THE 
 
 THEORY OF ACCOUNTS 
 
 BY 
 
 FREDERICK S. TIPSON, C.P.A. 
 
 SECOND EDITION 
 REVISED AND ENLARGED 
 
 NEW YORK 
 ISAAC MENDOZA BOOK CO. 
 
 17 ANN STREET 
 1913 
 
COPYRIGHT, 1902, BY 
 F. S. TIPSON. 
 
 COPYRIGHT, 1912, BY 
 ISAAC MENDOZA 
 
 
PREFACE. 
 
 This volume contains all questions set in the Theory 
 of Accounts paper at the New York State semi-annual ex- 
 aminations for Certified Public Accountants, from Decem- 
 ber, 1896 (the first examination held), to June, 1902, 
 inclusive, with full answers and explanations. While these 
 answers may be found in extended and various forms in 
 textbooks by several writers on accountancy subjects, they 
 are not all to be found, as far as I am aware, in any one. 
 Now, while it is claimed that the answers herein set forth 
 contain the main facts bearing on the subject, they do not 
 contain them all. Nor is it, I deem, expedient that they 
 should. For it is by no means contemplated that the in- 
 formation conveyed should be got up " by rote," but rather 
 that it should stimulate inquiry, study, and research on the 
 part of the reader who desires to master the technique of 
 the subject. 
 
 It is the invariable custom of the author, in preparing 
 students for C. P. A. examinations, to teach the theory of 
 accounts in connection with examples in practical account- 
 ing, and in a great measure to lead them to deduce and 
 formulate the theory for themselves ; on the principle that 
 art precedes science, and that a proposition should be 
 first worked out, and the reasoning process the " how " 
 
 267761 
 
and the " why " explained afterwards. To use this book 
 intelligently then, a knowledge of bookkeeping is necessary. 
 
 With respect to nomenclature, the author will occasion- 
 ally be found at variance with many distinguished writers. 
 In most textbooks, items of revenue expenditure and in- 
 come are referred to as losses and gains. It would seem 
 more reasonable to limit their meaning to " contributory 
 factors"; for loss or gain is only arrived at after transfer- 
 ring them to the profit and loss account, and determining 
 by preponderance of balances, whether a loss or gain has 
 been made. An article published by the author on the 
 " Profit and Loss Account " some time since, has been in- 
 serted in the body of this work, to which attention is 
 specially drawn. Again, the terms "fund " and " account " 
 appear to be used very frequently indiscriminately. It 
 would be desirable to speak of a " fund " when a debit 
 balance is referred to ; an " account " when the credit 
 balance corresponding is meant. 
 
 The extent to which the author has availed himself of 
 the works of Mr. George Lisle, C. A., Mr. Lawrence R. 
 Dicksee, F. C. A., Mr. Francis Gottsberger, C. P. A., and 
 others, will be apparent to those who are familiar with the 
 productions of these writers. 
 
 FREDERICK S. TIPSON. 
 
 December 15, 1903. 
 
PREFACE TO SECOND EDITION. 
 
 It is just ten years ago since the first edition of this 
 book was published. The entire issue was disposed of, 
 and the volume reported "out of print." The constant 
 requests for the book from all parts of the world have led 
 the author to get out the present edition; it being likely 
 to supply a somewhat pressing need. 
 
 The questions and answers have been practically 
 brought up to date; and no candidate who has mastered 
 the contents of this volume need have the slightest doubt 
 of his ability to pass any C. P. A. or Civil Service Ex- 
 amination in this subject. 
 
 The student is advised to read through carefully, each 
 question separately, with its answer, twice making sure 
 that he understands it: then, putting the book aside he 
 should write out the answer in his own words. No 
 attempt should be made to memorize the answer. This 
 exercise will give him self-confidence, and facility in 
 expression; both qualities being of first-class importance 
 to a candidate in any examination. 
 
 The author desires to gratefully acknowledge the receipt 
 of some hundreds of congratulatory and commendatory 
 letters the contents of which his modesty deters him 
 from publishing. 
 
It will be noticed that the same question has necessarily 
 been asked more than once. In some cases the wording of 
 the answers has been changed so as to avoid meaningless 
 repetition ; in others the reader has been referred to ques- 
 tions where answers will be found. 
 
 At the moment of going to press a copy of the following 
 decision of Chief Magistrate William McAdoo, defining the 
 law governing Certified Public Accountants, has just been 
 forwarded to me by the esteemed Secretary of the New 
 York State Society of Certified Public Accountants, Mr. 
 S. D. Patterson, C. P. A., and I deem it of such import- 
 ance to professional accountants and to the public gen- 
 erally as to warrant its insertion here. 
 
 CERTIFIED PUBLIC ACCOUNTANTS. 
 
 Use of Letters " C. P. A." Section 80, 81 and 82 General 
 
 Business Law. 
 
 FIRST DEPARTMENT 
 
 CITY MAGISTRATE'S COURT FIRST DIVISION. 
 
 November, 1912. 
 
 TJTE PEOPLE OF THE STATE OF NEW YORK on the relation 
 of FRANCIS R. CLAIR, as Chairman of the Committee 
 on Violations of the New York State Certified Public 
 Accountants Society, v. 
 BLANK, defendants. 
 
 A person using the letters "C. P. A.," signifying "certified public account- 
 ant," after his name, unless he has complied with the provisions of 
 sections 80 and 81 of the General Business Law, is guilty of the offense 
 prescribed by section 82 of said law. 
 
A person is not entitled to use the letters "0. P. A." in connection with 
 his business in this State because he is a certified public accountant 
 duly registered as such in another State. 
 
 A certified public accountant in the State of New York may not legally, in 
 conjunction with others, whether certified public accountants or not 1 , 
 form a corporation and act as a company conducting his and their 
 business. 
 
 Although a firm name is used by public accountants and one of its mem- 
 bers is a certified public accountant, the letters "C. P. A." may be used 
 only with his individual name. 
 
 O'Gorman, Battle & Marshall (Albert Blogg Unger of 
 counsel) for complainant; John Thomas Smith, A. Par- 
 ker Nevin and Meyer B. Cushner for defendants. 
 
 McAdoo, Ch. Magistrate This case comes before the 
 court on a summons issued on the instance of persons 
 desiring to enforce the provisions of article 8, sections 80, 
 81 and 82 of the General Business Law (Consolidated Laws 
 of the State of New York, 1909, page 1193), so far as the 
 same relates to public accountants using the letters C. P. 
 A. or the words certified public accountant after their 
 names without being duly authorized to do so by the per- 
 sons specified in said act. 
 
 " Sec. 80. Certified public accountants. Any citizen 
 of the United States, or person who has duly declared his 
 intention of becoming such citizen, residing or having a 
 place for the regular transaction of business in the State, 
 being over the age of twenty-one years and of good moral 
 character, and who shall have received from the regents 
 of the university a certificate of his qualifications to prac- 
 tice as a public expert accountant as hereinafter provided, 
 shall be styled and known as a certified public accountant ; 
 
and no other person shall assume such title, or use the 
 abbreviations C. P. A., or any other words, letters or 
 figures to indicate that the person using the same is such 
 certified public accountant. 
 
 " Sec. 81. Eegents to make rules. The regents of the 
 university shall make the rules for the examination of 
 persons applying for certificates under this article, and may 
 appoint a board of three examiners for the purpose, which 
 board shall be composed of certified public accountants. 
 The regents shall charge for examination and certificate 
 such fee as may be necessary to meet the actual expenses 
 of such examinations, and they shall report annually their 
 receipts and expenses under the provisions of this article 
 to the State Comptroller, and pay the balance of receipts 
 over expenditures to the State Treasurer. The regents may 
 revoke any such certificate for sufficient cause after written 
 notice to the holder thereof and a hearing thereon. 
 
 " Sec. 82. Misdemeanor. Any violation of this article 
 shall be a misdemeanor." 
 
 Briefs have been filed with me by counsel for various 
 defendants who would be affected by this law, in which 
 the main contention is that it is unreasonable and 
 violative of the State and Federal Constitutions in 
 that it seeks to monopolize the right to the title 
 C. P. A. in certain persons to the exclusion of others. 
 I do not believe it is within the province of a mag- 
 istrate to pass upon the large question here pre- 
 sented, but I am free to say in passing that the cases cited, 
 
being those with regard to insurance agents, undertakers 
 and plumbers, do not appear to me to be analogous to the 
 case at bar. Those laws excluded all persons from acting 
 as fire insurance agents, plumbers, embalmers or under- 
 takers unless they complied with certain provisions of 
 statutory enactment. The General Business Law, as 
 applied to public accountants, does not do so. It does not 
 prevent any one from acting as a public accountant. The 
 legislature has recognized an existing fact, to wit, that 
 to be a public accountant requires specialized learning, 
 training and aptitude for a work of great importance to 
 the general public. The expert public accountant is gen- 
 erally recognized as a professional man, and as such his 
 services are called into requisition not only by individuals, 
 companies and corporations, but by governments local, 
 State and national. Great and important results depend 
 upon his ability, skill and integrity. Eecognizing these 
 facts, the State of New York has standardized the degree 
 of efficiency and other requirements which it considers 
 necessary to allow a man to put the letters after his name. 
 C. P. A., meaning certified public accountant. This term 
 "certified public accountant" under this law means that 
 the person so using this designation has complied with the 
 standard requirements of the State authorities, that is, that 
 he has been tested and has been found to come up to the 
 standard adopted by the State, and that he can so hold 
 himself out to the public. The law simply says to the 
 citizen who requires the services of a public accountant 
 
that the person writing the letters C. P. A. after his name 
 has been found by the State authorities to meet with cer- 
 tain requirements in examination tests which show him to 
 be a fit person to do the work required of men of his call- 
 ing. It does not, however, give him a monopoly of the 
 business. Any citizen is free to employ either a public 
 accountant or a certified public accountant. With that 
 choice the State does not concern itself in any way. There 
 is, therefore, no such monopoly as is created for other pro- 
 fessions, such as law and medicine, where no one can prac- 
 tice either profession unless he has met the requirements 
 of the State and has been duly licensed to engage in such 
 profession. The letters C. P. A. in connection with the 
 profession or business of a public accountant is a sort of 
 sterling mark by which the State says that the particular 
 person using this designation is competent according to 
 its standards to perform the work which he solicits from 
 the public- Under this law any citizen of the United 
 States or any one who has declared his intention of be- 
 coming a citizen, residing or having a place for the regular 
 transaction of business in this State, being over the age 
 of 21 years and of good moral character, has the right to 
 make application and submit himself to the tests given by 
 the Eegents of the University of this State. 
 
 I see, therefore, no reason to depart from, the plain re- 
 quirements of the statute, and I find that no one has the 
 right to use the letters C. P. A., signifying "certified 
 public accountant," after his name unless he has complied 
 
with the provisions of this law and has been certified by 
 the Regents of the University of the State of New York. 
 
 In some of the other cases before me the question is 
 raised whether or not a certified public accountant, duly reg- 
 istered as such in another State, can so act in the State of 
 New York and use the letters C. P. A. in connection with 
 his business. I think that to do so would be plainly evasive 
 of the law of this State and would tend to make it of no 
 effect. If the Legislature had intended to grant this right 
 or courtesy to certified public accountants of other States 
 it would have said so. This is strikingly shown in the 
 Motor Vehicle Law, chapter 374 of the Laws of 1910, as 
 amended by chapter 491 of the Laws of 1911, subdivision 4, 
 section 289, which says : 
 
 " No person shall operate or drive a motor vehicle as a 
 chauffeur upon a public highway of this State after the 
 first day of August, nineteen hundred and ten, unless such 
 person shall have complied in all respects with the require- 
 ments of this section; provided, however, that a non-resi- 
 dent chauffeur, who has registered under provisions of the 
 law of the foreign country, State, territory or federal dis- 
 trict of his residence substantially equivalent to the pro- 
 visions of this section, shall be exempt from license under 
 this section; and provided, further, he shall wear the badge 
 assigned to him in the foreign country, State, territory or 
 federal district of his residence in the manner provided in 
 this section/' 
 
 If the Legislature had intended to do so it would have 
 
been an easy matter to have provided, as in the Motor Vehi- 
 cle Law above cited, that certified public accountants of 
 other States having a law substantially equivalent to that 
 of this State in regard to this subject should be allowed 
 to hold themselves forth as certified public accountants in 
 this State. 
 
 The question is also raised in another case at bar as to 
 whether or not a certified public accountant in the State 
 of New York, in conjunction with others, whether certified 
 public accountants or not, can form a corporation and act 
 as a company conducting his and their business. If this 
 could be done it would be such an evasion of the law as to 
 practically nullify it by allowing one man to extend the 
 privilege given to him by the State in part to others who 
 had not complied with the provisions of the law or the 
 requirements necessary to authorize them to designate 
 themselves 3 certified public accountants. The analogy 
 suggested between them and law firms is not apparent. All 
 the members of the firm in that case are duly admitted 
 members of the bar, who have complied with the require- 
 ments of the laws of the State in order to be able to prac- 
 tice their profession. A firm name could be used as public 
 accountants, and if one of the members is a certified 
 public accountant that fact could be stated by having the 
 letters C- P. A. put after his individual name. The ex- 
 clusive title the State confers upon those persons who have 
 submitted themselves to the requirements of the law and 
 
passed the necessary examinations of the university of the 
 State is " certified/' which means that the State " certifies" 
 through constituted authorities that the persons using 
 these titles are competent according to State standards. 
 The State says in effect that it certifies that the individual 
 in question, being properly eligible? has submitted himself 
 to certain standard requirements and tests of examination 
 and has proven himself to be fit to exercise the function 
 of a public accountant. How can he delegate the right 
 that the State has conferred upon him to others in a part- 
 nership by having one, two or ten partners or a corpora- 
 tion holding themselves or itself out as " certified " public 
 accountatns? If the law is not obviously unreasonable 
 and unconstitutional in being unreasonable, then any at- 
 tempt to permit people from other States to use the desig- 
 nation " certified public accountant " or to confer this 
 general term upon a corporation or partnership because 
 one individual in it has that right, would make the law of 
 no effect. If the Legislature acted within its constitutional 
 rights in passing this law, it is not for a magistrate to say 
 that it is not reasonable from his individual point of view, 
 or that of others who are interested, or that he has better 
 judgment than the representatives of the people in the 
 Legislature assembled, as to what is good public or business 
 policy regarding matters within their control. Magistrates 
 do not make laws; that belongs to the Legislature. Nor 
 do they have the right to question the wisdom of the Legis- 
 
lature or write words into laws that are not there originally 
 The Legislature is accountable to the people for the ex- 
 ercise of its great powers. It can only be restrained by the 
 courts when it violates its constitutional limitations- 
 
 FREDERICK S. TIPSON. 
 December 15, 1912. 
 
1. J*TATE the essential principles of double entry 
 *y bookkeeping and show wherein it differs from 
 single entry bookkeeping. 
 
 The essential principles of double entry bookkeeping 
 are, (1) The record of every transaction involving the 
 transfer of money or its equivalent must appear on both 
 the debit and credit side of the ledger, thus maintaining 
 it in balance. (2) Provision must be made for the con- 
 stant differentiation under properly classified accounts of 
 capital and revenue income and expenditure. (3) As re- 
 sulting therefrom, the profit or loss determined from the 
 collection of the preponderance of the balance of the reve- 
 nue accounts must be proved by the excess of the assets 
 over the liabilities as exhibited in the balance sheet. 
 
 The fundamental difference between single and double 
 entry bookkeeping is this : In single entry the income and 
 expenditure accounts are not kept, and the profit or loss 
 for any given period is determinable solely from a com- 
 parison of the assets with the liabilities the excess of the 
 one over the other showing the profit or loss; the proof of 
 the accuracy of same, through the same result being 
 arrived at through the profit and loss account being entirely 
 wanting. 
 
8 
 
 Of minor importance also is the fact that the mathe- 
 matical accuracy of the posting is in single entry bookkeep- 
 ing undemonstrable in trial balance form, as in double 
 entry, 
 
 2. Describe the following and show wherein they differ : 
 (a) trial balance, (b) balance sheet, (c) statement of 
 affairs, (d) realization and liquidation account. 
 
 (a) The " trial balance " is an extract from the ledger 
 of all the balances debit and credit. If the posting has 
 been correctly performed, the total of all the debit bal- 
 ances will exactly equal the total of the credit balances. 
 (&) The balance sheet is an exhibit of all the assets and 
 liabilities of a business at a particular moment of time in 
 summarized form, (c) A statement of affairs is an ex- 
 hibit of the assets and liabilities of an insolvent concern, 
 showing on the one side in summarized form the nominal 
 assets as taken from the Ledger extended into a second 
 column stating the amount they are expected to realize; 
 on the other, the liabilities extended into a second column 
 stating the amounts which are expected to rank. Preferred 
 claims are deducted from the assets, and the excess of the 
 liabilities over the assets is the amount of the deficiency, or 
 measure of insolvency, (d) A realization and liquidation 
 account is designed to show in condensed form the result 
 of the winding up of the affairs of a business. It is 
 charged with the total amount of the assets and credited 
 with the total amount of the liabilities, exclusive of capi- 
 
tal. It is charged with the amount expended to liquidate 
 the liabilities, together with any expenses attendant there- 
 on, and credited with the total amount realized by the 
 assets. If the debit side exceed the credit, the excess is a 
 loss and should be credited to the account and charged 
 against capital. In those very exceptional cases where the 
 credit side exceeds the debit, the difference should be 
 debited to the account and credited to capital. To sum up, 
 while the "trial balance" contains the balances of all the 
 accounts in the ledger, nominal and real, the "balance 
 sheet" contains only the real and personal accounts in 
 totals. The "statement of affairs" groups the assets and 
 liabilities as shown in the balance sheet with estimates as to 
 the actual amounts to be realized and liquidated; and the 
 "realization and liquidation account" records the actual 
 transactions with the resultant increase or decrease of 
 capital. 
 
 3. In devising a system of accounts for a business, what 
 are the main subjects for consideration, and in what order 
 should they have attention ? 
 
 In devising a system of accounts for any business two 
 principal considerations must be constantly borne in mind : 
 
 (1) The record of every transaction must be explicit and 
 self explanatory; (2) every transaction must be properly 
 classified, so that the total results for any period may be 
 obtained with facility. 
 
 Inasmuch as the end of classification of sources of income 
 
 
10 
 
 and expenditure is to determine ultimately the amount 
 of profit or loss in the sales of individual departments of a 
 business, or of separate classes of goods, the revenue 
 accounts should be so designed as to readily furnish such 
 information. The introduction of columnar cash books, 
 journals, and sales books would be important factors in 
 this, as well as minimizing the mechanical labor of posting. 
 Next should come the division of the accounts in the 
 general, purchase, and sales ledgers; each of which should 
 be made "self balancing." A proper system of internal 
 check should be arranged for to ensure as far as possible 
 the detection of unintentional or fraudulent errors. 
 Finally, the handling of the cash should be such as to call 
 for the deposit in the bank of every amount received, and 
 the payment of every amount by check, except petty cash 
 items. 
 
 4. Describe the following and show wherein they differ : 
 (a) revenue account, (5) trading account, (c) profit and 
 loss account, (d) deficiency account. 
 
 (a) A revenue account is used by non- trading concerns 
 to determine the amount of net income earned. It is 
 charged (at the end of a fiscal period) with the debit 
 balances of all the nominal accounts and credited with 
 those with credit balances. The excess of the credit side 
 over the debit side of the account indicates the amount of 
 the net revenue. (&) A trading account is designed to 
 show the gross profit on trading, t. e., the total excess of 
 
11 
 
 the amount charged for goods sold over their purchase 
 price, together with any expense attendant on their acquisi- 
 tion. It is charged with the amount of the inventory on 
 hand at the commencement of a fiscal period, and with 
 the cost of all goods purchased during the same. It is 
 credited with all sales and with the inventory at the end 
 of the period the excess of the credit side over the debit 
 is the amount of the gross profit. (c) The profit and 
 loss account is the revenue account of a trading business, 
 and is used to determine by preponderance of balance of 
 the nominal accounts (all of which are periodically closed 
 out into it) the amount of the net profit for the period 
 under review. It is first credited with the amount of gross 
 profit, as shown by the merchandise or trading account, and 
 charged and credited with the debit and credit balances re- 
 spectively of the nominal accounts. The excess of the 
 credit side over the debit is the amount of the net profit. 
 (d) A deficiency account is, or should be, the regular ac- 
 companiment of a statement of affairs. It is charged with 
 the deficiency shown by the statement of affairs, and with 
 the amount of the capital account. It is credited with the 
 shrinkages as exhibited in the difference between the nomi- 
 nal assets and the amounts they are expected to realize; 
 with the expenses of the business, and with the amount 
 withdrawn from the business by members of the firm. The 
 account should then balance exactly. It is designed to 
 show in condensed form what has become of the capital in- 
 vested and how the deficiency was caused. 
 
