number, and they, in turn, deed the La Belle mine to the company. The remaining 1,000 shares are subscribed and paid for by Martin Otis. Davis and Greene donate to the treasury 49,800 shares to be sold for the purpose of securing working capital. The directors, by proper resolution, decide to sell 200,000 shares: 50,000 shares to be sold at 20 cents on the dollar, 50,000 shares at 25 cents, and 100,000 shares at 35 cents. The resolution also provides that the corporation's liability for working capital shall be no more than the amount realized from the sale of treasury stock. Subscriptions are received for the 200,000 shares and payments are made at the prices specified.

Make all necessary entries to get these transactions properly recorded on both the general and stock books.

STOCK ISSUED FOR PROMOTION

=32.= Frequently when a corporation is organized, stock is issued to a promoter as payment for his services. An enterprise may have great latent possibilities provided sufficient capital can be secured for its development, but until the possibilities for making a profit can be clearly shown, it is difficult to interest the investing public. To interest investors in an enterprise yet to be developed requires a special talent not possessed by the average owner of a patent, mine, or process. There are men who possess this special talent and who make a business of promoting companies.

In many cases--probably most cases--the owner of the thing to be promoted has no money with which to pay the promoter. Consequently, the promoter first satisfies himself that the enterprise actually holds possibilities of profit and then agrees to accept all or a part of his fees in the stock of the company. The portion of his fee that he is willing to accept in stock, and the number of shares demanded, is governed largely by his own faith in the enterprise. His fee may be a certain per cent on the stock sold, or it may be an arbitrary sum represented by a certain number of shares. When he accepts his entire fee in stock, it may represent from 25 per cent to 50 per cent of the entire capitalization, and while the fee may appear exorbitant when represented by the par value of the stock, its actual value to him is represented by the _real_ value of the stock, or the price at which he could sell it.

Volumes might be written on the subject of promotion, but our special concern is the proper treatment of promotion fees on the books of the company. Strictly speaking, promotion fees are as much an expense as the cost of printing the company's prospectus, but to immediately charge it to expense would, in many cases, cause the accounts to show an impairment of capital at the outset. Suppose, for example, that a corporation is organized with a capital of $100,000.00 all paid in cash. The promoter is paid a fee of $15,000.00. Profits earned--trading profits--in the first year are $8,000.00, but we have a charge of $15,000.00 for promotion in the expense account. The books show that the company is insolvent, the liabilities being $7,000.00 in excess of the assets, while the business actually is in a healthy condition.

Expenses paid in the regular course of business are expected to be off-set by earnings. When we pay rent for a store or office we expect that, by reason of our occupancy of that store or office as a place of business, our earnings will be increased in an amount greater than that paid for rent. Promotion expense cannot, in itself, produce earnings. The cash, or other form of asset, received from the sale of stock--the direct result of promotion expense--is off-set by the stock liability created. Earnings to off-set promotion expense must come from future operations of the business.

It has become quite the general custom, therefore, to allow the expense incident to the organization of the company to stand on the books as a fictitious asset, under some such caption as _promotion expense_, _promotion fund_, or _organization expense_. The amount is gradually reduced by charging a stated per cent to profit and loss each year.

There is another special reason why it would be manifestly unfair to immediately charge promotion fees to expense. Suppose a promoter receives 20% of the stock for his services, while the holders of the remaining 80% have paid cash for their shares. Since the 80 per cent paid in cash must earn dividends on the entire 100 per cent of stock, it would be unjust to the holders of the 80 per cent to withhold dividends until the par value of the 20 per cent of stock shall have been added to the assets of the company from profits earned.

=The Entry.= A patent is owned by Geo. Davis, who secures the services of Wm. Lane to promote a company to undertake its manufacture. The corporation is capitalized at $500,000.00. Davis sells the patent to the company receiving $250,000.00 stock in payment, and Lane receives $25,000.00 stock for promotion, when he has secured subscriptions for the remaining $225,000.00 at par. The entries to record the issue of stock to Lane for promotion are:

Subscriptions $25,000.00 Capital stock $25,000.00 Subscription of Wm. Lane

Promotion expense 25,000.00 Wm. Lane 25,000.00 Fee due Wm. Lane for promotion of company and sale of stock. -------- Wm. Lane 25,000.00 Subscriptions 25,000.00 Amount due to Lane credited to subscriptions to pay for stock subscribed by him.

The entries for the shares issued to Davis and those sold are the same as previously explained and illustrated.

SURPLUS AND DIVIDENDS

=33.= The directors are under no obligation to distribute in dividends the profits earned in any one year. Instead, the by-laws usually provide that the decision as to when a dividend shall be declared is to be left entirely to the directors. They have it in their power to retain of the profits such an amount as, in their judgment, is advisable or necessary to safeguard the interests of the company. At the close of the fiscal year it is customary to close profit and loss account, and in a corporation it is closed into surplus.

=34. Surplus Sub-divided.= Sometimes the term surplus is used to designate a part of the profits set aside for a special purpose, as the creation of a fund to meet an obligation falling due at some future date. When surplus is treated as a special fund, or when it has been provided by resolution of the directors "_that a certain sum, or a certain per cent of the profits shall be set aside as a surplus fund_," and remaining profits not distributed as dividends may be placed to the credit of an account called _Undivided Profits_ or _Undistributed Profits_.

In reality undivided profits is surplus, and the division of the account merely serves to show that the amount credited to surplus is for some reason reserved, while the amount credited to undivided profits is available for dividends whenever the directors may so elect. Whether or not the surplus should be shown in the balance sheet under these various headings, or all under the general head of surplus, with explanatory notes, is a question which need not concern us at this point.

=35. Declaring a Cash Dividend.= When a dividend is declared an account should be opened under the caption _Dividends Payable_ or _Dividend No. 1._, etc. We will suppose that a dividend has been declared out of the profits of the business for the current year. The entry is:--

Profit and Loss Dividends payable Dividend of----% declared by the board of directors --------1909, payable--------1909.

When the dividend is paid the entry will be--

Dividends payable Cash To pay dividend payable --------1909.

=36. Declaring a Stock Dividend.= Not all dividends are paid or payable in cash. Sometimes the directors declare a dividend payable in stock and this is known as a stock dividend. There may be treasury stock in possession of the treasurer, and if the books show a surplus, which would make it proper to declare a cash dividend, a dividend may be declared payable in treasury stock. When such a dividend is declared the entry is--

Profit and Loss Stock dividend A dividend of----% declared by the board of directors --------1909 payable--------1909, payment to be made in treasury stock Stock dividend Treasury stock To pay stock dividend declared--------1909.

The shares are then transferred on the stock books debiting treasury stock and crediting stockholders.

It is not absolutely necessary that a company possess treasury stock to declare a stock dividend. When current profits are large or a surplus, larger than the requirements of the business demand, has been accumulated, a stock dividend may be declared by issuing additional shares, provided the original stock has not all been subscribed for.

If a large surplus has been accumulated and a part of the stock is unsubscribed, a stock dividend would require the following entries:

Surplus Stock dividend A stock dividend of----% declared by the directors--------1909 payable in the unissued stock of this company. -------- Subscriptions Capital stock Additional stock subscriptions received from the following. -------- Stock dividends Subscriptions Stock dividend due stockholders used to off-set subscriptions.

The stock dividend is a device frequently used to conceal actual profits, or to cover up the fact that dividends are being declared in excess of a fixed rate. This is especially true of such public service corporations as lighting companies or street railways. In many cases a company will go through the necessary formalities to increase its capital stock for the purpose of absorbing surplus by means of a stock dividend.

=37. Treatment of a Loss.= If, during any year, the business has sustained a loss, it will, of course, appear as a balance on the debit side of profit and loss account. This will then be transferred to the debit of undivided profits or surplus, if any, remaining from previous years. For illustration, suppose the books show a surplus of $5,000.00, undivided profits $500.00, loss for the current year $2,500.00, the entry will be:--

Undivided profits $500.00 Surplus 2,000.00 Profit and loss $2,500.00 Loss for the year.

If there is no surplus remaining from former years, the business is insolvent, in which case the capital is said to be impaired. This can be taken care of in either of two ways. First--by the stockholders subscribing to a fund to cover the deficiency. Second--by a reduction of the capital stock.

EXERCISES

1. David Francis and Henry Harmon own a large tract of timber land in Mexico. In connection with F. B. Walker--a promoter--they organize a corporation to build railways and mills for the purpose of developing the property and to market the timber. The company is capitalized for $1,000,000.00. The land is sold to the corporation for $1,000,000.00, stock for that amount being issued to Francis, Harmon, and Walker. Francis and Harmon each received $400,000.00 and Walker, $200,000.00. This $200,000.00 stock is issued to Walker as his fee for promoting the company. Francis and Harmon each donate 250 shares, of the par value of $100.00 each, to the treasury to be sold to produce working capital.

Make all necessary entries in general books.

2. The profits of a manufacturing company with a paid up capital of $100,000.00, are $9,765.00. The directors, by proper resolution, declare a cash dividend of 6 per cent, set aside a surplus of $3,000.00, and transfer the balance to undivided profits.

Make all necessary entries in general books, showing ledger accounts after payment of dividends.

3. The following year's business of the above company showed a loss of $2,160.00. How is this loss disposed of? Make entries.

4. A company capitalized at $250,000.00 has sold $100,000.00 of its stock, the balance being unsubscribed. Its accumulated surplus is $90,000.00, and the directors declare a stock dividend of 50 per cent to all stockholders. Make all entries.

5. A manufacturing company has a capital stock of $100,000.00. One item in its assets is machinery $26,750.00. The profits for the year are $11,640.00. The directors provide for a reserve for depreciation of machinery of 10% and declare a dividend of 5%.

Make all entries.

CHANGING BOOKS FROM A PARTNERSHIP TO A CORPORATION

=38.= Wilson, Brackett, and Nixon have been conducting a retail clothing business under a partnership agreement. Appreciating the advantages of a corporate form of organization, they decide to incorporate under the name of the Continental Clothing Company.

The first step necessary to prepare for the incorporation of a partnership is to ascertain the net capital of the business as it stands. Accordingly, an inventory is taken, the books are closed, and a balance sheet prepared with the following results:

_Balance Sheet of Wilson, Brackett, and Nixon_ _Assets_ Cash $1,650.72 Bills receivable $1,725.00 Accounts receivable 3,264.18 4,989.18 -------- Merchandise inventory 10,450.00 Furniture and fixtures 4,000.00 14,450.00 $21,089.90 -------- -------- _Liabilities_ Bills payable 3,000.00 Accounts payable 2,089.00 5,089.90 -------- Wilson, capital account 7,000.00 Brackett, capital account 5,000.00 Nixon, capital account 4,000.00 16,000.00 21,089.90 -------- --------

From this balance sheet it is seen that the net capital is $16,000.00, of which Wilson owns $7,000.00, Brackett, $5,000.00, and Nixon, $4,000.00. On this showing, it is decided to form the company with a capital stock of $20,000.00, all of which is to be issued as full paid stock to the partners in proportion to their interests in the partnership.

New books are opened for the corporation and the next step is to transfer the accounts of the partnership to the corporation. An account is opened in the partnership ledger with the Continental Clothing Company and the following entry is made:

Continental Clothing Co. $21,089.90 Cash $1,650.72 Bills receivable 1,725.00 Accounts receivable 3,264.18 Merchandise inventory 10,450.00 Furniture and fixtures 4,000.00

The above entry closes all of the asset accounts and shows that they have been transferred to the new company.

The next entry is:

Bills payable $3,000.00 Accounts payable 2,089.90 Wilson 7,000.00 Brackett 5,000.00 Nixon 4,000.00 Continental Clothing Co. $21,089.90

The above entry closes the liability and partners' accounts showing that they have been transferred to the new company and also closes the account of the Continental Clothing Co.

=39. Entries on the Corporation Books.= We are now ready to open the books of the new company. Subscription books are opened and the following subscriptions are received:

Wilson 8,750.00 Brackett 6,250.00 Nixon 5,000.00

The net assets of the partnership are $4,000.00 less than the capital stock of the new company. No money is to be invested to cover this discrepancy, so it will be necessary to account for it on the books by opening a fictitious asset account under some such name as _goodwill_. Having made this provision, the books of the new company are opened by the following entries:

Subscriptions 20,000.00 Capital stock 20,000.00 Subscriptions received as per subscription books. -------- Cash 1,650.72 Bills receivable 1,725.00 Accounts receivable 3,264.18 Merchandise inventory 10,450,00 Furniture and fixtures 4,000.00 Goodwill 4,000.00 Bills payable 3,000.00 Accounts payable 2,089.90 Subscriptions 20,000.00

The business and goodwill of the firm of Wilson, Brackett, and Nixon transferred to this company in payment of subscriptions to capital stock.

These entries serve to get the capital stock, also the assets and liabilities of the partnership properly recorded on the books of the new company.

