Part 5

=4. Rules for Debit and Credit.= The rules for debit and credit are the same in single entry as in double entry, except that no debits and credits are recorded which do not effect persons or cash—when a cash account is kept. Briefly, these rules applying to single entry are:

_Debit the person_ When he receives anything of value;

When you pay him cash.

_Credit the person_ When you receive anything of value;

When he pays you cash.

_Debit cash_ When you receive it.

_Credit cash_ When you part with it.

=5. Posting.= There is no difference between posting to a single entry ledger and one kept by the double entry method. However, the only accounts posted are personal accounts, and the ledger shows merely how much money the business owes to persons and how much money persons owe the business. A single entry ledger does not show the amount of our notes outstanding, or the amount of other persons' notes held by us. This information can be found only in the bill book. The ledger does not show the value of merchandise purchased or sold, expenses of the business, nor the amount of our investments in land, buildings, or other forms of property.

=6. Proprietor's Account.= A proprietor's investment or capital account is kept in single entry just as it is in double entry. This may or may not include withdrawals. They may be recorded in a personal or private account, in which case the proprietor's account will exhibit the net investment in the business.

=7. Proving the Work.= Since but one side of each journal entry is posted, the two sides of the ledger will not agree as in double entry. Hence a trial balance is, strictly speaking, impossible. The only absolutely sure method of checking the accuracy of a single account in the ledger is to carefully check all postings; this is also true of double entry. But it is possible to prove that the correct totals have been posted in single entry, as it is in double entry. Since the ledger is never in balance as in double entry, the proof is not found by comparing the two sides of the ledger, but by comparing the difference between the two sides of the ledger, with the difference between debits and credits in the columns of books of original entry from which postings have been made. If the difference between debits and credits in the ledger agrees with the difference between debits and credits in the books of original entry, the work may be assumed to be correct.

To prove the work, first find the balances of all ledger accounts and enter the amounts in the debit and credit columns on journal paper—as for a trial balance. Foot and find the difference between the two columns. Next foot the order book, day book, cash book, or any other books from which posting is done, and list the totals which should be posted to debit and credit of ledger accounts. Foot and find the difference.

SAMPLE TRANSACTIONS

=8.= For the first demonstration of single entry bookkeeping, we have selected a small retail business, using transactions which have been used to illustrate a double entry set. This set is kept in the most simple manner possible, the books used being journal, cash book, and ledger.

The business is opened by Wm. 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; a stock of groceries, $946.50; personal accounts due him as follows: Henry Norton $25.00, L. B. Jenkins $22.70. His liabilities consist of two accounts, as follows: Brewster & Co., $115.20; Warsaw Milling Co., $64.00. The opening entry recording the above, is made in the journal as in double entry, but only personal items are posted. Cash is transferred to the cash book.

—Nov. 21— Sold to Henry Norton on account 10# sugar 5½¢ $.55 2 cans corn .25 1 can peas .15 3# rice .30 ----- 1.25

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

—21— Cash sales 14.10

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

—22— Bought for cash 10 doz. eggs .21 2.10

—23— Bought from H. Kling & Co. on account 244# hams .12½ 22.50 201# lard .07½ 15.08 ----- 45.58

—23— Sold to F. W. Bradley on account 2 bu. potatoes 1.60

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

—23— Cash sales 13.20

—24— Sold to A. C. Maybury on account 1# bkg. powder $.50 1# corn starch .10 1# soda .10 1 pkg. jello .20 ----- .90

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

—24— Bought from John Smallwood on account 100 bu. potato .60 60.00

—24— Paid John Smallwood Cash on account 25.00

—24— Cash sales 15.00

—25— Paid Brewster & Co. Cash on account 115.20

—25— Sold to L. B. Jenkins on account ½# pepper .20 12# ham .14 1.68 ----- 1.88

—25— Received from Henry Norton Cash 26.25

—25— Cash sales 13.00

—26— Credited Wm. Bristol for one month's rent $30.00

—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

—26— Sold to C. D. Glover on account ¼ bbl. flour 1.35 1# bkg. powder .50 7 cks. borax soap .25 ----- 2.10

—26— Paid cash for clerk hire 8.00

—26— Cash sales 18.70

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

—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

—28— Cash sales 9.45

—29— Bought from Lowell & Sons on account 500# sugar .04¾ $23.75 50 gal. molasses .30 15.00 ----- 38.75