12 
 
 5. State the purposes for which series of perpendicular 
 columns are employed in books of original entry and how 
 these purposes may be accomplished relative to the follow- 
 ing conditions: (a) several ledgers comprehended in one 
 system of accounts, (b) several departments comprehended 
 in one business, (c) several accounts comprehended in in- 
 come and expenditure. 
 
 The general purpose of the columnar system in books 
 of original entry is first to facilitate classification and anal- 
 ysis, and second to minimize the amount of posting. 
 
 (a) Where several ledgers are comprehended in one 
 system of accounts, by means of the columnar system, the 
 total amount charged and credited in each ledger can be 
 seen at a glance, and by these totals an adjustment ac- 
 count for each ledger can be kept, rendering each self-bal- 
 ancing. 
 
 (b) Where several departments are comprehended in 
 one business, the columnar system admits of the analysis of 
 the income, expenditure, and profit or loss attending the 
 conduct of each department separately. 
 
 (c) Where several accounts are comprehended in in- 
 come and expenditure, the columnar system readily adapts 
 itself to the most minute classification, affording explicit 
 information on points of detail while curtailing the labor 
 of posting. 
 
 6. Describe the following and show wherein they dif- 
 fer: (a) statement of income and expenditure, (b) state- 
 ment of receipts and payments. 
 
13 
 
 (a) A statement of income and expenditure is another 
 designation for a revenue account. It is charged 
 with all expenses for the period under review, whether 
 actually paid or not, and credited with all items of income 
 earned whether received or not the excess of the credit 
 side over the debit indicating the net income. From this, 
 and from the answer to question No. 4, it will be seen that 
 three different terms are applied to virtually the same ac- 
 count the results being net revenue, net profit and net 
 income. 
 
 (b) A statement of receipts and payments is a cash 
 statement in summarized form showing the cash on hand 
 at the beginning of a fiscal period, and the total receipts 
 and payments under classified headings during the period ; 
 the excess of receipts over expenditures, showing the bal- 
 ance of cash on hand at the end of the period. 
 
 7. Describe a method of keeping accounts so that the 
 aggregate sums due from customers and due to creditors 
 can be known without preparing a schedule of the ac- 
 counts of such customers and creditors, and so that an 
 independent balance of the ledger, containing only the real, 
 nominal, special and controlling accounts, exclusive of the 
 individual accounts of customers and of trade creditors 
 may be taken. 
 
 Where separate ledgers are kept for customers and credi- 
 tors, an independent balance of the general ledger 
 can be taken off containing the total amount due by cus- 
 
14 
 
 tomers and to creditors by constructing controlling ac- 
 counts. Supposing the general ledger to be correctly 
 posted if two accounts be opened, one called customers' con- 
 trolling account, and the other creditors' controlling ac- 
 count : if the former be charged with the total amount due 
 by customers and the latter credited witH the amount due 
 to creditors, the general ledger would balance by itself. 
 
 Taking the customers' controlling account; if at the end 
 of the month this be credited with the total amount of 
 cash received from customers and discount allowed as 
 shown by the totals of the cash book and with total amount 
 of merchandise returned, if it be also charged with the 
 total amount of merchandise sold as shown by the sales 
 book, the excess of the debit side over the credit would 
 show the aggregate amount due by customers. In other 
 words, if the balances of the customers' ledger accounts 
 were taken off, the total would exactly correspond with the 
 total amount of the controlling account balance in the gen- 
 eral ledger. The same principle applied to the creditors- 
 controlling account would show a balance indicating the 
 aggregate amount due to creditors. Thus a complete trial 
 balance could be taken from the general ledger and the 
 amounts due by customers and to creditors shown without 
 the necessity of waiting for detailed balances from the 
 several customers' and creditors' ledgers. The importance 
 of this, where the personal ledgers contain several thou- 
 sand accounts, can scarcely be over-estimated. 
 
15 
 
 8. Define and differentiate: (a) capital and reve- 
 nue, (b) capital receipts and revenue receipts, (c) capital 
 expenditure and revenue expenditure. 
 
 (a) Capital in its broadest sense is the excess of the 
 assets over the liabilities of a business. It is often defined 
 as the amount invested in a business. But it must 
 be borne in mind that it is a fluctuating quantity; increas- 
 ing or decreasing from day to day according as gains or 
 losses are made. Revenue is (or should be) the resultant 
 of the judicious employment of capital. At the end of 
 every fiscal period revenue by transfer becomes capital 
 accretion. 
 
 (b) Capital receipts are the amounts received for em- 
 ployment in a business with the object of earning a reve- 
 nue. They constitute in the case of a corporation the assets 
 contributed as value for capital stock. Eevenue receipts 
 are all the other sources of income of a business. 
 
 (c) Capital expenditure is simply the replacement of 
 one species of assets by another. 
 
 Revenue expenditure is what is spent to earn a revenue. 
 The excess of revenue receipts over revenue expenditure 
 constitutes the net revenue, income, or profit of a business. 
 The distinction between capital and revenue expenditure 
 may again be briefly stated thus: Capital expenditure 
 appears upon the balance sheet, while revenue expenditure 
 is closed out into the profit and loss account. . 
 
 9. How may the accounts in a trial balance be best ar- 
 
16 
 
 ranged to facilitate the preparation of a business and 
 financial statement? 
 
 (a) Real Accounts; (b) Revenue or Nominal Accounts; 
 (c) Personal Accounts; (1) Customers, (2) Creditors. 
 
 10. Define and differentiate : (a) fixed assets and cash 
 assets, (b) fixed liability and floating indebtedness, (c) 
 fixed charges and operating expenses. 
 
 (a) Fixed assets are those whose retention is essential 
 to the carrying on of a business e. g., plant and ma- 
 chinery, furniture and fixtures, &c. Cash assets are those 
 which consist of cash or can be readily converted thereinto, 
 e. g., Bills Receivable, Accounts Receivable, &c. They 
 constitute the real working capital of a business. 
 
 (b) Fixed liabilities are those which are constant and do 
 not ordinarily fluctuate, e. g., capital stock, bonds, &c. 
 
 Floating indebtedness implies all other liabilities, such 
 as Bills Payable, Accounts Payable, &c. 
 
 (c) Fixed charges are those which reciir periodically as 
 a first-charge against income, viz., interest on bonds, etc. 
 
 Operating expenses are those incurred in earning a 
 revenue. 
 
 11. Describe the following kinds of accounts: (a) per- 
 sonal, (b) impersonal, (c) real, (d) nominal, (e) current, 
 (/) summary. 
 
 (a) Personal with persons. 
 
 (b) Impersonal all others. 
 
17 
 
 (c) Beal those representing value. 
 
 (d) Nominal those regarding revenue income and 
 expenditure. 
 
 (e) Current literally running one containing charges 
 and credits usually rendered for specially agreed on periods. 
 
 (/) Summary the various items of expenditure and in- 
 come for a fiscal period expressed in totals. 
 
 12. Describe the process and state some of the pur- 
 poses of analyzing a ledger. 
 
 Where books of original entry have been lost or 
 destroyed and fraud is suspected the somewhat tedious 
 procedure of analyzing the ledger is adopted. The method 
 pursued is as follows : A sheet of paper is ruled with as 
 many columns for debits and credits as there are items 
 in the books of original entry. Two extra columns are pro- 
 vided for the debit and credit balances of all the accounts 
 at the commencement of the period from which the analysis 
 is to start. Each charge and credit in every account ii 
 entered under its proper column and the balance (debit or 
 credit) is shown in columns provided for same. At the 
 end of the period, when the totals of the columns in the 
 analysis sheet are completed they should agree with the 
 totals of the books of original entry as shown in the nomi- 
 nal accounts in the ledger or if procurable, with the totals 
 shown in the books of original entry themselves. 
 
 13. Describe the nature of the following accounts: 
 (a) sinking fund, (b) reserve fund, (c) redemption fund, 
 
18 
 
 (d) depreciation fund, (e) contingent fund, (/) invest- 
 ment fund. 
 
 (a) A sinking fund is formed by setting aside period- 
 ically and investing such a sum as will in a given 
 time amount to the total of a stated indebtedness which it 
 is desired to discharge. It would be well if more discrim- 
 ination were shown in accountancy nomenclature so as to 
 make a clear distinction between a " fund" and an " ac- 
 count " ; the generic difference between them being that 
 the former should always appear as a debit balance; the 
 latter as a credit. A " fund " should always rank as a cash 
 asset; an "account" with a credit balance, while repre- 
 sented by some portion of the assets in excess of all other 
 liabilities, may not always be thus available. 
 
 (b) A reserve fund is formed by a charge to revenue 
 periodically of such an amount as may be deemed necessary 
 to hold in reserve for some specific purpose. 
 
 (c) A redemption fund is treated in the same way as a 
 sinking fund and practically means the same thing. 
 
 (d) A depreciation fund is formed by a charge to rev- 
 enue and periodically investing a certain percentage of the 
 book value of plant, machinery, etc., to replace same when 
 worn out. 
 
 (e) A contingent fund is formed in the same way, but 
 is not reserved for any specific purpose. 
 
 (/) An investment fund is that portion of the assets of 
 a concern which is invested outside the business. 
 
10 
 
 14. Define the following: (a) stock, (b) capital, (c) 
 surplus, (d) deficiency, (e) capital stock, (/) preferred 
 stock, (g) common stock, (h) share capital, (i) loan capi- 
 tal. 
 
 (a) Stock is the generic term applied to all forms of 
 share capital. 
 
 (b) Capital in an ordinary business is the excess of 
 assets over liabilities. In a corporation it is the amount 
 of its share capital. 
 
 (c) Surplus, as applied to corporations, is the excess of 
 assets over liabilities including capital stock; it is really 
 undistributed profit. 
 
 (d) Deficiency occurs when the capital is impaired, i. e., 
 when the assets do not equal the liabilities, including capi- 
 tal stock as a liability. 
 
 (e) Capital stock is the term applied to the share capital 
 of a corporation authorized as stated in its articles of in- 
 corporation. It is represented by share certificates of 
 specified par value. 
 
 (/) Preferred stock entitles the holders to a fixed rate of 
 dividend before any be paid to common stock holders. It is 
 divided into two classes: cumulative and non-cumulative. 
 In the former case if a dividend be not earned in one fiscal 
 period it becomes a liability on the next; in the latter, if 
 the dividend be not earned no liability on such item is 
 incurred. 
 
 (g) Common Stock is the ordinary share capital of a 
 corporation entitling the holder to such a share in the 
 
profits in the form of dividends as may be declared by the 
 directors after dividends on preferred stock have been paid. 
 It might be as well to add here that in the event of the 
 dissolution of a corporation, preferred stock holders have 
 ordinarily no prior right over common stock holders in the 
 distribution of surplus assets. 
 
 (h) Share capital is the term applied to all classes of 
 capital stock of a corporation evidenced by share certifi- 
 cates. 
 
 (i) Loan capital is money invested in a business, or bor- 
 rowed temporarily to be paid at some specified date. 
 
 15. Describe the nature of the following accounts : (a) 
 merchandise, (b) construction, (c) consignment, (d) joint, 
 (e) subscription, (/) expense, (g) maintenance, (h) ven- 
 ture, (i) suspense, (/) dividend. 
 
 (a) The Merchandise Account is, as ordinarily kept, 
 nondescript; being when active partly real and partly 
 nominal; but when closed it becomes a real account, the 
 balance representing inventory. It is designed to show the 
 gross profit on trading. It is debited with the stock on 
 hand at the commencement of a fiscal period, with all pur- 
 chases, and items returned by customers. It is credited 
 with sales, with returns to creditors, and with inventory at 
 close of said period. The excess of the credit side over the 
 debit shows the gross profit which is carried to profit and 
 loss account. 
 
 (6) The Construction Account is kept to show the cost 
 
21 
 
 of constructing buildings, plant, railroad beds, &c. It is 
 charged with all expenses connected with such work. 
 
 (c) A Consignment Account is simply a trading account 
 kept to show the profit or loss on goods consigned to 
 another party for sale. It is charged with goods consigned, 
 with consignee's expenses, commission, etc., and credited 
 with sales. If a profit is shown, it is closed out into the 
 profit and loss account. 
 
 (d) A Joint Account is a trading account of two persons 
 partners in a special transaction. The profit or loss 
 shown is credited pro rata to the capital or personal ac- 
 counts of those jointly interested. 
 
 (e) Subscription Account is charged with that portion 
 of the capital stock of a corporation which is offered for 
 sale. It is credited with subscriptions as received. 
 
 (/) Expense Account is a generic term applied to those 
 items of revenue expenditure whose classification is not 
 specifically arranged for. 
 
 (g) Maintenance is the term applied to an account 
 which is charged with those expenditures necessary to keep 
 in working order, t. e., to maintain plant, fixtures, build- 
 ings, &c. 
 
 (h) A Venture Account is a trading account, containing 
 the particulars of some transaction outside the regular 
 business of a firm. It is charged with the cost of purchase, 
 and expense, and credited with sales. It is a combination 
 of a merchandise and profit and loss account. 
 
 (t) A Suspense Account is designed to contain all items 
 
22 
 
 whose ultimate collection is doubtful. When an account 
 is found uncollectable, it should, at the end of a fiscal 
 period, be credited to Suspense Account and charged to 
 profit and loss. 
 
 (;) Dividend Accounts are numbered consecutively. 
 When a dividend is declared, it should be charged to Sur- 
 plus Account and credited to Dividend Account. When 
 checks are mailed to stockholders, they should be charged 
 to Dividend Account through the cash book thus closing 
 the account. 
 
 16. Describe the principal books of account of some 
 concern with which you are familiar, and show the relation 
 and connection of these books. 
 
 For an ordinary wholesale trading establishment the 
 following books would be required. Their inter-relation 
 and connection are shown seriatim: 
 
 (a) Stock book to contain itemized details of merchan- 
 dise purchased, with cost of same, date of purchase and 
 date of sale. 
 
 (b) Invoice book, in which to paste all bills of goods 
 purchased. Totals should be extended and added monthly 
 The total purchases should be charged to merchandise ac- 
 count and the items credited to the firms from whom the 
 goods were purchased. By some firms a purchase journal is 
 used instead. By means of this a careful analysis of goods 
 purchased can be made in separate columns, and the totals 
 charged to the several departments of a business. 
 
 (c) Day book or sales book, in which should be entered, 
 
23 
 
 or copied, particulars of merchandise sold previous to 
 charging same to debtors in ledger and crediting total to 
 merchandise account. 
 
 (d) Journal for all entries for which no separate book 
 of original entry is kept. 
 
 (e) Cash book in which to record all moneys received 
 and paid previous to posting in ledger. Discounts allowed 
 and received should also be entered here. 
 
 (/) Bills Eeceivable and Bills Payable Book- in which 
 to record particulars of notes given and received previous 
 to charging and crediting same to Bills Eeceivable and 
 Bills Payable accounts in ledger. 
 
 (g) Pay Eoll Book to contain details of wages and 
 salaries paid. 
 
 (h) Credit Book divided so as to contain particulars 
 of goods returned by debtors and to creditors previous 
 to posting in ledger. 
 
 (i) Doubtful Accounts Ledger to contain accounts 
 whose ultimate realization is doubtful. 
 
 (/) Ledgers Purchase, Sales, General and Private. 
 
 (k) Trial Balance book in which to preserve a record 
 of the monthly balances of all accounts in ledger. 
 
 17. What various meanings may an entry in a ledger 
 account have, on (a) the debit side, (b) the credit side? 
 
 (a) On the debit side a ledger entry may mean (1) 
 a charge for merchandise sold to a debtor or returned to a 
 creditor; (2) cash paid to a creditor, or discount charged; 
 (3) a note payable charged to a creditor; (4) total cash 
 
24 
 
 received during the month; total merchandise purchased 
 or returned by debtors during same period ; total discounts 
 allowed to debtors, or total expenditure under specific heads 
 either capital or revenue; (5) total amount of notes re- 
 ceivable received from customers in settlement of their 
 accounts during the month. 
 
 (I) On the credit side a ledger entry may mean: 
 (1) A bill of goods purchased from a creditor, or total 
 sales for a month to debtors, or total amount of merchan- 
 dise returned to creditors; (2) cash paid by a debtor or 
 discount credited to him; (3) a note receivable credited to 
 a debtor; (4) total cash expended during the month; total 
 discount allowed by creditors; (5) total amount of bills 
 payable given to creditors during the month; (6) total 
 capital; (7) surplus; (8) revenue; (9) other liabilities 
 under specific headings. 
 
 18. Show the advantages and the disadvantages of the 
 column system for books of original entry. 
 
 The principal advantages are: (1) the ease with which 
 thoroughness of classification is secured; (2) the enor- 
 mous saving of labor in posting; and (3) the consequent 
 lessening of the probability of errors in posting resulting 
 therefrom. These advantages outweigh the disadvantages 
 of the system, which are the ever present possibility and 
 likelihood of entries being made in wrong columns, and 
 the consequent enlarged opportunity for fraudulent entries 
 on the part of a dishonest employee. 
 
25 
 
 19. Describe the process of closing the ledger of a mer- 
 cantile firm. 
 
 The trial balance having been tested and found cor- 
 rect, the inventory of stock on hand is credited to merchan- 
 dise account, and the gross profit determined and carried 
 to the credit of profit and loss account. The amount of the 
 inventory is then brought down as a debit balance in mer- 
 chandise account, thereby converting it into a real account. 
 A proper percentage is charged off plant and machinery and 
 furniture and fixtures to profit and loss account. All nomi- 
 nal accounts with debit balances are closed out by crediting 
 them and charging profit and loss account; and all those 
 with credit balances are closed by debiting them, and cred- 
 iting profit and loss account. A reserve account should be 
 created for bad debts and discounts and if after charging 
 them to the profit and loss account a credit balance is shown 
 the said balance is the net profit for the period under 
 review. This should be closed out at once by charging 
 profit and loss and crediting the capital accounts of the 
 principals of the firm in the proportion they are entitled to. 
 
 20. In what ways may bad or doubtful debts be dis- 
 posed of at the close of a fiscal period? 
 
 Bad debts should be charged at once to Profit and 
 Loss Account; but if doubtful, they should either be trans- 
 ferred to a Suspense Account, or into a " Doubtful Ac- 
 counts" ledger specially ruled for that purpose. Of course 
 no debt should be charged to Profit and Loss Account until 
 
26 
 
 it has been definitely ascertained that it is absolutely un- 
 collec table; for once thus transferred its reappearance in 
 any shape as an asset may be regarded as doubtful. 
 
 21. What are the functions of the cash book? Describe 
 the peculiarities of one or more cash books with which you 
 are familiar. 
 
 The functions of the cash book are to record in detail 
 and in gross all receipts and expenditures, and to show at 
 any time the balance of cash on hand. The peculiarities 
 of all cash books consist in the extent to which the column 
 system is made use of. 
 
 By a little thought this may be so planned as to greatly 
 curtail the labor of posting, to afford considerable detailed 
 information, and to constitute an indispensable feature in 
 the keeping of self-balancing ledgers. 
 
 22. In what order should the several items in a bal- 
 ance sheet be placed ? Give reasons for your answer. 
 
 The following is the proper order for items in a balance 
 sheet : 
 
 Assets. Liabilities. 
 
 1. 
 
 2. 
 3. 
 
 4. 
 5. 
 6. 
 
 7. 
 
 Cash. 
 Investments secu rities. 
 Notes receivable. 
 Stock on hand. 
 Accounts receivable. 
 Furniture and fixtures. 
 Plant and machinery. I 
 
 1. 
 2. 
 3. 
 4. 
 5. 
 
 Notes Payable. 
 Accounts payable. 
 Other liabilities. 
 Capital. 
 Surplus. 
 
27 
 
 The reason for this arrangement is that the assets should 
 always appear in the order or facility of their realization; 
 and that liabilities should stand in the order in which they 
 would ordinarily be liquidated. 
 