STOCK DONATED TO EMPLOYES

=40.= A partnership composed of Benson, Black, and Mabley is conducting a retail hardware business. They desire to give their bookkeeper (Parker) an interest in the business. The firm has the following assets and liabilities:

_Assets_ Cash $3,000.00 Accounts receivable 2,000.00 Merchandise 15,000.00 Total assets $20,000.00 _Liabilities_ Accounts payable 2,000.00 Benson capital 6,000.00 Black capital 6,000.00 Mabley capital 6,000.00 Total liabilities 20,000.00

They incorporate the Benson Company with a capitalization of $40,000.00 divided into 400 shares of $100.00 each. Benson, Black, and Mabley each subscribe for 100 shares, and 20 shares are presented to Parker. The balance of the stock is to remain unsubscribed until such time as it is decided to accept further subscriptions. The business of the partnership is to be accepted by the company in payment of subscriptions which have been made, and which are for 320 shares or $32,000.00. The net assets of the partnership being $18,000.00, goodwill must represent the balance of $14,000.00. The entries on the books of the partnership follow--

The Benson Co. $20,000.00 Cash $ 3,000.00 Accounts receivable 2,000.00 Merchandise inv. 15,000.00 -------- Accounts payable 2,000.00 Benson 6,000.00 Black 6,000.00 Mabley 6,000.00 The Benson Co. 20,000.00

=41. On Books of the Benson Co.= The entries on the books of the new company are the same as in previous illustrations, the stock donated to Parker having been a gift from the partnership and the amount included in the goodwill.

Subscriptions 32,000.00 Capital stock 32,000.00 -------- Cash 3,000.00 Accounts receivable 2,000.00 Merchandise inventory 15,000.00 Goodwill 14,000.00 Accounts payable 2,000.00 Subscriptions 32,000.00

=42. When the Gift is Made by an Existing Corporation.= We will suppose that the Benson Co. wishes to donate 10 shares of stock to each of three employes, _A_, _B_, and _C_. Having 80 shares unsubscribed, the donation will be made from that stock. Supposing that the company has accumulated a surplus, the transaction will be entered on the "books" as follows:

Subscriptions 3,000.00 Capital stock 3,000.00 Subscriptions of _A_, _B_, & _C_ per subscription book. -------- Surplus 3,000.00 Subscription 3,000.00 Surplus appropriated to subscriptions per resolution of the board of directors Jan. 25th, 1909.

The above would be a rather unusual proceeding as the stock is fully paid, though such gifts are sometimes made. The tendency of the present times is toward profit sharing for the employes of corporations. The plan of profit sharing takes many forms, and there are some notable examples among very large corporations which have given employes stock in the corporation, or afforded them an opportunity to acquire stock on very favorable terms.

Among smaller corporations it is quite common to enable employes to acquire its stock subject to certain special conditions. Frequently employes are permitted to subscribe for stock with an agreement that they are to pay no money, but that dividends declared are to be applied to the payment of subscriptions. In this way the stock is made to pay for itself out of its own earnings. Sometimes provision is made for the payment of small annual installments on the subscriptions in addition to applying the dividends. When stock is issued to employes under these conditions, the contract sometimes specifies that in the event of the subscriber leaving its employ before the subscription is paid in full, the ownership of the stock shall revert to the company, and in such cases the stock, until it becomes full paid, is usually placed in the hands of a trustee. The principal object in issuing stock to an employe and surrounding the transaction with these restrictions is, of course, to insure his continuous service by making it an object to him to remain in the employ of the company.

When stock is so issued, the entry is--

Subscriptions Capital stock

Subscriptions to stock by employes, said stock to be issued subject to the conditions named in the resolution authorizing its issue, passed by the board of directors January 25th, 1909.

The subscription account is left open until such time as it is closed by the payments credited. When a dividend is declared the entries are--

Surplus Dividends payable Being a dividend of----% declared by the board of directors on--------1909 payable--------1909. -------- Dividends payable Subscriptions Dividend applied to the payment of subscriptions.

Another provision sometimes met with in the issue of stock to an employe is that in lieu of an increase in salary he shall receive, at the end of the year, a certain amount in stock. He is then permitted to subscribe for a stated amount of stock and to apply the bonus, or added salary, as a payment. The bonus is usually a stated per cent of sales or of net profits. When such a contingency arises the entry is--

Salaries John Jones ----% of sales as per agreement. John Jones Subscriptions Amt. due applied in payment of stock subscription.

If he has no account, on the books the transaction may be recorded by one entry--

Salaries $1,500.00 Subscriptions $1,500.00 ------------

WHEN STOCK SUBSCRIPTIONS ARE NEVER FULLY PAID

=43.= Corporations are sometimes organized with all capital stock subscribed but only paid for in part, and the balance of subscriptions never called for. T. C. Harris, John Alfred, and M. B. Hatch organize a company to conduct the business of buying, selling, and renting automobiles with a capital stock of $15,000.00, each subscribing for $5,000.00. A cash payment of 25% is made on the stock and the balance is to be paid in when called for. The entries stand on the books as follows--

Subscriptions $15,000.00 Capital stock $15,000.00 Cash 3,750.00 Subscriptions 3,750.00

The business prospers to such an extent that the profits provide sufficient money and it is not likely that the stockholders will be called upon for further payments. It is decided to reduce the stock to $5,000.00 and to declare a dividend to make this stock full paid. The entries for these transactions follow:

Capital stock 10,000.00 Subscriptions 10,000.00 Capital stock reduced in accordance with resolution of board of directors passed Jan. 27, 1909. -------- Surplus 1,250.00 Dividends payable 1,250.00 Dividend declared by board of directors Jan. 27, 1909, payable immediately. -------- Dividends payable 1,250.00 Subscriptions 1,250.00 Dividends applied to the payment of stock subscriptions.

The original stock certificates are now surrendered and new ones issued in their place. In the stock ledger the stockholders are debited and capital stock credited for the shares surrendered. Then, capital stock is debited and stockholders credited for the new shares issued.

It might happen that a corporation wishes to reduce the capital stock held by stockholders without having it appear that capital stock has been reduced. This has been done by purchasing its stock and placing it in the treasury. Payment for the stock may be made in cash or notes, or it may be taken from surplus. The entries would be--

Treasury stock 10,000.00 Cash 10,000.00

or

Treasury stock 10,000.00 Bills payable 10,000.00

or

Treasury stock 10,000.00 Surplus 10,000.00

If the capital stock is to be reduced on the books, capital stock will take the place of treasury stock in these entries as--

Capital stock 10,000.00 Cash 10,000.00

EXERCISES

1. Parsons, Young, and Searles are partners and decide to form a corporation with capital stock of $40,000.00, which is to be issued as full paid stock in exchange for their present business. Each partner is to receive stock in proportion to his interest in the present business. The balance sheet of the partnership is as follows:

_Assets_ Cash 3,500.00 Bills receivable 6,000.00 Accounts receivable 6,500.00 Merchandise 14,000.00 -------- Total 30,000.00 _Liabilities_ Bills payable 4,000.00 Accounts payable 2,000.00 Parsons 10,000.00 Young 8,000.00 Searles 6,000.00 -------- Total 30,000.00

Make entries on books of the partnership.

Make entries on books of the corporation.

2. Hoadley and Stockton are partners and desire to incorporate a company with a capital of $10,000.00 to take over their business. It being necessary to have three incorporators they agree to give Hopper, an employee, 10 shares--$1,000.00--of the stock of the new company. The stock is to be divided equally between Hoadley and Stockton after giving Hopper $1,000.00. The balance sheet of the partnership is as follows:

_Assets_ Cash $960.00 Accounts receivable 1,570.00 Merchandise 720.00 -------- Total $3,250.00 _Liabilities_ Accounts payable 460.00 Bills payable 500.00 Hoadley 1,145.00 Stockton 1,145.00 -------- Total 3,250.00

Make all necessary entries on the books of the partnership.

Make open entries on the books of the new company.

3. The National Manufacturing Co., has an authorized capital of $100,000.00 of which $60,000.00 is paid up and $40,000.00 unsubscribed. It is decided to permit employes to subscribe for $10,000.00 of the stock by paying 10 per cent in cash, all dividends declared to be applied to the payment of subscriptions.

What entries are made when this stock is subscribed for?

A 10 per cent dividend being declared at the end of the first year what entry is required?

4. The Atlas Novelty Co. has a capital stock of $50,000.00. All of the stock has been subscribed for, but only 40 per cent has been paid. A surplus of $10,000,00 has been accumulated. It is desired to reduce the stock to $25,000.00 full paid. What is the necessary proceeding, and what entries are required?

5. A company has a capital stock of $50,000.00 full paid, and a surplus of $11,172.00. A stockholder who owns $7,000.00 stock in the company wishes to dispose of his stock and, to secure cash, offers to sell it to the company at par. His offer is accepted and the stock purchased, but the company does not wish to reduce its capitalization. What is the entry?

RESERVES AND THEIR TREATMENT

=44.= A reserve is an amount retained from current earnings to meet a future contingency. According to a prominent authority whose recent discussions of this subject have attracted attention, _a reserve is an expression of the judgment of the accountant as to what amount will be necessary to meet a contingency_. Reserves are created for many purposes, among which the following are good examples.

_Reserves for bad debts._ An amount--usually a stated per cent of accounts receivable--annually set aside to cover losses from uncollectable accounts.

_Reserves for depreciation._ The plant--buildings and machinery--will wear out, no matter how substantially built. A charge is made against current earnings to create a reserve which will provide for a renewal of the plant, or any part of it, when worn out. Separate reserves are usually maintained for buildings and machinery.

_Reserves for Patents, Franchise, Goodwill_ and similar fictitious assets. An annual charge of an amount sufficient to extinguish the value at which the fictitious asset has been placed on the books.

_Reserves for permanent improvements on leased property._ Permanent buildings, title to which will revert to the lessor at the expiration of the lease, are sometimes erected on leased property. A reserve is created to absorb the cost of such improvements during the life of the lease.

_Reserves for buildings in hazardous undertakings._ In certain lines of business, manufacturing plants are erected with the expectation of having a permanent supply of raw material. If the supply gives out, the plant may be valueless for other purposes. Examples are oil wells and mines. A reserve is created to absorb the cost.

The reserve is coming into more general use every year, especially by corporations, whose managers see the necessity of providing for these contingencies. When a machine wears out it must be replaced. If no reserve has been created, the money for its replacement must come from current earnings, or be provided by borrowing money or increasing capital. The better plan is to make provision in advance by creating a reserve.

The amount of the reserve should be the value of the asset, and the sum set aside annually should be sufficient to equal the value of the asset at the end of its estimated life. To illustrate, if a machine is estimated to last 10 years, the annual reserve for depreciation should be 10% of its cost. The reserve is carried on the books as a liability and is an off-set to the asset which it is to replace. If we were to prepare a statement of the value of machinery as shown by the books we would state it in this form--

Machinery $20,000 Less reserve for depreciation 2,000 -------- $18,000

This shows the exact amount at which this asset is valued. Taking the illustration referred to--at the end of 10 years the liability _reserve for depreciation_ will equal the asset _machinery_, and the funds which have been reserved from profits during the past 10 years will be available for the purchase of new machinery.

=45. Reserve Funds.= A term frequently used to designate a reserve created for a certain purpose is reserve fund. This term is somewhat confusing for when we speak of a _fund_ we are more likely to think of it as an asset than as a liability. When the principle underlying reserves is thoroughly understood, however, it is readily seen that the use of the term _reserve fund_ is merely a question of the use of English and does not affect the principle. A reserve or _reserve fund_ is a nominal liability artificially created to off-set a decrease in value of an asset. On the principle that an increase of liabilities represents a loss, the amount reserved each year represents a loss, but since the liability created is not a real but a nominal liability it does not affect the real assets of the business.

=46. Sinking Funds.= A sinking fund is an amount set aside out of profits to meet an anticipated liability, or an obligation which is to fall due at some future date. Sinking funds are set aside for such purposes as the payment of bonds at maturity, mortgages, etc. The sinking fund is the amount which, invested at compound interest, will produce the desired amount at the end of the period.

A sinking fund is an asset and may or may not be withdrawn from the business. Frequently a sinking fund is invested in securities, such as government bonds, which are placed in the hands of a trustee, thus insuring against the withdrawal of the funds from actual use in the business.

Unlike a reserve, a sinking fund has no effect on the apparent profits of the period in which it is created. It does, however, tie up or render unavailable for dividends a certain part of those profits. Whether or not it is carried on the books in a separate account, a sinking fund is a part of the surplus of a business.

=47. Computing Sinking Funds.= The amount necessary to set aside at the end of the year to provide a given sum in a stipulated number of years at a stated rate of interest, compounded annually, may be found as follows:

Divide the interest for one year upon the sum to be accumulated by the compound interest upon $1.00 for the stipulated time. The result will be the amount necessary to invest at the end of each year.

If the amount is to be invested at the beginning of the year, divide the result obtained as above by the amount of $1.00 for one year.

_Example._ To provide for payment of $50,000.00 at the end of 15 years, what amount must be put into a sinking fund at the end of each year, if the fund is invested to earn 3% compound interest? Interest on $50,000.00 for 1 year at 3% is $1,500.00. Compound interest on $1.00 for 15 years at 3% is .55797. Dividing $1,500.00 by .55797 gives $2,688.32, the amount necessary to put into the fund annually. If this amount is to be invested at the beginning of each year, divide the above result ($2,688.32) by $1.03 (the amount of $1.00 for one year at 3%) and we obtain $2,610.02 the amount needed.