—29— Bought from Star Salt Co. on account 10 bbls. salt .80 8.00

—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

—29— Cash sales 14.35

—30— Received from F. W. Bradley on account Cash 1.60

—30— Paid Warsaw Milling Co. on account Cash 64.00

—30— Sold to John Smallwood on account 1 bbl. salt 1.10

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

—30— Bought for cash 5 bu. apples 1.00 $5.00

—30— Cash sales 17.90

At the close of business, Nov. 30, the ledger is proved, in accordance with the rules given in Art. 7. All open accounts in the ledger are listed on ordinary journal ruled paper and the balances extended to the debit and credit columns. These columns are footed, the total of the credit columns being $1,564.02, and of the debit column, $56.08. Subtracting the latter from the former, we find the difference to be $1,507.94. The total postings—debit and credit—from the journal and the cash book are then entered and added, the total debit postings being $296.44, and the total credit postings, $1,804.38. The former deducted from the latter leaves $1,564.02, which agrees with the _difference_ in the ledger balances. This proves the correctness of the postings to the ledger, and takes the place of the trial balance used in the double entry method.

DETERMINING THE PROFIT

=9.= Having no nominal accounts, we cannot close through trading account into profit and loss, but must use another method to find the profit or loss for a given period. It will be necessary to first ascertain the present worth of the business. Therefore the first step will be to take an inventory, just as we would if closing a double entry ledger. Our inventory shows merchandise $1,042.77. Next, we will make a statement of assets and liabilities, following the same form as the balance sheet when the books are kept by double entry. This will give us the present worth.

From the present worth, we will deduct the capital investment (or the present worth at the time of making the last statement) which will show the profit for the period. If the present worth is less than the capital investment, the business shows a loss.

It will be noted that while this method shows net profits, it does not show how those profits were made. Having no accounts with purchases and sales, we can have no trading account to show gross profits, and without expense accounts there is no data from which to make up a detailed profit and loss statement. Herein is one of the shortcomings of the single entry method of bookkeeping.

CLOSING THE BOOKS

=10.= To close a single entry ledger, all that is necessary is to credit the proprietor's investment account, or any account representing capital, with the net gain, or debit the account with the net loss. Then rule the personal accounts and bring down the balances.

EXERCISE

On a certain date the assets and liabilities of David Henry are as follows:

_Assets_ Cash $450.00 Due from sundry debtors 75.20 Merchandise per inventory 762.50 _Liabilities_ Due sundry creditors 144.00

The following transactions are recorded:

Sales to sundry persons on account 44.71 Bought from sundry persons on account 337.54 Sold for cash 94.90 Received cash on account 62.00 Paid cash on account 132.50 Paid cash for rent 35.00 Paid cash for clerk hire 7.00

At the close of the period in which these transactions were recorded, the inventory of merchandise on hand was $987.75.

_First._ Open single entry books, entering these transactions in the journal and cash book.

_Second._ Post to ledger using the terms _Debtor_ and _Creditor_ to represent account of customers and those from whom goods were purchased.

_Third._ Prove the ledger.

_Fourth._ Make a statement of assets and liabilities.

_Fifth_. Has there been a gain or a loss, and how does it affect the account of the proprietor?

CHANGING TO DOUBLE ENTRY

=11.= How to change the method of keeping a set of books from single to double entry is an important question to the bookkeeper, for he may be called upon any time to do the work. When once understood, the change involves only very simple entries. The routine may be briefly described as follows:

_First._ Prepare a statement of assets and liabilities.

_Second._ Enter this statement in the journal and post to the ledger, debiting all accounts which represent assets and crediting all accounts which represent liabilities. Credit proprietor's account with the difference, which is the present worth.

If a new ledger is to be opened, new accounts will be opened for each form of asset or liability represented in the entry.

If the old ledger is to be used new accounts are to be opened with assets and liabilities not already represented by accounts in the ledger, and the net gain only will be credited to the proprietor's account. Check personal accounts, but do not post.

_Third._ Take a trial balance to see if the ledger is in balance, as it should be after posting these entries.

EXERCISE

Following the rules given, change the books of David Henry to double entry using the old ledger.

Show necessary journal entry and indicate what new accounts must be opened.

CHANGING PARTNERSHIP BOOKS TO DOUBLE ENTRY

=12.= We will suppose that the ledger illustrated in the following model set (pages 23-27) represents the business of Benton, Douglas, and Kemp, and that the books have been kept by single entry.

