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Title: Cyclopedia of Commerce, Accountancy, Business
Administration, v. 04 (of 10)

Author: American School of Correspondence

Release date: August 9, 2014 [eBook #46545]
Most recently updated: October 24, 2024

Language: English

Other information and formats: www.gutenberg.org/ebooks/46545

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*** START OF THE PROJECT GUTENBERG EBOOK CYCLOPEDIA
OF COMMERCE, ACCOUNTANCY, BUSINESS ADMINISTRATION, V.
04 (OF 10) ***

THE BUSY RETAIL STORE OF THE L. E. WATERMAN COMPANY
At the "Pen Corner," 173 Broadway, New York City

Cyclopedia
of

Commerce, Accountancy,
Business Administration

Volume 4

A General Reference Work on
ACCOUNTING, AUDITING, BOOKKEEPING, COMMERCIAL LAW,
BUSINESS
MANAGEMENT, ADMINISTRATIVE AND INDUSTRIAL

ORGANIZATION,
BANKING, ADVERTISING, SELLING, OFFICE AND FACTORY
RECORDS, COST KEEPING, SYSTEMATIZING, ETC.

Prepared by a Corps of
AUDITORS, ACCOUNTANTS, ATTORNEYS, AND SPECIALISTS IN
BUSINESS METHODS AND MANAGEMENT

Illustrated with Over Two Thousand Engravings

TEN VOLUMES

CHICAGO
AMERICAN TECHNICAL SOCIETY
1910

Copyright, 1909
BY
AMERICAN SCHOOL OF CORRESPONDENCE

Copyright, 1909
BY
AMERICAN TECHNICAL SOCIETY

Entered at Stationers' Hall, London
All Rights Reserved

Authors and Collaborators

JAMES BRAY GRIFFITH, Managing Editor
Head, Dept. of Commerce, Accountancy, and Business
Administration, American School of Correspondence.

ROBERT H. MONTGOMERY
Of the Firm of Lybrand, Ross Bros. & Montgomery, Certified
Public Accountants.
Editor of the American Edition of Dicksee's Auditing.
Formerly Lecturer on Auditing at the Evening School of Accounts
and Finance of the University of Pennsylvania, and the
School of Commerce, Accounts, and Finance of the New
York University.

ARTHUR LOWES DICKINSON, F. C. A., C. P. A.
Of the Firms of Jones, Caesar, Dickinson, Wilmot & Company,
Certified Public Accountants, and Price, Waterhouse &
Company, Chartered Accountants.

WILLIAM M. LYBRAND, C. P. A.
Of the Firm of Lybrand, Ross Bros. & Montgomery, Certified
Public Accountants.

F. H. MACPHERSON, C. A., C. P. A.
Of the Firm of F. H. Macpherson & Co., Certified Public
Accountants.

CHAS. A. SWEETLAND
Consulting Public Accountant.
Author of "Loose-Leaf Bookkeeping," and "Anti-Confusion
Business Methods."

E. C. LANDIS
Of the System Department, Burroughs Adding Machine
Company.

HARRIS C. TROW, S. B.
Editor-in-Chief, Textbook Department, American School of
Correspondence.

CECIL B. SMEETON, F. I. A.
Public Accountant and Auditor.
President, Incorporated Accountants' Society of Illinois.
Fellow, Institute of Accounts, New York.

JOHN A. CHAMBERLAIN, A. B., LL. B.
Of the Cleveland Bar.
Lecturer on Suretyship, Western Reserve Law School.
Author of "Principles of Business Law."

HUGH WRIGHT
Auditor, Westlake Construction Company.

GLENN M. HOBBS, Ph. D.
Secretary, American School of Correspondence.

JESSIE M. SHEPHERD, A. B.
Associate Editor, Textbook Department, American School of
Correspondence.

GEORGE C. RUSSELL
Systematizer.
Formerly Manager, System Department, Elliott-Fisher Company.

OSCAR E. PERRIGO, M. E.
Specialist in Industrial Organization.
Author of "Machine-Shop Economics and Systems," etc.

DARWIN S. HATCH, B. S.
Assistant Editor, Textbook Department, American School of
Correspondence.

CHAS. E. HATHAWAY
Cost Expert.
Chief Accountant, Fore River Shipbuilding Co.

CHAS. WILBUR LEIGH, B. S.
Associate Professor of Mathematics, Armour Institute of
Technology.

L. W. LEWIS
Advertising Manager, The McCaskey Register Co.

MARTIN W. RUSSELL
Registrar and Treasurer, American School of Correspondence.

HALBERT P. GILLETTE, C. E.
Managing Editor, Engineering-Contracting.
Author of "Handbook of Cost Data for Contractors and
Engineers."

R. T. MILLER, JR., A. M., LL. B.
President, American School of Correspondence.

WILLIAM SCHUTTE
Manager of Advertising, National Cash Register Co.

E. ST. ELMO LEWIS
Advertising Manager, Burroughs Adding Machine Company.
Author of "The Credit Man and His Work" and "Financial
Advertising."

RICHARD T. DANA
Consulting Engineer.
Chief Engineer, Construction Service Co.

P. H. BOGARDUS
Publicity Manager, American School of Correspondence.

WILLIAM G. NICHOLS
General Manufacturing Agent for the China Mfg. Co., The
Webster Mfg. Co., and the Pembroke Mills.
Author of "Cost Finding" and "Cotton Mills."

C. H. HUNTER
Advertising Manager, Elliott-Fisher Co.

FRANK C. MORSE
Filing Expert.
Secretary, Browne-Morse Co.

H. E. K'BERG
Expert on Loose-Leaf Systems.
Formerly Manager, Business Systems Department, Burroughs
Adding Machine Co.

EDWARD B. WAITE

Head, Instruction Department, American School of
Correspondence.

Authorities Consulted

The editors have freely consulted the standard technical and business
literature of America and Europe in the preparation of these volumes. They
desire to express their indebtedness, particularly, to the following eminent
authorities, whose well-known treatises should be in the library of everyone
interested in modern business methods.
Grateful acknowledgment is made also of the valuable service rendered
by the many manufacturers and specialists in office and factory methods,
whose coöperation has made it possible to include in these volumes suitable
illustrations of the latest equipment for office use; as well as those financial,
mercantile, and manufacturing concerns who have supplied illustrations of
offices, factories, shops, and buildings, typical of the commercial and
industrial life of America.

JOSEPH HARDCASTLE, C. P. A.
Formerly Professor of Principles and Practice of Accounts,
School of Commerce, Accounts, and Finance, New York
University.
Author of "Accounts of Executors and Testamentary Trustees."

HORACE LUCIAN ARNOLD
Specialist in Factory Organization and Accounting.
Author of "The Complete Cost Keeper," and "Factory Manager
and Accountant."

JOHN F. J. MULHALL, P. A.

Specialist in Corporation Accounts.
Author of "Quasi Public Corporation Accounting and
Management."

SHERWIN CODY
Advertising and Sales Specialist.
Author of "How to Do Business by Letter," and "Art of Writing
and Speaking the English Language."

FREDERICK TIPSON, C. P. A.
Author of "Theory of Accounts."

CHARLES BUXTON GOING
Managing Editor of The Engineering Magazine.
Associate in Mechanical Engineering, Columbia University.
Corresponding Member, Canadian Mining Institute.

F. E. WEBNER
Public Accountant.
Specialist in Factory Accounting.
Contributor to The Engineering Press.

AMOS K. FISKE
Associate Editor of the New York Journal of Commerce.
Author of "The Modern Bank."

JOSEPH FRENCH JOHNSON
Dean of the New York University School of Commerce,
Accounts, and Finance.
Editor, The Journal of Accountancy.
Author of "Money, Exchange, and Banking."

M. U. OVERLAND
Of the New York Bar.

Author of "Classified Corporation Laws of All the States."

THOMAS CONYNGTON
Of the New York Bar.
Author of "Corporate Management," "Corporate Organization,"
"The Modern Corporation," and "Partnership Relations."

THEOPHILUS PARSONS, LL. D.
Author of "The Laws of Business."

E. ST. ELMO LEWIS
Advertising Manager, Burroughs Adding Machine Company.
Formerly Manager of Publicity, National Cash Register Co.
Author of "The Credit Man and His Work," and "Financial
Advertising."

T. E. YOUNG, B. A., F. R. A. S.
Ex-President of the Institute of Actuaries.
Member of the Actuary Society of America.
Author of "Insurance."

LAWRENCE R. DICKSEE, F. C. A.
Professor of Accounting at the University of Birmingham.
Author of "Advanced Accounting," "Auditing," "Bookkeeping for
Company Secretary," etc.