BONDS

=48.= In the sense here used a _bond_ is the written obligation of a corporation to pay a certain amount at a specified future date. Bonds are usually secured by a mortgage on all or a part of the property of the corporation.

A bond issue is a favorite method of borrowing money with corporations. Bonds can be issued in any denomination, and by reason of this a loan can be distributed among a large number of investors. Being secured by mortgage on the company's property the bonds of a corporation are very frequently more desirable investments than its stocks. Interest on bonds must be paid before dividends can be declared.

Bonds can only be issued with the consent of the holders of a certain per cent of the stock.

=49.= _Classes of Bonds._ The bonds of corporations are of several classes, as follows:

A first mortgage bond is one secured by first mortgage on the company's property.

A second mortgage bond is one secured by second mortgage. Interest cannot be paid on second mortgage bonds until it has been paid on the first mortgage bonds.

General mortgage bonds are those secured by a general mortgage on all of the company's property.

Collateral bonds are secured by the deposit of collateral security.

A debenture is a bond with no other security than the good name of the company.

Refunding bonds are those issued in place of maturing bonds which the company does not wish to pay in cash.

Equipment bonds are those secured by the rolling stock of a railway, and are also known as car trust certificates.

A gold bond is any form of bond, the terms of which specify that it shall be paid in gold.

Registered bonds are those, the names of the owners of which must be registered on the books of the company. Ownership of a registered bond can be transferred only on the books of the company.

=50. Bond Liability.= When bonds are issued by a corporation, either public or private, an account is opened under some such caption as _bond issue_ or _bonds payable_. As fast as bonds are sold the proceeds are credited to this account, which represents a liability. A new account should be opened for each issue of bonds.

The bonds of a given issue will all bear the same date, with interest payable from that date. We will suppose that a corporation issues its bonds for $100,000.00 in denominations of $1,000.00 each. These bonds are dated Feb. 1st, and bear interest at 5 per cent payable annually. They are payable at the end of 10 years from date. The company agrees to maintain a sinking fund of an amount sufficient to pay the bonds at maturity if invested in securities drawing 4 per cent interest, and to invest the fund in such securities which are to be placed in the hands of a trustee.

During the first year bonds are sold in the amounts and under the conditions which follow:

_First._ On the date of issue $10,000.00 of these bonds are sold at par.

_Second._ At the end of three months $10,000.00 of the bonds are sold at 101 and accrued interest, yielding $10,225.00 of which $10,000.00 is principal, $100.00 premium, and $125.00 interest.

_Third._ The next sale is $10,000.00 of the bonds at 98, interest accrued $250.00, yielding $10,050.00 made up of principal $10,000.00, less discount $200.00, and interest $250.00.

=51. Premium on Bonds.= When bonds are sold at a price above par, the premium should be credited to a _premium on bonds_ account. When sold below par, the discount may be charged to the same account.

=52. Interest on Bonds.= The interest paid on bonds may be charged to an _interest on bonds_ account, which keeps it separate from the regular interest account. When bonds are sold with accrued interest, which is paid by the purchaser, the accrued interest is credited to interest on bonds.

=53. Expense of Bond Issue.= All expenses incurred in the issue and sale of bonds should be charged to _expense of bond issue_ account. The account can be closed into profit and loss immediately, or it is proper to spread it over the life of the bonds, charging off the proper amount each year. It is also considered proper to charge discount on bonds to this account.

=54.= Continuing the example in Art. 50, we find that the amount of bonds outstanding is $30,000.00, and a sinking fund must be established which will equal this amount when the bonds mature. Following the rule in Art. 38, we divide the interest on $30,000.00 for one year at 4 per cent ($1,200.00) by the compound interest on $1.00 for 10 years at 4 = (.48024) obtaining as a result $2,498.75, the amount necessary to be invested at the end of each year. This amount must be provided each year for permanent investment to meet the principal and an additional $1,500.00 must be provided each year for interest.

The entries which follow are the ones necessary to record the sales shown in Art. 50.

--Feb. 1-- Cash $10,000.00 Bond issue $10,000.00 -------- --May 1-- Cash 10,225.00 Bond issue 10,000.00 Premium on bonds 100.00 Interest on bonds 125.00 -------- --Aug. 1-- Cash 10,050.00 Expense of bond issue (discount) 200.00 Bond issue 10,000.00 Interest on bonds 250.00

At the end of the year when the interest is paid and the first installment of the sinking fund is set aside, these entries are made:

--January 31-- Interest on bonds 1,500.00 Cash 1,500.00 -------- Sinking fund 2,498.75 Cash 2,498.75

The illustrations (page 240) show the status of all of these ledger accounts at the end of the year.

MANUFACTURING AND COST ACCOUNTS

=55.= Manufacturing began in this country many years ago and was for a long time confined to the eastern and New England states. Encouraged and fostered by national, state, and local governments, and by discoveries of sources of supplies, it has extended to all parts of the country. Manufacturing has grown to proportions which place it at the very head of our industries, if we except agriculture, the growth of which has been largely influenced by the progress in manufactures. One result is that the business of manufacturing has perhaps more than any other, attracted capital from great numbers of investors, large and small. Owing to its very nature, manufacturing readily lends itself to the corporate form of organization, and it is for manufacturing that a very great number of corporations have been formed. Manufacturing has, therefore, been selected for a more complete exposition of corporation accounting.

The accounts of a manufacturing business are to a certain extent peculiar to itself. Regardless of the nature of the product, there are certain underlying principles which should govern the devising of a system of accounts for a manufacturing business. Perhaps the most important feature to be kept in mind is to so arrange the system that the cost of manufacturing the goods will be shown.

Correct cost accounting methods are of greater importance to the manufacturer than the method of keeping accounts with his customers. He cannot afford to wait until the end of the year for results; he must know what his goods cost him if he is to intelligently make selling prices. There are so many opportunities for fluctuations in manufacturing costs that the accounts must at least show approximate results at all times.

Cost accounting is a profession in itself, and it is not our purpose to discuss, in this paper, all of the details of collecting data in the factory and shop. The purpose of this paper is to show the accounts with which a bookkeeper for a manufacturing business should become familiar. Even when a manufacturer does not maintain a complete cost accounting system the bookkeeper can produce some valuable statistics by a proper arrangement of the accounts.

ACCOUNTS USED

=56.= For the purpose of illustration we have selected a representative schedule of the accounts of a manufacturing business. The following accounts are those which have a direct bearing on the manufacturing branch of a business and do not include the administrative and selling branches.

FACTORY ASSETS

1. _Real Estate._ Includes the cost of land and factory buildings.

2. _Machinery._ Charged with the cost of all machinery including total cost of installation. Freight, cartage, and cost of erecting the machine ready for use should be included.

3. _Patterns and Tools._ Charged through cash and purchase book for all patterns and tools purchased. Charged through cash book and journal--with proper credit to material and labor accounts--if manufactured in the factory.

4. _Material Purchases._ Charged through purchase and cash books for all purchases of material that enters into the product. Cost includes charges for delivery. Credited for all material used in the factory. This may be subdivided into several accounts to represent the different classes of material used--as iron, steel, lumber, leather, hardware, etc.

5. _Supplies Purchases._ Charged through purchase and cash books for all purchases of factory supplies, like oil, waste, belt lacing, and similar items. Credited for all supplies used in the factory.

6. _Finished Goods._ Charged for all goods finished, usually at cost of manufacture. Sometimes a small factory profit is added. This account represents a purchase account to the commercial department, as it represents the cost of goods to them,

FACTORY EXPENSES

7. _Salaries._ Charged for salaries of superintendent, assistant superintendent, and factory clerks.

8. _Labor._ Charged through cash and pay roll books for the amount of all factory pay-rolls.

9. _Experimental._ Charged through cash and pay-roll books and journal for all labor and material used in experimental work carried on for the purpose of improving the product.

10. _General Factory Expense._ Charged through cash and purchase books for cost of miscellaneous factory expense items not otherwise accounted for.

11. _Power, Heat, and Light._ Charged for fuel, oils, water, wages of engineer and firemen, electricity (when purchased), and all other items entering into their cost.

12. _Building Maintenance and Repairs._ Charged through cash and purchase books for materials purchased specially for repairs to buildings. Charged through journal and pay-roll book for labor and materials or supplies consumed in maintenance and repairs to buildings.

13. _Repairs to Machinery._ Treated the same as No. 12.

14. _Repairs to Patterns and Tools._ Treated the same as No. 13.

15. _Insurance._ Charged through cash book for all premiums paid for insurance on buildings and contents.

16. _Taxes._ Charged for all state, county, and city taxes.

17. _Depreciation of Buildings._ An amount charged off each year to cover depreciation.

18. _Depreciation of Machinery._ Treated the same as No. 17. Depreciation based on estimated life of machine.

19. _Depreciation of Patterns and Tools._ Treated the same as No. 18.

SUMMARY ACCOUNTS

20. _Manufacturing Account._ Charged for cost of labor and material consumed in manufacture of goods; charged for proper proportion of all expense accounts; credited with cost of all finished goods. Balance represents cost of all goods in process.

COLLECTING COST STATISTICS

=57. Routine Followed.= The notes following the names of the accounts in the above schedule explain their purpose and show clearly how charges are made direct to the expense accounts. Further explanations are necessary in regard to charges and credits to manufacturing account.

Labor is easily disposed of as the amount standing to the debit of labor account at the end of the month is transferred to the debit of manufacturing account, closing labor account.

Material charges are more difficult to handle. In all well-regulated factories all material is as carefully accounted for as cash. Proper storage rooms are provided in which all material is stored. These rooms are placed in charge of a man known as stockkeeper or stores clerk, and no one is allowed to take material from the storerooms without first presenting a written order, signed by the foreman, showing for what purpose the material is to be used. This order is retained by the stockkeeper and after he has posted the material to his own records he sends it to the bookkeeper. From these orders, the bookkeeper compiles a record of material withdrawn and, at the end of the month, the amount is debited to manufacturing account and credited to material purchases.

The stockkeeper keeps a record of all material received and delivered and the balance of his accounts shows the quantities of the different materials which he should have in stock. His record should agree with the balance of material purchases account.

When a stockkeeper is not employed it is necessary to have reports from the factory. The bookkeeper should arrange to obtain daily reports from the foremen showing all materials taken into their departments which are to be used in the manufacture of the regular product. If any of this material is to be used for the manufacture of tools or patterns for use in the factory, or for repairs to tools, patterns, machinery, or buildings, it should be noted on the report with a statement of the exact purpose for which it is intended. From these reports, the bookkeeper will compile his material records which will be credited to material purchases, and charged to manufacturing account and the different repair accounts at the end of the month.

Supplies are handled the same as materials, except that where this is a small item it is sometimes treated as an expense account. Where a considerable value is involved it is preferable to consider it as a subdivision of the material account.

The expense accounts must be charged on a percentage basis for the reason that the amounts actually expended vary in different months, and an expense item paid in one month may cover that particular expense for an entire year. Such items are insurance premiums and taxes, paid once a year to cover twelve months. Other expense items like experimental, power, and repairs are difficult to determine for a single month. It is customary to base the charge for these items on the records for the previous year. The amount of such expenses for a year is divided by twelve and each month one twelfth of the amount is charged to the manufacturing account and credited to the expense account. If there is any discrepancy at the end of the year it is adjusted by a debit or credit to finished goods.

Reports should be made daily by all foremen showing exactly what partly finished goods are received in their department and the quantity delivered to the next department. A record of these reports should be kept, which will show at all times the quantity of goods in process in each department. Reports of finished goods received in the stock room will show the quantity manufactured, or rather finished, during the month. See report form illustrated on page 53.

If all goods on which work had been started were finished, the charges to manufacturing account would represent their exact cost, but there is always a certain quantity of goods in various stages of manufacture, and the amount already expended on them must be considered. Therefore an inventory is taken of goods in process. Great care must be exercised, in taking this inventory, that too high a value is not placed on partly finished goods, for if the valuation is too high the apparent cost of finished goods will be less than actual cost. It is of utmost importance that the cost of manufacture be not understated, for it is on this cost that selling prices will be based. This is one reason why some manufacturers add a small-factory profit. Unless a complete system of cost accounting is maintained, this inventory of goods in process must be an estimate, but the record of goods in process in each department will be of considerable assistance in making the estimate.

When the inventory is complete the amount should be deducted from the total debits to manufacturing account, which will show the cost of goods manufactured. This cost should then be credited to manufacturing account and charged to finished goods account. Manufacturing account will now show a debit balance representing cost of goods in process.

This method will produce very satisfactory results for factories in which but one line of goods is manufactured, but does not supply the information required where several styles, sizes, or lines are made. For one line of goods it is only necessary to divide the total cost by the quantity produced, as pounds, feet, dozen, or gross to find the cost of a single unit. In the more complicated business a detailed cost system would be required.

PAY-ROLL RECORDS

=58.= In connection with the labor account, the manner of keeping the pay-roll record is of considerable importance. Like most other forms of record, pay-roll books are made to suit the needs of the individual concern. For a manufacturing business a feature to be kept in mind is such an arrangement as will give the most complete record of the cost of labor in each separate department. Where men are never transferred from one department to another during a weekly or monthly pay-roll period, this result would be obtained by a simple grouping of the names by departments. In many manufacturing lines, however, workmen are frequently transferred so that to obtain costs for departments it is necessary to provide special forms for distribution.