 23. Describe a bill book and show its relation to (a) 
 the bills receivable account, (b) the bills payable account. 
 
 The bill book is generally divided into two parts: 
 Bills Receivable and Bills Payable. It is ruled with col- 
 umns showing date, name of maker, in whose favor drawn, 
 due date, amounts and any remarks. A note received from 
 a customer in settlement of account is entered in 
 the Bills Receivable book and posted to the credit of the 
 person from whom received at once. At the end of the 
 month the total amount of notes received is debited in 
 the ledger to Bills Receivable Account. On the other 
 hand notes given to creditors in settlement of accounts 
 are entered in the bill book and charged to creditors at once. 
 Once a month the total amount of notes so paid out is 
 credited in the ledger to Bills Payable Account. When the 
 amount of a note is received or paid, it is credited or 
 charged in the cash book to Bills Receivable or Bills Pay- 
 able Account, and the balance of either account in the 
 ledger will always show the gross amount owed or owing on 
 notes. For schedules, reference of course has to be made 
 to the Bill Book. 
 
 24. How should one proceed to detect an error in a 
 trial balance? 
 
First verify the previous trial balance; check all the 
 footings in books of original entry ; check all postings from 
 same into ledger; check the taking off of ledger balances, 
 and the footings of the trial balance book. If this work 
 be done thoroughly the error will generally be detected. It 
 is very important to make clear all blurred or doubtful 
 figures, as it is often found that an item is added as one 
 figure and posted as another. This may be termed the 
 " good old-fashioned " method. It has this advantage : it 
 never fails. The above work may often be curtailed ; espe- 
 cially if self-balancing ledgers be in use. The particular 
 side on which the error lies can generally be very readily de- 
 termined, thus cutting the work of checking in half. If 
 the difference is exactly divisible by " 9," a transposition 
 of figures may be looked for; and if by "2," the error is 
 probably in taking off and placing an amount on the wrong 
 side of the trial balance. Numerous " short methods" have 
 been invented from time to time; but experience best of 
 teachers generally shows that there is no method so good 
 as the " old-fashioned " one of " calling over." 
 
 25. State various ways of treating the bank balance in 
 connection with cash on hand. 
 
 In most English cash books special columns are ruled 
 for the bank account ; one for deposits, the other for with- 
 drawals. Thus the bank balance is shown at a glance. 
 This balance added to checks and cash undeposited will ex- 
 actly equal the cash balance called for by the excess of 
 
29 
 
 receipts over expenditure as entered in the cash book. In 
 this country, however, the usual plan is to keep the bank 
 account on the stubs of the check book, the balance being 
 ascertained by deducting the one side from the other. 
 
 26. Describe the merchandise account as ordinarily 
 kept. Show how it may be subdivided and suggest im- 
 provements. 
 
 The Merchandise Account as ordinarily kept is a non- 
 descript kind of account, partly real and partly nomi- 
 nal when active; the balance of which represents nothing. 
 When closed, however, it becomes a real account; the debit 
 balance representing stock on hand at a particular date. It 
 is usual to charge the account with stock on hand at the 
 beginning of a fiscal period; with purchases during the 
 period, and with merchandise returned by customers. Sales 
 made and merchandise returned to creditors during the 
 period are credited to the account, as is also the amount of 
 stock on hand at the end of the fiscal year. If a credit bal- 
 ance is then disclosed it represents the gross profit for the 
 period, which should be credited to Profit and Loss Ac- 
 count; but if a debit balance appear, it represents the gross 
 loss for the period which should be charged to Profit and 
 Loss Account. 
 
 The Merchandise Account should be subdivided as fol- 
 lows: 
 
 1. Merchandise Account Purchases. 
 
 2. Merchandise Account Sales. 
 
30 
 
 3. Merchandise Account Eeturn sales. 
 
 4. Merchandise Account Eeturn purchases. 
 
 5. Merchandise Account Stock. 
 
 Each balance would then represent something definite; 
 and the comparative statistics derivable therefrom would 
 be of utmost value, not only at the close of a fiscal period, 
 but also at any time during said period. 
 
 27. How may a set of books be changed from single 
 entry to double entry ? 
 
 A statement of assets and liabilities should be made up 
 from the single entry books and from subsidiary records 
 so as to arrive at the net capital. 
 
 All impersonal accounts in the single entry ledger should 
 be ruled off. One journal entry " Sundries Dr. to Sun- 
 dries" will then be sufficient to bring all assets and liabili- 
 ties not appearing on the old ledger into account and con- 
 sequently the books into balance. 
 
 Existing personal accounts need not be disturbed, care 
 being taken not to open again accounts already appearing 
 on the old ledger. 
 
 28. Describe various uses of the journal. 
 
 The journal is used (1) to contain the "opening" 
 and "closing" entries of a set of books ; (2) to contain those 
 entries for ledger posting which do not appear in other 
 books of original entry; (3) to record transfers, which 
 
31 
 
 should always be accompanied by careful explanatory 
 notes. 
 
 29. What are the functions of a real estate account? 
 What entries may it properly have on each side ? 
 
 The functions of a Real Estate Account are to contain 
 a record of purchase price and cost of improvements and 
 profit on the debit side, while it is credited with deprecia- 
 tions and sale price and loss. It should be supplemented 
 by a " Real Estate Income and Expenditure Account," 
 which should be charged with all expenditures not enhanc- 
 ing values, and credited with income arising from the 
 property. 
 
 30. Describe the stock ledger (shares ledger) of a cor- 
 poration and show how it is kept. 
 
 A corporation stock ledger (shares ledger) is used for 
 keeping the accounts of stockholders in, with regard to 
 their individual shares of stock in the corporation. The 
 first account should be the capital stock account, which 
 should be charged with the total amount of stock issued. 
 Stockholders' individual accounts should be credited with 
 their holdings and thus the ledger will be rendered "self- 
 balancing." The ruling for an individual account is ap- 
 pended. 
 
DR. 
 
 32 
 JOHN BROWN. 
 
 CR. 
 
 M 
 
 Date 
 
 Certificates 
 
 m 
 
 "8 1 
 
 & 
 
 Par 
 Value 
 
 Date 
 
 Certificates 
 
 In- 
 stall- 
 ments. 
 
 "o S 
 
 & 
 
 Pai 
 Vak 
 
 March 
 
 6 
 6 
 
 Renewed 
 by No. 40 
 Transf d to 
 J. Davis 
 
 400 
 100 
 
 
 
 Feb'r 
 March 
 
 4 
 6 
 
 No 10 
 No 40 
 
 
 
 500 
 400 
 
 
 
 31. What are the main features of difference between a 
 trial balance taken out at the end of a fiscal year before the 
 books of a business are closed, and one taken out imme- 
 diately after the books are closed ? 
 
 A trial balance taken out at the end of a fiscal year 
 before the books of a business are closed, contains the bal- 
 ances of all the accounts in the Ledger nominal, real and 
 personal. After the books are closed, the trial balance con- 
 tains only the balance of real and personal accounts. It 
 is really a " Balance Sheet " proper in extended form. 
 
 32. What is meant by (a) capital, (b) working capital? 
 Why is capital always shown on a balance sheet as a 
 liability? 
 
 (a) Capital means, (1) the excess of assets over liabili- 
 ties of a firm. The term is also applied to (2) the assets 
 corresponding to the liability of a corporation to its stock- 
 holders as evidenced by its capital stock. 
 
 (b) By working capital, is meant all assets available as 
 cash for the carrying on of a business. Cash, accounts re- 
 
33 
 
 ceivable, bills receivable, etc., would come under this head ; 
 but plant and machinery, good will, etc., would not. 
 
 Capital is shown on a balance sheet as a liability because 
 a business is liable to the members of a firm or corporation 
 for the amount standing to the credit of investment, or 
 capital stock account. 
 
 33. Formulate journal entries to express fully each 
 of the following transactions : 
 
 (a) A sale of goods for a note bearing interest, (b) the 
 discounting of the above mentioned note at a bank, (c) 
 the annulling of a personal account as uncollectable, (d) 
 the adjusting of an interest account for interest earned but 
 not yet collected. 
 
 Bills Receivable, Dr., to Sundries. 
 
 (amount of sale) Merchandise account, 
 
 (amount interest on note) Interest account. 
 
 Note received in payment of goods sold to A. B. this 
 day, bearing interest at 6 per cent dated January 10th, 
 due April 10. 
 
 (b) Sundries, Dr., 
 
 To Bills Receivable. 
 
 Cash account (amount received from bank for note). 
 Discount account (amount charged by bank for dis- 
 count). 
 
 (c) Profit and Loss account, Dr. 
 
 To C. D. 
 
34 
 
 Account returned this day pronounced "uncollectable," 
 now charged off as per order of ( ) . 
 
 (d) Accrued Interest Account, Dr. 
 
 To Interest Account. 
 
 Interest earned but not collected on . 
 
 34. Under what circumstances is a patent regarded 
 as an asset ? After a patent has been valued, should such 
 value be considered as permanent? Give reasons for your 
 answer. 
 
 A patent may be regarded as an asset when it is a virtual 
 lease of a monopoly. 
 
 It should not be considered of permanent value because 
 its existence is limited. This extermination of its value 
 should be provided for by writing off to depreciation ac- 
 count annually such an amount as would make extinguish- 
 ment of value coincident with the expiration of the patent 
 
 35. In the opening of a ledger, what principle should be 
 followed as to the order of arrangement of the accounts? 
 Show the advantages of different plans. 
 
 The principle to be followed as to the order of arrange- 
 ment of accounts in the opening of a ledger should ob- 
 viously be that which most readily facilitates the making 
 up of a balance sheet or financial statement from the trial 
 balance when taken off. Eeal accounts with Dr. balances 
 would naturally come first. Next the nominal accounts, 
 and then personal ones. The same order should obtain 
 
35 
 
 with regard to accounts ordinarily showing credit balances. 
 A better arrangement would be as follows: 
 
 1. Nominal accounts. 2. Real. 3. Accounts Receiv- 
 able. 4. Accounts Payable. 
 
 The advantage of the latter method is that if the nomi- 
 nal accounts be kept on one sheet of the trial balance book, 
 the other sheets will be the schedules of accounts receiv- 
 able, payable, and real accounts. 
 
 36. Describe a set of books for a commission mer- 
 chant. Show the relation of each book to the other books 
 of the set. 
 
 A commission merchant should have the ordinary ledger, 
 journal and cash book, and, in addition, a separate stock 
 book and sales book for every client for whom he sells 
 goods. On receipt of goods to be sold on commission, he 
 enters quantities in stock book and opens an account in 
 ledger with consignor, charging it with any freight and ex- 
 penses incurred in their receipt. All sales made are en- 
 tered in the sales book of the consignor as made; charged 
 to the party to whom sold, and the total of these sales 
 credited periodically to the consignor's account on the led- 
 ger. A memorandum is made in stock book as each lot 
 of stock is sold, which then constitutes a standing inven- 
 tory of goods undisposed of. When settling, he charges 
 the consignor's account with commission and expenses in- 
 curred in selling, and remits cash for the balance. 
 
 37. State what is meant by a cost sheet, showing its 
 
36 
 
 advantages and how it is made up. Give a form of cost 
 sheet for some manufacturing business with which you are 
 familiar. 
 
 By cost sheet is meant a statement in detail of all items 
 which enter into the cost of manufactured goods. Its ad- 
 vantages are as follows : The ability to determine quantity 
 and cost of raw material, manufactured and in process of 
 manufacture ; cost of labor; proportion of fixed charges 
 and incidental expenses to be added to manufacturing cost, 
 forming a stable basis on which to base selling price to 
 obtain a given percentage of profit. 
 
 COST SHEET FOIt A CIGAR FACTORY. 
 
 MANUFACTURING COST, LABOR AND MATERIALS. 
 
 MONTH OF 190 . . . 
 
 RAW LEAF DEPARTMENT. 
 
 
 
 
 
 
 
 Corresponding 
 Month Last 
 
 
 Previous 
 Month of 
 
 
 
 
 
 
 Weight 
 
 
 Year. 
 
 
 Present Year. 
 
 
 Division 
 of Cost. 
 
 
 No. of 
 Ibs.Raw 
 LeafRe- 
 ceived. 
 
 si 
 
 Deliv- 
 ered in 
 Ship- 
 ping 
 
 
 
 2-S 1 
 
 Basis 
 No. of 
 
 |l 
 
 4 
 
 Basis- 
 No, of 
 
 M 
 
 a| 
 
 
 ?. 
 
 
 o^ 
 
 Dept. 
 
 03 ^ 
 
 Ibs. 
 
 o 1 " 1 
 
 
 Ibs. 
 
 2 
 
 ** 
 
 
 
 
 U 
 
 
 HH 
 
 
 
 
 ^ 
 
 
 
 
 
 Labor. . . . 
 
 
 
 
 
 
 
 
 
 
 
 
 Cartage. . 
 
 
 
 
 
 
 
 
 
 
 
 
 Storage . . 
 
 
 
 
 
 
 
 
 
 
 
 
 Insurance 
 
 
 
 
 
 
 
 
 
 
 
 
 Totals . 
 
 
 
 
 
 
 
 
 
 
 
 
37 
 
 STRIPPING DEPARTMENT. 
 
 Division 
 of Cost. 
 
 | 
 
 No. of 
 Ibs. Re- 
 ceived 
 from 
 Raw 
 Leaf 
 Dept. 
 
 Cost per 
 100 Ibs. 
 
 Weight 
 De- 
 livered 
 to 
 Rolling 
 Dept. 
 
 Loss in 
 Weight. j 
 
 Previous 
 
 Month Same 
 Year. 
 
 Loss in 
 Weight. 1 
 
 Corresponding 
 Month Last 
 Year. 
 
 i 
 
 Basis- 
 No, of 
 Ibs. 
 
 Cost per 
 100 Ibs. 
 
 Basis 
 No. of 
 Ibs. 
 
 1 
 
 Labor. . . . 
 Supplies . 
 
 
 
 
 
 
 
 
 
 
 
 
 Totals . 
 
 
 
 
 
 
 
 
 
 
 
 
 ROLLING AND BUNCH MAKING. 
 
 Division 
 of Cost 
 
 Foreman's 
 Labor. . 
 Rollers- 
 Labor. . 
 Bunch 
 Makers' 
 Supplies. . 
 
 a 
 < 
 
 No. of 
 Ibs. 
 Pre- 
 
 SS? 
 
 from 
 Stpg. 
 Dept. 
 
 1 
 
 No. of 
 Cigars 
 Made 
 De- 
 livered 
 toPkg. 
 Dept. 
 
 Previous 
 Month Same 
 Year, 
 
 Same Month 
 Last Year. 
 
 
 Basis- 
 No, of 
 Ibs. 
 
 jj 
 
 t 
 
 Basis 
 No. of 
 Ibs. 
 
 S.8 
 
 ji 
 
 
 
 
 
 
 
 
 
 Totals . 
 
 
 
 
 
 
 
 
 
 PACKING DEPARTMENT. 
 
 
 
 No. of 
 Cigars 
 
 
 Previous 
 Month Same 
 Year. 
 
 Same Month 
 Last Year. 
 
 
 Division 
 of Cost. 
 
 
 Re- 
 ceived 
 
 
 Basis 
 
 
 
 
 
 
 I 
 
 from 
 Bunch 
 Making 
 
 fi 
 
 o 
 
 No. of 
 CJgr. 
 
 ceived. 
 
 ?o 
 ~ 
 
 
 
 Basis- 
 No, of 
 Cigars. 
 
 O 
 
 
 Men's 
 
 
 
 
 
 
 
 
 
 Labor . 
 Women's 
 
 
 
 
 
 
 
 
 
 Labor . 
 
 
 
 
 
 
 
 
 
 Cases at 
 
 
 
 
 
 
 
 
 
 Cost... 
 
 
 
 
 
 
 
 
 
 Wrappers. 
 Labels... 
 
 
 
 
 
 
 
 
 
 Supplies . 
 
 
 
 
 
 
 
 
 
 Totals . 
 
 
 
 
 
 
 
 
 
38 
 
 SUMMARY. 
 
 Raw Leaf Dept. 
 Stripping Dept. 
 Rolling and Bunch Mkg. 
 Packing Dept. 
 Total Cost, 
 
 Cost per thousand present 
 
 month 
 
 Cost per thousand last month. 
 Cost per thousand last year. 
 Decrease or Gain in cost 
 
 of per M. 
 Depreciation of Building 
 Depreciation of Plant. 
 
 No. of Cigars made and packed 
 
 Cost per M 
 
 Loss in weight present 
 
 month . 
 
 Loss in weight last month. 
 Loss in weight last year. 
 Decrease or Gain in loss 
 of per cent. 
 
 Equal to- - -per M. 
 
 Revenue Stamps. 
 
 38. What is meant by the good will of a business? 
 Under what circumstances does it become important to 
 determine the value of the good will of a business? 
 
 By Good Will ordinarily is meant the capitalized value 
 of the average net profits of a business for a certain period. 
 If a business has earned for a period of say, ten years, an 
 average profit of $10,000 per annum, and the books show 
 that after discharging all liabilities, the net capital of the 
 proprietor is $50,000, it is very evident that should he 
 desire to sell his business, he would be justified in asking 
 more than $50,000 for it. Such sum as he asked for about 
 $50,000, would be Good Will value. The purchase price 
 for Good Will varies from three to ten years of the average 
 amount of net profit earned. 
 
39 
 
 It becomes important to determine the value of the 
 Good Will of a business in case of (1) the sale of a busi- 
 ness, or (2) of its being absorbed by a joint stock com- 
 pany. The substance of the theory is this: Good Will 
 is the presumption that the old customers will resort to the 
 old place. 
 
 39. Mention five classes of ledgers and describe the 
 peculiar features of each class. 
 
 1. Purchase Ledger, for goods purchased and credited. 
 
 2. Sales Ledger, for sales made and debited. 
 
 3. General Ledger, for impersonal and real accounts. 
 
 4. Private Ledger, for such accounts as it is considered 
 desirable to keep accessible to principals only. 
 
 5. Stock Ledger, to contain record of shares sold, paid 
 for, transferred, etc. 
 
 40. Describe the following, and state the disinguishing 
 feature of each: (a) income account, (b) surplus account, 
 (c) suspense account, (d) reserve fund. 
 
 (a) Income account contains the entire income and ex- 
 penditure for the term under review, whether same has 
 been collected, or remains outstanding at close of fiscal 
 period, or whether same has been paid, or is still a lia- 
 bility. 
 
 (b) Surplus account is that account to which is trans- 
 ferred the balance of net profit for any fiscal period as dis- 
 closed by the Profit and Loss account. From the " sur- 
 plus," dividends are declared, and when declared, total 
 
40 
 
 amount should be charged to surplus account and credited 
 to dividend account. The system of leaving a surplus to 
 the credit of profit and loss account is unscientific and 
 illogical. 
 
 (c) Suspense account is charged with those items whose 
 collection or realization is uncertain. It is customary to 
 transfer doubtful accounts to this "suspense" and close 
 them out into Profit and Loss account when it is definitely 
 ascertained that they are uncollectable. 
 
 (d) Reserve Fund is a proportion of profit set aside for 
 a particular purpose, and it must be borne in mind that it 
 should only be used for the purpose designated. Thus it 
 is very common to find "reserve for bad debts," "reserve 
 for depreciation," etc. A " fund " should be represented 
 by a debit balance, while the "account " appears as a 
 credit balance. 
 
 41. Define (a) funded debt, (b) floating indebtedness, 
 (c) fixed charges. May interest on floating debt properly 
 be considered a fixed charge? 
 
 (a) By funded debt is meant the amount of bonded in- 
 debtedness incurred to discharge general liabilities with. 
 Such debt bears a fixed rate of interest and is redeemable 
 generally at a stipulated date. Suppose a corporation 
 has $100,000 of outstanding floating indebtedness. It 
 may issue mortgage bonds for this amount and pay off its 
 floating indebtedness with the proceeds. Liabilities thus 
 discharged would become a portion or all of the corpora- 
 tion's funded debt. 
 
41 
 
 (b) Floating indebtedness means the general liabilities 
 which have to be discharged from time to time, as dis- 
 tinguished from capital stock, bonds, mortgages, etc. 
 
 (c) Fixed charges are those which occur periodically 
 without variation in amount. Instances of these would 
 be interest on bonds, mortgages, etc. 
 
 Interest on floating debt could scarcely be called a fixed 
 charge, because it would vary in amount and would not 
 have to- be paid at certain definite intervals. 
 