FRANCIS W. PIXLEY
Author of "Auditors, Their Duties and Responsibilities," and
"Accountancy."

CHARLES U. CARPENTER
General Manager, The Herring-Hall-Marvin Safe Co.
Formerly General Manager, National Cash Register Co.
Author of "Profit Making Management."

C. E. KNOEPPEL
Specialist in Cost Analysis and Factory Betterment.
Author of "Systematic Foundry Operation and Foundry Costing,"
"Maximum Production through Organization and
Supervision," and other papers.

HARRINGTON EMERSON, M. A.
Consulting Engineer.
Director of Organization and Betterment Work on the Santa Fe
System.
Originator of the Emerson Efficiency System.
Author of "Efficiency as a Basis for Operation and Wages."

ELMER H. BEACH
Specialist in Accounting Methods.
Editor, Beach's Magazine of Business.
Founder of The Bookkeeper.
Editor of The American Business and Accounting Encyclopedia.

J. J. RAHILL, C. P. A.
Member, California Society of Public Accountants.
Author of "Corporation Accounting and Corporation Law."

FRANK BROOKER, C. P. A.
Ex-New York State Examiner of Certified Public Accountants.
Ex-President, American Association of Public Accountants.
Author of "American Accountants' Manual."

CLINTON E. WOODS, M. E.
Specialist in Industrial Organization.
Formerly Comptroller, Sears, Roebuck & Co.
Author of "Organizing a Factory," and "Woods' Reports."

CHARLES E. SPRAGUE, C. P. A.

President of the Union Dime Savings Bank, New York.
Author of "The Accountancy of Investment," "Extended Bond
Tables," and "Problems and Studies in the Accountancy of
Investment."

CHARLES WALDO HASKINS, C. P. A., L. H. M.
Author of "Business Education and Accountancy."

JOHN J. CRAWFORD
Author of "Bank Directors, Their Powers, Duties, and Liabilities."

DR. F. A. CLEVELAND
Of the Wharton School of Finance, University of Pennsylvania.
Author of "Funds and Their Uses."

CHICAGO SALES AND DISPLAY ROOMS OF THE NEW HAVEN
CLOCK COMPANY

Foreword

With the unprecedented increase in our commercial activities has come
a demand for better business methods. Methods which were adequate for
the business of a less active commercial era, have given way to systems and
labor-saving ideas in keeping with the financial and industrial progress of
the world.
Out of this progress has risen a new literature—the literature of
business. But with the rapid advancement in the science of business, its
literature can scarcely be said to have kept pace, at least, not to the same
extent as in other sciences and professions. Much excellent material dealing
with special phases of business activity has been prepared, but this is so
scattered that the student desiring to acquire a comprehensive business
library has found himself confronted by serious difficulties. He has been
obliged, to a great extent, to make his selections blindly, resulting in many
duplications of material without securing needed information on important
phases of the subject.
In the belief that a demand exists for a library which shall embrace the
best practice in all branches of business—from buying to selling, from
simple bookkeeping to the administration of the financial affairs of a great
corporation—these volumes have been prepared. Prepared primarily for use
as instruction books for the American School of Correspondence, the
material from which the Cyclopedia has been compiled embraces the latest
ideas with explanations of the most approved methods of modern business.
Editors and writers have been selected because of their familiarity with,
and experience in handling various subjects pertaining to Commerce,
Accountancy, and Business Administration. Writers with practical business
experience have received preference over those with theoretical training;

practicability has been considered of greater importance than literary
excellence.
In addition to covering the entire general field of business, this
Cyclopedia contains much specialized information not heretofore published
in any form. This specialization is particularly apparent in those sections
which treat of accounting and methods of management for Department
Stores, Contractors, Publishers and Printers, Insurance, and Real Estate. The
value of this information will be recognized by every student of business.
The principal value which is claimed for this Cyclopedia is as a
reference work, but, comprising as it does the material used by the School
in its correspondence courses, it is offered with the confident expectation
that it will prove of great value to the trained man who desires to become
conversant with phases of business practice with which he is unfamiliar,
and to those holding advanced clerical and managerial positions.
In conclusion, grateful acknowledgment is made to authors and
collaborators, to whose hearty cooperation the excellence of this work is
due.

Table of Contents

(For professional standing of authors, see list of Authors and Collaborators at front of volume.)

VOLUME IV
Theory of Accounts By James B. Griffith Page 11
Dictionary of Commercial Terms—Commercial Abbreviations—Objects of
Bookkeeping—Methods—Single Entry—Double Entry—Advantages of Double
Entry —Classes of Account Books—Recording Transactions—Promissory
Notes—Bank Deposits—Sample Transactions—Classes of Accounts—Classes
of Assets—Revenue Accounts—Rules for Journalizing—Rules for Posting—
Trial Balance—Sample Ledger Accounts—Treatment of Cash Discounts—Profit
and Loss—Merchandise Inventory Accounts—Balance Sheet—Journalizing
Notes—Journalizing Drafts

Single Proprietorship and
Partnership Accounts By James B. Griffith Page 119
Retail Business—Proprietors' Accounts—Inventory—Retail Coal Books—
Uncollectible Accounts—Sales Tickets—Departmental Records—Partnership
Agreements—Kinds of Partners—Participation in Profits—Interest on
Investments—Capital and Personal Accounts—Opening and Closing
Partnership Books—Model Set of Books

Corporation and Manufacturing
Accounts By James B. Griffith Page 195
Classification of Corporations—Joint Stock Company—Creation of Corporation
—Stockholders—Stock Certificates—Capitalization—Capital and Capital Stock
—Stock Subscriptions—Management of Corporations—Powers of Directors
and Officers—Dividends—Closing Transfer Books—Sale of Stock Below Par—
Corporation Bookkeeping—Books Required—Opening Entries—Changing
Books from Partnership to Corporation—Stock Donated to Employes—

Reserves—Computing Sinking Funds—Premium and Interest on Bonds—
Manufacturing and Cost Accounts—Factory Assets—Factory Expenses—
Balance Ledger

The Voucher System of
Accounting By James B. Griffith Page 273
Use of Vouchers—Voucher Checks—Journal Vouchers—Voucher Register—
Operation of System—Auditing Invoices—Executing Vouchers—Paying, Filing,
and Indexing Vouchers—Voucher File—Demonstration of System—Voucher
Accounting—Unit System—Combined Purchase Ledger and Invoice File—
Private Ledger—Private Journal—General Ledger—Manufacturing Accounts—
Charting Accounts—Chart of Trading Business—Chart of Manufacturing
Accounts—Examples of Charts—Explanation of Charts

Review Questions Page 325

Index Page 345

THE ACCOUNTING DEPARTMENT IN THE OFFICES OF THE
GREEN FUEL ECONOMIZER COMPANY, MATTEAWAN, N. Y.

THEORY OF ACCOUNTS

PART I

Like every other special branch of study, the Theory and Practice of
Accounts has its own special vocabulary of technical terms. In all literature
of accounting and business methods in general, these terms are frequently
employed; and the student will find it not only advantageous, but in fact
absolutely necessary, to familiarize himself thoroughly with their use.
The commercial terms and definitions in the following list are the ones
most commonly used in business. Great care has been exercised in
preparing a list that is practical and in making the definitions clear.

DICTIONARY OF COMMERCIAL TERMS

Acceptance—When a draft or bill of exchange is presented to the payer,
he writes across the face "Accepted" or "Accepted for payment at ..." and
signs his name. It is then termed an acceptance.
Accommodation Note—A note given without consideration of value
received; usually done to enable the payee to raise money.
Account—
(a) A statement of debits and credits.
(b) A record of transactions with a particular person or persons, or
with respect to a particular object.
Account Books—Books in which records of business transactions or
accounts are kept.

Account Current—An account of transactions during the present month,
week, or other current period. An open account.
Account Sales—A statement in detail covering sales, expenses, and net
proceeds made by a commission merchant to one who has consigned goods
to him.
Accrued; Accrued Interest—
(a) Accumulated interest not payable until a specified date.
(b) Accumulated rent.

Specimen Account

Acknowledgment—A certificate to the genuineness of a document
signed and sworn to before an authorized official, as a Notary Public.
Administrator—One appointed by the court to settle an estate.
Ad Valorem—According to value. A term used to indicate that duties are
payable on the value rather than on the weight or quantity of articles.
Adventure—As used in business, this term signifies a venture or
speculation.

Account Sales

Advice—Information with reference to a business transaction; notice of
shipment; notice of draft. Transmitted by letter or telegram.
Affidavit—A statement or declaration made under oath, before an
authorized official.
Agent—One authorized to act or transact business for another.
Agreement—A mutual contract entered into by two or more persons.