But why go to the trouble of distributing the pay-roll by departments? That we may more closely watch expenses and costs. The reports which the bookkeeper receives from foremen show quantities of goods passing through each department. If the pay-roll is sectionalized it will enable the bookkeeper to determine the labor cost per unit of goods manufactured in each department. A comparison of these costs from month to month will be of value in showing changes in cost. The form illustrated provides for a business having four departments and paying employes both on piece work and day wage plans.

EXPENSE INVENTORY

=59.= When the books are closed, it usually happens that certain expense accounts show expenditures for items of expense that are not accrued. Illustrations are insurance and taxes paid yearly in advance. Suppose insurance premiums to the amount of $150.00 are paid on April 1st to cover insurance for one year. If the books are closed July 1st, 9/12 of this amount will have been paid for insurance that we have not received--the premium has not been earned. The inventory will also show unused material which has been charged to such expense accounts as repairs. It is proper to take an inventory of these amounts, treating them as assets in the balance sheet.

To properly record all such unearned expenses and make the books agree with the balance sheet, an account should be opened under the title of _Expense Inventory_, to which these items will be charged, with corresponding credits to the proper expense accounts. After the books have been closed, these items will be changed to the expense accounts, and credited to expense inventory, closing the latter account.

EXPENSE LIABILITY

=60.= Certain expenses will have accrued which have not been paid. Such an item is interest on bills payable, bonds, or mortgages, or taxes due and unpaid. These items should be treated as liabilities in the balance sheet. An account called _Expense Accrued_ should be opened and credited with these items, with corresponding debits to expense accounts. When the books have been closed, this account is closed by crediting the items to the expense accounts from which they were received.

BALANCE LEDGER

61. A form of ledger now in quite common use is known as the _balance ledger_. The form differs from the standard ledger form in being provided with an extra column in the center in which balances are extended. If the bookkeeper when posting, extends the balance after each item is posted, much time is saved in looking up accounts and in taking trial balances. The nature of the account will usually indicate whether there is a debit or credit balance. Accounts in the sales ledger will usually show a debit balance, while one in the purchase ledger will have a credit balance. If the balance is the opposite from what is to be expected it may be indicated by placing the letter _D_ in front of the amount in the balance column for debits, or the letter _C_ after the amount for credits.

SAMPLE TRANSACTIONS

62. The following transactions exhibit the accounts which are special to a manufacturing business without including the commercial accounts which record sales. The manner of keeping those accounts is the same for a manufacturing business as for any other.

Being a business conducted by a corporation these accounts include the stock accounts usually kept in the general books. The auxiliary stock books are omitted, it being felt that the special illustrations of such books will have been sufficient to give the student a thorough understanding of their uses.

The books required in the manufacturing business, omitting sales accounts, are _invoice register_ or _purchase book_, _cash book_, _journal_, _pay-roll distribution book_, _purchase ledger_, and _general ledger_.

A corporation known as the Atlas Manufacturing Co., is organized with an authorized capitalization of $100,000.00, with the provision that business is to begin when $50,000.00 of the stock has been subscribed, and $25,000.00 paid in. The incorporators are Henry Biddle, John Noonan, David Snow, Henry Farwell, and George Dunn. Each incorporator subscribes for $10,000.00 stock payable one-half down and one-half in 30 days. The detailed record follows:

--March 1--

Received subscriptions to the capital stock, payable one-half down, and one-half in 30 days, from the following. Stock is to be issued when paid in full.

Henry Biddle $10,000.00 John Noonan 10,000.00 David Snow 10,000.00 Henry Farwell 10,000.00 George Dunn 10,000.00

Received cash in payment of subscriptions from the following:

Henry Biddle 5,000.00 John Noonan 5,000.00 David Snow 5,000.00 George Dunn 5,000.00

Received from

Henry Farwell

His note at 30 days with 6% interest in payment of installment on his subscription 5,000.00 -------- Deposited cash in Second National Bank 20,000.00

--2--

Received from

Derby Desk Co. Invoice #1, terms N/30 Charge to office fixtures 350.00

--3--

Leased for two years from Jacob Newman a factory building at an annual rental of $1,800.00, payable quarterly in advance. Gave him check No. 1 for 3 months' rent.

--4--

The following invoices are entered--

Meyers Engine Co. Invoice No. 2, terms N/30 Charge to machinery 1,500.00

--4--

Patton Machine Co. Invoice No. 3, terms N/30 Charge to machinery 3,500.00

--4--

Danforth & Co. Invoice No. 4, terms N/30 Charge to material 960.00

--5--

The following invoices are entered--

Franklin Printing Co. Invoice No. 5, terms 2/10, N/30 Charge to office supplies 165.40

--5--

Slade Oil Co. Invoice No. 6, terms 3/10, N/30 Charge to supplies 54.25

--6--

Norwich Machine Co. Invoice No. 7, terms N/30 Charge to machinery 8,500.00

--6--

Paid freight by check No. 2 to T. Fogarty, Agt. Machinery 216.20 Materials 11.60 227.80 ------

--8--

Francis & Co. Invoice No. 8, terms 3/10, N/30 Charge to materials 640.00

--9--

Stevens & Co. Invoice No. 9, terms 3/10, N/30 Charge material 225.00

--9--

Gave Danforth & Co. Check No. 3 To pay bill of March 2 960.00 Less 2% 19.20 940.80 ------

--10--

Lackawana Coal Co. Invoice No. 10, terms N/30 Charge power, heat, & light 185.00

--11--

Gave Franklin Printing Co. Check No. 4. To pay bill of March 4 165.40 Less 2% 3.31 162.09 ------

--12--

Danforth & Co. Invoice No. 11, terms 2/10, N/30 Charge material 315.00

--13--

Drew check No. 5. for 2 weeks' pay-roll 220.50 Charge machinery for cost of installing 178.50 Building maintenance for repairs to building per pay-roll distribution 42.00

--15--

Gave Derby Desk Co. Check No. 6 To pay bill of March 1 350.00

--15--

Gave Slade Oil Co. Check No. 7 To pay bill of March 5 54.25 Less 3% 1.63 52.62 ------

--17--

Gave Francis & Co. Check No. 8 To pay bill of March 7 640.00 Less 3% 19.20 620.80 ------

--18--

Gave Stevens & Co. Check No. 9 To pay bill of March 8 225.00 Less 3% 6.75 218.25 ------

--19--

Eureka Tool Co. Invoice No. 12, terms N/30 Charge tools 250.00

--20--

Check No. 10 for 1 week's pay-roll Charge labor 326.25 Charge tools 27.50 353.75 ------ (Making tools for shop per pay-roll distribution)

--22--

Received from Danforth & Co. Credit memo for damaged goods in lot covered by invoice dated 3/12 63.00 Credit material Gave them check No. 11 For acct. 252.00 Less 2% 5.04 246.96 ------

--27--

Check No. 12 for 1 week's pay-roll $ 342.70 Charge labor per pay-roll distribution

--30--

Gave Norwich Machine Co. Note of Henry Farwell 5,000.00 Accrued interest 25.00 5,025.00 ------ Gave them check No. 13 to pay their account 3,475.00

--31--

Salaries check No. 14 for salaries of Supt. & Clerks 350.00

=63. Manufacturing Data.= The following data has been collected by the bookkeeper from the reports of superintendent and foremen, and from the inventories taken at the end of the month.

Material issued to factory 1,003.35 Material used for building repairs 50.00

_Inventories_ Supplies 45.00 Rent (unexpired) 300.00 Power, heat, and light (Coal) 150.00 Office supplies 140.40 Goods in process--material 602.00 Labor 400.00 1,002.00 ------

We will now close the ledger to ascertain manufacturing results for the month, by making the following adjusting entries in the journal--

Debit Manufacturing Account for material issued to factory.

Debit Building Maintenance and Repairs for material used in repairs.

Credit Material Purchases for both of the above.

Debit Manufacturing Account for Labor Account for Supplies used--found by deducting inventory from supplies purchases. for Salaries Account for Rent one month for Power, Heat, and Light--found as above for Building Repairs for Office Supplies--found as above Credit accounts representing above for amounts charged.

The manufacturing account will now show, on the debit side the total manufacturing expense for the month. The next step is to find the cost of finished goods to be credited to manufacturing account and charged to finished goods account. Our inventory of goods in process, which includes material and labor only, amounts to $1,002.00. The labor account and reports from foremen show that the amount of these items used in the factory is $1,672.30. In round numbers, the former is 60% of the latter, that is, sixty per cent of the work started is still in process. We will assume, therefore, that this is a fair percentage to be used in determining the expense items invested in goods in process. Taking 60% of the total manufacturing expense gives $1,400.13, which, deducted from the total, leaves $933.42 as the cost of finished goods.

In this case the per cent of goods in process is large for the reason that it is the first month of operation. The results in succeeding months will be more nearly equal. If the factory is running regularly, turning out practically the same quantities each month, the quantity of finished goods will just about equal the work started in any one month.

Should we wish to show a factory profit of 10%, it will be necessary to add 10% to the cost of finished goods which will then represent the cost to be used by the sales end of the business. Since we have no account to which this amount can properly be credited, we will open a new account called _contingent profits_, which will be closed into profit and loss at the end of the year.

Since we are not closing the books for the purpose of making a balance sheet, we do not close the expense accounts into an expense inventory account as explained in article 59. Instead, the balances are allowed to stand until such time as the books are finally closed.

EXERCISE

The transactions given in this exercise are a continuation of the business referred in to the preceding articles. During the month of April the following transactions are recorded.

Material purchases $2,670.00 Supplies purchases 127.50 Patterns and tools purchases 150.00 Cash received on subscriptions 25,000.00 Deposited in Bank 25,000.00 Checks drawn Purchase accounts 5,500.00 Salaries 375.00 Pay-rolls 1,670.20 distributed as follows: Labor $1,652.70 Machinery repairs 17.50 David Snow 10,000.00 (Stock purchased at par by Company)

The following data is obtained from the reports of foremen and inventories taken at the end of the month:

Material issued to factory to be used in manufacturing goods. 2,261.00 Material used in machinery repairs 16.70 Inventories, April 30 Supplies 147.00 Rent (unexpired) 150.00 Power, heat, and light (Coal) 75.00 Office supplies 118.40 Goods in process--material 615.00 Labor 410.00 1,025.00 ------

1. Find value of goods in process, using the same percentages in estimating expense items as shown for material and labor.

2. Make journal entries closing accounts into manufacturing account to show cost of goods completed during the month.

NOTE:--To find total cost of material and labor, used and partly used, add to the amounts shown for one month the inventory of the same items at end of preceding month.

3. Make trial balance of general ledger after books are closed as shown in model set.

THE VOUCHER SYSTEM AND ACCOUNTING CHARTS

VOUCHER SYSTEM OF ACCOUNTING

1. _Voucher._ A document which vouches the truth of accounts.

_Receipt._ An acknowledgment of money paid.

The voucher system is sometimes referred to as a modern system of accounting, but a study of the above standard definitions indicates that it is modern only in respect to forms of records and routine.

In the nomenclature of accounting the term voucher is quite commonly used in the same sense as the term receipt. The only distinction appears to be that a voucher is usually understood to be an acknowledgment of the payment of a particular item on account, while a receipt may be an acknowledgment of the payment of money without reference to the item or items covered.

Since the transaction of business began receipts or vouchers in some form have undoubtedly been used. Some form of acknowledgment of money paid has always occupied a place in business. But at first, receipts were not required--they were incidental; given as a matter of courtesy; a "thank you" in written form.

When the first man, after paying his grocery bill, was forced to pay it a second time because the merchant had failed to mark his account "paid," he _demanded_ a receipt. He learned then and there that accounts, and those who keep them, are not infallible. He told his neighbors, and the custom of demanding receipts for money paid, came into being.

The receipt was demanded as a matter of self-protection, to prevent the possibility of payment of an amount being successfully demanded a second time. But the receipt was not an integral part of the accounting records of a business; it might or might not be demanded without affecting the records. So long as business was conducted by single proprietors or small partnerships, this was satisfactory, since the receipt was not required as a record between partners.

With the advent of joint-stock companies and corporations, came ownership by a large number of investors. Having their capital invested, these owners had a right to know what was being done with their property, and there came a demand for a more strict accounting of money and property entrusted to the care of the managers of the business.

As business expanded and corporations grew in size and power, with wider spheres of activity, it became necessary to divide the operations of business concerns into departments, with corresponding divisions of authority. This meant the creation of a central authority to whom an accounting must be made by the departments or branches.

Audits were introduced. Not only did stockholders want to know that the business was honestly conducted, but the managers demanded proof that property entrusted to subordinates was accounted for and that the accounts were accurate--that is, truthful. Not satisfied with the evidence offered by entries in account books, auditors asked for further proof of the payments recorded; they demanded receipts, _vouchers_.