 42. State cases in which leases have a value that 
 should appear in the accounts. How should provision be 
 made in such cases for the falling out of such value at 
 th expiration of the lease. 
 
 When a premium is paid for the acquisition of a lease, 
 such sum might very properly appear as an asset on the 
 balance sheet. Such cases would be, (1) where the busi- 
 ness locality is of so valuable a character that the land- 
 lord can be reasonably certain of commanding tenants; 
 (2) premises licensed. 
 
 Provision for the falling out of such value at the ex- 
 piration of a certain period should be made by charging 
 annually to revenue such a percentage of the total amount 
 as would extinguish the account at the end of the period. 
 
 43. In case of discrepancy in a trial balance, how 
 may the accountant ascertain which side is erroneous? 
 
 By testing either side. In the case of the debit side 
 test, the total debit of last balance should be taken and to 
 
42 
 
 it should be added total of all debit entries during month. 
 From this total should be subtracted all credit entries af- 
 fecting debit side; the remainder should be total of debit 
 side of new trial balance. 
 
 44. How may the gross profit or loss on merchandise 
 be ascertained? 
 
 Charge merchandise account with inventory at com- 
 mencement of period, with total purchases and returns 
 from debtors. Credit it with total sales and total returns 
 to creditors and also with inventory at close of period ; the 
 excess of credit side over debit side will then represent 
 the gross profit. 
 
 45. Describe the profit and loss account. Show how 
 this account is made up and from what accounts it is 
 made. What does the balance of the profit and loss ac- 
 count represent, and how should such balance be finally 
 treated ? 
 
 A Profit and Loss Account is an adjustment account 
 for the determination of profit and loss for a given period. 
 It is made up by charging it with nominal accounts with 
 debit balances and crediting with nominal accounts with 
 credit balances. If the credit side exceeds the debit side, 
 the result is a profit ; if the opposite, a loss. If a profit is 
 disclosed, in case of a copartnership, it should be trans- 
 ferred to the capital account of the members of the firm, 
 but if a corporation, the profit should be credited to sur- 
 
43 
 
 plus account. (The following article, written by the 
 author, has appeared in several magazines, and may be 
 found interesting) : 
 
 THE PROFIT AND LOSS ACCOUNT. 
 
 In the paper on Theory of Accounts set at several recent 
 C. P. A. examinations, one of the questions has been, 
 " Describe the Functions of the Profit and Loss Account." 
 The obviously proper answer would be, "An adjustment 
 account opened at the close of a fiscal period as the re- 
 cipient for the debit and credit balances of the nominal 
 accounts, so as to enable one to ascertain by preponderance 
 of balance whether a profit or loss has been made during 
 said period." It is clear that the account must show 
 either a profit or a loss; it cannot show both. And yet it 
 is a matter of everyday occurrence for the auditor to find 
 such an item as " Profit and Loss" as a liability in the bal- 
 ance sheets submitted to him. In two instances which 
 came under the writer's notice recently, " Profit and Loss " 
 figured in the balance sheet as an asset! It is contended 
 that the appearance of the words profit and loss on either 
 side of a balance sheet is unscientific and misleading. If 
 a profit has been made (we are, of course, referring to 
 corporations) after allowing for bad debts, depreciations, 
 etc., the balance should be carried to surplus account, from 
 which, and from which only, directors have authority to 
 recommend the declaration of dividends. If a dividend 
 be declared, the amount must be charged to surplus ac- 
 
44 
 
 count and credited to dividend account, to which are 
 charged the checks as paid to stockholders of record. If, 
 on the other hand, a loss be made, it should be credited to 
 profit and loss account and charged to surplus account (if 
 there be one in existence) ; if not, it must be charged to 
 deficit account. 
 
 It is strongly contended that the profit and loss account 
 is as designed originally for the sole purpose of deter- 
 mining whether a profit or loss has been made; and that 
 as soon as this purpose is accomplished, it should be closed 
 at once, and remain closed until the next fiscal period ter- 
 minates. 
 
 Unfortunately, the practice is very prevalent among 
 bookkeepers and corporation officials of regarding the ac- 
 count as a kind of financial dust heap; so that any item 
 whose disposal under intelligible classified heading is not 
 readily ascertainable, is thrown into "Profit and Loss/' This 
 is to be deprecated greatly and resisted by the conscientious 
 auditor. If he points out, as it is part of his duty to point 
 out, first, that the abuse of this account is often made a 
 channel for the covering up of fraudulent entries; and, 
 second, that the appearance of the words " Profit and Loss " 
 on the balance sheets will generally mislead outsiders, it 
 is possible that a much-needed reform may be brought 
 about; resulting in improved systems within and in a 
 clearer presentation of facts to the outsider; both results 
 being greatly to be desired in the highest interest of com- 
 mercial morality. 
 
45 
 
 46. Describe fully each of the following accounts, show- 
 ing what entries may be made on each side and what dis- 
 position should be made of the balance: (a) cash account, 
 (b) . interest account, (c) merchandise account, (d) sus- 
 pense account, (c) real estate account. 
 
 (a) The cash account is charged with the balance of 
 cash in bank and undeposited at the beginning of a fiscal 
 period, and with all receipts to the end of said period. It 
 is credited with all payments. The balance indicated by 
 the excess of the total debits over credit represents the 
 amount of cash on hand at the end of the period, which 
 should appear in the Balance Sheet. 
 
 (b) The Interest Account is charged with interest paid 
 on notes, mortgages, etc., and credited with interest re- 
 ceived. If a debit balance appears at the end of a fiscal 
 period, it is charged to Profit and Loss account, if a credit 
 balance, it is credited to the same account. 
 
 (c) The Merchandise Account is charged with the in- 
 ventory on hand at the commencement of a fiscal period, 
 and with all purchases and returns during the period. It 
 is credited with all sales, and with the inventory on hand 
 at the end of said period. If the credit side is the greater, 
 the balance indicates the gross profit, which should be 
 charged to the Merchandise Account, and credited to Profit 
 and Loss Account. If the debit side is the greater, the 
 balance is the gross loss, which should be credited to 
 Merchandise, and charged to Profit and Loss Account. 
 
 (d) Suspense Account is charged with all items whose 
 
ultimate realization in full is doubtful. Amounts so 
 charged, if found uncollectable, should be credited, and 
 charged to Profit and Loss Account. If a partial payment 
 be made on account of any item so charged, and the bal- 
 ance be deemed uncollectable, the amount received on ac- 
 count should be credited to Suspense Account, and the 
 balance be credited and charged to Profit and Loss Ac- 
 count. The balance of the suspense account should be 
 added to the amount of accounts receivable appearing in 
 the balance sheet, and adequate reserve be deducted for 
 bad and doubtful debts. 
 
 (e) Real Estate Account should be charged with the cost 
 of property and with any expenditure which enhances 
 value. It should be credited with sales made (if any) 
 and with a proper percentage of depreciation periodically. 
 The balance would ordinarily represent the cost value of 
 the property, which should appear in the balance sheet as 
 an asset. In connection with this account, a Real Estate 
 Income and Expenditure Account should be kept. This 
 should be charged with any expenditure in the nature of 
 repairs, and credited with the income arising from the 
 property. The balance would show the net revenue or 
 loss on the property periodically. As instances, the pay- 
 ment of an assessment for laying sewers or for asphalting 
 the street would properly be chargeable to Real Estate Ac- 
 count as enhancing value. Repainting and plumbing re- 
 pairs would be charged to the income and expenditure as 
 being in the nature of maintenance. 
 
47 
 
 47. Describe the following securities and show the es- 
 sential features of each: (a) common stock, (b) pre- 
 ferred stock, (c) income bonds, (d) debenture bonds, (e) 
 mortgage bonds. 
 
 (a) Common stock is a certificate of specified par value 
 entitling the holder to vote at meetings of stockholders of 
 a corporation, and to participate in dividends (if"" de- 
 clared) after the preferred stockholders have been paid 
 the dividend stipulated on their certificates and after all 
 fixed charges have been paid. As far as equity in the 
 property of a corporation is concerned, the interest of 
 common stockholders is generally identical with that of 
 the preferred stockholders. 
 
 (b) Preferred stock is a certificate of specified par value 
 entitling holder to a fixed rate of dividend before any dis- 
 tribution of profits in the form of dividends is made 
 amongst the common stockholders. It is divided into two 
 classes: cumulative and non-cumulative. With regard to 
 the cumulative stock, if sufficient profit is not available at 
 the close of a fiscal period to pay the stipulated rate of 
 dividend, the deficit unpaid becomes a liability of the cor- 
 poration until paid. In the case of non-cumulative stock, 
 if the full dividend is earned it is paid, but no deficit is 
 carried forward as a liability; it is lost to the stockholder. 
 
 (c) Income bonds are those issued against the surplus 
 income of a corporation as security, after fixed charges 
 have been paid. 
 
48 
 
 (d) Debenture bonds are a class of security superior to 
 income bonds and inferior to mortgage bonds. The hold- 
 ers are preferential creditors to whom bonds are issued in 
 much the same way as shares are issued to preferred stock- 
 holders, carrying a fixed rate of interest. They are gen- 
 erally divided into two classes: (1) those that are re- 
 deemable at the end of a certain specified time, or upon a 
 specified notice, and (2) those that are issued as perma- 
 nent liabilities. 
 
 (e) Mortgage bonds are securities issued covered by a 
 mortgage constituting a lien upon certain classes of fixed 
 assets such as buildings, plant, real estate, &c. They 
 always carry a stated rate of interest, which is a fixed 
 charge upon income. 
 
 48. Describe the process of taking a trial balance. 
 State the purposes of the balance and show its relations to 
 the balance sheet. 
 
 A trial balance is taken by adding up the postings on the 
 debit and credit side of every account in the ledger singly, 
 and by placing the balance of each account on the debit or 
 credit side of a trial balance sheet. If the postings are 
 correct and the balances accurately taken from the ledger, 
 the totals of both sides of the trial balance will agree. The 
 purpose of the trial balance is to demonstrate the mathe- 
 matical accuracy of the posting. 
 
 The relation of the trial balance to the balance sheet is 
 basic; for when the nominal accounts are closed out into 
 
49 
 
 the profit and loss account, and the inventory brought into 
 account, the trial balance is converted into a balance sheet 
 in extended form. 
 
 49. Give a rule averaging the maturity of the balance 
 of an account containing items of various dates on each 
 side. 
 
 First find the due date of each item and assume the ear- 
 liest due date, as the day of settlement of all the items on 
 both sides of the account. Multiply each item by the 
 number of days intervening between the assumed date of 
 settlement and due date of the item. Find the sum total 
 of the products on each side of the account. Divide the 
 difference between the sums of the debit and credit prod- 
 ucts by the balance of the account. The quotient will be 
 the number of days intervening between the asumed date 
 and true date of settlement, counting forward the number 
 of days when the account balances are on the same side 
 and counting backwards when on opposite sides. 
 
 50. State in the form of journal entries the following 
 transactions : (a) a note of a customer returned with pro- 
 test charges from the bank where it had been left for col- 
 lection, (b) the setting aside for wear and tear of a portion 
 of the value of machinery, (c) the adjustment of interest 
 accrued but not yet payable on a mortgage, (d) accom- 
 modation paper indorsed by the firm when coupon bonds 
 are received as security. 
 
50 
 
 (a) John Brown, Dr., $51.25. 
 
 To Bills Receivable $50.00 
 
 To Expense Account 1.25 
 
 note returned by bank with protest charges. 
 
 (b) Profit and Loss account, Dr., $500. 
 
 To Plant and Machinery $500 
 
 being 5 per cent depreciation written off $10,000 for wear 
 and tear. 
 
 (c) Interest account, Dr., $250.00. 
 
 To accrued interest account $250.00 
 
 being accrued interest on mortgage at time of closing books, 
 but not yet payable. 
 
 (d) Collateral security account, Dr. $10,000.00 
 
 To Contingent liability account 10,000.00 
 
 being $10,000.00 coupon bond C. M. & St. P. Ry. Co. re- 
 ceived as collateral security for accommodation note in- 
 dorsed by us, this day, in favor of A, B & C, $15,000.00 
 due September 14 ult., 1898. 
 
 51. In case of bonds purchased at a premium or at a 
 discount, to be held till maturity, state how the price 
 should be disposed of on the books at purchase, at maturity 
 and at any intervening time. 
 
 In the case of bonds purchased at a premium: 
 
 (a) When purchased, the par value should be charged to 
 
 investment account, and the premium to bond premium 
 
 account. 
 
 (&) At any intervening time the bond premium account 
 
 would be credited with such a proportion of the interest 
 
51 
 
 received as would wipe out the account at the maturity of 
 the bonds. On the balance sheet the balance of premium 
 added to the investment would ordinarily represent the 
 value of the investment. 
 
 (c) At maturity the premium would be wiped out, and 
 the bond would be redeemed at par. The investment ac- 
 count would therefore be credited and cash debited with the 
 par value of the bonds. 
 
 In the case of bonds purchased at a discount, the in- 
 vestment account would be charged with the cost of the 
 bonds, and debited annually, and interest account credited 
 with such an amount as would raise the cost to par value 
 by the time the bonds were redeemable. 
 
 52. Formulate, in an imaginary case, the journal en- 
 try or entries for the conversion of a partnership into a 
 joint stock company with the same resources and liabilities. 
 
 Balance sheet of Messrs. Nogood, Allbad & Allthere. 
 ASSETS. LIABILITIES. 
 
 Cash $10,465.00 Bills Payable . .$17,483.32 
 
 Mdse 29,700.00 Accounts 15,482.30 
 
 Plant, etc 20,000.00 Mr. Nogood, cap- 
 Accounts Rec'ble, 22,800.62 ital 25,000.00 
 
 Mr. Allbad, capi- 
 tal 15,000.00 
 
 Mr. Allthere, cap- 
 ital 10,000.00 
 
 $82,965.62 $82,965.62 
 
The copartnership is dissolved, and a corporation is 
 formed with a capitalization of $100,000.00 to take over 
 the business as it stands the whole of the stock to be 
 divided amongst the partners in proportion to their in- 
 vestment. 
 
 Journal Entries. 
 Good Will, Dr., $50,000.00. 
 
 To Mr. Nbgood.. $25,000.00 
 To Mr. Allbad . . 15,000.00 
 To Mr. Allthere.. 10,000.00 
 
 being excess value of stock paid them over amount to their 
 credit as capital. 
 
 Sundries, Dr., to Capital Stock, $100,000.00. 
 
 Mr. Nogood $50,000.00 
 
 Mr. Allbad 30,000.00 
 
 Mr. Allthere .... 20,000.00 
 
 being transfer to them of Capital Stock for the full settle- 
 ment of their individual Capital Accounts. 
 
 53. Describe a voucher record for the expenditures 
 of a corporation. 
 
 The voucher record is designed to facilitate the analysis 
 of expenditures by analysis columns; to minimize the 
 labor of posting, and to obviate the necessity of keeping 
 individual accounts with creditors in the ledger. After 
 bills have been checked and passed for payment, they are 
 
53 
 
 attached to a voucher folder, on the back of which is en- 
 tered the detailed analysis of the bill under headings with 
 the same designations as those at the heads of the columns 
 in the voucher record book. The folder with bills at- 
 tached is then passed to the vouchers record clerk for entry 
 in the proper columns of the record book. At the end of the 
 month, the columns of the book are footed and charged to 
 the various nominal accounts in the ledger, while the totals 
 of all the bills, as shown in the " totals" column is credited 
 to " Vouchers Payable " account in the ledger. Checks are 
 made out and marked by number to correspond with the 
 vouchers, and all items entered in the " Vouchers Pay- 
 able " column in the cash book. The footing of this col- 
 umn at the end of the month is debited to the " Vouchers 
 Payable " account in the ledger, the balance of which 
 should show the amount of " accounts payable." 
 
 54. What is meant by good will? What kind of prop- 
 erty is good will ? May the good will of a partnership be 
 sold? 
 
 By good will is meant ordinarily the capitalized value 
 of the average net earnings of a business for a term of years 
 usually varying from three to ten years. 
 
 It is based upon the probability that old customers will 
 resort to the same place. Its existence is to be found in 
 most corporation balance sheets under some " fancy " title 
 or other. Its value depends on 
 
 (a) the place; 
 
 (b) the name; 
 
54 
 
 (c) the chance that no one connected with the old firm 
 will step in to compete. The question of its value may 
 arise : 
 
 (a) upon the dissolution of a firm; 
 
 (b) upon the sale of the business. Good will is per- 
 sonal property. The good will of a partnership may be 
 sold just as well as any other species of property. 
 
 55. What names are given to accounts that represent 
 the excess of assets over liabilities? Differentiate these 
 names in their application to various kinds of business. 
 
 Capital, Surplus, Reserve, Undivided profits. Excess of 
 assets over liabilities is capital in the case of an individual 
 or partnership. In the case of monetary corporations, it is 
 called " Surplus and reserve." By transportation com- 
 panies, it is called " undivided profits," and sometimes, 
 though very improperly, " Profit and Loss." 
 
 56. AYhat is the proper course of procedure in taking 
 charge of the bookkeeping of a firm that has either no 
 books of account or very imperfect ones? 
 
 The proper course would be, first, to take a careful in- 
 ventory of merchandise, plant and machinery, furniture 
 and fixtures and other assets, and if sufficient data are un- 
 obtainable to determine their approximate value, to have 
 them properly appraised. Next, bills, letters and memo- 
 randa should be investigated so as to find out what are 
 the other assets and liabilities, and arrive at the capital 
 of the concern. Statements should be procured from 
 
55 
 
 creditors, and sent to debtors, and confirmation of their 
 accuracy requested. The bank pass book should be written 
 up to date and balanced, and the cash in hand counted. On 
 the ascertained basis of affairs, a proper set of books should 
 be opened. The personal assistance of the members of the 
 firm would probably be indispensable in arriving at satis- 
 factory conclusions. 
 
 57. Describe fully a system by which occasional small 
 sales made on credit to persons not regular customers may 
 be recorded without opening a separate account with each 
 purchaser. 
 
 A very simple method is to have the opening pages of 
 the ledger alphabetically indexed, giving a few folios to 
 each letter. Sales, as made, could be posted in alphabeti- 
 cal order, and the settlement of same would appear oppo- 
 site. Another method would be to have a " Petty Sales 
 Ledger" alphabetically indexed, the balance of which 
 might easily be shown in the General Ledger by means of 
 a controlling account. 
 
 58. Describe the most complicated form of cash book 
 with which you are acquainted, showing its functions, 
 the sources from which its materials are derived and where 
 its results are carried. 
 
 Cash books differ from one another principally in the 
 extent to which the columnar system is made use of. As 
 the use of this system is to lessen the labor of posting and 
 to facilitate the analysis of receipts and expenditure, it 
 
56 
 
 might be reasonably assumed that complication of form is 
 in inverse ratio to the number of columns used. This be- 
 ing so, the most complicated form of cash book might 
 fairly be said to be that which contains one column for 
 receipts, and one for expenditures, thus necessitating the 
 posting of every individual cash transaction. 
 
 59. Describe fully the method of keeping a bills re- 
 ceivable account, and state the connection of the account 
 with the bill book. 
 
 The Bills Receivable account in the ledger should be 
 charged monthly with the total amount of notes received 
 from customers, and be credited with cash paid in settle- 
 ment of same, or with cash received for those discounted. 
 When a note is received in payment of an account, it 
 should be entered in the bill book and posted to the credit 
 of the person from whom received at once. The double 
 entry is completed by charging the total to the ledger ac- 
 count, as before stated. If this method be pursued, the 
 necessity of journalizing is obviated. 
 
 While this system is the shortest and the one generally 
 employed, the ledger account does not furnish a complete 
 detailed schedule, necessitating constant reference to the 
 bill book. This could be avoided by posting each item 
 singly to bills receivable account, marking in also the due 
 date. 
 
 60. As the bookkeeper of a firm that had no articles 
 of copartnership, what would be your duty on learning of 
 the death of a partner? 
 
57 
 
 The proper course for the bookkeeper to pursue under 
 the circumstances would be to suggest the taking of an 
 inventory, closing the book, adjusting the capital account, 
 and making up a complete statement of affairs at the time 
 of the decease of the partner. He should also recom- 
 mend the opening of another set of books to contain de- 
 tails of the subsequent realization of assets, and liquida- 
 tion of liabilities of the firm. 
 
 61. Define debit, credit, debtor, creditor. State the 
 general law growing out of the relationship of debtor and 
 creditor that governs double-entry bookkeeping. What is 
 the result of a debit entry? of a credit entry? 
 