Acknowledgment

Allowance—An abatement; a credit for inferior goods, error in quantity,
etc.
Annual Statement—A yearly summary of the transactions of a business.
Annuity—An amount payable to or received from another each year for
a term of years or for life.
Antedate—To date a document or paper ahead of the actual time of its
execution.
Appraise—To place a value on goods or property. An estimate made for
the purpose of assessing duties or taxes.
Appreciation—An increase in value. Real estate may increase in value
on account of the demand for property in the immediate vicinity.
Approbation or Approval Sales. Goods delivered to customers with the
understanding that if not found satisfactory they are to be returned within a
definite period and without payment.
Articles—A collection of merchandise; parts of a written agreement, as
"Articles of Association."
Arbitrate—To determine or settle disputes between two or more parties,
as settlement of differences between employer and employees.

Assets—All of the property, goods, possessions of value of a person or
persons in business.
Assign—To transfer or convey to another for the benefit of creditors.
Assignee—The person to whom the property or business is transferred.
Usually acts as a trustee of the creditors.
Assignment—The debtor's transfer or conveyance of his property to a
trustee.
Assignor—The debtor who makes an assignment, or transfers property
for the benefit of creditors.
Association—A body organized for a common object.
Attachment—A legal seizure of goods to satisfy a debt or claim.
Auxiliary—Books of record other than books of original entry or
principal books of account. Books used for purposes of distribution or the
gathering of statistics are "auxiliary" books.
Audit—To verify the accuracy of accounts by examining or checking
records pertaining thereto.
Average—As applied to accounts, the mean time which bills of different
dates have to run, or an average due date for several accounts. Determining
the due date is sometimes referred to as averaging accounts.
Balance—The difference between the debit and credit sides of an
account. To close an account by entering the amount on the lesser side
necessary to make the two sides balance.
Balance Sheet—A statement or summary in condensed form made for
the purpose of showing the standing or condition of a business.
Balance of Trade—The balance or difference in value between the
imports and exports of a country.
Bale—The form in which certain commodities are marketed. A bale of
cotton, bale of hay, etc.
Bank Balance—The net amount to the credit of a depositor at the bank.
Bank Note—A note issued by a bank, payable on demand, which passes
for money.
Bank Draft—An order drawn by one bank on another for the purpose of
paying money.

Bank Pass-Book—A small book furnished to a depositor by his bank, in
which are entered the amounts of deposits and sometimes the checks or
withdrawals.
Bankrupt—A person, firm, or corporation whose liabilities exceed their
assets; who are unable to meet their obligations.
Bill—A statement or record of goods bought or sold, or of services
rendered.

Bill

Bill of Exchange—An order on a given person or bank to pay a
specified amount to the person and at the time named in the bill. The term is
more commonly used to apply to orders on another country, being made in
triplicate.
Bill of Lading—A receipt issued by the representative of a common
carrier, for goods accepted for transportation to a specified point and at a
given rate. It is a contract, and, when transferred to a third party, becomes
an absolute title to the goods.

Bill of Lading

Bill of Sale—A written document executed by the seller, transferring
title to personal property.
Bill Head—The blank or form on which a bill is made. For illustration,
see Bill.

Bill of Exchange

Bills Payable—Promissory notes and acceptances which we are to pay.
Bills Receivable—Promissory notes and acceptances which are to be
paid to us.
Blanks—Papers or books ruled or printed in suitable form for business
records.
Blotter—A book in which are entered memoranda of transactions which
are later copied into other books. Also known as a day book.

Bond—A written agreement binding a person to do or not to do certain
things specified therein. A negotiable instrument secured by mortgage or
other security, binding the maker to pay certain sums on specific dates.
Bonded Goods—Goods stored in a government warehouse, or in
bonded cars, bonds having been given by the owner for the payment of
import duties or internal revenue taxes when removed.
Bonus—An amount paid in excess of the sum originally agreed upon. A
premium or gift—for example, a sum paid to a salesman as extra
compensation for making a certain number of sales.
Book Account—A charge or evidence of indebtedness on the books of
account not secured by note or other written promise.
Brand—A class of goods. A symbol or name used to designate a
specific article. A trade mark.
Broker—One who acts as agent or middleman between buyer and seller.
Brokerage—The commissions or fees paid the broker for his services.
Also a term used to designate his business.
Bullion—Uncoined gold or silver.
Call Loans—Loans made payable on demand or when called for.
Cancel—To render null and void; to annul.
Capital—Property or money invested in a business.
Capital Stock—A term used to indicate the subscriptions of all
stockholders to the capital of a corporation.
Cartage—The charges made for hauling goods by wagon, or otherwise
than by freight or express.
Cash Sales—Sales for which immediate payment is received in
contradistinction to sales of goods on credit.

Bill of Sale

Certificate of Stock—A written statement or declaration of the purchase
of a specified number of shares of the capital stock of a corporation. An
evidence of ownership.
Certified Check—A check, the payment of which is guaranteed by the
bank on which it is drawn.
Charges—The expense involved in handling goods or in performing a
specific act—as, for example, charges for storage, freight charges, etc. Also

a synonym for debits.
Chart—A classified exhibit of the components of a business
organization, showing the authority and responsibilities of the members.
Grouping of the accounts of a business with respect to their relation to one
another.
Charter—To hire a car, ship, or other instrument of transportation. A
document defining the rights and duties of a corporation.
Check—An order on a bank to pay to a certain person, or to the order of
such person, a specified sum, which sum is to be charged to the account of
the drawer of the check.
Clearing House—An exchange established by banks in cities, for their
convenience in making daily settlements. The checks and drafts on the
different banks are exchanged without the formality of presenting them
personally at each bank. A balance is found, and this amount only is paid in
cash.
Closing an Account—Making an entry that will balance the account.
Collateral—Pledges of security—as stocks, bonds, etc.—to protect an
obligation or insure the payment of a loan.
Commission—A percentage or share of the proceeds allowed for the
sale of merchandise—as the pay of a commission merchant for selling a car
of flour.
Commission Merchant—One who sells goods on commission. Similar
to a broker.
Commercial Paper—Negotiable paper used in business.
Common Law—Law based upon the precedent of usage, though not
contained in the statutes.
Company—A corporation; also used to designate partners whose names
are not known.
Compromise—To settle an account for less than the amount claimed. To
agree upon a settlement.

Certificate of Stock

Consideration—The price or money paid or to be paid which induces
the entering into a contract by two or more persons.
Consignee—The party to whom goods are shipped. A person to whom
goods are sent to be sold on commission is a consignee. The goods so sent
are known as a consignment, and the sender is the consignor.
Consul—An agent of the Government, residing in a foreign part, who
guards the interests of his own Government.
Contra—On the opposite side—as a contra account.
Contract—A written agreement between two or more persons to
perform or not to perform some specified act or acts.
Contingent Assets and Liabilities—Resources or liabilities whose value
depends upon certain conditions.
Contingent Fund—A sum put aside to provide for an anticipated
obligation; a reserve fund.
Conveyance—A term used to describe certain forms of legal documents
transferring from one person to another, title to property or collateral.
Copyright—A right granted to an author or publisher to control the
publication of any writing, or the reproduction of a photograph, painting,
etc.
Counterfeit—A spurious coin, or bank or treasury note.
Coupon—A certificate detached from a bond, which entitles the holder
to the payment of interest.

Coupon Bond—Bonds to which are attached coupons calling for the
payment of interest. The coupons, when detached, become negotiable paper.
Credentials—Letters or testimonials conveying authority.
Creditor—One whom we owe; one who gives credit.
Currency—The coin or paper money constituting the circulating
medium of a country.
Debenture—A certified evidence of debt. See Bond.
Debit—To charge; to record an amount due.
Deed—A written document or contract transferring title to real estate.
Defalcation—The appropriating to one's own use, of money intrusted to
him by another; embezzlement.
Deferred Bonds—Bonds which are to be paid when some condition is
fulfilled in the future.
Delivery Receipt—An acknowledgment of the delivery of goods.
Largely used by merchants in the delivery of goods to customers.
Demand Note—A promissory note or acceptance payable on
presentation or on demand.

Deposit—The money placed in custody of the bank, subject to order.
Depreciation—A reduction in the value of property. In a manufacturing
plant, buildings and machinery depreciate in value through wear and tear; a
residence property may depreciate owing to the nature of a nearby building.

Delivery Receipt

Discount—An allowance or abatement made for the payment of a bill
within a specified period. The interest paid in advance on money borrowed
from a bank.
Dishonor—Refusal to accept a draft, or failure to pay a written
obligation when due.