The voucher as used in modern accounting practice is then something more than a receipt for the payment of money; it is a proof that property has been administered as claimed by the accounting records. "A document which vouches the truth of accounts,"

=2. Use of Vouchers.= The most general use of the voucher still is as an acknowledgment of the payment of money. In fact, when we speak of a voucher it is usually understood to mean a receipt or acknowledgment of the payment of money for a specific purpose.

A voucher states the exact purpose for which the money is paid, the items either being listed or reference made to a specific invoice or account. Then when receipted it becomes a voucher in fact and takes its place as an integral part of the accounting records. The voucher may be said to form a connecting link, furnishing proof that the money was expended as shown in the records and that it was received by the payee. In this respect it acts as a check against a misappropriation of funds.

As the system of vouchers for payment of money came into more general use, many accountants argued that it should be carried still further. Sales records were vouchered by original orders, shipping receipts, and invoice copies, and purchases by the regular vouchers, but there was no voucher for transactions involving transfers of values from one account to another. In making journal entries involving such transfers, many opportunities for fraud were opened. Just such entries have been frequently used to cover up fraudulent transactions.

The logical step to make the voucher system complete in every detail was the introduction of the journal voucher. If a voucher is provided for each journal entry, the bookkeeper can produce authority for every transaction recorded in his books.

The journal voucher is a voucher of authority, that is, it authorizes the entry involved and must be signed by an officer having power to make such authorization. To the bookkeeper, it is in many cases a protection, for if a question arises as to the legality of a transaction, he can produce his authority for the entry, which will place the responsibility where it belongs.

We have come in contact with cases in which the bookkeeper, following the explicit instructions of an officer of a company, has made entries clearly intended to defraud either creditors or stockholders, only to be later made the "scapegoat" and held jointly responsible with his superior officer.

Not all such entries show their clear intent, though their real purpose be fraudulent. Some of them are so ingenuous and supported by such plausible explanations, that the bookkeeper has no suspicion of their real nature. A case in point: a corporation was organized in a small town to engage in a manufacturing enterprise. Like many another corporation of similar character, the benefits which would accrue to the town, were dwelt upon at length by the promoters, and citizens were induced to invest their savings in small blocks of stock. Also, like many another enterprise entered into and managed by men with no technical training, this little factory struggled along for a few years, always operated at a loss. But a change came; an experienced manager was secured and the business began to exhibit symptoms of a healthy growth. The second year showed a profit; almost enough to wipe out the deficit. The third year the business outgrew the capacity of the plant, and $20,000.00 was invested in new machinery. Not an old machine was discarded. The manager instructed the bookkeeper to charge $15,000.00 of the amount to repairs, explaining that it would off-set the amount which should have been charged off as depreciation in former years. Perhaps,--but it made the books show a small loss instead of a substantial profit for the year. And it is significant that several holders of stock, worth face value, and more, sold their holdings to the manager at an average price of .65. If no profit could be made on such a volume of business as had been transacted that year, what hope for the future?

To what extent a bookkeeper is justified in presuming to conserve the morals of his employer, is not a subject for present discussion. Just where the line should be drawn between moral and legal responsibility, is sometimes difficult to determine. But that bookkeeper innocently assisted in robbing unsuspecting stockholders. Had he insisted on the signed authority of the manager--that is, demanded a voucher--the entry might never have been made; he, at least, would have been freed from any possible charge of complicity.

=3. Forms of Vouchers.= The essential feature of a voucher is that it must show clearly the purpose for which it is drawn, and provide a proper form of receipt. There are many forms of vouchers designed to meet the requirements of different businesses.

The most simple form of voucher is a statement of items paid, with a receipt to be signed by the payee. A remittance in the form of cash or a check accompanies the voucher, the receipted voucher being returned by the payee. A form of voucher of this class is shown in Fig. 1.

The items paid can be listed on the voucher, or there may be a reference to certain invoices included in the payment. Some accountants attach the original invoice to the voucher, but for certain reasons we do not advocate this practice. Until the receipted voucher is returned there is no record of the items covered, unless the invoice has been copied.

Some houses are slow in returning receipted invoices, resulting in many annoying delays. If the invoice is kept on file we at least have a record of the transaction, and it may be very necessary to refer to the invoice for prices or other information.

The back of the voucher is usually printed with a form for a distribution of the amount to the account or accounts to which it should be charged. A typical form is shown in Fig. 2. For permanent filing a voucher of this style is folded so that the number appears at the top, followed by the name of the payee, and the distribution record.

=4. Voucher Checks.= A step in advance of the early form of voucher with separate check is the voucher check. This is a form which combines the voucher and check.

Of voucher checks there are many forms, each designed to meet some special condition, or to conform with the ideas of the accountant. While these forms exhibit many variations in detail they may be divided into two general classes: folded voucher checks and single voucher checks.

The folded voucher check is usually twice the width of an ordinary check, making it regular check size when folded. This is intended to provide a receipt for the payment of items listed, by the endorsement of the check. Several such forms are illustrated.

Fig. 3 is a form of combined voucher and check used by the Pennsylvania Railroad Company, The account is transcribed on _A_, this being a sheet twice the width of a check. This form is made in duplicate, _B_ being the carbon copy which is filed as a record of authority for the issuance of the voucher. The check itself, shown in _C_, is written on the back of the original voucher. _A_. When folded, this form is the size of a regular check and goes through the bank in the usual manner. The endorsement of the payee is a receipt in full for the items covered by the voucher.

This is a representative form of the folded voucher check. Naturally the details recorded will vary in different businesses, but the general plan is subject to slight changes. Some objection is raised by banks to the folded form. The claim is made that considerable inconvenience is caused in handling in the bank, by checks slipping between the folds.

Many of the earlier forms of voucher checks were not checks until certain conditions had been complied with. On the face of the voucher was printed "when properly receipted this voucher will be paid through ... Bank." This required a receipt in some special place, instead of the usual endorsement of a check, and it was not always easy to tell, at a glance, the amount to be paid.

Very naturally, objections were raised by the banks against the use of these complicated forms, but forms have been simplified in ways that have largely overcome these objections.

An improvement is the ordinary check form arranged to provide a valid receipt for stated items. Such a form is illustrated in Fig. 4. This is an ordinary check form of regulation size, on which is noted the item or items paid. The checks are put up in pads and numbered as used. When endorsed, the check provides a valid receipt for the items covered.

A voucher check with some advantageous features is shown in Fig. 5. This is made in duplicate. _A_ is the original voucher check, while _B_ is the duplicate. When sent out, the stub shown in _B_, a duplicate of the statement on the original check, is attached to the check. This is detached by the payee for his records, and enables him to deposit the check without waiting to make the entry in his cash book.

These voucher checks are made in sheets and punched for filing in a loose-leaf binder. The balance of the form shown in _B_, the part remaining after the check and duplicate statement have been removed, is a copy of the check, and remains in the binder.

The checks are numbered consecutively, but the voucher number is entered when used and corresponds with the number of the voucher paid.

The office record of the items paid is made on the voucher form shown in Fig. 6. These are numbered consecutively, in the order in which they are approved, and when paid are filed in numerical sequence.

Another style of loose-sheet voucher check is illustrated in Fig. 7. This form is made on the typewriter, in triplicate, and includes the original check, a receipt and a copy of the check. The forms are made two to a sheet, and when a check is to be written the triplicate sheet is placed in the machine, three copies being made at one writing.

The triplicate form, or copy of the check, is the permanent record from which posting is done. Both the check and receipt are mailed and the payee is expected to return the receipt. If not returned within a reasonable time, the payee is followed up by letter and asked to return the receipt, as this becomes a part of the permanent office records.

An excellent form of voucher with check attached is shown in Fig. 8. The voucher is made in duplicate, the check being attached to the original. The duplicate is kept on file for the office record, while the original, with check attached, is mailed to the vendor. He detaches the check and deposits it, keeping the original statement in his files. In the event of discrepancies, the vendor is expected to return both voucher and check, endorsement being considered as a receipt in full for items included in the statement.

=5. Journal Vouchers.= As previously explained, a journal voucher is a properly signed authorization of a journal entry. Journal vouchers are not intended to be used for the ordinary journal entries of a business, as closing entries and ordinary adjusting entries. They are more particularly intended for special credit items or allowances, and special transfer or adjusting entries.

Fig. 9 illustrates a convenient form of journal voucher. This form is intended to be filed in a loose-leaf binder, and when so filed, becomes the journal itself, posting being made direct to ledger accounts. The usual method, however, is to make the entry in the journal and file this voucher as an evidence of authority.

A journal voucher should require the final approval of some one man before it becomes valid. The head of a business can keep in touch with all special allowances by having the journal vouchers brought to him for his signature.

One reason for the use of journal vouchers in large establishments having several departments is that special credits and allowances are constantly coming up, with which only one department manager is familiar. His O. K. is obtained, and the voucher must be approved by the manager, which makes these men responsible for the transaction.

=6. The Voucher Register.= Though the form of voucher is of considerable importance, and should be designed to meet the requirements of the business, the keystone of the voucher system of accounting is the voucher register. Wherever used, the voucher register possesses certain uniform characteristics, but in each business the form takes on special features; in fact, the voucher register is distinctively a special form.

The voucher register is really a form of purchase book, with other features added, and takes the place of these records. In addition to the usual features of the purchase book or invoice register, the voucher register furnishes a complete record of payment of bills, and shows at all times the net amount of Accounts Payable. Another most important feature is that it exhibits all expenditures, for whatever purpose. A voucher is provided and properly registered for every check issued, insuring a receipt in proper form for every dollar paid out.

When properly handled, the voucher system does away with the purchase ledger, no ledger accounts with creditors being necessary. The register in connection with a file of unpaid vouchers, furnished a complete record of each individual creditor's account. At the same time, a controlling account is provided, which exhibits the total of outstanding accounts, and balances with the voucher register.

To furnish representative illustrations, we show several forms of voucher registers, which exhibit the special features usually found in such records. These may be used as guides in designing registers for any business.

Figs. 10 and 11 show forms identical in general arrangement, except that one is designed for a mercantile business, while the other is intended for a manufacturing establishment. The columns beginning at the extreme left are as follows: _Date Entered_, _Voucher Number_, _Name of Payee_ and nature of account, _Date of Invoice_, _Vouchers Payable_ (the total), and _Date Due_. The columns following are for distribution of the total to the different accounts. Columns are provided for those accounts in each group to which most frequent charges are made. The amounts of the vouchers are extended in these columns and footings carried forward to the end of the month.

In every business there are certain expense accounts to which charges are infrequent, not more than one charge a month, and in some cases one or two in a year. Examples of these accounts are insurance, taxes, rent, etc. To add columns to an already large voucher register for the accommodation of these few items is impractical, hence the Sundries column is provided for charges to accounts for which special columns are not provided. Space is allowed for entering the names of the accounts, and each item is posted direct to the ledger account.

Typical Forms of Voucher Registers

The form of voucher register illustrated in Fig. 12 is designed for use where a complete voucher system, including the use of journal vouchers, is maintained. The special feature of this form is the addition of several columns for credit accounts. Space is provided for entering the names of the accounts to be credited, the amounts being carried to the proper ledger columns. This makes it possible to enter any journal voucher, and since full particulars are shown in the voucher itself, no explanations are required in the register.

At the right of these forms are columns for recording particulars of settlement. A column headed _Unpaid Vouchers_ will also be noted. On the last day of the month, when all items have been entered, the amounts of all unpaid vouchers are extended in this column, and the total is carried forward to the next month's sheet, where it is entered in the _vouchers payable_ column. When these vouchers are paid, particulars of payment are entered on the sheets containing the original record; as would have been done if they were paid in the month in which they were entered.

The footings of all columns are carried forward to the end of the month, when the totals of all distribution columns, excepting sundries, are posted to the debit of the corresponding ledger accounts. The footing of the _vouchers payable_ column, less unpaid amount brought forward, must agree with the total footings of all distribution columns, since it represents the total of all vouchers registered. The net amount, that is, the footing of the _vouchers payable_ column, less the amount of unpaid vouchers brought forward, is posted to the credit of a vouchers payable account.

On the credit side of the cash book, two columns headed _Vouchers Payable_ are provided for the entry of payments. One column is headed Discount and the other _Amount of Check_, the discount column being a memorandum only. At the end of the month the total of these columns is posted to the debit of the vouchers payable account, the controlling account of the voucher register. When the footing of _unpaid vouchers_ is brought forward at the end of the month, it should agree with the balance of the vouchers payable account.

Another method of handling unpaid vouchers is to provide both _debit_ and _credit_ columns on the voucher register, headed _Suspense Accounts_, as shown in Fig. 13. All unpaid vouchers are carried to the credit column at the end of the month, and when paid the entry is made in the debit column. Footings of the suspense columns are carried forward in pencil, for, when all amounts on one sheet have been paid, those items need not be considered in obtaining the balance. One advantage claimed for this method is that it keeps the _vouchers payable_ column free of all but current items.

Another feature of this form, Fig. 13, is the absence of a check number in the _payment_ column. In this case, a voucher check is used, which necessitates but one series of numbers. When bills are audited, the voucher checks are made out and numbered, but the dates are omitted until payment is made, when they are entered with other particulars under the head of _Payments_.