 Debit he owes; Latin, debeo. 
 
 Credit he believes or trusts; Latin, credo. 
 
 Debtor one who owes something. 
 
 Creditor one who trusts another; one to whom some- 
 thing is owing. 
 
 The general law growing out of the relationship of 
 debtor and creditor maintained in double-entry bookkeep- 
 ing is that if one person or account is charged, another 
 person or account is credited with a like amount. By this 
 means the equilibrium of the ledger is maintained. The 
 result of a debit entry is to charge some person or account 
 with a certain amount. It is the record of the creation of 
 an asset either by purchase or transfer, or of an expense. 
 The result of a credit entry is the creation of a liability, 
 either by purchase or transfer, or of an item of profit. 
 
58 
 
 62. Mention the different classes into which accounts 
 are usually divided. Give the names of the principal ac- 
 counts of each class. Which class or classes of accounts 
 close into loss and gain account? Mention the principal 
 accounts common to mercantile bookkeeping and state the 
 purposes of each. 
 
 Accounts are divided into the following classes: 
 Personal. Impersonal. 
 
 Nominal. Real. 
 
 Personal accounts are those kept with persons, debtors 
 and creditors; impersonal accounts are all others. 
 
 The principal nominal accounts are : Discount, Interest, 
 Commission, Expense, Salaries, Wages, etc. 
 
 The principal real accounts are: Cash, Merchandise 
 (Inventory), Plant and Machinery, Buildings, etc. 
 
 The nominal accounts close out periodically into Profit 
 and Loss Account. 
 
 The principal accounts common to mercantile bookkeep- 
 ing, and the purpose of each, are as follows : 
 
 (a) Merchandise or Trading Account to determine 
 the amount of gross profit earned. 
 
 (b) Cash Account to record amount on hand at the 
 beginning of a fiscal period, the monthly receipts and 
 expenditures, and the balance left at the end of the period. 
 
59 
 
 (c) Discount Account to record the amounts allowed 
 to debtors and received from creditors in settlement of 
 accounts. 
 
 (d) Interest Account to show the amount of interest 
 received and paid in the course of a fiscal period. 
 
 (e) Expense Account (subdivided into as many classes 
 as necessary) to show the general expenses of a business. 
 
 (/) Salary Account to contain the amounts paid out 
 under this heading. 
 
 (g) Wages Account to show the total amount paid for 
 labor, etc. 
 
 (h) Plant and Machinery Account to record cost of 
 plant, and to show amount written off for depreciation. 
 
 (t) Furniture and Fixtures Account showing cost of 
 these items. 
 
 (/) Bills Receivable Account to contain amount due 
 by debtors on notes. 
 
 (k) Bills Payable Account to show amount and par- 
 ticulars of notes given to creditors. 
 
 (1) Accounts Receivable and Payable showing full par- 
 ticulars of amounts due by debtors and to creditors. 
 
 (ra) Capital Account to show amounts invested and 
 withdrawn by principals, and also amount of capital accre- 
 tion consequent on transfer to it of profit from time to 
 time, as shown by the Profit and Loss Account. 
 
 63. Define assets, liabilities. What are fixed assets, 
 quick assets? In making up a general statement of assets 
 and liabilities, what groups of accounts constitute assets 
 
60 
 
 and what constitute liabilities? State how to treat, on 
 closing the books, assets and liabilities accrued but not 
 actually due (such as interest receivable and payable, 
 taxes, insurance, commissions, salaries, rents). 
 
 Assets things owned. 
 
 Liabilities things owed. 
 
 Fixed Assets those not available as working capital, 
 i. e., which cannot be converted into cash readily. 
 
 Quick Assets another name for cash assets, i. e., cash or 
 what can be readily converted thereinto. 
 
 Personal and real accounts constitute assets; personal 
 and capital accounts constitute liabilities. 
 
 For assets accrued but not yet due an account should be 
 opened (take interest for example) under the heading of 
 Accrued Interest Eeceivable, and the amount accrued 
 should be charged through the Journal to this account, 
 and credited to Profit and Loss Account. On the balance 
 sheet the item would appear as " Interest Accrued " 
 amongst the assets. For liabilities accrued but not yet due, 
 Profit and Loss Account should be debited, and an "Ac- 
 crued" account credited under proper descriptive title. 
 The item would of course appear on the balance sheet 
 amongst the liabilities. 
 
 64. Describe the different methods of determining the 
 loss or gain of a business. How is the loss or gain of a 
 business determined from books kept by single entry? 
 State the usual mode of procedure when the books are kept 
 by double entry. 
 
61 
 
 There are two methods of determining the loss or gain 
 of a business : 
 
 (a) The resource and liability method, which consists 
 in comparing the total assets with the total liabilities ; the 
 excess of the former over the latter constituting the net 
 profit. 
 
 (b) The profit and loss method, which consists in com- 
 paring the total of the revenue accounts, with credit bal- 
 ances, with that of those with debit balances in the profit 
 and loss account. The excess of the former over the latter 
 is the amount of net profit. The accuracy of this is con- 
 firmed by the balance sheet, where the same result is shown 
 in the increased excess of assets over liabilities. 
 
 In single-entry bookkeeping the loss or gain is deter- 
 mined by the resource and liability method, as the nominal 
 accounts recording revenue income and expenditure are not 
 kept. 
 
 When books are kept by double-entry the loss or gain is 
 determined by the Profit and Loss Account method. The 
 procedure is as follows : the gross profit having been deter- 
 mined by the Merchandise or Trading Account, the amount 
 is transferred to the credit of the Profit and Loss Account. 
 
 All nominal accounts with debit balances are charged, 
 and all nominal accounts with credit balances are credited 
 to the Profit and Loss Account. Depreciations and re- 
 serves having been also charged, the excess of the credit 
 over the debit side is the amount of the net profit. 
 
62 
 
 65. State the purpose of (a) consignment account, (&) 
 shipment or adventure account, (c) adventure joint ac- 
 count, (d) merchandise company account. Describe how 
 each should be opened, conducted and closed. 
 
 The purpose of 
 
 (a) A consignment account is to show the profit or loss 
 made on sales effected through a second party, called the 
 consignee. 
 
 (&) A shipment or adventure account is to show the 
 profit or loss made on a particular speculative shipment of 
 goods to another place for sale. 
 
 (c) An adventure joint account is to record particulars 
 and show the ultimate profit or loss on a trading venture, 
 generally of a temporary character, in which two or more 
 persons join, who agree to share profits or losses in certain 
 proportions. 
 
 (d) A merchandise company account is to record the 
 transactions and profit or loss of a company formed to 
 conduct adventures and the shipments of merchandise. 
 
 (a) Goods consigned are credited by the consignor to 
 Merchandise Account, and charged to Consignment Ac- 
 count under the name of consignee. The consignee receives 
 the goods and opens a consignment account with the con- 
 signor. He charges it with expenses and commission, and 
 credits it with sales. When the transaction is completed 
 he renders an account sales and remits the balance due the 
 consignor. 
 
 (&) A shipment or adventure account is opened by 
 
63 
 
 crediting merchandise, and charging the account with the 
 value of the goods shipped. It is further charged with all 
 expenses of shipment and sales, and credited with the 
 amounts sold. A credit balance would indicate the amount 
 of net profit on the adventure, which should be credited to 
 Profit and Loss Account. 
 
 (c) An adventure joint account should be conducted in 
 precisely the same manner the profit being distributed as 
 agreed on amongst the parties to the venture. 
 
 (d) The Merchandise Company Account is kept in the 
 same manner, the result of each venture being credited to 
 Profit and Loss Account for ultimate division amongst the 
 stockholders. 
 
 66. Describe the entries necessary to open a set of 
 double-entry books. In what respect is the double-entry 
 system preferable to the single-entry system? 
 
 Double-entry books are opened by first preparing com- 
 plete schedules of assets and liabilities, the excess of the 
 former over the latter being the capital. One Journal 
 entry only is necessarj', viz. : 
 
 Sundries, Dr. (all assets). 
 
 To Sundries (all liabilities, including capital). 
 
 Such nominal accounts should also be opened in the 
 ledger as may be found necessary to record income and 
 expenditure, and the books are " opened." 
 
 The double-entry system is preferable to the single-entry 
 system because : 
 
64 
 
 (a) by means of the trial balance the mathematical 
 accuracy of the posting is demonstrable. 
 
 (5) by means of the merchandise account the gross profit 
 is determinable. 
 
 (c) the accuracy of the profit or loss shown by the profit 
 and loss account is confirmed by the balance sheet. 
 
 (d) all receipts and expenditure, both capital and rev- 
 enue, MUST appear on the ledger; 
 
 (e) comparative statistics for fiscal periods of any class 
 of receipts and expenditure are available ; 
 
 (/) profit or loss may be shown on any department, on 
 any commodity sold, or on any article manufactured ; 
 
 (g) the facility offered for a rapid and exhaustive audit 
 is to that extent a deterrent from fraudulent entries ; 
 
 (h) lastly, not only is the amount of profit and loss 
 shown but also the direct sources of same. 
 
 67. Describe the process of changing single entry 
 books to double entry. What additional accounts are re- 
 quired? Is it necessary to disturb any accounts already 
 opened in the ledger, or to keep such accounts differently 
 after the change? 
 
 Single entry books may be readily converted into double- 
 entry books, in the following manner: First rule off all 
 expense accounts and make up a complete schedule of 
 assets and liabilities from all sources whether on the 
 books or not. Determine from the excess of the assets over 
 the liabilities the amount of the net capital, and then make 
 the following Journal entry : 
 
65 
 
 Sundries, Dr. (enumerate all assets). 
 
 To Sundries (enumerate all liabilities, including capi- 
 tal). 
 
 Then open accounts, and post, leaving untouched those 
 items already open on the ledger. A trial balance should 
 be taken off at once to prove the correctness of the opening 
 entries. The additional accounts required would be such 
 as might be necessary from appearing amongst the assets, 
 and such nominal accounts as might be required to show 
 in detail, revenue expenditure and income. 
 
 It is not necessary to disturb any accounts in the ledger 
 (except the ruling off of expense accounts as above stated), 
 nor to keep them any differently after the change. 
 
 68. Describe in detail the manner of closing a double 
 entry ledger. How should the results of the business be 
 stated? Why is property unsold credited to the account 
 to which it belongs before closing ? How should worthless 
 and doubtful debts be treated in closing? 
 
 First determine the amount of gross profit by crediting 
 Merchandise Account with the inventory at the end of the 
 period, carry amount of gross profit to the credit of Profit 
 and Loss Account, and bring over the inventory as a debit 
 balance in the Merchandise Account. Next close out all 
 nominal accounts into the Profit and Loss Account. Charge 
 off a proper percentage for depreciation, reserve for bad 
 debts, etc., and the excess of the credit side of Profit and 
 Loss Account over the debit will be the net profit. 
 
66 
 
 The results of the business should be stated in the Profit 
 and Loss Account, the confirmation of their accuracy ap- 
 pearing in the balance sheet, under the head of increase 
 or decrease of capital. 
 
 Property is credited to the account to which it belongs 
 before closing, because the object in view is to show the 
 actual excess of sales over purchase price of things actually 
 sold. Theoretically it would appear more correct to deduct 
 the amount from the debit side of the account. In closing, 
 worthless debts should be charged to profit and loss ac- 
 count, while doubtful debts should be carried into a sus- 
 pense account or doubtful debts ledger. 
 
 69. State the entries necessary to open a set of cor- 
 poration books so that the assets may appear properly on 
 the ledger. What books are necessary in corporation ac- 
 counting that are not necessary in mercantile accounting? 
 What does the capital account show? Define preferred 
 stock, common stock, watered stock. 
 
 In opening a set of books for a corporation a complete 
 set of schedules of assets and liabilities should first be 
 prepared and the amount of the authorized capital stock 
 ascertained from the articles of incorporation, a copy of 
 which should be found in the Minute book. The following 
 Journal entry should then be made : 
 
 Sundry Assets, Dr. 
 
 To Sundry Liabilities (include capital stock). 
 
 If the assets do not equal the liabilities some fictitious 
 asset must be entered so as to make the ledger balance. 
 
67 
 
 Good Will, Rights and Franchises, Organization Account, 
 are a few of the " fancy " titles used. In the very rare cases 
 where the assets EXCEED the liabilities the balance should be 
 credited to Reserve Account. 
 
 If any portion of the capital stock is offered for subscrip- 
 tion the amount should be charged to Subscription Ac- 
 count and credited to Capital Account. Stock unissued 
 should appear on the debit side of the ledger under the 
 head of Treasury Stock. Such nominal accounts should be 
 opened as might be found necessary to set forth the trans- 
 actions clearly. The following additional books are neces- 
 sary for corporations : Minute Book, Stock or Shares Led- 
 ger, Transfer Book, Stock Certificate Book. The Capital 
 Account should show the authorized amount of capital 
 stock. 
 
 Preferred Stock is a share certificate entitling the holder 
 to a fixed rate of dividend before any be declared on the 
 Common Stock. 
 
 Common Stock is a share certificate entitling the holder 
 to share in the profit earned in the form of dividends if 
 declared. The holder is also entitled to vote at stock- 
 holders' meetings. 
 
 Watered Stock is capital stock issued for which no value 
 has been received. 
 
 70. State the object of each of the following: Plant 
 account, capital account, surplus or reverse^ fund account, 
 redemption fund account, depreciation account. 
 
 fo& 
 
 
68 
 
 Plant Account should be charged with the cost of plant 
 and machinery, and with any expenditures which may en- 
 hance its value. It should be periodically credited with a 
 proper percentage for depreciation consequent on wear and 
 tear. 
 
 Capital Account of a firm should be credited with 
 amount invested, and with profit earned, as shown by the 
 profit and loss account. It should be charged with cash 
 withdrawn. Capital Account of a corporation should show 
 the total amount of its authorized capital stock. Surplus 
 Account should be credited with profits as shown by the 
 Profit and Loss Account. It should show at any time the 
 amount of undistributed profits. 
 
 Reserve Fund Account should be credited periodically 
 with such a portion of the profits as may be thought desir- 
 able to meet certain expenditures or losses. Thus there 
 may be reserve for bad debts, reserve for depreciation, etc. 
 The purpose of the reserve should always be specified, and 
 it should only be used for such purpose. 
 
 Redemption Fund Account is the title applied to an ac- 
 count whose object is to record the amount of money set 
 aside periodically to redeem some given obligation (gener- 
 ally bonds) at some future time. The Redemption Fund 
 Account should be represented by a credit balance, while 
 the fund itself, consisting of cash or investments, would of 
 course be a debit item. 
 
 Depreciation Account should show at any time the 
 
69 
 
 amount set aside out of earnings to replace plant, machin- 
 ery, etc., when worn out. 
 
 71. What should be done regarding the books on the 
 admission of a new partner into a firm? What entry 
 should be made (a) when cash is invested for a certain 
 share in the gains and losses (b) when a specified amount 
 is paid to the old members for a certain share in the gains 
 and losses? 
 
 An inventory should be taken, the books closed, and capi- 
 tal accounts adjusted. 
 
 (a) The amount invested should be charged to Cash 
 Account, and credited to the new partner. 
 
 (b) The amount should be divided between the old part- 
 ners pro rata. It need not necessarily be placed in the 
 business. The old partners should be charged, and the 
 new partner be credited with such an amount as may be 
 necessary to give expression to the agreement. 
 
 72. What is understood by cost or factory bookkeep- 
 ing? What is shown by the cost books? What are the 
 principal items entering into the cost of manufactured 
 products ? 
 
 By cost or factory bookkeeping is meant the keeping a 
 detailed record of the cost of different articles manufac- 
 tured. The debit side should show their actual cost. The 
 cost books should show prime cost, cost and quantities 
 manufactured. 
 
70 
 
 The principal items entering into cost are : 
 
 Material (including freight); Labor; Direct and de- 
 partmental expense of production; Superintendent's 
 wages, etc.; Depreciation of buildings and plant; 
 Light, heat, rent, insurance and taxes, depreciation, 
 salaries, etc. 
 
 73. What is meant by the voucher system of bookkeep- 
 ing? Describe the voucher record book. 
 
 The voucher system of bookkeeping is designed to ob- 
 viate the necessity of keeping individual accounts with 
 creditors, while affording complete detailed analysis of ex- 
 penditure under classified headings. As bills are approved 
 for payment they are placed in a voucher folder, and the 
 analysis of expenditure is entered in columns ruled at the 
 back. Each folder is numbered and passed on for entry 
 in the voucher record book. 
 
 The voucher record book contains columns for the num- 
 bers of the vouchers, names of creditors, total amount of 
 bills, and a separate column for each item of expenditure. 
 At the end of the month the totals of the first column is 
 posted to the credit of an account entitled " Vouchers Pay- 
 able " in the general ledger. The total of every other 
 column is posted to the debit of the nominal account whose 
 heading it bears, thus completing the double entry. A sepa- 
 rate column is kept in the cash book for vouchers payable 
 paid, the total of which is monthly posted to the debit of 
 that account in the ledger. 
 
71 
 
 The balance of the ledger account would show monthly 
 the total amount of accounts payable unpaid. 
 
 74. How should executors' and administrators' ac- 
 counts be stated for the purpose of filing in court? What 
 does the sjuLmnaary^of^acjcojonts usually include? What 
 are assets of the estate? When are dividends, interest and 
 rents to be treated as principal? Define an intermediate 
 account. What is a final account? With what does the 
 executor charge himself ? For what does he take credit ? 
 
 They should be filed in such a way as to show under the 
 head of 
 
 (1) Principal Amount of inventory at start and par- 
 ticulars of income and expenditure under this head in 
 schedule form, the balance being added to the inventory, 
 showing " balance " of principal. 
 
 (2) Income Particulars of all receipts and expendi- 
 ture coming under this head in schedule forms. The sum- 
 mary of accounts shows totals of principal and income, 
 receipts and expenditure and the balance available for dis- 
 tribution. 
 
 Assets of the estate are all personal property, i.e., gen- 
 erally speaking, everything except real estate. 
 
 Dividends, interest and rent are to be treated as principal 
 when they were accrued at the time of the death of the 
 testator. 
 
 An intermediate account is one filed at any time previous 
 to the final account. It may be made at any time by an 
 
72 
 
 executor voluntarily, or he may be ordered to file one at 
 any time by the Surrogate. 
 
 A final account is one submitted showing the balance in 
 the hands of the executor available for distribution prior 
 to its judicial settlement. 
 
 The executor charges himself with the assets of the 
 estate and any balance of increase, of principal or excess of 
 income receipts over income expenditure. 
 
 He credits himself with all payments made by him, in- 
 cluding commission. 
 
 75. What is the duty of the assignee's accountant in 
 the case of an assignment? How is the inventory stated? 
 What are included in the schedules ? How is the assignee's 
 account stated for submission to the court? What does 
 the summary of account usually include? With what does 
 the assignee charge himself? For what does he take 
 credit? 
 
 To prepare an inventory of all property coming into the 
 possession of the assignee and to prepare a statement of 
 affairs. .He should also open a new set of books designed 
 to show in detail the transactions of the assignee. The in- 
 ventory states in detail particulars of all the property, the 
 quantity and estimated value. In the schedules are con- 
 tained a list of accounts receivable at nominal and esti- 
 mated realizable value, also accounts and bills payable. 
 
 Preferred claims are deducted from the assets. It should 
 be shown in schedule form, and disclose the amount of 
 property which came into his possession, the amounts re- 
 
73 
 
 ceived by him, and his expenses of administration. It 
 should also show the balance available for distribution 
 amongst the creditors. The summary of account shows the 
 total amounts received as per schedule, and total expendi- 
 tures; also the balance available for distribution. 
 
 He charges himself with all that he receives and takes 
 credit for all that he expends. He charges himself also 
 with any increase over estimate in the amount realized by 
 assets. 
 
 76. State and explain the two principal purposes for 
 which accounts are kept. 
 
 The two principal purposes for which accounts are kept 
 are: (a) To preserve such an explicit record of every 
 transaction that its exact nature may be perceived at once. 
 
 (b) To classify them in such a manner that the total 
 result of the transactions for any given period may be 
 readily obtained. 
 
 77. What important features of a business are shown 
 by double entry bookkeeping that single entry books can 
 not show? Explain clearly. 
 
 (a) Not only the amount of profit or loss for any given 
 period is a seer tamable, but also the source of same 
 whether by departments or class of goods sold. In single 
 entry, the amount of the profit only is shown by comparing 
 the total resources by the total liabilities. 
 