Demand Note

Dividend—The profits which are distributed among the stockholders of
a corporation.
Draft—A written order for the payment of money—usually made
through some bank.
Drawer—The person by whom the draft is made; the one who requested
the payment of money by the drawee.
Drayage—Synonymous with cartage.
Due Bill—A written acknowledgment of an amount due; of the same
effect as a demand note.
Dunning—Soliciting or urgently pressing the payment of a debt.
Duplicate—A copy of a paper or document; the act of making a copy.
Duty—The tax paid on imported goods.
Doubtful—Of questionable value. We refer to an account as "doubtful"
when we question the likelihood of its payment.

Draft

Earnest—An advance payment, applying on the purchase price, made to
bind an oral bargain.
Embezzlement—See Defalcation.
Exchange—The charge made by a bank for the collection of drafts or
checks.
Exports—Commodities sent to another country.
Extend—To set a later date for payment; to add several items and carry
the totals to the proper column.
Face Value—The amount for which a commercial paper is drawn.
Facsimile—An exact duplicate or exact copy.
Financial Statement—A term used in the same sense as balance sheet or
annual statement.
Fiscal—A financial or business year, in contradistinction to a calendar
year. The fiscal year of a business may commence and end on any date—
usually on the date on which it was started.
Fixed Assets—Permanent assets acquired by a firm or corporation to
enable them to conduct a business. Includes real estate, building,
machinery, horses and wagons, etc.
Fixed Charges—Those charges in connection with the operation of a
business which occur at regular intervals, such as rent, taxes, etc.
Fixtures—A fixed asset represented by that part of the furniture not
readily removable, such as gas and electric light fixtures.
Folio—A column provided in account books, in which to enter the page
numbers of other books from or to which records are transferred.
Footing—The sum or amount of a column of figures.
Foreign Exchange—Drafts on foreign cities.

Freight—The charges paid for the transportation of goods.
Gain—The increase in value of assets or profit resulting from a
transaction or transactions.
Gauging—Measuring the liquid contents of casks or barrels.
Going Business—A term used to designate a business in actual
operation. Goodwill or the reputation of a business has a value so long as
the business is in operation, or keeps going. When a business is
discontinued, only the physical assets or actual properties owned by the
business are of value.
Good Will—The monetary value of the reputation of a business over
and above its visible assets; the value of a business name.
Gross—The entire amount in contradistinction to the net amount—as
gross weight or gross profit.
Guarantee or Guaranty—Surety for the maintenance of quality or the
performance of contracts.
Honor—To pay a promissory note when due; to accept or pay a draft.
Hypothecate—To deposit as collateral security for a loan.
Import—To bring goods into the country.
Income—The receipts of a business.
Income Bonds—Bonds on which the payment of interest is contingent
on profits earned. If the interest is passed on account of lack of funds, the
holder of the bond has no claim.
Indemnity—Security against a form of loss which has occurred or may
occur—as fire insurance, against loss by fire.
Indorse—To guarantee the payment of commercial paper by writing
one's name on the back.
Indorsee—The person to whom a paper is indorsed.

Lease

Indorser—The person who guarantees payment; the one who indorses.
Infringe; Infringement—To trespass upon another's rights—as
infringement of a patent or copyright.
Installment—An account or note the payment of which is to be made in
several parts, at stated intervals.
Insolvent—Unable to pay one's obligations.

Instant—Principally used in correspondence to indicate the present
month.
Insurance Policy—A contract between an insurance company and the
insured.
Interest—The sum or premium paid for the use of money; one's share in
a business or a particular property.
Inventory—An itemized schedule of the property or goods belonging to
a business.
Investment—Money paid for goods or property to be held; not for
speculation.
Invoice—A list of goods bought or sold. See Bill.
Jobber—One who buys from manufacturers and sells to retailers; a
middleman.
Job Lot—An incomplete assortment of goods to be disposed of in a
lump. Usually indicates small portions or remnants of a stock, the bulk of
which has been sold.
Joint Stock—Property owned in common by several individuals known
as stockholders.
Leakage—An allowance for waste of liquids in transit; refers
particularly to liquids shipped in casks.
Lease—A written agreement covering the use of property during a
specified period, at a stated rental.
Legal Tender—The lawful amount to be offered in payment of an
obligation. Bank notes or other currency which passes for money.
Lessee—One who receives a lease. The lessor makes it.
Letter of Advice—A letter giving notice of some act in which the one
receiving the advice has an interest—as making a shipment, notice of draft,
etc.
Letter of Credit—A letter which authorizes the receiving, by the holder,
of credit to a stated amount. Principally used by travelers to secure credit
from foreign bankers.
Liabilities—The obligations or debts of a firm, corporation, or
individual.

License—Permission, usually granted by a municipality, to conduct a
specified business.
Liquidation—The closing-out of a business or an estate.
Loss and Gain—The amount of profits or losses of a business.
Maker—One who signs a note.
Manifest—A list or schedule of the articles in a ship's cargo, or of the
goods comprising a shipment.

Order

Maturity—The time when an obligation or an account is due.
Mercantile Agency—A company which obtains and keeps for the use of
its customers information showing the standing of business firms.
Merchandise—The stock in trade, or goods bought to be sold again.
Money Order—An order instructing a third party to pay money to the
person named. A form in which money is transmitted.
Monopoly—The exclusive control of the manufacture or sale of an
article.
Mortgage—A temporary transfer of title to land, goods, or chattels to
secure payment of a debt.

Mortgagor—One who gives a mortgage. The one to whom the
mortgage is given is the mortgagee.
Negotiable—An agreement or any commercial paper which can be
transferred by delivery or endorsement—as a bank note or promissory note.
Net—Less all charges or deductions. Gross assets less liabilities leaves
net capital; gross income less all expenses leaves net profit; etc.
Nominal—Having no actual existence; exists in name only.
Obligation—Indebtedness.
Open Account—An account which has not been paid.
Opening Entries—The entries made in the books when it is desired to
open the accounts of a business.
Option—The right to be the first purchaser; a privilege.
Orders—Requests for the shipment of goods.
Original Entry—The first record made of a charge or credit which
becomes the basis of proof of the account.
Overdraw—To draw a check for a greater amount than the drawer has
on deposit in a bank.
Par—Face value.
Partnership—A firm; a union of two or more persons for the transaction
of business or the ownership of property.
Payee—The one to whom money is to be paid. The one who pays the
money is the payer.
Per Annum—By the year.
Per Cent or Per Centum—By the hundred.
Per Diem—By the day.
Personal Account—Any account with an individual, firm, or
corporation.
Personal Property—All property other than real estate.
Petty Cash—A term used to signify small expenditures in actual cash.
Postdate—To date ahead; after the real date.
Post—To transfer amounts from books of entry to the ledger, which is
the book of final record.

Power of Attorney—Authority to act for and in the name of another in
business transactions.
Preferred Stock—Stock which participates in the profits before any
dividend can be paid on the common or ordinary stock.
Premium—The amount paid above par value; the amount paid to an
insurance company for insurance against loss.
Present Worth—The net capital of an individual.
Proceeds—The amount realized from a sale of property.
Profit and Loss—Synonymous with loss and gain.
Promissory Note—A promise, signed by the maker or makers, to pay a
stated sum at a specified time and place.

Promissory Note

Pro Rata—A distribution of money or goods in proportionate parts.
Protest—A formal notice acknowledged before a notary that a note or
draft was not paid at maturity, and that the maker will be held responsible
for the payment.
Quotation—A price named for a given article or for services.
Ratify—To approve; to sanction the acts of an agent.
Raw Material—Material to be manufactured into other products—as
iron ore, pig iron, lumber, etc.
Real Estate—Primarily refers to land, although buildings are frequently
included.
Rebate—An allowance or deduction. See Allowance.

Receipt—An acknowledgment that money or something of value has
been received.
Receiver—One appointed to take charge of the affairs of a corporation,
either solvent or insolvent, and administer its affairs under orders of the
court.
Remittance—Money or funds of any character transmitted from one
place to another.

Power of Attorney

Renewal Note—A new note given to take the place of a note that is due.
Rent—A payment for the use of property owned by another.
Resources—Synonymous with assets.
Revenue—Income of a business.
Revoke—To recall authority of another to act as agent.
Royalty—A stipulated amount paid to the owner of a mine, patent,
copyright, etc., usually based on sales. The owner of a copyright receives a
royalty based on the number of books sold.

Receipt

Schedule—Inventory of goods or statement of prices.
Sight Draft—A draft payable on presentation or at sight.
Solvent—Able to pay one's debts.
Statement—Commonly used to designate a list of bills to customers
during a stated period. Also used to designate a financial summary showing
profits and losses of a business.
Stockholder—An owner of stock in a corporation or joint stock
company.
Storage—The charge for keeping goods in a store or warehouse.
Surety—One who has guaranteed or made himself responsible for the
acts of another.
Syndicate—A combination of capitalists, usually temporary, for the
conduct of some financial enterprise.
Tare—The amount deducted from gross weights to cover weight of
packages—as crates, boxes, barrels, etc.