They wish to adopt the double entry method and call you in to make the necessary changes in their books.

Your first step is to make a statement of the ledger accounts, including all except the capital accounts of the partners. This statement gives you the following information:

Personal Accounts, _Debit Balances_ $189.25 Personal Accounts, _Credit Balances_ 2,828.50 Cash in Bank 7,313.73

You also balance the cash book and compare the balance with the cash in drawer, and find that the amount shown, $21.60, is correct.

In the meantime an inventory is being taken. When completed, the results shown are:

Merchandise $2,114.50 Furniture and Fixtures 2,000.00

The next step is to make a statement of assets and liabilities for the purpose of finding the present worth of the business.

STATEMENT OF ASSETS AND LIABILITIES

_Assets_ Cash in Bank (Ledger) $7,313.73 Cash in Office (Cash Book) 21.60 Personal Accounts (Ledger) 189.25 Merchandise (Inventory) 2,114.50 Furniture and Fixtures (Inventory) 2,000.00 --------- Total Assets $11,639.08

_Liabilities_ Personal Accounts (Ledger) 2,828.50 ---------- Present Worth 8,810.58

The capital accounts of the partners show the original investment to have been $9,000.00, which is more than the present worth. Deducting the latter from the former will give the net loss.

Investment $9,000.00 Present Worth 8,810.58 --------- Net Loss 189.42

The partnership agreement provides that profits and losses are to be shared equally, but contains no reference to the payment of interest on withdrawals, or allowance of interest on personal credits.

The statement of assets and liabilities is entered in the journal and accounts opened in the ledger with _merchandise inventory_ and _furniture and fixtures_—the only items not already represented by ledger accounts. To complete the change and balance the ledger the following single entry is made in the journal and posted to partners' personal accounts.

James Benton Dr. $63.14 Horace Douglas Dr. 63.14 Henry Kemp Dr. 63.14

A trial balance will now show the ledger to be in balance.

You have followed the routine necessary to change the books of a partnership from single to double entry under the conditions given. A general rule to be followed is to ascertain the present worth, make the partnership adjustment as in double entry, and post as in changing books of a single proprietorship.

EXERCISE

The books of Lancaster, Jenkins, and Stubb have been kept by single entry, but they desire to change to double entry.

The partnership agreement provides that each partner shall share in the profits in proportion to his net investment. Separate accounts are kept with each partner to cover his investment and withdrawals.

The following is a statement of the ledger accounts as they appeared December 31st. The balances of partners' investment accounts are the same as when the last adjustment was made, no additional investments having been made during the present period.

STATEMENT OF LEDGER

Lancaster, Investment Credit Balance $2,000.00 Jenkins " " " 1,500.00 Stubb " " " 1,500.00 Personal Accounts " " 900.00 " " Debit " 2,200.00 Lancaster, Withdrawals " " 325.00 Jenkins " " " 250.00 Stubb " " " 175.00 Bank " " " 2,150.00 Cash in office 50.00

An inventory is taken and shows the value of merchandise in stock to be $1,850.00, fixtures $300.00.

_First._ Transfer debit balances of partners' withdrawal accounts to investment accounts.

_Second._ Show entries to make the partnership adjustment and to change books to double entry.

_Third._ Indicate by check (√) what accounts are to be posted, the old ledger being used.

CHANGING CORPORATION BOOKS TO DOUBLE ENTRY

=13.= Corporation books are seldom kept by single entry, but such cases are not impossible to find. In Chicago, there is a manufacturing corporation which has been in business for more than twenty years and is doing a business of a quarter million dollars a year, whose books have been kept by single entry. Not until January 1909 was an accountant called in to change their books to a modern double entry system.

In the case cited a capital stock account was kept, and dividends were paid in cash. The routine followed by the accountant was to first take an inventory of machinery, material, supplies, goods in process, and manufactured goods. Then the land and buildings were appraised at their present value. Accounts had been kept with real estate and machinery, but repairs to buildings had been charged to real estate, thus showing a fictitious increase in value, and no depreciation had been charged against machinery. There was also a merchandise account which had been charged with all purchases and credited with all sales, so that it furnished no information of value.

For these reasons only personal accounts, capital stock, bank account, and cash were taken from the books in making up a statement of assets and liabilities. In making this statement capital stock was included as a liability and the excess of assets over liabilities represented surplus.