 (b) Not only is the net profit shown by means of the 
 profit and loss account, but also the gross profit by means 
 
74 
 
 of the merchandise or trading account. In single entry 
 the merchandise account is not kept. By means of this 
 account, it is also possible to determine the actual or ap- 
 proximate amount of the inventory at the end of any given 
 period by calculating the percentage of gross profit for 
 past years. This is a most important and valuable piece of 
 information in the case of a fire. 
 
 (c) All expenditure must be recorded and all receipts 
 accounted for. 
 
 (d) The trial balance is prima facie evidence of the cor- 
 rectness of the posting, and incidentally, comparative sta- 
 tistics of monthly receipts and expenditures under classified 
 headings are available. 
 
 (e) The use of the columnar system in books of original 
 entry minimizes the labor of posting and facilitates analyti- 
 cal information. 
 
 (/) The superior facility offered for an exhaustive and 
 rapid audit is to that extent a deterrent from fraudulent 
 entries and other irregularities. 
 
 78. Describe the ordinary merchandise account and 
 state its purpose. Does it fully accomplish the purpose 
 desired? Give reasons for your answer. 
 
 The ordinary merchandise account is first charged with 
 the amount of the inventory at the commencement of any 
 fiscal period, and with all purchases and returns by cus- 
 tomers. It is credited with all sales; with returns to 
 creditors, and with the inventory at the end of the period. 
 
75 
 
 The excess of the credit over the debit side is the amount 
 of gross profit, which is charged to merchandise account, 
 and credited to profit and loss account. Its purpose is to 
 show the amount of gross profit and the amount of pur- 
 chases and sales. 
 
 It does not; because the amount of the inventory, an 
 indispensable factor in determining the gross profit, is 
 never shown, except when specially taken at the end of a 
 stated period. Again, while the amounts of sales, pur- 
 chases and returns may be found by analysis of the contents 
 of the account, the balance as it appears at the end of every 
 month in the trial balance is meaningless. 
 
 79. Describe a voucher record and the process of con- 
 ducting a vouchers payable system. State fully the ad- 
 vantage of this system. 
 
 A voucher record is a columnar journal designed to do 
 away with the necessity of keeping ledger accounts with 
 creditors individually. It is ruled with parallel columns 
 for voucher number, date, name of creditor, total amount 
 of bill, and as many additional columns as may be found 
 necessary to distribute the analysis under classified de- 
 scriptive headings of purchases. The total of the first 
 column is posted monthly to the credit of an account called 
 " vouchers payable " in the ledger, and the separate total of 
 each of the other columns is posted to the debit of the 
 nominal account corresponding to its title thus effecting 
 the double entry. As bills are passed for payment, they 
 
76 
 
 are encased in a voucher folder whose face bears analytic 
 columns, corresponding to those in the voucher record 
 book. The particulars are then filled in and the voucher 
 is passed on to be recorded. When a check is sent in pay- 
 ment, it is charged in the voucher payable column in the 
 cash book, the total of which is posted monthly to the debit 
 of the vouchers payable account in the ledger. The bal- 
 ance of this account represents the amount of accounts pay- 
 able. The advantage of the system is the facility afforded 
 for minute analysis in the record of expenditure, and the 
 enormous saving of labor in posting. 
 
 80. Recommend, with all necessary explanations, a set 
 of books peculiarly adapted to the use of a firm that deals 
 exclusively in butter, cheese and eggs, at wholesale, retail 
 and on commission, and has three branches in the same 
 city, the books being kept at the main store. 
 
 It is assumed that all merchandise will be purchased by, 
 consigned to, and supplied to the branch stores from the 
 main office. Each branch store should have two cash 
 books, sales books, and credit books for alternate days 
 which would be sent to the office to be recorded on the 
 books kept there. Cash books should be ruled for cash 
 sales and credit sales separate columns being provided for 
 butter, amount and Ibs. ; cheese, amount and Ibs. ; eggs, 
 amount and dozens. The sales books should be ruled so 
 as to afford the same information. The total quantities 
 sold should be monthly deducted from the quantities 
 
77 
 
 charged to the branches by the main office; the difference 
 should show the inventory. 
 
 The actual inventory will always be actually less, and 
 the difference, the shrinkage, should be written off 
 monthly. 
 
 At the main office should be kept a General Ledger, 
 Purchase Ledger, two branch store Customers' Ledgers, 
 Cash Book, Purchase Journal, Sales Journal, and for 
 record of consignment " pick up " sheets. 
 
 Purchases should be passed through the purchase jour- 
 nal as to quantity of commodity and amounts, credited to 
 the vendor, and charged in the General Ledger monthly to 
 the commodity account. 
 
 Sales should be passed through the Sales Journal in the 
 same way, charged to customers or branch stores, and 
 credited monthly to the commodity accounts. 
 
 Total purchases, less total sales, should show the inven- 
 tory monthly; the shrinkage should be written off. 
 
 The General Cash Book should have columns for cash 
 received daily from each store and that received at 
 main office. Total received for each store is monthly 
 credited to customers controlling account for each 
 branch store kept in General Ledger. The General Cash 
 Book should also have rulings for expense columns for 
 each branch store and such additional ones as may be 
 necessary to divide up the business of the main office. 
 
 Branch store's customers' ledgers should be daily posted 
 sales, cash and returns from books sent up to the main 
 
78 
 / 
 
 office and a general ledger account in each will make them 
 
 self-balancing corresponding in amount to the branch 
 store's customers' controlling, account in the General 
 Ledger. 
 
 Consignments should each receive a "lot" number and 
 particulars as to quantities, &c. As goods are disposed of 
 they should be entered on the sheet and a sales slip passed 
 through to charge customer in Sales Journal. When a 
 " lot " is disposed of, the amount realized less commission 
 and expenses should be credited to consignor on the 
 General Ledger through the Purchase Journal and the 
 total net cost thus shown charged to the particular com- 
 modity account. A check to consignor will then close up 
 the account. 
 
 At the main office the following results can be shown: 
 (a) Amount and quantity of every commodity pur- 
 chased and sold by main stores and the gross profit and 
 net profit on the whole business. Amount and quantity 
 of every commodity sold by branch stores, the amount of 
 stock on hand, the amount owing by their customers and 
 the gross and net profit earned. 
 
 81. Define the following terms as applied to accounts: 
 Personal, real, nominal, resource, liability. Mention two 
 real and three nominal accounts. 
 
 Personal with persons. 
 Real real value. 
 
Nominal names only. They contain items of income 
 and expenditure. 
 
 Resources another for assets i. e., what one owns, 
 either in possession or action. 
 
 Liability what is owed. 
 
 Two real accounts cash, plant and machinery. 
 
 Three nominal accounts interest, discount, wages. 
 
 82. Describe the nature of the following accounts: 
 Consignment, trading, suspense, construction, subscription. 
 
 A consignment account is one kept by a person called 
 the consignee to record his transactions in selling the goods 
 of another person, called the consignor. It records cost 
 and selling price of goods, expenses attending the handling 
 of same, and his profit on the transaction. 
 
 A trading account is designed to show the gross profit 
 on sales. It is charged with purchases, and expenses at- 
 tending the same, and credited with sales, and with inven- 
 tory at time of stock taking. The excess of the credit side 
 over the debit side is the gross profit. 
 
 A suspense account is one opened to contain those ac- 
 counts receivable whose realization is doubtful. Any 
 amount received on account should be credited and the bal- 
 ance, if found uncollectable, should be carried to Bad Debt 
 account. 
 
 A Construction Account is one designed to record the 
 cost of constructing buildings, roadbeds, etc., of railroads. 
 It comes under the head of capital expenditure. 
 
80 
 
 A subscription account should be charged with the total 
 amount of capital stock offered for sale. The journal en- 
 try would, of course, be Subscription Account Dr., to 
 Capital Stock Account. 
 
 83. Formulate and explain a rule for determining 
 whether an account should be debited or credited in any 
 given transaction. Explain the application of the prin- 
 ciple. 
 
 (a) Personal accounts : if the amount will be received, 
 debit ; if not, credit. 
 
 (b) Real accounts: debit the account which is increased, 
 and credit the person from whom received. 
 
 (c) Nominal accounts: debit what is not to be received; 
 credit what is. 
 
 Example (a) Sold goods to A; the amount will be re- 
 ceived; debit A. Purchased goods from B, the amount 
 will not be received; credit B, etc. 
 
 84. Describe a safe and easy system of keeping the ac- 
 count of goods returned, (a) as buyer, (b) as seller. 
 
 (a) As buyer, when goods are returned, the stockkeeper 
 should make out a slip with name of firm to whom returned 
 quantity of goods, price, etc., and pass same in to the book- 
 keeper for entry in the return book and for mail advice. 
 Each slip should be consecutively numbered, be signed by 
 stockkeeper, and by shipping clerk. After being entered 
 in the return book by the bookkeeper, each slip should be 
 preserved as a voucher. 
 
81 
 
 (b) As seller, particulars of goods returned should be 
 entered on a slip and turned over to the stock clerk, who 
 should enter in stock book, sign slip, and pass on to book- 
 keeper for entry in the credit book. Slips should be con- 
 secutively numbered and preserved as vouchers. In each 
 case, the design should be to have the record pass through 
 as many hands as possible. 
 
 85. State explicitly and fully the function of the profit 
 and loss account. Distinguish between the function of the 
 profit and loss account and that of the balance sheet. 
 
 The function of the profit and loss account is to deter- 
 mine by a comparison of the balances of the nominal ac- 
 counts whether a profit or loss has been made for some 
 stated period. If the total credit balances preponderate, a 
 profit has been earned; if otherwise, a loss. While the 
 function of the profit and loss account is to determine this 
 point, that of the balance sheet is to disclose the exact 
 financial position of a firm at a given moment. It also 
 confirms the result shown in the profit and loss account by 
 exhibiting a corresponding increase in the surplus of assets 
 over liabilities. 
 
 86. Some proprietors keep a private ledger of their 
 business, to which bookkeepers and clerks have no access. 
 Explain the purpose of such a book, and show what ac- 
 counts it usually contains and how it is made to agree with 
 the general ledger. 
 
 The purpose of the private ledger is to contain such ac- 
 
82 
 
 counts as may be deemed desirable to be kept from the 
 knowledge of the general office staff. It usually contains 
 capital account, profit and loss account, loans, investments, 
 etc. Appended to the general trial balance sheet, is an 
 account marked " Private Ledger." The difference between 
 the total debit and credit balances in the private ledger in- 
 serted here should make the general trial balance correct. 
 If this balance be kept in the hands of the principal, a per- 
 fect check against " forced balances " can always be main- 
 tained. 
 
 87. State the theory and purpose of each of the fol- 
 lowing, and show wherein they differ: (a) reserve fund, 
 (b) sinking fund. 
 
 Properly speaking, any " fund " should be represented by 
 a debit balance, i. e., it should be in the form of some 
 specific investment. The corresponding liability would be 
 the " account." A reserve " account " not " fund " is 
 formed by setting aside periodically some portion of the 
 profits of a concern by a charge to revenue account, and a 
 credit to reserve account. The purpose of the reserve 
 should always be clearly stated and used only for such 
 purpose. If it be a reserve " fund," the amount should be 
 represented by some specific asset. 
 
 The difference between the reserve fund and the sinking 
 fund is this : That whereas the necessity of the former may 
 be contingent that of the latter is absolute inasmuch as 
 it is a sum of money accumulated by installments to liqui- 
 date a liability of stated magnitude at a designated time. 
 
83 
 
 88. State the general theory of the balance sheet. On 
 what theory does the English form of balance sheet differ 
 from the continental and American form? Give an argu- 
 ment either for or against the English form. 
 
 The general theory of the balance sheet is, that it is an 
 exhibit in condensed form of all the accounts in the ledger 
 at a particular moment of time. The English form differs 
 from the American and continental on the theory that the 
 latter represents the closing balance account as exhibited in 
 journal form, while the former represents the opening 
 form. The advocates for the English form deny that 
 the balance sheet is an account; and also affirm that in 
 their form the proprietor is a debtor for his liabilities and 
 a creditor for his assets. There is no doubt that the pas- 
 sage of the English Companies Act of 1862 is largely re- 
 sponsible for the now almost universal adoption of the 
 English form (liabilities on the left hand side and assets 
 on the right) in that country. The unanswerable argu- 
 ment against the English form is, that the balance sheet 
 is not an extract from the journal, but from the ledger, 
 and that being so, there is no valid reason why the sides 
 of the accounts should be transposed. 
 
 89. Define permanent assets, floating assets. Show 
 how each should be treated in ascertaining the standing 
 of a business at any specified time. State the theory of 
 each step in the process. 
 
 Permanent assets are those continually required for the 
 proper conduct of a business, and being constantly used, 
 
84 
 
 are subject to depreciation in value through wear and tear. 
 In ascertaining their value at any given time, purchase 
 prices should be examined and each account scrutinized to 
 see that repairs and renewals have not been added to the 
 cost. Further, care should be exercised to see that a 
 proper amount has been written off periodically for de- 
 preciation. If any doubt still remains as to their actual 
 value, the services of a competent appraiser should be in- 
 voked. 
 
 Floating assets are those which fluctuate in amount from 
 time to time and constitute the working capital of the 
 business. 
 
 Cash can, of course, be verified, merchandise can be ap- 
 praised, bills receivable can be inspected, accounts re- 
 ceivable can be gone over, and a proper deduction made 
 for doubtful accounts, discounts, etc. 
 
 90. Describe two forms of sales ledger and the process 
 of entering the sales in each. Explain the advantage of 
 each form. 
 
 The first form would be the ordinary ledger ruling; 
 sales as made being charged to customer under proper 
 date, folio of sales book, " To Sundries." While quite con- 
 venient for the record of ordinary mercantile transactions, 
 " sundries " would be ordinarily unintelligible to retail cus- 
 tomers. For retail stores, another form of ruling would 
 be advantageous containing two parallel debit columns and 
 the ordinary credit column. The first column would be 
 
85 
 
 a detailed transcript of the sales book as to items the total 
 of each bill being extended into the second column which 
 is the one considered by the bookkeeper in taking off his 
 trial balance. The first form entails less work in posting, 
 but the second one is necessary for retail stores, as the 
 statement rendered monthly can be made out in itemized 
 form from the ledger direct, instead of the bookkeeper 
 having to look up his items from the sales book. 
 
 91. What is meant by double entry and how does it 
 differe essentially from single entry? Show the advan- 
 tages of recording every business transaction in two or 
 more different accounts. 
 
 By DOUBLE ENTRY is meant the recording of the 
 same amount twice; once on the debit and once on the 
 credit side of the ledger. The entries, either individual, 
 or in gross total equalling one another, balance. This 
 balance check demonstrates the mathematical accuracy of 
 the posting, and is the essential feature of double entry as 
 distinguished from single entry, where each amount is 
 only recorded on one side of the ledger, either as a debit or 
 credit. The advantage of recording every business trans- 
 action in two or more accounts is, that if assets are created, 
 the source of their derivation is recorded at the same time ; 
 if liabilities are incurred, the reason for same is stated. 
 If revenue expenditure is charged, it appears under specific 
 heading, and the corresponding liability recorded; if 
 revenue income be entered, it shows the source from which 
 
86 
 
 it arises. Finally, the profit or loss, as disclosed by a 
 comparison of the totals of the revenue accounts, is con- 
 firmed by the increase or decrease of assets over liabilities 
 in the balance sheet. 
 
 92. State what is indicated by each of the following 
 ledger accounts, (a) when the account shows a debit bal- 
 ance, (b) when the account shows a credit balance; loss 
 and gain, merchandise, customers' ledger, purchase ledger, 
 Chicago branch or agency, insurance, rent, interest, com- 
 mission. Explain fully. 
 
 (a) Debit balance : 
 
 Loss and gain the amount of the loss for a given fiscal 
 period. 
 
 Merchandise (when active) that the amount of sales 
 has not yet exceeded the amount of the inventory at the 
 commencement of the period and purchases to date ; (when 
 passive) the amount of the inventory at some specific date. 
 
 Customer^' Ledger total of account receivable. 
 
 Purchase Ledger excess of payments to creditors over 
 amounts credited to them. 
 
 Chicago Branch or Agency amount due by same. 
 
 Insurance amount paid for Insurance. 
 
 Rent amount paid for Eent. 
 
 Interest amount paid for Interest. 
 
 Commission amount paid for Commission. 
 (b) Credit balance: 
 
 Profit and Loss amount of net profit made for a certain 
 period. 
 
87 
 
 Merchandise excess of sales over purchases and inven- 
 tory at commencement of period. When present inven- 
 tory is added to credit side, or debited from debit side, the 
 excess as balance shows the Gross Profit. 
 
 Customers' Ledger total amount overpaid by cus- 
 tomers. 
 
 Purchase Ledger total amount of accounts payable. 
 Chicago branch or agency the profit made by same. 
 
 Insurance 
 Eent 
 Interest 
 Commission 
 
 Excess of income over 
 expenditure. 
 
 93. Describe a private ledger. Describe the process 
 of opening a private ledger for a mercantile firm. What 
 relation would the private ledger bear to the general trial 
 balance ? 
 
 A private ledger should, as its title imports, be designed 
 to contain accounts, the details of which it is deemed de- 
 sirable to keep from the knowledge of the general office 
 staff, and to which only principals and their confidants 
 should have access. Ordinarily it would contain the cap- 
 ital investments, profit and loss, and such other accounts 
 as would be needful to determine and record increase or 
 decrease of capital or surplus. 
 
 In opening such a ledger for a mercantile firm, the 
 balances of such accounts as are intended to be kept in it, 
 should be entered in one total in a " controlling account " 
 in the general ledger. All items posted in the private ledger 
 
88 
 
 could be entered by totals in this account, and then a 
 general trial balance could be taken off without disclosing 
 the initial contents of the private ledger. 
 
 94. Define auditing, accounting, bookkeeping, and 
 show the relation of each to the others. 
 
 Bookkeeping is the recording of transactions in proper 
 books of account. 
 
 Accounting is the designing of forms of account and 
 systems to be carried out in the bookkeeping so as to show 
 the results in proper forms. The work of the accountant 
 is generally constructive. 
 
 Auditing is the examination and verification of the work 
 done, and is occupied in detecting: 
 
 (1) Errors of principal; (2) technical errors; (3) 
 fraud. 
 
 The work of the auditor is generally then analytical. 
 
 95. You are required to suggest a method of bookkeep- 
 ing and to undertake the annual balancing of the books 
 of a large wholesale or jobbing establishment. What gen- 
 eral methods in the bookkeeping would you recommend, 
 and what plan would you adopt to expedite your work ? 
 
 In general, it would be desirable to have such properly 
 designed books of account on the columnar system as 
 would (1) insure the smallest labor in posting, (2) give 
 the fullest amount of detailed departmental statistics as to 
 income and expenditure; and (3) would afford the greatest 
 facility for rapid and systematic audit. 
 
89 
 
 In the bookkeeping method, the ledgers should be di- 
 vided up on such principles as the magnitude of the busi- 
 ness called for and each one made self balancing. Prop- 
 erly kept, controlling accounts in the general ledger would 
 enable the books to be closed and balance sheet drawn up 
 at any time without waiting for accurate schedules of ac- 
 counts receivable and payable to be taken off from the 
 other ledgers. 
 
 96. Describe a sinking fund. How should the account 
 of such a fund be conducted in the case of a manufactur- 
 ing corporation that bonds its works for $100,000, pay- 
 able in twenty years, and wishes to accumulate during that 
 period the sum necessary to retire the bonds at maturity? 
 
 A sinking fund is the term applied to an account to 
 which is charged such a sum (kept invested) from time to 
 time, as will (with or without interest) equal a given lia- 
 bility, which it is desired to extinguish at the end of a 
 given term of years. In the case above, the fund could be 
 raised, (a) by investing $5,000 annually and crediting the 
 income to surplus or reserve account; (b) by investing 
 such a sum annually as would, with interest at a specified 
 rate, amount to the sum of $100,000 in twenty years. Ac- 
 cording to the latter method, it is found that $1 invested 
 annually for twenty years at 5 per cent compound interest- 
 will at the expiration of that time, amount to $34,719. 
 
 $100,000.00 
 
 -=$2,880.27. 
 $34,719 
 
90 
 
 So $2,880.27 invested annually at 5 per cent compound 
 interest in twenty years amount to $100,000. 
 