Tariff—A schedule of prices, as freight tariff. The duties imposed on
imports or exports.
Terms—The conditions governing a given sale. "Terms cash" means
that payment is to be made as soon as goods are delivered.
Tickler—Memoranda of matters requiring attention in the future,
arranged according to dates.
Time Draft—A draft which matures at some future date.
Trade Discount—The discount allowed by a manufacturer to a jobber or
by a jobber to a retailer.

Statement

Trade Mark—See Brand.
Ultimo—Principally used in correspondence to designate last month.
Valid—Legal or binding; usually applied to a properly executed
contract.

Value Received—Used in notes to indicate that value has been given.
Void—Without legal force; not binding.
Voucher—A receipt; a document which proves the accuracy of an
account or the authority for an expenditure.

Voucher

Warehouse—A building used for storage purposes.
Warehouse Receipt—A document acknowledging the receipt of goods
for storage in a warehouse.
Warranty—An agreement to assume responsibility if certain facts do
not prove as represented.
Way Bill—A document containing a list of goods shipped by a railroad.
Wholesale—A business which sells goods in large quantities, usually in
original packages and to the trade only.
Working Capital—The capital actually used in the active operations of a
business.

COMMERCIAL ABBREVIATIONS

The commercial abbreviations in the following list are in constant use in
the various lines of trade, and should be thoroughly understood by the
student of accounting.
A1 First-class
acct. Account
ad Advertisement
Agt. Agent
amt. Amount
Ans. Answer
Art. Article
asstd. Assorted
Ass't. Assistant
Atty. Attorney
bal. Balance
bbl. Barrel
B. B. Bill Book
bds. Boards
bdls. Bundles
bgs. Bags
bk. Book
bkt. Basket
B. L. or B/L Bill of Lading
bls. Bales
bot. Bought
B. P. or B/P Bills Payable
bro't. Brought
B. R. or B/R Bills Receivable
B. Ren'd. Bill Rendered
bu. Bushel
bx. Box
C. B. Cash Book
¢ or cts. Cents
chgd. Charged
c. i. f. Cost, Insurance, and Freight
ck. Check
cks. Casks, Checks
Co. Company
C. O. D. Collect on delivery

Coll. Collect or Collector
Com. Commission
Com'l. Commercial
Cons'd. Consigned
Const. Consignment
Cr. Credit or Creditor
ctg. Cartage
cwt. Hundredweight
D. B. Day Book
Dept. Department
dft. Draft
dis. or Disc't. Discount
div. Dividend
do. or ditto The Same
doz. Dozen
Dr. Debit or Debtor
ds. Days
ea. Each
E. E. Error excepted
E. and O. E. Errors and omissions excepted
e. g. For example
Ent. Entry or Enter
Ent'd. Entered
etc. or &c. And others; And so forth
Exch. Exchange
ex. Express
exp. Expense
Exr. Executor
f. o. b. Free on board
fol. Folio; Page of a book
f'd, ford. Forward
frt. Freight
ft. Foot, Feet
gal. Gallon
gr. Grain
gro. or gr. Gross
guar. Guaranteed
hdkf. Handkerchief
hhd. Hogshead

hund. Hundred
I. B. Invoice Book
in. Inches
Ins. Insurance
Inst. Instant (this month)
int. Interest
inv. Invoice
invt. Inventory
I. O. U. I owe you; A due bill
J. Journal
lb. Pound
lbr. Lumber
lab. Labor
Manf. Manufacture
Mdse. Merchandise
Mem. Memorandum
Mfd. Manufactured
Mfst. Manifest
Mfr. Manufacturer
Mo. or mo. Month
Mtg. Mortgage
Ms. Manuscript
Mut. Mutual
Nat. or Nat'l. National
N. B. Take notice
No. Number
N. P. Notary Public, Net Proceeds
O. B. Order Book
O. K. All Correct; Approved
oz. Ounce
p. Page
pp. Pages
pay't or pm't. Payment
pc. Piece
pcs. Pieces
P. B. Pass Book
P. C. B. Petty Cash Book
pd. Paid
per. By; By the

per an. By the year
pk. Peck
pkg. Package
pop. Population
pref. Preferred
Prem. Premium
Pro. Proceeds
prop'r. Proprietor
prox. Next Month
P. S. Postscript
pub. Publisher
Qr. or qr. Quarter, Quire
Qt. or qt. Quart
rec'd. Received
ret'd. Returned
R. R. Railroad
Ry. Railway
S. B. Sales Book
S. E. Single Entry
Sec. Secretary
Shipt. Shipment
Shs. Shares
Sig. Signature
S. S. Steamship
s. s. To wit; Namely
St. dft. Sight Draft
Sund. Sundry
Supt. Superintendent
sq. Square
T. B. Trial Balance; Time Book
ult. Ultimo; Last month
via. By way of
viz. Namely
Vol. Volume
vs. Against
W. B. Way Bill
Wk. Week
Wt. or wt. Weight
yr. Year

yd. or yds. Yard or Yards

COMMERCIAL SIGNS AND CHARACTERS

The signs and characters most commonly used in business are the
following:
@ To or At
a/c Account
B/L Bill of Lading
B/R Bills Receivable or Bill Rendered
B/P Bills Payable
B/S Bill of Sale
¢ Cents
c/o Care of
D/D Days after date
D/S Days after sight
F/B Free on board
J/A Joint Account
L/C Letter of Credit
L/M Letters of Marque
£ Pounds Sterling
o/c On account
o/c Out of courtesy
% Per cent
p Per
$ Dollars
# Number, if written before a figure, as #25;
Pounds, if written after, as 25#
✓ Check Mark
" Ditto
° Degrees
' Prime; Minute; Feet
" Seconds; Inches; also used as Ditto marks
1¹ One and one-fourth
1² One and one-half
1³ One and three-fourths
+ Plus

- Minus
× By or times
÷ Divided by
= Equals

DEFINITION AND OBJECTS OF BOOKKEEPING

1. Bookkeeping is the art of recording the transactions of a business in a
manner that makes it possible to determine the accuracy of the records.
The objects of bookkeeping are:
(a) To exhibit a record of the separate transactions of a business.
(b) To furnish statistical information in respect to any particular class of transactions.
(c) To exhibit the financial standing or condition of a business.

When properly assembled the bookkeeping records become accounts
(for definition, see Dictionary of Commercial Terms).
If correct methods are used, the bookkeeping records will be assembled
or grouped in a manner to show their exact nature and their bearing on the
status of the business, or the standing of the account.
2. Debit. The term debit designates those items in an account
representing values with which we have parted, or transferred to another
person or account. Debits are always placed on the left side (or in the left-
hand column) of an account. Debits to persons are of the following classes:
(a) The transfer of merchandise.
(b) The rendering of services.
(c) The use of something of value.

Examples—
(a) We sell to John Doe two tons of coal at $7.50 per ton. We debit his
account with the amount.
(b) We render services to Thos. Ryan for which he is to pay us a stated
fee. We debit his account with the amount of the fee.
(c) We are to pay rent for the use of our offices. Our landlord debits us
with the amount.
3. Credit. The term credit designates those items in an account
representing value which we have received or which has been transferred to

us. Credits are always placed on the right side (or in the right-hand column)
of an account. Credits to persons are of the following classes:
(a) The receipt of merchandise or money.
(b) The rendering of services.
(c) The use of something of value.

Examples—
(a) John Doe pays us $10.00 on account. We credit his account with the
amount.
(b) Our attorney makes a charge for legal services. We credit his
account with the amount.
(c) We rent or lease property to another; and when payment is made, we
credit his account.
4. Rules for Debit and Credit. Debit and credit are the fundamental
principles of bookkeeping. The general rules to be followed in debits and
credits are:
Debit cash when you receive it.
Debit a person when you trust him.
Debit a person when you pay him.
Credit cash when you pay it out.
Credit a person when he trusts you.
Credit a person when he pays you.

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

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

METHODS OF BOOKKEEPING

6. There are but two methods or systems of bookkeeping, and they are
known as single entry and double entry. No matter in what form

bookkeeping records are kept, the method must be either single or double
entry.
Single entry is used only in very small businesses or by those who do
not understand the advantages of double entry.

SINGLE ENTRY

7. As the name indicates, single entry is a single record of the
transaction—that is, a record of one phase of the transaction only.
Example—John Doe's account would show that he received two tons of
coal, but there would be no corresponding account to show that our supply
of coal had been diminished.
Single entry fails to fulfil the object of bookkeeping, as it does not
exhibit the true financial condition of the business, and is incapable of proof
of accuracy.