An objection is sometimes made that with the voucher system, allowing but one line to an invoice, no provision is made for partial payments. This can be easily overcome with this form of register. Any unpaid balance of a current item will be carried to the _suspense_ column. If further partial payments are likely to be made, the amount should be entered in the _credit_ column and the name of the payee in the _remarks_ column. Several lines should then be allowed for the account, permitting the entry of as many separate payments.

When all bills are paid as soon as audited, taking advantage of cash discounts, there is no necessity for columns intended to care for suspense items. All vouchers will be paid not later than during the month next following the date of entry, and there will be no unpaid vouchers not found on the current or next preceding month's record.

=7. Operation of Voucher System.= While accountants have introduced many details into the operation of the voucher system, all intended to make the application of the system more nearly perfect in some particular business, the general routine of conducting the system is summed up in the following:

1. Auditing of invoices. 2. Executing and registering vouchers. 3. Filing audited vouchers. 4. Paying vouchers. 5. Filing paid vouchers. 6. Indexing paid vouchers.

=8. Auditing of Invoices.= When invoices are received they should immediately go to the purchasing agent. If there is no regularly appointed purchasing agent, or in a business like a department store where there are several buyers, the invoices should be kept by the auditor, comptroller, or chief accountant until the goods are received, when he will obtain the O. K. of the person who ordered the goods or incurred the obligation.

Pending the receipt of the goods, the invoices should be filed alphabetically, under the name of the vendor. The file may be one of the flat files which can be kept on the desk or if the number of invoices be large, a section of a vertical file drawer can be used.

When the goods have been received, which will be attested by a report in some form by the receiving clerk, the invoice is O. K.'d for quantities and prices by the buyer, and extensions are checked by the auditor or chief accountant.

=9. Executing and Registering Vouchers.= As soon as the invoices are audited, vouchers are executed and entered in the invoice register. Extensions are made to the proper columns, placing the accounts on the books, just as would be done if invoices were credited to accounts of the vendors in the general or purchase ledgers.

Vouchers should never be made for invoices in dispute, as to prices or on account of claims for shortage, damaged goods or other cause. Until such claims are adjusted, the invoices should be kept in a file reserved for items in suspense. When the books are closed, such items must be included under liabilities in the balance sheet. To avoid actually entering them on the books, they may be entered in the balance sheet under some such caption as "_Suspense Accounts_."

=10. Filing Audited Vouchers.= The vouchers are now ready for filing until date of payment. This does not apply if invoices are always paid as soon as audited, but in the majority of business houses at least a part of the vouchers will not be paid until the last due date; or if discounts are taken, they will be paid on the last discount date.

Some provision must be made for bringing these vouchers to notice on the date at which they should be paid. For this purpose, a "tickler" or date file is used. This consists of a file with an index of 31 numbered index sheets, intended to represent the days of the month, and sometimes a set of twelve index sheets printed with the names of the months.

The audited vouchers are filed under the date when payment is to be made, either the discount date or the last due date, by placing them back of the index sheet bearing the corresponding number. To illustrate; if an invoice is dated the 2nd of the month, and terms are 2/10, the last discount day will be the 12th, and the voucher will be filed back of the No. 12 index sheet. If payment is due in a subsequent month, the voucher is filed back of the corresponding monthly index, then on the first of the month these vouchers are distributed under the proper dates.

=11. Paying Vouchers.= Each day the vouchers filed back of that day's index are removed from the file for attention. If for any reason they are not to be paid that day, they should be filed under the next date when it is desired to bring them to notice. It may be well to note at this point that the vouchers and invoices are usually filed together in the date file.

The check is now written and entered in the cash book or the check register, attached to the voucher, and mailed. Or if a voucher check is used it is only necessary to date and enter. These payments are posted from the cash book to the voucher register. It is not a safe plan to enter the voucher check direct in the voucher register, as postings to the cash book are liable to be overlooked. Payments in one day may be recorded on widely separated pages of the voucher register, while in the cash book or check register they would be entered consecutively, making posting much less difficult.

When the voucher and check have been mailed the invoices are placed in a temporary file, indexed alphabetically, where they are kept until the return of the receipted voucher. It will be noted that we do not advocate mailing the original invoice with the voucher. This temporary file is examined from time to time, and if any vouchers have been out an unreasonable length of time, the vendors are asked to sign and return them, or sign duplicates sent for the purpose.

When the voucher check is used, the temporary file for invoices is not required. The checks, if cashed, must be returned through the bank, and the invoices can be filed permanently.

=12. Filing Paid Vouchers.= On the return of the voucher, properly receipted, the invoices which it pays are removed from the temporary file, when all are ready for permanent filing.

The invoices are permanently filed in an alphabetically indexed file, under the names of the vendors, keeping all invoices from each firm together. At some time before filing, preferably when the voucher is executed, the voucher number should be entered on the invoice, and when several invoices are paid by one check, they should be fastened together with a staple or other suitable device.

The paid vouchers should be filed in numerical sequence, with indexes numbered by 100's and 20's to separate them and to assist in locating any desired number. If we want to find voucher No. 964, we turn to the index 900, constituting the main division, then to index 60, back of which the desired voucher will be quickly located. A file should be procured of suitable size to accommodate the voucher to be filed.

=13. Indexing Vouchers.= With the permanent filing of the paid voucher the transaction is closed, with one exception. There must be another index to the voucher file. Knowing the number, we can quickly locate any voucher or find its record on the register, but if we want to locate the voucher paid to Jackson & Co.--without knowing the number--we have no guide.

Reference to the original invoices, filed alphabetically, on which the numbers are noted, will locate the voucher, but there are vouchers for which no invoices are on file. To locate these by name of payee, an alphabetical index is necessary, and it is advisable to include all vouchers even when invoices are on file.

For this purpose, a card index is recommended, and a suitable form is shown in Fig. 14. A card is used for each person or firm to whom vouchers are issued, and all vouchers are listed by date and number. The cards are filed alphabetically, making it easy to find any name.

=14. Voucher File.= The manner of filing and indexing invoices and vouchers, from the receipt of the invoices to the permanent filing of the paid voucher, has been explained. For the file itself, the vertical file is recommended.

Fig. 15 illustrates one drawer of a vertical file, subdivided with the different indexes required, showing how in a small business a single drawer can be made to answer all purposes.

In a large business several drawers would be required. The first drawer would be for pending invoices, where would be filed invoices for which shipments have not been received. The second drawer would contain audited vouchers held for payment, and suspense items; the latter including invoices held for adjustment of claims. Paid invoices and paid vouchers would each require a separate drawer.

Files should be selected with reference to the size of the papers to be filed. Manufacturers of such equipment now supply cabinets in sections, in a great variety of sizes, making it possible to build up a filing cabinet with drawers to fit every paper of standard size.

DEMONSTRATION

=15.= The operation of the voucher system in respect to the records in the register is demonstrated in the illustration, Fig. 16, the record showing how the following transactions are handled. Invoices listed have been audited for payment.

--Jan. 12th-- National Mercantile Co. 100 bbls. flour $4.25 $425.00 Dated Jan. 9th Terms 2/10, N/30

--Jan. 12th-- Western Grocer Co. 50 cases soap 2.10 105.00 Dated Jan. 8th Terms 2/10, N/30

--Jan. 14th-- Morton Salt Co. 100 bbls. salt .85 85.00 Dated Jan. 11th Terms 1/10, N/30

--Jan. 15th-- Paid voucher No. 1 to National Mercantile Co.

--Jan. 15th-- Paid voucher No. 2 to Western Grocer Co.

--Jan. 16th-- Watson & Snow 60 bbls. vinegar, 3000 gals. .14 420.00 Dated Jan. 12th Terms N/30

--Jan. 17th-- Jennings Coal Co. 3 tons coal 6.50 19.50 Dated Jan. 17th Terms N/30

--Jan. 18th-- Paid pay roll Wages of laborers 125.50 Office salaries 37.50

--Jan. 19th-- Paid voucher No. 3 to Morton Salt Co.

The illustration, Fig. 16, shows the complete record of these transactions in the voucher register. The total footings of all distribution columns agree with the total of vouchers payable column, proving the extensions to be correct. The combined totals of checks and discounts equal the total payment column. Unpaid vouchers are extended, and the total of this column added to the total payments equals the total of vouchers payable.

Our voucher register being in balance, footings are now posted. The total of _vouchers payable_ column is posted to the credit of that account in the general or private ledger, and the footings of the distribution columns are posted to the debit of their respective accounts.

Fig. 17 illustrates how the payments are recorded on the disbursement or credit side of the cash book. When the checks are written they are entered in the cash book, from which they are posted to the voucher register. Voucher numbers are entered when the amounts are posted.

At the end of the month the columns are footed, and the totals of the discount and check columns are posted to the debit of vouchers payable. Footings of _discount_ and _total_ columns are posted to the credit of discount on purchases and bank accounts.

The vouchers payable account in the ledger would now appear as follows:

_Vouchers Payable_ Dr. Cr. Balance $777.00 $1,216.50 $439.50

We have already seen that the voucher register balances, and turning to that record, we find the footing of the unpaid vouchers column to be $439.50, which agrees with the balance of vouchers payable account.

EXERCISE

Prepare a form of voucher register providing for distribution to the following accounts: Merchandise, Purchases, In-Freight, Expense, Salaries, and Sundries. One of the chief requisites of the accountant is the ability to prepare suitable forms for accounting records. Care should be used in preparing this form to omit no detail that should be included in such a voucher register.

When the register has been prepared, record the following transactions.

--Feb. 12th-- Enter the following invoices #1 Jones & Laughlin For merchandise $164.20 Date 2/10, Terms 2/10, N/30. #2 Francis & Roberts For expense Date 2/12, Terms cash 27.50

--Feb. 13th-- #3 David Nelson & Sons For merchandise 239.80 Date 2/11, Terms 3/10, N/30 Paid Henry Meyer For salary 25.00 Check #1

--Feb. 14th-- Paid Jones & Laughlin by check #2, Voucher #1 less cash discount

--Feb. 15th-- Paid Francis & Roberts by Check #3, Voucher #2 less cash discount

--Feb. 16th-- Paid David Newman for rent 40.00 Check #4

--Feb. 17th-- Enter the following invoices #4 National Furniture Co. For office furniture 65.00 Date 2/16, Terms 2/10, N/30 #5 Watkins & Hollister For merchandise 84.00 Date 2/15, Terms 2/10, N/30

--Feb. 19th-- Paid David Gillette, Agt. For in-freight 9.62 Check #5

Foot all columns as for posting at end of the month.

UNIT SYSTEM OF VOUCHER ACCOUNTING

=16.= In all classes of accounting records, the unit system is rapidly gaining in popularity. The unit system, so called, consists of individual records of each transaction or each item recorded, instead of a combination of several transactions in one record.

The increase in the use of the unit system has been brought about very largely by the improvements in typewriters, which make it possible to produce several copies of a given document at one writing. An example of the application of the unit idea is seen in modern sales records, where duplicate invoices are made, one copy serving as a sales sheet and posting medium.

The unit system has been very successfully applied to voucher accounting, saving much time and resulting in very complete records. Compared with ordinary voucher systems, the most prominent feature of the unit system is a method of distribution by filing, rather than by means of a voucher register.

All vouchers are made on the typewriter, in manifold, one or more copies being used for record purposes only. The original is used exactly as described in the preceding pages.

An essential feature of the system is that a copy of the voucher is provided for each account to which it is to be distributed. When one account only is involved, the voucher is made in duplicate, but if the amount is to be distributed to two accounts an extra copy is required. The voucher should be so arranged that the distribution can be shown on the face of the duplicate and triplicate copies.

The duplicate voucher is filed according to its distribution, instead of recording the amount in the voucher register. A vertical file is used for this purpose. The index cards are headed with the names of the accounts, and are arranged in the order of the accounts in the ledger; this being the order in which the same accounts would be arranged in a voucher register. Back of each index is a folder in which the vouchers are filed.

Each voucher copy is filed in the folder representing its proper account, and is securely fastened to the folder with a staple or paper fastener. When this voucher is filed it is also recorded on the outside of the folder, which is printed as shown in Fig. 18.

This form is designed for a record of amounts, distributed under the proper monthly headings. The amount of each voucher is carried to the current month's column. At the end of the month, the footing of the column shows the amount to be charged to that particular account in the general ledger.

To arrive at the total of vouchers payable account, a recapitulation sheet, ruled as shown in Fig. 19, is used. This is an index card, and is placed in the front of the file. Totals of all account folders are entered in the proper columns of this sheet, at the end of each month. Payments are posted to this sheet at the end of the month, from the cash book, and the balance extended. This balance, of course, represents the unpaid vouchers and is checked against the unpaid voucher file.

The totals of the different account columns are posted to their respective accounts in the general ledgers, either directly from the recapitulation sheet, or through the journal. The recapitulation sheet, as here shown, is a transcript of the vouchers payable account, and might be used as a ledger card, but it is generally considered better practice to carry the account in the general or private ledger, as usual.

Such a voucher system furnishes a complete record, with much less transcribing of items, than is involved in the use of the voucher register. The copy of the voucher is made at the same writing as the original, the amount of each individual voucher is entered but once, on the account folder, and monthly totals, only, are carried to the distribution columns on the recapitulation card.