 That sum therefore should constitute the annual con- 
 tribution to the sinking fund. 
 
 97. What is a controlling account? Give an illustra- 
 tion of the use of such an account. 
 
 Controlling account is the title of an account so kept in 
 the general ledger as to show exactly in gross the amount 
 of outstanding accounts receivable or payable, without 
 the necessity of waiting for the proved schedules from the 
 bought and sales ledgers. If this account be kept by one 
 person and the other ledgers divided up among several 
 others, the correctness of their contents as evidenced by 
 schedules is controlled by the controlling account, e. g., 
 their accuracy is tested and proved by the figures called 
 for in the controlling account. As an illustration, take 
 "controlling account" customers' ledgers. Say that the 
 total amount due by customers at time of opening the 
 account was $10,000 : 
 
 To Balance ....$10,000.00 By Cash $4,250.00 
 
 To Sales 5,000.00 By Discount .... 250.00 
 
 Total amount of accounts receivable are at once found 
 to be $10,500.00, and the schedules in the sales ledger 
 should equal this amount. 
 
 The value of this account can be estimated when it is 
 seen that at the close of any fiscal period a balance sheet 
 
91 
 
 can be very quickly made up without waiting for the 
 proving of the trial balance by means of correct schedules 
 of accounts receivable and payable. 
 
 98. Show what is meant by the following terms: 
 Closing the books, balancing the books, making out a state- 
 ment, preparing a balance sheet, taking off a trial balance. 
 
 Closing the books, means closing out nominal accounts 
 into the profit and loss account, preparatory to making up 
 a balance sheet. 
 
 Balancing the books means checking the postings, 
 etc., and proving the correctness of same by means of a 
 correct " trial balance." 
 
 Making out a statement, means the rendering of a copy 
 of the items on each side of a ledger account showing bal- 
 ance due from a debtor. 
 
 Preparing a balance sheet, means the making up in 
 proper form of the total assets and liabilities of a firm at 
 a given date, with proper references to schedules, etc. 
 
 Taking off a trial balance, means the drawing off on 
 sheets of all the balances contained in a ledger and proving 
 the correctness of the same by the total footings of debit 
 and credit balances being equal. 
 
 99. Describe a means for the protection of a manu- 
 facturing company in the purchase of necessary materials 
 and supplies and in the payment for such materials and 
 supplies. 
 
92 
 
 The principal points to be borne in mind in devising a 
 protective system, are : 
 
 (a) In purchasing necessary materials and supplies : 
 
 1. To be able to tell by means of records who requested 
 their purchase. 
 
 2. For what purpose they were required. 
 
 3. Who signed the order for purchases. 
 
 4. Who received the goods. 
 
 5. Who recorded their entry into stock. 
 6." Who recorded consumption or sale. 
 
 Properly designed requisitions, calling for signatures at 
 every stage of the handling of things purchased, also fix- 
 ing responsibility upon a certain individual will constitute 
 a thorough check, and the more hands the requisitions, 
 etc., pass through, the less liability there is of collusion on 
 the part of dishonest employees. 
 
 (b) In paying for same, orders, etc., would be attached 
 to bills which should be checked as to correctness of prices 
 by the party ordering them ; passed into the counting house 
 for checking of extensions and additions before being 
 passed through the books for payment. It need scarcely 
 be added that payments should always be made by check. 
 
 100. State the process of making a trial balance of a 
 single entry ledger. How may the loss or gain be deter- 
 mined from books kept by single entry? 
 
 In order to take off a trial balance of a single entry 
 ledger, it must be pre-supposed that every item posted in 
 
93 
 
 the ledger has been passed through the day book or jour- 
 nal. The footing of both sides of each ledger account 
 should be entered on a sheet and the excess of the total of 
 one side of all the accounts over the other will be the 
 " balance of the ledger." If posted and taken off correctly, 
 they should exactly equal the total of the difference of the 
 total sides of the day book. The proof of the correctness 
 therefore consists in equal balances of day book and ledger 
 instead of equal debits and credits. 
 
 The loss or gain is determined from books kept by single 
 entry by comparing the total assets with the total lia- 
 bilities, the excess of the one over the other constituting 
 the net gain or loss for the period under review. 
 
 101. A mercantile house draws on its customers at 
 sight, depositing its drafts in bank. Occasionally a draft 
 is returned dishonered. What entry should be made when 
 a draft is drawn, and what counter-entry should be made 
 when the draft is returned dishonered? 
 
 Sight drafts should be treated as checks and should be 
 credited on the cash book to the person on whom drawn 
 previous to deposit in bank. 
 
 When the draft is returned dishonered, a check should 
 be given to the bank in payment of same, and expenses (if 
 any), which should be charged in the cash book to the 
 party by whom draft was dishonered. 
 
 102. Describe a plan for handling invoices of materials 
 purchased for the use of a factory, payments for which 
 are to be made at the best discount date. 
 
94 
 
 The simplest and most expeditious method is, after the 
 invoices have been checked and passed through the books, 
 to deposit them in files (each file containing one month's 
 due payments) under the date for payment which will 
 enable the best discount rate to be obtained. The cashier 
 daily draws checks for all invoices, due on that particular 
 day as per file. 
 
 103. Describe an approved system of recording and 
 vouching petty cash transactions. 
 
 A check should be drawn for such an amount as may 
 be deemed advisable, which is charged in the general 
 ledger to " office cash account." The cashier should per- 
 sonally enter same in the petty cash book. The one side 
 of the petty cash book should record receipts from general 
 cashier; the other should be ruled with as many columns 
 as may be necessary to classify the expenditure made. 
 Cash as paid out should be charged under its proper col- 
 umn, and there should be consecutively numbered vouchers 
 for every payment, with such supplementary proof as is 
 obtainable. Carfares vouchers might be initiated by per- 
 sons to whom paid; postage stamps vouchers initiated by 
 general cashier, etc. At the end of every month the ex- 
 penses are added and the balance brought down. The 
 totals of the expense columns are charged (by journal 
 entry) to the proper account in the ledger, and office cash 
 account is credited. The balance of the ledger account 
 would then agree with the balance shown by the petty cash 
 
95 
 
 book. It need hardly be added that no ledger accounts 
 should ever be paid through the petty cash. 
 
 104. Give the ruling of a stock or shares ledger for a 
 corporation. Show how this book is kept, and indicate 
 its relation to the general books of account. 
 
 DR. 
 
 JOHN BROWN. 
 
 CR- 
 
 Date. 
 
 Certificates 
 
 J 
 
 002 
 
 Z 
 
 Par 
 
 Value 
 
 Date 
 
 Certificates 
 
 In- 
 stall- 
 ments. 
 
 OCQ 
 
 fc 
 
 Pa 
 Vali 
 
 March 
 
 6 
 6 
 
 Renewed 
 by No.40 
 Transf d to 
 J. Davis 
 
 400 
 
 100 
 
 
 
 Feb'r 
 March 
 
 4 
 6 
 
 No. 10 
 No. 40 
 
 
 
 500 
 
 
 
 400 
 
 This book is kept to show the number of shares held by 
 each stockholder of a corporation, as required by law. 
 From it, voters 5 lists and dividend lists are prepared. The 
 stockholder is credited with the number of original shares 
 issued to him, or with those he became possessed of by 
 transfer. He is charged with the number of shares he 
 transfers to other parties. Original stock is posted from 
 the stock certificate book ; transfers from the transfer book, 
 which is virtually the shares ledger journal. 
 
 It has no direct relation to the general books of account 
 further than this: While the capital stock account in the 
 general ledger shows the gross amount of stock issued, 
 the shares ledger gives the names of the stockholders and 
 the amount of stock held by each. 
 
96 
 
 105. Illustrate a columnar cash book, a columnar jour- 
 nal, and a columnar sales book. What general require- 
 ments should be observed in designing such books? Give 
 an estimate of the utility of the columnar plan. 
 
 (a) Cash Book. 
 
 DR. 
 
 CASH. 
 
 CASH. 
 
 CH. 
 
 
 
 
 d 
 
 
 
 
 
 d 
 
 i 
 
 
 3 
 
 oe 
 Q 
 
 Name. 
 
 1 
 O 
 
 Discou 
 
 a 
 
 s 
 
 
 
 5 
 
 Name. 
 
 (D 
 
 a 
 
 V 
 
 O 
 
 Discou 
 
 o 
 
 01 
 
 a 
 
 H 
 
 w 
 
 I 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 (b) Journal. 
 
 DR. CR. 
 
 
 
 
 I 
 
 
 
 
 
 a 
 
 >H 
 
 
 
 
 | 
 
 
 
 
 
 
 
 i 
 
 "3 
 
 Name. 
 
 Name. 
 
 "rt 
 
 'i 
 
 
 
 & 
 
 V 
 
 8 
 
 
 
 0) 
 
 g 
 
 s 
 
 
 
 
 
 w 
 
 O 
 
 
 
 
 
 O 
 
 
 
 
 
 1 
 
 
 
 
 
 (c) Sales Book. 
 
 Name. 
 
 ! Butter. 
 
 
 Cheese. 
 
 
 Egg3. 
 
 
 Total. 
 
 
 
 1 
 
 
 
 
 
 
 
 
07 
 
 In designing such books, the nature of the business has 
 to be carefully considered so as to comprehend in the sys- 
 tem complete analysis of income and expenditure under 
 proper classification, and so as to furnish full details of the 
 origin of profit or loss on every class of goods, sold or 
 manufactured. Its utility is of great value, where the ends 
 as above indicated, are constantly borne in mind. The 
 amount of posting is considerably lessened ; and while there 
 is always the possibility of items being intentionally or un- 
 intentionally placed in wrong columns, the intelligent ap- 
 plication of the principle will result in advantages greatly 
 exceeding its weaknesses. 
 
 106. State one general rule that will embrace all the 
 principles governing double entry bookkeeping. Define 
 journalizing, in its broadest sense. 
 
 For every debit there must be a credit of corresponding 
 amount. 
 
 Journalizing in its broadest sense is the arranging in 
 systematic form for posting in the ledger the record of 
 transactions whose entry in other books of original entry 
 is not provided for. 
 
 107. What is the result of a debit entry? of a credit 
 entry? Illustrate in the case of an account of each of the 
 following classes : (a) personal, (b) real, (c) nominal. 
 
 The result of a debit entry is the record of an asset, or 
 of an expense. The result of a credit entry is the record 
 of a liability or of a source of income. 
 
98 
 
 (a) Personal Mr. B is sold goods to the amount of 
 $20. An asset is recorded ; debit him with $20. I buy mer- 
 chandise from Mr. C for $50, a liability is created, so I 
 credit him with $50. 
 
 (I) Real I buy a building for $5,000. An asset is 
 created. I debit building account with $5,000. 
 
 (c) Nominal I pay $500 for repairs to building. An 
 expense is recorded and expense account is debited. I rent 
 part of the building and receive $480 for same. A source 
 of income is recorded, so I credit rent account. 
 
 108. State the characteristic distinctions between single 
 entry bookkeeping and double entry bookkeeping. What 
 are the advantages of double entry over single entry? 
 
 The characteristic distinctions between single entry 
 bookkeeping and double entry bookkeeping are: (1) Inas- 
 much as all transactions to be recorded are transfers of 
 money, or money's worth, every entry must be made twice ; 
 once on the debit side, and again on the credit side. (2) 
 Resulting from this, the total debits will equal the total 
 credit, and the ledger be kept in balance. (3) That while 
 the profit and loss account shows the amount of profit or 
 loss for a given period by a comparison of income and 
 expenditure, the result so arrived at is confirmed by the 
 balance sheet. In single entry bookkeeping, income and 
 expenditure accounts are not kept, and the profit or loss is 
 arrived at solely by a comparison of the resources and lia- 
 
99 
 
 bilities at the end of any given period. The advantages 
 of double entry over single entry are: 
 
 (1) The gross profit is shown in the merchandise ac- 
 count. (2) The profit or loss, as shown by the profit and 
 loss account, is confirmed by the balance sheet. (3) The 
 proof of the accuracy of amounts posted is demonstrable 
 through the trial balance. (4) The profit and loss ac- 
 count shows not only the amount, but also the sources of 
 profit or loss. (5) The profit or loss made in every de- 
 partment of a store can be shown separately, as well as on 
 separate classes of merchandise sold. (6) By means of 
 the columnar system the labor of posting is greatly les- 
 sened. (7) The facility with which a thorough audit 
 can be made is to that extent a deterrent from fraud. 
 
 109. In double entry bookkeeping, why are the debits 
 on the left and the credits on the right ? 
 
 This is probably only a matter of historical develop- 
 ment. Originally there was only one column. A mer- 
 chant sold goods to a customer, and debited him with the 
 cost. When cash was paid> he credited him in the same 
 column, and brought down the balance (if any). This 
 caused many mistakes, and so a second column was pro- 
 vided for credit entries which was placed further to the 
 right. 
 
 110. Define the following accounting and business 
 terms : Floating capital, fixed capital, quick assets, floating 
 liabilities, nominal accounts, passive assets, passive liabili- 
 ties. 
 
100 
 
 Floating capital is another term for quick assets. It is 
 such portion of the assets as is continually varying in 
 amount, and which can be readily collected. 
 
 Fixed capital is the amount of the authorized capital 
 stock of a corporation. 
 
 Quick assets are cash, and whatever can be readily con- 
 verted thereinto. 
 
 Floating liabilities are those which vary from time to 
 time, such as notes and accounts payable. 
 
 Nominal accounts are those which record income and 
 expenditure, as distinguished from personal and real ac- 
 counts. 
 
 Passive assets another term for fixed assets those 
 which do not fluctuate in value and which are not available 
 as working capital. 
 
 Passive liabilities are such items as capital stock, sur- 
 plus, reserve accounts, etc. 
 
 111. In making up a business statement or a balance 
 sheet, why are the assets placed as debits and the liabilities 
 as credits ? Are there any exceptions to this rule. 
 
 The assets on a balance sheet appear as debits because 
 they are items which are owing to the business. The lia- 
 bilities appear as credits because the business has been 
 trusted with, and owes these items. A second reason is 
 because they appear this way in the ledger. The excep- 
 tion is the English form of balance sheet, where this order 
 is reversed; the liabilities appearing on the left hand 
 
101 
 
 side, and the assets on the right. It is fair to add that the 
 advocates for the English form claim that the balance sheet 
 is not an account, and that consequently the terms debit 
 and credit do not apply. 
 
 Describe the entries necessary to open a set of 
 double entry books for a firm just starting in business. 
 
 A schedule of assets and liabilities should be carefully 
 prepared and each partner credited with the amount of 
 capital contributed by him. The journal entry would be 
 Sundry Assets, Dr., to Sundry Liabilities, care being taken 
 of course to see that the total assets exactly equal the total 
 liabilities, including capital accounts. The items should 
 then be posted in the ledger. Such nominal accounts 
 should be opened as might be necessary to record sources 
 of income and expenditure clearly, and finally, a trial bal- 
 ance should be taken off to test the accuracy of the posting. 
 
 113. In closing the ledger accounts of an ordinary 
 business for the purpose of a general exhibit of affairs, 
 what order should be observed? 
 
 The cash should first receive attention. Cash unde- 
 posited should be verified, the pass book balanced and a 
 reconciliation statement prepared showing the difference 
 between the pass book balance and that of the check book. 
 The inventory of goods on hand should then be checked as 
 to footings and extensions, and the total credited to mer- 
 chandise account, from which the gross profits shown 
 should be transferred to the credit of profit and loss ac- 
 
102 
 
 count. The real accounts should then be examined and 
 provision be made for depreciation and prepaid charges. 
 The Bills Receivable and Payable accounts should be ad- 
 justed and schedules prepared. The customers accounts 
 should next be gone over and provision made for doubtful 
 debts, discounts, etc., by means of a reserve account. 
 Schedules of these and of accounts payable should be made 
 up, profit or loss credited or charged to capital accounts, 
 and a balance sheet drawn up in proper form. It is taken 
 for granted that the books are in balance, and that a cor- 
 rect trial balance has been furnished. 
 
 114. Define and differentiate reserve fund, sinking 
 fund, depreciation, surplus. Classify the foregoing as as- 
 sets or liabilities and give reasons in each case. Explain 
 the meaning of an item in suspense. 
 
 A reserve fund is a portion of the profits set aside for a 
 specific purpose by debiting profit and loss account and 
 crediting reserve fund account. While the credit is offset 
 by some portion of the assets, when a " fund " is desig- 
 nated, it should consist of some definite investment. 
 
 A sinking fund is a fund set aside out of the assets, in- 
 vested and accumulated at interest for the purpose of 
 liquidating a certain liability at some specified date. 
 
 Depreciation is caused by wear and tear of usage, etc. 
 It is offset by crediting the items subject to it and charging 
 the amounts written off to profit and loss account. 
 
 Surplus is the amount of the undistributed profits of a 
 
103 
 
 corporation. Reserve and sinking funds are both assets, 
 corresponding to the amount of the " account " they repre- 
 sent. Depreciation, if appearing as a reserve instead of 
 being charged to profit and loss is a liability. Surplus is 
 a liability of the business to the stockholders for profits 
 earned but not distributed. 
 
 An item in suspense is one whose realization is doubtful. 
 A customer becomes insolvent. It is doubtful how much 
 will be received in settlement of his account. Pending 
 final adjustment, his personal account should be credited 
 and suspense account debited with the balance due by 
 him. The amount received in final settlement is credited 
 to suspense account, and the balance should be charged to 
 profit and loss account. 
 
 115. What is understood by the term ne t profit? State 
 the final disposition of net profit in the books of a part- 
 nership ; of a corporation. 
 
 Net profit is the surplus remaining over from the em- 
 ployment of capital after all expenses and outlays con- 
 nected with its use have been defrayed. In the books of a 
 partnership profit is credited to the individual capital ac- 
 counts of the partners in the proportion called for by the 
 articles of copartnership. In the books of a corporation 
 profit should be credited to surplus account. 
 
 116. "What is a stock (or shares) ledger? Explain the 
 nature of its records and describe the maniier in which 
 they are made. What relation does this book bear to the 
 general books of the corporation ? 
 
104 
 
 A stock or shares ledger is designed to show the amount 
 of the individual holdings of the stockholders of a corpora- 
 tion. The original holdings are posted to the credit of in- 
 dividual accounts in the ledger direct from the stock cer- 
 tificate book. Subsequent purchases or sales are credited or 
 charged to individual accounts from the transfer book. 
 It has no direct connection further than furnishing the 
 names and amounts of stock held by individual stock- 
 holders; the total amount to the credit of stockholders 
 agreeing with the amount to the credit of capital stock 
 account in the general ledger. 
 
 117. Describe and illustrate at least three forms of 
 ledgers adapted to customers' accounts, and state the form 
 you prefer for some specific class of accounts. 
 
 For general business purposes, the ordinary ledger rul- 
 ing is found convenient; one column for debits, one for 
 credits. For retail merchants it would be desirable to 
 have two debit columns one to contain the items, and the 
 other the totals of bills, and one credit column. This 
 would enable the bookkeeper to render detailed statements 
 without necessitating recourse to the sales books. 
 
 For banks, it would be necessary to have a separate col- 
 umn to show the daily balances of customers. So three 
 columns should be provided: One for deposits, one for 
 withdrawals, and one to contain the amount of the daily 
 balances. 
 
 118. What plan would you suggest for recording in 
 
106 
 
 the books of a large mercantile firm its contingent lia- 
 bilities incurred by indorsements on bills receivable ? 
 
 As a note is discounted it should be credited in bills 
 receivable account through the cash book, opposite the 
 amount of the charges, and the letter " d " marked against 
 it. When paid at maturity, the "d" should be marked 
 through with red ink. 
 
 119. What distinction would you make in an ordinary 
 set of books, as to debits to the merchandise account; in- 
 cidental expenses of the business; losses such as bad debts, 
 destruction of property, etc. ? 
 
 Merchandise account should be debited with initial in- 
 ventory, with purchases, and returns by customers. In- 
 cidental expenses should be recorded under properly clas- 
 sified descriptive accounts. Bad debts should be charged 
 to profit and loss account. 
 
 Destruction of property should be credited to its proper 
 account and charged direct to capital account. 
 
 120. Give a rule for averaging an account not yet due, 
 for the purpose of settling by note. 
 
 Eule. Fix upon any one of the various dates and mul- 
 tiply the various amounts by the number of days between 
 this date and the dates upon which the sums fall due; 
 divide the sum of these products by the sum of the amounts, 
 and the result is the number of days between the date 
 fixed upon and the average due date. (Lisle.) 
 