DOUBLE ENTRY

8. Double entry is a system of making two entries (or a double record)
of every transaction. In every business transaction, two distinct factors are
involved—namely, that which is received, and that which is parted with. If
we sell a given quantity of a commodity, we part with it, and the sale takes
from or decreases the value of that particular commodity in our possession.
If we sell for cash, the transaction adds to our cash possessions; while if the
value of the commodity is debited or charged to the account of a customer,
it adds to the amount we are to receive from that customer.
9. Principle of Double Entry. Double entry is a system of debits and
credits. One writer expresses it as a system of opposing contra things.
The fundamental principle of double entry is that there must be a
corresponding credit for every debit.
Example—When we sell John Doe two tons of coal, we debit his
account; but we have decreased the value of our stock of coal, and to
complete the double entry, we credit coal account (or Merchandise, as the
account representing our stock in trade is sometimes known). When he pays
us money, we credit his account, and debit cash.

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

11. Account books are ruled with special forms which adapt them to
bookkeeping records. The forms of ruling are many and varied to suit the
requirements of different classes of business. Rulings for double entry
bookkeeping do not differ materially from those used in single entry. For
double entry, at least two amount columns must be provided—one for
debits, and one for credits.
The most common form of ruling is known as journal ruling. A book
with this ruling is also known as a journal ledger.
The words in parentheses explain the purpose of the different columns.
The abbreviations Dr. (debit) and Cr. (credit) are sometimes written at the
head of the amount column; but most bookkeepers omit them, as the
position of the columns indicates their purpose.

DEMONSTRATION

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

EXAMPLES FOR PRACTICE

1. On journal ruled paper, which can be procured at any stationer's,
write up the account of John Doe as per example given in Articles 2 and 3.
2. Write up the account of John Doe, showing also the accounts
necessary to complete the double entry, as per example in Article 11.
3. Write up the accounts covering the following transactions, by the
single entry method:
Nov. 16. Sold to James Stevenson 4 cords of wood, at $4.75 per cord.
Sold to Andrew White 2½ tons of coal, at $6.00 a ton.
Nov. 17. Sold to Wm. Johnson 1 ton of coal, at $7.00 a ton.

Nov. 19. Received from James Stevenson $12.00 cash, to apply on
account.
Nov. 20. Received from Wm. Johnson $7.00 in payment of account.
4. Write up the same accounts by the double entry method, using a
merchandise account to represent all classes of merchandise sold.

CLASSES OF ACCOUNT BOOKS

12. Account books are of two classes: (a) those in which complete
records of transactions, or complete accounts, are kept; (b) those which
contain particulars of individual transactions which must afterward be
transferred to books of the (a) class.
Books of the (a) class are known as principal books or books of record;
that is, they contain the final or permanent record of an account.
Books of the (b) class are of two kinds: (ba) books of original entry;
(bb) auxiliary books.
Any book which contains the first (or original) record of a transaction is
a book of original entry (ba).

A CORNER IN THE OFFICES OF THE PLATT IRON WORKS,
DAYTON, OHIO

Any book in which records contained in books of original entry (ba) are
assembled, to be transferred later to principal books (a), is an auxiliary
book.
Any book used for the purpose of assembling statistical information is
an auxiliary book.
The books most commonly used in double entry bookkeeping are:
Order Book, Day Book, Cash Book, Journal, Sales Book, Purchase Book,
Ledger.
13. Order Book. An Order Book is a book of original entry in which is
entered a record of each order or request for the shipment or delivery of
merchandise. The record shows the name and address of the customer, the
kinds and quantities of goods wanted, and the prices at which they are to be
sold.
The ruling of the order book varies according to the nature of the
business. A simple form of ruling is shown.
14. Day Book. A Day Book is a book of original entry in which are
entered full particulars of each completed transaction. These records are
afterwards assembled in auxiliary books, from which they are transferred to
the principal books.

The use of the day book was formerly universal, but it has been
discarded by modern bookkeepers as its use involves unnecessary labor.
The records formerly kept in the day book are now made directly in certain
books then known as auxiliary, which makes of them books of original
entry. The ruling of the day book is shown.
15. Cash Book. A Cash Book is a book of original entry containing
records of all transactions which involve either the receipt or payment of
cash. The records in the cash book are in fact a complete account with cash.
We debit cash for all money received, and credit cash with all money paid
out; therefore, the difference between the total footings of the debit and
credit sides of the cash book shows the amount of cash which we should
have on hand. Since we cannot pay out more than we receive, the debit side
should be the larger, unless both sides are equal, which shows that we have
paid out all the cash received.
The amounts entered on the debit side of the cash book are transferred
(or posted) to the credit side of the account of the one from whom the cash
is received.
The amounts entered on the credit side of the cash book are posted to
the debit side of the account of the one to whom the cash is paid.

There are many special forms of ruling for cash books, with separate
columns for entering certain classes of receipts and payments of a special
nature. The ruling of the cash book should be made to meet the
requirements of the business in which it is to be used. A simple form of
ruling is shown.
It will be noted that the left-hand page is used for the debit side, while
the right-hand page is used for credits. This is the only account kept with
cash.
16. Journal. A Journal is a book in which separate transactions are
entered in a manner to preserve the balance necessary in double entry—that
is, showing the proper debit and credit for each transaction. The journal is
used for making adjusting entries, and it was formerly the custom to copy
into this book from the day book the particulars of every transaction.
Records are now made in the journal directly, which makes it a book of
original entry.
The records in the journal are transferred or posted to the debit and
credit sides of the accounts which they represent.
The journal is frequently combined with the cash book, and is then
called a cash journal. An ordinary form of journal ruling is shown in Article
11.

17. Sales Book. A Sales Book is an auxiliary book in which is kept a
record of all goods sold, showing name of purchaser, quantity and kind of
articles, prices, and amounts.
A sales book is a journal of sales. The amounts of individual sales are
posted (transferred) to the debit side of the accounts of the purchasers. The
footings of the sales book are carried forward until the end of the month,
when the total amount is posted as one item to the credit side of the
merchandise account, completing the double entry.
The merchandise account has been universally used in the past, all
purchases being debited and all sales credited to this account. Certain other
accounts (which will be explained later) are now recommended by leading
accountants, to take the place of the merchandise account.
Sales books are usually ruled to meet the special needs of each business,
separate columns being provided for a record of special classes of sales, or
sales of special kinds of goods.
18. Purchase Book. A Purchase or Invoice Book is the opposite of the
sales book, being used for a record of all purchases made. Like the sales
book, the totals are carried forward to the end of the month, and posted as
one item to the debit side of the merchandise account. The amounts of the
separate transactions are posted daily to the credit of the persons from
whom the goods are purchased.

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

The ledger is the book which contains the final or complete records of
all dealings, either with an individual or with respect to a specific class of
transactions—as expenditures for a certain purpose, or receipts of a given
character, or sales of a given kind of goods.
A transcript of the ledger accounts exhibits the progress and standing of
the business.
Like other books, ledgers are now made with special forms of ruling,
depending on the purpose for which they are to be used. The old style or
common form of ledger ruling is shown (p. 35).
20. Invoice or Bill. An Invoice or Bill is an itemized statement or
record of goods sold by one person to another. The invoice or bill is used in
every line of business. A conventional form of invoice is shown (p. 5).

RECORDING TRANSACTIONS

21. The records of transactions in the journal which show what accounts
are debited and what accounts are credited are called journal entries. The
act of making these entries is known as journalizing.
It was formerly the custom to journalize each individual transaction
from the day book, but in modern bookkeeping the journal is used only for
adjusting and special entries.
22. Posting. When the record of a transaction is transferred to the ledger
from a book of Class (b), it is said to be posted. The act of making the
transfer is called posting.
The original method was to itemize all transactions in the ledger, but the
present custom is to post the totals only.
23. When a record is transferred from one book of Class (b) to another,
or posted to the ledger, the page number of the book to or from which it is
transferred or posted is entered in the column known as the folio column.
This is done that the transaction may be traced from one book to another.
The presence of the page number also serves as a check to show that the
item has been posted.
Example—An item is to be posted from page 1 of the sales book to page
10 of the ledger. In the folio column of the ledger will be entered "S 1"
indicating that the item will be found on page 1 of the sales book. In the

folio column of the sales book will be entered "10" indicating that the item
has been posted to page 10 of the ledger.
24. Ledger Index. An index to the ledger is necessary to enable us to
find the accounts. In small ledgers the index is placed in the front of the
book itself, while for large ledgers a separate index book is used. There is a
distinct advantage in this, as the index book can be kept open on the desk
while posting is being done, and the names found much quicker than when
it is necessary to turn the leaves of the ledger to find the index.
When an account is opened in the ledger, the name should be written in
the index, followed by the page number. The names in the index are
arranged in alphabetical order, each name being written under the letter of
the alphabet corresponding to the first letter in the name. For example:
A B C
Adams, J. C. 11 Bacon, I. H. 2 Crandall, Jas. 7
Andrews, Henry 14 Brown, Henry 9 Campbell, Don. 12