This system is equally well adapted to the loose-leaf method. A sheet is used for each account, behind which the vouchers are filed, and a monthly recapitulation sheet is provided for distribution.

COMBINED PURCHASE LEDGER AND INVOICE FILE

=17.= Not every business readily adapts itself to a complete voucher system. Special conditions sometimes arise which make it seem advisable to keep ledger accounts with all firms from whom the business is making purchases. A case in point is a business, lacking capital to pay all bills promptly, necessitating payments on account, or by note, instead of payments covering certain invoices in full.

To obviate the difficulties, in maintaining a complete voucher record, under these and similar conditions, many substitutes have been devised. As an example of what may be accomplished in this direction, we illustrate a system which is in successful operation in a manufacturing business.

In the ledger, the usual nominal accounts are kept but no purchase or voucher register is used. Columns are provided on the credit side of the cash book for such expense accounts as are usually paid in cash, that is, for which no invoices are rendered, and for accounts payable.

For the purchase accounts with firms and individuals, a vertical file is used. Each creditor is assigned a folder, on the front of which a suitable record form is printed. This form is shown in Fig. 20. The name and address are written at the top, and the ledger account is kept in the columns at the extreme left of the form. All of the columns for distribution are left blank, it being seldom that purchases from one firm are distributed to more than a half dozen different accounts.

When an invoice has been O. K.'d it is immediately filed in the proper folder. The total is entered in the credit column and distributed to the proper accounts, the names of which are written at the head of the distribution columns. Payments on account are posted to these ledger accounts from the cash book.

If the distribution is properly made, the totals of all distribution columns will agree with the total of the credit column. At the end of the month the total of these distribution columns on the individual account folders are drawn off on the monthly recapitulation sheet illustrated by Fig. 21. The totals shown by the recapitulation are posted to the debit of the corresponding ledger accounts, while the grand total is posted to the credit of accounts payable account;--which is the controlling account of the purchase ledger. Totals of payments on account are posted to the controlling account from the cash book.

The proof of accuracy of the controlling account is found in the usual way, by checking against the balances of the individual purchase accounts.

With this system, invoices are filed, and the amounts posted, with practically one operation. The items which make up each ledger account are distributed as soon as posted, totals only being carried to the recapitulation sheet, from whence they reach the ledger.

Accounts are quickly located, as the folders are indexed alphabetically. When an account is balanced it must be left in its place until the end of the month, provided credits have been entered in the current month, so that totals of distribution will be carried to the recapitulation sheet. At the end of the month, all accounts which balance may be transferred to a section of the file reserved for closed accounts. Should any of these accounts again become active, they are transferred to the regular file without the slightest confusion.

For the purpose of saving time, the balances of all open accounts may be drawn off when the totals of the distribution columns are obtained.

While not recommended for general adoption this system has its points of merit, and in certain contingencies would undoubtedly prove very satisfactory. The main reason for its publication in this work is to show the possibilities of modifying a system, in respect to details, without destroying its more important features. The voucher feature, the obtaining of a formal receipt for every payment, can be maintained just as effectively with this system as with a more formal voucher system.

THE PRIVATE LEDGER

=18.= A ledger, devised to contain such accounts as the principals of a business desire to keep from the knowledge of the bookkeeper or other office employes, is known as a private ledger. The title is also frequently used to designate an ordinary general ledger.

The accounts most frequently found in the private ledger are Capital accounts, Profit and Loss, Reserves, Surplus, Bills Payable, Bonds and Mortgages Payable, and Controlling accounts with the general or personal ledgers. It may also contain such accounts as Salaries of Officers, or Partners, Investment and Drawing accounts, and accounts with real or nominal assets. If it is desired to keep from the employes, knowledge of the exact nature of any transaction, or the standing of a particular account, it can be done by making use of the private ledger.

When both ledgers are used, the private ledger contains only those accounts which it is desired to keep _private_, while the general ledger is kept for all other accounts, except those included in the personal ledgers.

The private ledger is most commonly used in large businesses where, for various reasons, a number of employes have access to the books, and it is desired to keep them in ignorance of the private affairs of the concern. The private ledger is usually kept by one of the partners, an officer, the auditor, or the chief accountant.

=19. Advantages of Private Ledger.= The primary advantage of the private ledger to the principals of a business, is that by its use, they can keep to themselves all details of transactions of a special nature.

Some other advantages that accrue to the principal may be enumerated as follows:

He can, through the private ledger, keep an eye on the activities and condition of the business as a whole, or of any particular department or branch of that business.

He can keep in touch with the liabilities, or with the total amount of personal accounts outstanding.

He can absolutely control the distribution of expense in manufacturing operations.

He can keep from his employes, knowledge of the profits or losses of the business.

Partners can keep private the amount of their investments, or the salaries drawn.

Salaries paid to individual officers or employes can be kept private.

Dividends declared, capital subscribed, investments of a special nature, or amount of assets of any kind, can all be kept from the knowledge of employes.

=20. How Operated.= Accounts in the private ledger must not conflict with accounts in general or personal ledgers, and the fact that private accounts are kept should not interfere with the balance of the general books. To insure against any such conflict, a private ledger controlling account is kept in the general ledger.

In the general cash book, and sometimes in the journal, debit and credit columns headed _Private Ledger_ are provided. All entries affecting private ledger accounts are extended in these columns, but no particulars are recorded. At the end of the month, the totals of these columns are posted to a private ledger account in the general ledger. This controlling account then appears in the general ledger trial balance, and must agree with the balance of accounts in the private ledger.

With the private ledger a private journal is used, in which entries affecting private ledger accounts are made, with explanations in detail.

As an example of the use of the private ledger we will suppose that a payment of $500.00 is to be made to a certain party, and it is desired to keep that transaction private. The bookkeeper is instructed to draw a check for the amount, to be charged to private ledger account. He enters the check in the general cash book, debiting private ledger and crediting cash or bank. The entry is posted from the general cash book to the private journal, where full particulars are recorded, from which it is posted to the private ledger. In the case referred to, the amount of the check is debited to the proper nominal account, and credited to a general ledger account.

The general ledger account in the private ledger is a controlling account which agrees with the private ledger account in the general ledger. Only entries affecting general ledger accounts are posted to this account. Entries involving changes in private ledger accounts only, are made in the private journal direct.

Some concerns keep the controlling accounts with the sales and purchase ledgers in the private ledger. At the end of the month, total debits and credits to accounts in these ledgers are entered in the private journal. These totals are obtained from the general cash book, sales book, purchase book, and any other books from which postings are regularly made.

When a private ledger is kept, it precludes the possibility of forced balances in the general ledger trial balance, since the balances of the private ledger accounts must agree with the private ledger controlling account in the general ledger, and if sales and purchase ledger controlling accounts are kept in the private ledger, these must balance with the personal accounts in those ledgers. The use of a private ledger not only acts as a check on trial balance errors, but simplifies the trial balance by making possible a proof of ledgers in sections.

Fig. 22 is an illustration of a cash book with columns for the private ledger account.

=21. Manufacturing Accounts in the Private Ledger.= Not infrequently, manufacturers find it advisable to keep private certain details which affect costs, or even all knowledge of the exact cost of their manufactured product. This may be done by keeping certain manufacturing controlling accounts in the private ledger.

In determining the cost of manufacture of any class of goods, three elements enter into the computation; material, labor, and expense. To determine the cost of the first two items is comparatively simple, requiring only an efficient system of records in the factory. But to determine the amount of expense of all classes, included in the cost of a given article, job, or operation, is more difficult.

A system of records that will show the exact cost of such items as power, heat, or taxes properly chargeable to an individual job or operation is obviously impossible, and it has been found necessary to apportion these, and all similar items of expense, on a percentage basis. Usually this percentage is based on some element of cost which can be determined with accuracy.

Cost accountants and engineers have worked out this percentage on the basis of various elements of cost, as direct labor, material, machine hour, man hour, or a combination of two or more of these elements. The exact method used, which must be adapted to the conditions existing in the individual factory, does not enter into this discussion.

Since there are numerous items of expense of the character referred to, it is customary to group them, for purposes of cost computation. Sometimes all such expense items are grouped under the one head of General Expense. It is by means of a controlling account in the private ledger, that the distribution of expense is made, thereby keeping private the exact cost of manufacture.

The known cost of a certain job or article--the cost of material and labor--is frequently referred to as the prime cost. The duties of the cost clerk may end with determining the prime cost, his computations not including expense items.

The total cost of material and labor for the month is charged to private ledger account, material and labor accounts receiving proper credit. The exact amounts of the various items of expense for the month are also charged to private ledger account, with credits to expense accounts.

In the private journal, these items are charged to various controlling accounts, and credited to the general ledger controlling account. The usual entries are:

Manufacturing Account $______ General Ledger $______ For material $______ For labor $______ Expense Distribution $______ General Ledger $______ For rent $______ For power $______ For repairs $______ Etc. Etc.

The percentage of expense for the current month on whatever element based, has been determined from the actual results of the preceding month. To illustrate, we will suppose that expense is apportioned on the basis of direct labor; the cost of this item during the month was $1,600.00, and the amount of expense charged to operation of the plant during the same period was $240.00;--which gives us a ratio of 15%.

We wish to determine the cost of jobs as they are completed during the current month. The records turned in by the cost department give us the actual cost of material and direct labor, but not knowing the exact ratio of expense to direct labor for this month, we use last month's ratio, and add an amount equal to 15% of the known cost of direct labor. When the actual results for the month are determined it is quite probable that the ratio will vary from last month's record, as either factor may change. It will be necessary to adjust this difference, which is the reason for an expense distribution or expense adjustment account in the private ledger.

By keeping the expense controlling account in the private ledger, the principal can keep private, not only the actual cost of an article, but the percentage of expense and the basis of the expense apportionment. If thought desirable, he can add further amounts for the purpose of establishing a selling price.

In actual operation, the amount of expense to be charged against completed work will be computed, and the following entry made:

Manufacturing Account $______ Expense Distribution $______ The amount of expense charged to jobs completed.

If the expense ratio used were exact, the expense distribution account would balance at the end of each month, but owing to the fluctuations, a balance will remain. This is adjusted by increasing or decreasing the percentage used during the following month, and in this way the accounts are kept in balance.

Manufacturing account has been charged with labor, material, and expense,--the total manufacturing cost. Completed goods are charged to a finished goods account, the entry being:

Finished Goods $______ Manufacturing Account $______ Net cost of goods completed

But manufacturing account will not balance, for there always will be work in process, and the balance of the account will be the cost to date of this work in process, a most important record.

This discussion is not intended to cover every possible use of the private ledger, but, by means of examples, to suggest its possibilities. The explanations and examples should afford the student many hints of value.

EXERCISE

On a certain date, the following transactions are recorded on the books of Carter & Adams:

Purchases on account $560.00 Sales on account 420.00 Paid for rent 75.00 Sales for cash 82.00 Henry Carter (partner) Withdrew cash 50.00 John Adams (partner) Advanced to the business 300.00

What items in the above list of transactions should, in your opinion, be posted to the private ledger? On journal paper, make the entries and show necessary private ledger accounts.

CHARTING THE ACCOUNTS

=22.= The proper arrangement of the accounts of a business is best shown by a chart, in which the accounts to be kept are grouped according to their relative importance. In laying out a chart of accounts, they should be first separated into their proper divisions. The natural divisions are capital, trading, and profit and loss.

Each division contains only those accounts that naturally belong in that particular class. These divisions are then subdivided into groups containing specific kinds of accounts, the groups being arranged in logical sequence. As an example, the trading division of a manufacturing business is divided into manufacturing and trading. There may be several subdivisions of the manufacturing account; several classes of goods may be manufactured and a manufacturing account kept for each class, or it may be necessary to manufacture completed parts, each requiring a complete manufacturing process. Detailed costs being required for each of these completed parts, manufacturing accounts are kept for each, the main division representing the cost of the finished product, as a result of the assembling of the parts. The completed parts are treated as raw material, when drawn for use in the finished product, the total costs being finally absorbed by the main manufacturing account. One of the many examples that might be cited is a packing business, operating its own can factory and keeping a manufacturing account to show the cost of cans. Other accounts show the cost of the product packed in those cans, and both costs are absorbed in the cost of the commodity as marketed.

The trading account is similarly subdivided. In a department store, the manager of a department may receive a certain percentage of the profits of his department. This necessitates trading accounts for each department. A mercantile concern may operate branch stores and keep trading accounts with each, on the books of the main office; a factory may produce several lines of goods, with a corresponding subdivision of trading accounts.

A chart of accounts not only furnishes a guide to the bookkeeper, but presents in the most logical form, the natural divisions of the business. It is both a working guide and a mirror of the accounting records.

=23. Chart of Small Trading Business.= The most simple chart of accounts is one for a small trading business conducted by a single proprietor. Following is a chart of the accounts of such a business.

A study of this chart will disclose the reasons for the general grouping of the accounts. The first general group, capital accounts is subdivided into assets and liabilities. The assets are grouped in the order of their availability; the order in which they can most readily be converted into cash. The liabilities are grouped according to the security; unsecured, secured and capital.

There being but one trading account, it is represented by a single group, purchases and in-freight representing the cost of goods, and sales the gross proceeds. The balance of this account exhibits the gross profits.