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

SAMPLE TRANSACTIONS

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

Muskegon, Mich., Nov. 1, 1907.
I, Robert B. Robinson, have this day commenced business as a
wholesale dealer in groceries and provisions. I have rented the store located
at 68 Pine St., from Geo. Baker, at $40.00 a month. My resources and
liabilities are as follows:
Resources
Cash on hand $ 2,462.50
Merchandise per inventory 1,147.20
Due me from Roger Bros. 219.40

Liabilities
C. B. Whitney, Grand Rapids $ 126.90
My net investment 3,702.20
—Nov. 1—
Bought from Grand Rapids Gro. Co., Grand Rapids, Mich.
On account
10 cwt. sugar $4.85 $ 48.50
10 bbls. flour 5.25 52.50
150 " salt 1.10 165.00
2 " molasses 48
50,98 gals. .30 29.40 $295.40
—1—
Paid Geo. Baker
For 1 month's rent Cash 40.00
—2—
Sold to Geo. Wiggins, 110 Ottawa St.
On account
1 box B. B. soap 3.75
1 case X. X. corn 1.60
100# soda biscuit 4.25 9.60
—3—
Sold to Smith & Nixon, 262 Western Av.
On account
2 bbl. flour 6.15 12.30
2 cwt. sugar 5.15 10.30
1 bbl. molasses, 48 gal. .35 16.80 39.40
—5—
Bought from William Bratton, 48 Jefferson Av., Detroit
On account
10 sacks Java coffee, 1,000# .25 250.00
—6—
Sent to C. B. Whitney, Grand Rapids
Draft to balance account 126.90
—7—
Sold to H. A. Brainerd, 961 Lake Av.
On account
2 bbls. salt 1.35 2.70
10# baking powder .42 4.20 6.90
—8—

Charge Grand Rapids Gro. Co.
1 bbl. flour received in bad order 5.25
—9—
Sold to Bryan Bros., Lakeside
On account
2 bbls. salt 1.35 2.70
20# raisins .08 1.60 4.30
—10—
Bought from H. A. Edwin, Chicago
On account
20 bbls. pork 10.30 206.00
—12—
Sold for cash
3 bbl. pork 11.35 34.05
—13—
Sold to R. C. Ellison, 10 Jefferson Av.
On account
2 bbl. pork 11.40 22.80
5 bu. beans 2.10 10.50 33.30
—14—
Received from Geo. Wiggins
Cash to balance 9.60
—15—
Sent to Grand Rapids Gro. Co.
Draft to balance 290.15
—16—
Sold for cash
1 box soap 3.75
—17—
Received from Smith & Nixon
Cash on account 25.00

PROMISSORY NOTES

26. A promissory note is a form of commercial paper much used in
business. Goods are sold on specific terms—that is, to be paid for in a
certain time after date. Profits are based on the supposition that the bills will

be paid when due. When not so paid, the debtor is virtually borrowing
money from the creditor, and should pay interest for the use of that money
just as he would if he had borrowed it from a bank. To settle the account
when it is not convenient to pay cash, it is customary to give a promissory
note for the amount, plus interest, payable on a certain date. The promissory
note is more convenient for the creditor; for when it bears his endorsement,
his bankers will discount it, thus giving him the money for use in his
business. Even though he may not discount it, the promissory note is better
for the creditor, as it gives him a definite promise to pay, which he does not
have when the debt is represented by an open account.
27. Bills Receivable and Bills Payable. The commercial term for
promissory notes accepted by us is Bills Receivable. The commercial term
for promissory notes given by us is Bills Payable. The term "bill" is used in
this connection for the reason that a promissory note is a negotiable
instrument, and when indorsed it becomes practically a bill of exchange.
The accounts in the ledger which represent notes receivable and notes
payable are called Bills Receivable Account and Bills Payable Account.
The bills receivable account is debited when a note is received, and
credited when a note is paid. The balance of bills receivable account shows
the amount of unpaid notes payable to us.
The bills payable account is credited when we give a note and debited
when we pay a note. The balance of bills payable account shows the amount
of the notes that we owe.
28. Bill Book. For the purpose of keeping a record of bills receivable
and bills payable, a book known as a bill book is used. Any draft, note, due
bill, or other written promise to pay a specified sum at a stated time, should
be treated as a note or bill—receivable or payable, as the case may be. The
bill book is an auxiliary book, and the record kept is usually treated as a
memorandum only, records of each transaction being made in the journal.
The form shown (p. 45) is one in common use.

29. Acceptances. A draft when accepted—that is, when it becomes an
acceptance—has the same value as a promissory note, for it is a definite
promise to pay on a specified date. Drafts are used for the collection of
accounts in other cities than the one in which the creditor's place of business
is located. A draft may call for payment a certain number of days after date,
or it may call for payment at sight. The former is known as a time draft,
while the latter is a sight draft.
30. Discount and Exchange. When a promissory note is taken to the
bank for the purpose of raising money, it is customary for the banks to
calculate the interest for the time the note is to run, and to deduct this from
the principal, giving the borrower the net amount only. In other words, the
interest is paid in advance, and such advance payment of interest is called
discount.
When a draft is collected through a bank, a small fee is charged, and this
fee is called exchange. Exchange is also charged for the collection of out-
of-town checks, especially if they are drawn on banks in small towns and
cities.

BANK DEPOSITS

31. When money is deposited in a bank, a list of the items in the deposit
is made on a blank known as a deposit ticket or deposit slip. These deposit
tickets are furnished by the bank for the convenience of its customers.
32. Signature Card. Money deposited in a bank can be withdrawn only
by presenting a written order or check, signed by the one in whose name the

money is deposited. That the bank may know that money is not paid on
checks that do not bear the correct signature, each depositor is required to
leave at the bank the signature or signatures which are to be honored. These
signatures are written on a card, known as a signature card, which the bank
keeps for reference.
33. Check Books. Blank checks are usually bound in book form, the
checks themselves being perforated so that they can be easily removed.
These check books are in most cases furnished by the bank. The number of
checks on a page varies, but is seldom more than four. When a check is
written, the number, date, name, and amount should be written on the face
of the stub. To keep a convenient record of the balance in the bank, it is well
to enter a list of all checks and deposits on the back of the check stubs.

Signature Card

34. Pass Book. The bank pass-book should be taken to the bank
whenever a deposit is made, as it contains the bank's receipt for all money
deposited.
35. Indorsement of Checks. Before a check can be deposited in the
bank, it must be indorsed by writing the name of the payee across the back.
The indorsement should be on the back of the left end of the check—never
on the right end. Several forms of indorsement are shown (p. 48). When the
name only is written, it makes the check payable to the bearer, and is known
as a blank indorsement. When the words "Pay to" are used, the check
becomes payable to the one whose, name appears immediately under the

words. It can only be paid to him in person or credited to his account at any
bank at which he may deposit the check. A check indorsed with the words
"Pay to the order of" permits of a further transfer, and provides a receipt
from the one to whom it is so indorsed. When a check is to be deposited, the
proper indorsement is "For deposit only." This is of special importance
when deposits are sent by messenger. Such indorsements usually include
the name of the bank, and are made with a rubber stamp.
36. Depositing Cash. It is a good plan to deposit all cash received and
to pay all bills by check, except such small items as are paid from petty
cash. By doing this, all transactions pass through the bank, providing a
receipt in every case in the form of a canceled check bearing the
indorsement of the payee.
37. Treatment of Petty Cash. It is
customary in business establishments to keep on
hand a certain sum of cash out of which to pay
items of expense such as office supplies, etc.,
when the amount is too small or it is not
convenient to write a check.
The best way to handle this is to draw a
check for a certain amount, and keep this money
separate from the cash received from day to day.
At the end of the month, or sooner if the fund is
low, draw a check payable to cash for the
amount paid out and charge it to expense. This
will leave the fund intact.
Example—We shall suppose the amount of
petty cash to be kept on hand to be $25.00; and
the amount paid out, $15.60, leaving $9.40 on
hand. A check will be made for $15.60, to be
charged to expense through the regular cash
book. The cash will be drawn from the bank, and
the amount added to the $9.40, making a total of
$25.00.
A record of petty cash is usually kept in a
Endorsement small book called a petty cash book. This book
has the regular two-column journal ruling. In

handling petty cash, great care should be taken to secure a receipt in some
form for every payment.

A BIRD'S-EYE VIEW OF THE BELOIT, WIS., FACTORY OF THE
FAIRBANKS-MORSE CO.

SAMPLE TRANSACTIONS

38. The following sample transactions taken from the books of W. B.
Clark, Ames, Ia., illustrate the use of the papers and accounts explained in
this section, and show how the transactions would appear on the books.
Mr. Clark is a shipper of produce, and a retail dealer in coal. His assets
and liabilities are as follows:
Assets
Cash in bank $1,262.78
Inventory, Produce 685.00
" Coal 747.50
Geo. White—Open account 21.00
F. H. Russel " " 7.00
Henry Brown " " 8.00
O. L. Duncan—Note due Dec. 1 27.00 $2,758.28
————

Liabilities
Iowa Coal Co., Des Moines, Open acct. $120.00
Lehigh Coal Co., Chicago, Ill., Open acct. 325.00
George Hardy, Open account 60.00 505.00

————

As he wishes to know how much business he is doing in each
department of his business, he keeps accounts in the ledger with both
produce and coal instead of one merchandise account. In the sales book,
one column is used for coal sales, and one for produce sales. No purchase
book is kept, all purchases being posted from the journal or cash book.
—Oct. 22—
Bought from David Andrews, for cash
200 bu. potatoes @ .42c $84.00
Paid by check No. 11.
—22—
Sold to Albert Long on account
2 tons run of mine coal $3.25 6.50
—23—
Received from Geo. White on account
Cash 10.00
—24—
Sold to Taft Produce Co., Des Moines, on account
148 bu. beans 3.10 458.80
—24—
Drew from bank for petty cash 10.00
Check No. 12.
—25—
Sold to Geo. Hardy on account
1½ tons nut coal 9.00 13.50
Gave him check No. 13. 46.50
—27—
Gave to Lehigh Coal Co., Chicago.
60-day note 200.00
Check No. 14. 125.00
—28—
Taft Produce Co. paid sight draft through Iowa
National Bank 458.80
—29—
Accepted 30-day draft made by Iowa Coal Co. 120.00
Payable at Ames State Bank
—30—

Deposited in Ames State Bank
Draft Iowa National Bank 458.80
Cash 10.00
—30—
Paid for repairs to stove, cash 1.20
—31—
Sold for cash, ½ ton egg coal 4.50

ACCOUNTING DEPARTMENT IN THE NEW YORK OFFICE OF J.
WALTER THOMPSON COMPANY

THEORY OF ACCOUNTS

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 outwould be shown by the trial balance.

CLASSIFICATION OF ACCOUNTS

70. The arrangement of the accounts in the ledger is of considerable
importance. Since one of the objects of bookkeeping is to exhibit the
standing or condition of the business, the accounts should be classified in a
manner that will make easiest the assembling of important statistics.
The accounts in the ledger represent either Assets (resources),
Liabilities, Profits (gains), or Losses. Every account having a debit balance
represents either (a) an asset or (b) a loss. (a) A personal account having a

debit balance represents an asset; (b) any expense account having a debit
balance represents a loss, as it reduces the chance for profit.
Every account having a credit balance represents either (c) a liability or
(d) a profit. (c) A personal account having a credit balance represents a
liability—that is, something we owe; (d) a sales account having a credit
balance represents a profit because it increases our chance of gain.

OFFICE OF THE REGISTRAR, AMERICAN SCHOOL OF
CORRESPONDENCE

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.

CASHIER TERMINAL, LAMSON MOTOR-DRIVEN CABLE CASH
CARRYING SYSTEM FOR DRY GOODS, GENERAL, OR
DEPARTMENT STORES
Lamson Consolidated Store Service Co.

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.

ACCOUNTING DEPARTMENT, SWIFT & COMPANY, CHICAGO

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.

Ledger with Journal Ruling

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.

Day Book

Opening Entry in Journal

AIR-LINE MEAT-CARRYING SYSTEM FOR A LARGE RETAIL
MARKET
Lamson Consolidated Store Service Co.

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

Journal Entrees Recording all Transactions

Journal Entries Recording all Transactions

Journal Entries Recording all Transactions

Cash Book

Journal Ruled Retail Ledger

Journal Ruled Retail Journal

Journal Ruled Retail Ledger

Journal Ruled Retail Ledger

Journal Ruled Retail Ledger

Journal Ruled Retail Ledger

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.

Inventory Sheet

Trial Balance

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.

ERECTING SHOP IN THE WORKS OF THE BALDWIN
LOCOMOTIVE WORKS, PHILADELPHIA, PENNA.

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

Closing Entries, Trading and Profit and Loss Accounts

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.

CENTER RULED LEDGER

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.

Scale Book

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

Adjustment Journal and Department Purchase Book

Departmental Sales Book

Cash Book Including Bank Account

Center Ruled Ledger

Center Ruled Ledger

Center Ruled Ledger

Center Ruled Ledger

Center Ruled Ledger

Trial Balance

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/ $303.20
c
" 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

Journal Showing Opening Entries for a Partnership

Cash Book with Center Column for Particulars

Departmental Sales Book

Departmental Sales and Purchase Books

Classified Ledger Accounts

Classified Ledger Accounts

Classified Ledger Accounts

Classified Ledger Accounts

Classified Ledger Accounts

Classified Ledger Accounts

Classified Ledger Accounts

Classified Ledger Accounts

Classified Ledger Accounts

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.

A VIEW OF THE NEW YORK GENERAL OFFICES OF THE
WESTERN ELECTRIC COMPANY

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.

THE SUPERINTENDENT'S OFFICE, DOBIE FOUNDRY &
MACHINE CO., NIAGARA FALLS, N. Y.

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.

Transfer Book

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.

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.

INSTALLMENT CERTIFICATE

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.

Stock Register

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.

Dividend Book

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.

Stock Ledger

Stock Ledger

AIR-LINE CASH-CARRYING SYSTEM FOR LARGE RETAIL
DRUG STORE
Applicable to a Moderate-Sized General Store. Lamson Consolidated Store Service Co.

Stock Register

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.

A CORNER IN ONE OF THE SHOPS OF BROWNE & SHARPE
MANUFACTURING CO., PROVIDENCE, R. I.

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.

Ledger Accounts of a Bond Issue

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.

Daily Report of Work in Process

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.

Pay-roll Register for Time and Piece Work

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.

WHEEL LATHE SHOP IN THE BALDWIN LOCOMOTIVE
WORKS, PHILADELPHIA, PENNA.

Center-Ruled Balance Ledger

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.

Invoice Register with Distribution Columns.

Invoice Register with Distribution Columns

Check and Disbursement Record

Manufacturing Journal

Manufacturing Journal

Manufacturing General Ledger

Manufacturing General Ledger

Manufacturing General Ledger

Manufacturing General Ledger

Purchase Ledger

Purchase Ledger

General Ledger Trial Balance

Purchase Ledger Statement

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.

GENERAL OFFICES OF THE A. B. DICK COMPANY, CHICAGO,
ILL.

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?

Fig. 1. Voucher to be Receipted and Returned

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.

Fig. 2. Back of Voucher Showing Distribution

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.

Fig. 3. Combined Voucher and Check Used by the Pennsylvania
Railroad Company

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.

Fig. 4. Form of Voucher Check that Requires no Folding

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.

Fig. 5. Duplicate Voucher Check in Loose Leaf Form

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.

Fig. 6. Voucher Distribution
Sheet

Fig. 7. Triplicate Form of Voucher Check that Provides a Receipt and a
Copy of the Check

PLANT OF THE W. L. GILBERT CLOCK CO. AT WINSTED,
CONN.

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.

Fig. 8. Duplicate Voucher with Check Attached

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.

Fig. 9. Journal Voucher for Adjusting Entries

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.

Fig. 10

Fig. 11

Fig. 12

Fig. 13

Typical Forms of Voucher Registers

Designed for Use in Different Businesses

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.

Fig. 14. Card Index of Vouchers Paid

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. File Showing Method of Indexing Vouchers

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.

Fig. 16. Voucher Register Showing Entries

—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.

Fig. 17. Cash Disbursement Book

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.

A VIEW IN THE GENERAL OFFICES OF THE S. OBERMAYER
CO., CINCINNATI, OHIO

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.

Fig. 18. Front of Folder for Unit System of Voucher Accounting

Fig. 19. Monthly Recapitulation for Unit System of Voucher Accounting

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.

Fig. 20. Combined Purchase Ledger and Voucher System

Fig. 21. Monthly Recapitulation and Distribution Sheet

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.

Fig. 22. Cash Book with Columns for Private Ledger Accounts

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