We now come to the profit and loss account by which the trading or gross profits are absorbed. This group contains, first, the revenue producing accounts not represented in the trading account; second, the revenue expenditures or expense accounts. The outer brackets of the chart group all of the accounts under _Debit_ and _Credit_. This shows that the balances of the accounts are debit or credit as the case may be.

We have traced the profits to the profit and loss account, but in closing the books they will finally be absorbed by the proprietor's capital account. The chart, Fig. 23, traces the profits from trading to proprietor's account. In the trading account, the gross profit completes the balance. This profit is now absorbed by the profit and loss account. Net profit completes the balance of profit and loss account, and is, in turn, absorbed by the proprietor's account. Here, the net profit added to previous investment, equals the present worth. The chart, Fig. 24, also traces profits to the proprietor's account.

=24. Chart of Manufacturing Accounts.= A chart of the accounts of a manufacturing business follows similar lines to that of a trading business, the only change being the addition of the accounts of the manufacturing group. The accounts of this group will depend both upon the nature of the business and the extent to which the details of operation are recorded.

A chart of the accounts of a harness and saddlery manufacturing business is given herein. This business is divided into three departments; harness, collar, and saddlery.

A record of the gross profits, resulting from the operation of each department, being desired, we have three manufacturing and three trading accounts.

The chart shows the accounts classified to exhibit detailed operations of each department. The number of accounts in this chart is 98. This is rather more than is required in the average business of this character, but the chart furnishes a good illustration of the possibility of segregating accounts of various classes.

Even so large a number of accounts, with the minute subdivisions here shown, does not present the difficulties that might appear at first glance. The principal requirement is a thorough knowledge of the items entering into each account; the actual keeping of the accounts is a matter of close attention to these details. When an elaborate chart of accounts is laid out, it should be accompanied by detailed explanations and instructions. Some large concerns issue printed instructions which are given to all officers and employes who may be called upon to determine, to what account an item should be charged.

CHART OF ACCOUNTS--HARNESS MANUFACTURING

CAPITAL ACCOUNTS _Assets_ 1 Cash 2 Bills Receivable 3 Accounts Receivable Inventories--Harness Department 4 Finished Stock 5 Leather 6 Hardware 7 Supplies

Inventories--Collar Department 8 Finished Stock 9 Leather 10 Hardware 11 Supplies

Inventories--Saddlery Department 12 Finished Stock 13 Leather 14 Hardware 15 Supplies

Inventories--Machinery 16 Machinery--Harness 17 Machinery--Collar 18 Machinery--Saddlery

Inventories--Tools 19 Tools--Harness 20 Tools--Collar 21 Tools--Saddlery

Inventories--General 22 Office Fixtures and Supplies 23 Delivery Equipment 24 Real Estate--Land and Buildings

_Liabilities_ 25 Accounts Payable 26 Bills Payable 27 Mortgages

Reserves 28 Depreciation of Buildings 29 Depreciation of Machinery 30 Depreciation of Tools and Fixtures 31 Bad Debts 32 Capital Stock 33 Surplus

MANUFACTURING ACCOUNTS

_A_ Harness Department 34 Purchases--Leather 35 Purchases--Hardware 36 Purchases--Supplies 37 In-Freight 38 Labor--Cutting Department 39 Labor--Manufacturing Department 40 Inventory Adjustment

_B_ Collar Department 41 Purchases--Leather 42 Purchases--Hardware 43 Purchases--Supplies 44 In-freight 45 Labor--Cutting Department 46 Labor--Manufacturing Department 47 Inventory Adjustment

_C_ Saddlery Department 48 Purchases--Leather 49 Purchases--Hardware 50 Purchases--Supplies 51 In-Freight 52 Labor--Cutting Department 53 Labor--Manufacturing Department 54 Inventory Adjustment

_D_ Manufacturing Expense Adjustment 55 Power, Heat and Light 56 Engine Room Supplies 57 Salaries--Superintendent and Factory Clerks 58 Wages Engineers and Miscellaneous 59 General Factory Expense 60 Repairs and Maintenance--Buildings 61 Repairs and Maintenance--Machinery 62 Repairs and Maintenance--Tools

Trading Accounts _E_ Harness Department 63 Sales 64 Returns and Allowances 65 Inventory Adjustment _F_ Collar Department 66 Sales 67 Returns and Allowances 68 Inventory Adjustment _G_ Saddlery Department 69 Sales 70 Returns and Allowances 71 Inventory Adjustment _H_ Profit and Loss 72 Interest Credits 73 Cash Discount Credits 74 Rent Credits _I_ Administration 75 Insurance and Taxes 76 Salaries--Officers 77 Salaries--Bookkeepers and Clerks 78 Printing and Stationery 79 Legal Expenses 80 Postage, Telegraph and Telephone 81 Office Expenses 82 Traveling Expense--Officers 83 Misc. General Expense _J_ Sales Expense 84 Advertising 85 Salaries--Salesmen 86 Commission 87 Traveling Expense--Salesmen 88 Trade Show Expense 89 Out-Freight and Express _K_ Collecting 90 Collection Fees 91 Cash Discounts Allowed _L_ Delivery Expense 92 Wages 93 Maintenance Horses and Wagons 94 Maintenance Motor Trucks _M_ Depreciation Adjustment 95 Buildings 96 Machinery 97 Tools and Fixtures 98 Bad Debts

=25. Chart Explained.= The following explanations will give the student a working knowledge of the operation of these accounts. Accounts, 1 to 33, inclusive, comprising assets and liabilities, are omitted, as no instructions will be required for keeping these accounts. All accounts are referred to by number.

34. _Purchases--Leather._ Charged with all purchases of leather for use in harness department. Credited with all leather transferred to other departments.

35. _Purchases--Hardware._ Charged with all purchases of hardware for use in harness department. Credited with all hardware transferred to other departments,

36. _Purchases--Supplies._ Charged with all purchases of supplies and materials, other than leather and hardware, for use in harness department. Credited with all transfers to other departments.

37. _In-Freight._ Charged with the cost of freight and cartage on all purchases for the harness department. Totals pro-rated to department purchase accounts at the end of each month.

38. _Labor--Cutting Department._ Charged with the wages of all men employed in cutting department, including foreman.

39. _Labor--Manufacturing Department._ Charged with the wages of all harness makers, and others employed in the harness manufacturing department.

40. _Inventory Adjustment._ An account used for the temporary adjustment of inventories for the purpose of obtaining monthly balances. At the end of the fiscal period, or whenever the books are closed, the balance of this account is transferred to inventory accounts.

Accounts 34 to 40, inclusive, are finally closed into a harness manufacturing account.

The same instructions apply to accounts 41 to 47, inclusive, in respect to the collar department, and to accounts 48 to 54, inclusive, in respect to the saddlery department.

55. _Power, Heat and Light._ Charged with all fuel and electric power, consumed for power, heat and light.

56. _Engine Room Supplies._ Charged with all oils, waste and other supplies, used in the engine room.

57. _Salaries--Superintendents and Factory Clerks._ Charged with salaries of general superintendent, superintendent's clerk and all clerks employed exclusively in the factory, as time keepers and clerks.

58. _Wages--Engineers and Miscellaneous._ Charged with wages of engineer and assistants, wages of shipping clerk and assistants, wages of receiving and stock clerks, wages of all general laborers whose time is not chargeable to a specific department.

59. _General Factory Expense._ Charged with all miscellaneous items of factory expense not provided for in other accounts.

60. _Repairs and Maintenance--Buildings._ Charged with all material and labor consumed in the repairs and maintenance of buildings.

61. _Repairs and Maintenance--Machinery._ Charged with same items as No. 60, as applied to machinery.

62. _Repairs and Maintenance--Tools._ Same as No. 61, applied to tools.

Accounts 55 to 62, inclusive, are closed into a manufacturing expense adjustment account, monthly. This account is credited with expense charged to each departmental manufacturing account, the distribution being made on a percentage basis.

63. _Sales--Harness Department._ Credited with the amount of all sales in the harness department.

64. _Returns and Allowances._ Charged with all returns and allowances on account of harness sales, except cash discount.

65. _Inventory Adjustment._ An account used for the temporary adjustment of inventories of finished stock, for the purpose of obtaining monthly statements of gross profits. At the end of the fiscal year, the balance of the account is transferred to inventory of finished goods account, through the trading account.

Accounts 63 to 65, inclusive, are closed into a harness trading account, at the end of the fiscal year. For purposes of comparison, monthly trading statements are made, leaving these accounts undisturbed until the end of the year.

Accounts 66 to 68, inclusive, and 69 to 71, inclusive, are handled exactly the same manner, in relation to the collar and saddlery departments.

72. _Interest Credits._ Credited with all interest collected on past due accounts, or received on outside investments.

73. _Cash Discount Credits._ Credited with all discounts earned by the prepayment of bills.

74. _Rent Credits._ Credited with all amounts received from rentals of property owned by the company, or as a result of subletting leased property.

75. _Insurance and Taxes._ Charged with all sums paid for fire, liability or other insurance, state and municipal taxes, and license fees.

76. _Salaries--Officers._ Charged with the salaries of all administrative officers, and directors' fees.

77. _Salaries--Bookkeeper and Clerks._ Charged with amounts of salaries of all bookkeepers, stenographers, and other office clerks.

78. _Printing and Stationery._ Charged with the cost of all stationery and printed matter used in the offices.

79. _Legal Expense._ Charged with attorney's fees and all expense of litigation.

80. _Postage, Telegraph and Telephone._ Charged with all sums paid for postage, and telegraph and telephone service.

81. _Office Expenses._ Charged with sundry items of office expense, not provided for in other accounts.

82. _Traveling Expense--Officers._ Charged with all legitimate traveling expenses incurred by officers in the interest of the company.

83. _Misc. General Expenses._ Charged with all expense items not otherwise accounted for.

Accounts 72 to 83, inclusive, are closed into an administration account.

84. _Advertising._ Charged with all sums paid for advertising, including periodical advertising, catalogs, circulars, and novelties.

85. _Salaries--Salesmen._ Charged with the salaries of all traveling salesmen.

86. _Commissions._ Charged with all commissions paid to brokers or salesmen.

87. _Traveling Expenses--Salesmen._ Charged with all legitimate expenses of salesmen, incurred in the interest of the company.

88. _Trade Show Expense._ Charged with all expenses incurred on account of exhibitions at trade shows. Sometimes treated as a part of advertising expense.

89. _Out-Freight and Express._ Charged with all freight and express paid on goods sold at delivered prices.

Accounts 84 to 89, inclusive, are closed into a sales expense account.

90. _Collection Fees._ Charged with all fees paid to banks, attorneys or others, for the collection of accounts.

91. _Cash Discounts Allowed._ Charged with all allowances to customers, for prompt payment of bills.

Accounts 90 and 91 are closed into a collecting account.

92. _Wages._ Charged with the wages of drivers and barn men.

93. _Maintenance.--Horses and Wagons._ Charged with cost of feed, stable supplies, repairs to harness and wagons, blacksmithing and horse-shoeing.

94. _Maintenance--Motor Trucks._ Charged with all expense of up-keep and repairs to delivery trucks.

Accounts 92 to 94, inclusive, are closed into a delivery expense account.

95. _Depreciation--Buildings._ Credited monthly with current charges for depreciation.

96, 97, and 98. Handled the same as No. 95.

Accounts 95 and 98 are closed into a depreciation adjustment account.

The illustrations (pp. 48-50) show how all of these accounts are assembled into main groups, and finally closed into profit and loss, and capital accounts. An explanation of the accounts in the harness department will be sufficient to show how all of the accounts are treated.

Harness manufacturing, account _A_, is charged with accounts 34 to 39, inclusive, and the proper portion of account _D_. It is credited with the cost of all finished goods, the amount being transferred to account _E_, harness trading. It is credited with the increase in inventories over the preceding month, this amount being transferred to account 40; if inventories show a decrease, the amount is charged.

Harness trading, account _E_, is charged with cost of finished goods from account _A_; with account 64; with gross profits, transferred to profit and loss, account _H_. It is credited with sales, account 63; with increase in inventory, account 65.

Gross profits on account of trading are closed into profit and loss.

Inventory adjustment accounts Nos. 40 and 65, are still open and the balances show total inventories. The actual amounts of inventories are transferred to accounts 4 to 7, inclusive. This will leave a balance in inventory adjustment account No. 40, representing work in process in the harness factory. These inventory adjustment accounts are closed only at the end of the fiscal year, or when the books are closed. At the beginning of a new fiscal period the inventories are again charged to inventory adjustment accounts, and adjusting entries made monthly in manufacturing and trading accounts.

REVIEW QUESTIONS.

PRACTICAL TEST QUESTIONS.

In the foregoing sections of this Cyclopedia numerous illustrative examples are worked out in detail in order to show the application of the various methods and principles. Accompanying these are examples for practice which will aid the reader in fixing the principles in mind.

In the following pages are given a large number of test questions and problems which afford a valuable means of testing the reader's knowledge of the subjects treated. They will be found excellent practice for those preparing for Civil Service Examinations. In some cases numerical answers are given as a further aid in this work.

REVIEW QUESTIONS ON THE SUBJECT OF THEORY OF ACCOUNTS