 
 106 
 
 Date, 
 
 Amount 
 
 Days from 
 
 
 
 Feb. 1st. 
 
 Feb 1 
 
 $250 
 
 
 
 March 21 . . 
 
 $ 50 
 
 48 
 
 May 20.... 
 
 $500 
 
 108 
 
 May 30.... 
 
 $200 
 
 118 
 
 Product. 
 
 $ 
 
 2,400 
 
 54,000 
 
 23,600 
 
 $1,000 $80,000 
 
 $80,000 divided by 1,000 gives 80 days from February let 
 as the equated time. 
 
 121. Into what general classes should ledger accounts 
 be divided? State the distinguishing feature of each class 
 Mention one account belonging to each class. 
 
 Ledger accounts should be divided into two general 
 classes: nominal and real. The distinguishing feature of 
 each class is that while the former is periodically closed 
 out into the Profit and Los Account, the latter, after de- 
 ductions for depreciations, reserves, &c., appears upon the 
 balance sheet. One account belonging to each class: Ex- 
 pense Account, nominal; Plant and Machinery Account, 
 real. 
 
 122. State a comprehensive general rule for journaliz- 
 ing. Write in your journal the entries of the following 
 transactions and explain the application of the rule to each 
 debit and credit: You receive from A. Truman, adminis- 
 trator of an estate of which you are a legatee, full titles 
 to property as follows: warehouse on Bond st. valued at 
 $175,000, mortgaged to Ironclad Trust Co. for $18,000; 
 
107 
 
 suburban residence, valued at $8,000; 100 shares Tesla 
 Electric Co., par value $100 a share. Three days later 
 you convey the residence as a gift to your daughter. 
 
 Every item charged should have a corresponding amount 
 credited. If an amount will be ultimately received it should 
 be debited it is an asset. If it will not be received it 
 should be debited it is an expense. If an item will have 
 to be paid it should be credited it is a liability. If it has 
 not to be paid but records a source of profit it should be 
 credited. 
 
 Journal entries for James Lucky, legatee : 
 
 (a) Real Estate Dr. $175,000.00. 
 
 To James Lucky (capital account), $175,000.00. 
 
 (Real estate is an asset and is debited. Capital of J. L. 
 is credited because he will have to be paid this amount.) 
 
 (b) James Lucky (capital account) Dr., $18,000.00. 
 
 To Ironclad Trust Co., $18,000.00 
 
 (Here J. L. is debited because the amount will be even- 
 tually received from him. The I. T. Co. is credited because 
 they will eventually have to be paid.) 
 
 (c) Real Estate Dr., $8,000.00. 
 
 To J. L. (capital account), $8,000.00. 
 (Same explanation as (a).) 
 
 (d) Investment Account Dr., $10,000.00. 
 
 To J. L. (capital account), $10,000.00. 
 
 (Same reason as (a).) 
 
108 
 
 (e) James Lucky (capital account), Dr., $8,000.00. 
 
 To Real Estate, $8,000.00. 
 
 Residence conveyed by J. L. to his daughter as a gift this 
 day. 
 
 (Here J. L. is charged $8,000, amount of real estate; 
 real estate being made less is credited.) 
 
 123. What books of a mercantile firm should be treated 
 as books of original entry and be posted direct to the 
 ledger? Give an example of an entry that should neces- 
 sarily be made in the journal. 
 
 Cash book, sales book, purchase book, returns credited 
 to customers, and charged to creditors, bills receivable and 
 payable book. 
 
 John Brown (capital account) Dr. . . $2,500 00 
 To furniture and fixtures account 2,500 00 
 
 Damage done by fire in store, J. B. being uninsured. 
 This is a direct loss of capital. 
 
 124. State the different steps in the process of closing 
 the ledger at the end of a fiscal period and give the reason 
 for each step. 
 
 The inventory having been taken, it is credited to mer- 
 chandise or trading account the excess of the credit side 
 over the debit shows the gross profit, which is charged to the 
 account and credited to profit and loss. As the inventory 
 is unsold it is an asset and is brought down as a debit bal- 
 
100 
 
 ance. In order to determine the net profit, all the nominal 
 accounts with debit balances are charged and all those with 
 credit balances are credited to profit and loss. Provision 
 is made for depreciation, bad debts, interest on capital, etc., 
 by charging profit and loss and crediting specific reserve 
 accounts. The excess of the credit balances over the debit 
 balances is the amount of the net profit. 
 
 125. Explain the uses and relations of the petty cash 
 book to the principal cash book. Rule a section of a page 
 of an analytic petty cash book for a jobbing house and 
 make five illustrative entries. 
 
 The petty cash book should be used only to record pay- 
 ments in currency of non-ledger accounts. The cashier 
 should draw a check for a certain amount say $50, and 
 charge it in the general cash book to " office cash account." 
 He should personally enter it in the petty cash book. As 
 far aa possible the petty cash keeper should procure vouch- 
 ers for all his expenditures and charge each item under its 
 proper column. Monthly he should foot these columns and 
 a journal entry should be made charging the expense ac- 
 counts indicated and crediting " office cash account "- 
 which will then show the same balance as that appearing 
 in the petty cash book. The advantages of this system are 
 that while the cashier has no memoranda to carry, nor 
 bother with balancing petty cash, the balance always 
 appears upon the ledger as an asset, and is in no danger of 
 being overlooked. 
 
110 
 
 DR. 
 
 CR. 
 
 1902 
 
 
 Voucher 
 No. 
 
 Car 
 
 Fares 
 
 Tele- 
 phones 
 
 Postage 
 
 Express 
 
 Freight 
 
 1902 
 
 Aug. 6, 
 
 $50.00 
 
 1 
 2 
 3 
 4 
 5 
 
 .10 
 
 .35 
 
 10.00 
 
 1.30 
 
 5.40 
 
 Aug. 6 
 
 8 
 9 
 10 
 
 126. What is the purpose of a trading account, and 
 what general result should it show ? In closing the ledger 
 what disposition should be made of the balance of the trad- 
 ing account? 
 
 The purpose of ^trading account is to show the amount 
 of purchases, sales, returns by customers, returns to cred- 
 itors and the expenses attending same. The general result 
 shown is the gross profit on trading, i. e., the excess of sale 
 price over purchase price of goods actually sold. From this 
 the percentage of gross profit is determined. The balance 
 of the trading account should be closed out into profit and 
 loss account. 
 
 127. Explain the theory of goodwill. On what basis 
 should goodwill be valued ? Is goodwill a fixed or a float- 
 ing asset? Why? 
 
 Goodwill is the monetary value placed upon the connec- 
 tion and reputation of a mercantile or manufacturing con- 
 cern, and discounts the value of the turnover of a business 
 in consequence of the probabilities of the old customers 
 continuing. Probably Lord Eldon's definition is as good as 
 
Ill 
 
 any : " The goodwill of a trade is nothing more than the 
 probability that old customers will resort to the same 
 place." The value of the goodwill of a business depends 
 upon the place, the name, and the chance that no one con- 
 nected with the old firm will step in to compete. The 
 basis of valuation is the capitalized value of the net earn- 
 ings of a business for a term of years. Goodwill is a fixed 
 asset, because it is in no sense available as working capital. 
 
 128. Give a rule for adjusting partners' accounts (a) 
 when the gains or losses are to be divided in proportion to 
 each partner's investment and the time it remains in use ; 
 (b) when the proportion of gain or loss is" fixed and interest 
 is calculated on excess or deficit of capital. 
 
 (a) Assuming that profits are divided annually, deter- 
 mine the average amount invested for the year by each 
 partner, add the amount and so arrive at the total net aver- 
 age capital invested for one year. Divide this into the 
 amount of profit earned and the quotient will be the per- 
 centage of profit. Credit each partner with this percentage 
 upon his average capital invested for the year and the 
 profits will have been divided. 
 
 (b) Determine the average investment for the year as 
 before and charge the partner who has a deficit with inter- 
 est on half the excess capital kept invested by his co-partner 
 and credit same to the co-partner. Then divide profit or 
 loss in proportion stated in co-partnership articles of agree- 
 ment. 
 
112 
 
 129. What books besides such as are used by individuals 
 or firms are necessary for recording the transactions of an 
 incorporated company? State briefly the use of each book 
 mentioned. 
 
 Minute Book to contain copy of articles of incorporation, 
 bylaws, and minutes of directors' and stockholders' meet- 
 ings. Stock certificate book the stubs of which really con- 
 stitute the journal of the stock or shares ledger. Transfer 
 book to contain a record of all stock transferred by share- 
 holders. Stock or shares ledger to contain the individual 
 accounts of stockkholders and to show the number of shares 
 held by each. 
 
 130. How should inventories be treated in closing the 
 ledger at the end of a fiscal period? Is the common prac- 
 tice of adding the inventory of goods on hand to the credit 
 side of the merchandise account theoretically correct ? Ex- 
 plain. 
 
 They should be credited to the accounts to which the 
 purchases were charged; brought down as debit balances, 
 and appear upon the balance sheet amongst the assets. 
 
 It is not theoretically correct to credit the merchandise 
 account with the inventory at the end of a fiscal period. 
 The merchandise account should show the actual cost of 
 goods sold on the debit side, and this is best accomplished 
 by deducting the inventory from the total of the debits. 
 While the same result is accomplished by crediting the 
 inventory i. e., in the amount of gross profit shown the 
 actual cost of goods sold is not apparent. 
 
113 
 
 131. Mention four items of infonnation in addition to 
 those usually shown in the books of a mercantile business 
 which should appear in a set of books for keeping the ac- 
 counts of a factory. Give reasons for your answer. 
 
 (a) Wages account to show amount paid for factory 
 labor, (b) Materials account to show cost and consump- 
 tion of items entering into cost of articles manufactured. 
 
 (c) Plant and machinery to record cost of same and of 
 amount written off for depreciation a percentage of which 
 contributes to the cost of manufactured goods, (d) Stores 
 account to record cost of items which incidentally attend 
 the conduct of all manufacturing establishments. 
 
 132. What class of expenditures should be treated as 
 assets at the close of a fiscal period. 
 
 All items of capital expenditure after adequate deduc- 
 tions for depreciation, and such items of revenue expendi- 
 ture as would come under the head of prepaid charges, &c. 
 
 133. Define the following terms as used in factory 
 accounting : cost of production, prime cost, general charges, 
 maintenance, stores, stock, stock debit note, storekeeper, 
 writing off. 
 
 By cost of production is meant the prime cost plus shop 
 establishment and general establishment expenses. Prime 
 cost is the amount expended upon raw material and wages 
 in producing a given article. 
 
 General charges include office expenses for clerks, sal- 
 aries, stationery and all other expenses. Maintenance is the 
 
114 
 
 cost of repairing plant and machinery, buildings, &c., and 
 keeping same in efficient order. Stores are those items en- 
 tering into cost of production apart from prime cost. Stock 
 is the amount and quantity of manufactured goods on hand. 
 Stock debit note is a memorandum given to the stock clerk 
 charging his inventory with certain quantities of manu- 
 factured goods. Storekeeper is the title applied to the man 
 who takes charge of general stores and issues same on requi- 
 sition. " Writing off " is a term applied to the deductions 
 made for depreciation and for shrinkage in quantities of 
 raw material, &c. 
 
 134. What is meant by the surplus, or surplus fund, of 
 a stock company? How is this fund formed? What is its 
 purpose ? 
 
 By surplus or surplus fund is meant the excess of assets 
 over all liabilities including capital stock and all reserves. 
 It represents undistributed profits. 
 
 The fund is formed by periodically setting aside a por- 
 tion of the net profits of a corporation. 
 
 Its purpose is to strengthen the financial position of a 
 company and to provide an unspecified reserve for contin- 
 gencies. 
 
 135. Describe a method of keeping the accounts of an 
 executor and state what books are necessary for the pur- 
 pose. 
 
 The books should be kept by double entry. They should 
 show the principal of the estate, which includes all property 
 
116 
 
 belonging to testator at time of death after payment of all 
 debts then owing. They should also show what comprises 
 the income of the estate, its sources, and disposition. The 
 books necessary are cash book, journal, ledger, minute book 
 and check book. On the first page of the journal should be 
 entered copies of the will and inventory of the estate with 
 date of filing. The " estate account " should be credited and 
 the various " asset accounts " charged with the items com- 
 prising the inventory. Every transaction should be passed 
 through the journal with full explanatory notes, so that 
 any time an accounting is needed full particulars as to in- 
 come and principal receipts and disbursements may be 
 readily made up, and so that at the final accounting the 
 needed schedules and summary can be readily constructed. 
 
 136. Explain the theory of double-entry bookkeeping, 
 and state the principal advantages of the double entry 
 system. 
 
 The theory of double-entry bookkeeping is best ex- 
 plained by reference to the exact qualifying words double 
 entry, i. e. } a twofold entry. In this system every amount 
 is entered in the ledger twice ; once on the debit and once on 
 the credit side ; and thus the ledger is kept " in balance. " 
 
 If the items are correctly posted the total amount of the 
 debit balances will exactly equal the total amount of the 
 credit balances. Bookkeeping is simply a record of the 
 transfer of money or money's worth. 
 
 In double entry whatever is taken from one account is 
 
116 
 
 transferred to another so that a twofold record is made of 
 every transaction. The principal advantages of this sys- 
 tem are: (a) the demonstrable mathematical accuracy 
 of the posting by means of the trial balance; (6) the classi- 
 fication of expense accounts so that revenue and capital ex- 
 penditure be clearly distinguished; (c) the ability to as- 
 certain gross profit through the trading account; (d) the 
 valuable comparative statistics as to sources of income and 
 expenditure which can be readily obtained from the trial 
 balance monthly; (e) the ability to ascertain through the 
 Profit and Loss Account not only the amount of net profit, 
 but also the sources from which the profit is derived; (/) 
 the ability to ascertain not only the profits of a business as 
 a whole, but also the profit or loss of every department sep- 
 arately; (y) the confirmation of the amount of profit or 
 loss disclosed by the Profit and Loss Account by the balance 
 sheet proper; (h) the superior facility offered for rapid and 
 exhaustive audit, and to that extent acting as a deterring 
 factor in the prevention of fraud. 
 
 137. Into how many classes are ledger accounts usually 
 divided? Mention two of the principal accounts of each 
 class, and state the purpose of each. 
 
 Ledger accounts are broadly divided into two classes: 
 personal and impersonal; these being subdivided into real 
 and nominal. Personal accounts are those kept to record 
 transactions with debtors and creditors, i. e., those to whom 
 goods are sold and from whom they are bought. 
 
117 
 
 Real accounts contain records of amounts of real value 
 as distinguished from those of fictitious value. 
 
 Real Estate Account and Plant and Machinery Account 
 would be two very familiar examples. Nominal is the name 
 given to that class of accounts which closes out periodically 
 into the Profit and Loss Account. They simply record 
 expenditure or sources of income under classified headings. 
 Examples: Commission Account, and Interest Account. 
 Personal accounts are used to charge or credit firms or in- 
 dividuals with money or money's worth. 
 
 The purpose of the Real Estate Account is to record 
 amount paid for property and any additions or improve- 
 ments which increase value. It is credited with amounts 
 received from sales of property and with depreciation, 
 Plant and Machinery Account is to contain cost of these 
 items and additions made to same from time to time. It is 
 credited periodically with a certain percentage for depre- 
 ciation in value caused by usage. 
 
 Commission Account is to record total amount paid and 
 received for commission during any given fiscal period. 
 
 Interest Account is to show the amount of income and 
 expenditure under this heading. 
 
 138. Define current assets, current liabilities. Give two 
 examples of each. 
 
 The term current literally means " running," so that cur- 
 rent assets and current liabilities may be defined as those 
 which are actively running. 
 
118 
 
 Examples of current assets are Accounts and Bills Re- 
 ceivable; of current liabilities Accounts and Bills Payable. 
 
 139. Define capital, nominal capital, subscribed capital, 
 paid up capital, goodwill. 
 
 Capital in its broadest sense should be defined as 
 the amount of money or money's worth embarked in an 
 enterprise. In a more restricted sense it may be stated to 
 be the excess of a man's assets over his liabilities. 
 
 Nominal capital is nearly synonymous with "author- 
 ized " capital ; it means " capital in name " i. e., the 
 amount stated may, or may not, be actually paid in. Sub- 
 scribed capital is the amount for which subscriptions have 
 been secured and which need not be actually paid in in 
 full at the time of application. 
 
 Paid up capital is the amount of capital actually paid in 
 as distinguished from the amount of capital authorized. 
 
 Goodwill is the capitalized value of the net earnings of a 
 business for a specified term of years. 
 
 140. Define the following terms: balance sheet, re- 
 serves, items in suspense, surplus, impairment. 
 
 "Balance Sheet" is an exhibition in condensed form 
 of all the assets and liabilities of a business after all nomi- 
 nal accounts have been closed out into the Revenue Ac- 
 count. 
 
 " Reserve " a term applied to portions of the profit of a 
 firm or a corporation set aside for specific purposes i. e., 
 reserve for improvements, reserve for depreciation, &c. 
 
119 
 
 " Items in Suspense " are those accounts whose ultimate 
 realization or liquidation is doubtful. 
 
 " Surplus " is the net amount of undistributed profits. 
 
 "Impairment" is the creation of deficiency of assets 
 either by business losses or by the payment of dividends 
 when no surplus exists out of which to pay them. The cap- 
 ital of a corporation is supposed to be kept intact, i. e., the 
 assets must equal liabilities and capital stock. If the assets 
 are less, a deficiency is created and hence the capital is said 
 to be impaired. 
 
 141. Describe the merchandise account and its use. 
 State how it should be used in (a) a jobbing or wholesale 
 grocery business, (b) a department store such as that of 
 Wanamaker or of Siegel-Cooper Co., (c) a manufacturing 
 firm making agricultural implements. 
 
 The Merchandise Account is usually charged with 
 the inventory on hand at the beginning of a fiscal period, 
 and with purchases, and returned sales during the period. 
 It is credited with sales; and with amounts of goods re- 
 turned to creditors. It is credited with inventory at the 
 end of the period and then if the credit side exceed the 
 debit side, the amount of the excess is the gross profit for 
 the period, which is charged to Merchandise Account, and 
 credited to Profit and Loss Account. 
 
 The use of this account is to determine the amount of the 
 gross profit of a business for any particular fiscal period. 
 ^ (a) In a wholesale grocery house this account should be 
 
120 
 
 subdivided so as to show the gross profit or loss made in the 
 sale of specific items, such as tea, coffee, flour, canned 
 goods, etc. An account should be opened for each item, 
 showing purchases, sales and costs incidental thereto. Pe- 
 riodically these should be closed out into the general Mer- 
 chandise Account, which would then show the gross profit 
 on the whole business. 
 
 (b) In a department store like that of Wanamaker the 
 object would be to show the gross and net profit by depart- 
 ments, and the Merchandise Account should be divided into 
 as many classes as there are departments. Silks, linens, 
 boots and shoes, toys, stationer)', jewelry, &c., each account 
 as above closing out into the general Merchandise Account. 
 
 (c) In the case of a firm making agricultural imple- 
 ments, accounts would have to be opened for the various 
 classes of goods manufactured, showing cost of raw ma- 
 terial, labor and other items contributing to the cost of the 
 manufactured article all closing out into the general Mer- 
 chandise Account. 
 
 14:2. Describe the process of changing a set of books 
 from single to double entry. Draft an example. 
 
 The most expeditious way of changing a set of 
 books from single entry into double entry is to mle off all 
 accounts other than those with debtors and creditors; to 
 make up a complete list of all other assets and liabilities 
 and to credit the excess of assets over liabilities to capital 
 account opening at the same time such nominal accounts 
 
121 
 
 as may be necessary, to set forth the transactions of the 
 business clearly under classified headings. Suppose a 
 schedule of accounts be taken from the ledger and it be 
 found that accounts receivable amount to $10,500.00 and 
 that accounts payable amount to $3,465.26. An examina- 
 tion discloses the fact that there is $18,626.25 in the bank, 
 that there are in the safe $2,500.00 of bills receivable; 
 that the plant, etc., is worth $4;000.00; and the inven- 
 tory of stock $7,500.00. It is found that there are bills pay- 
 able outstanding for $6,700.00. The journal entry would 
 be: 
 
 Sundries, Dr. 
 
 Accounts receivable $10,500 00 
 
 Cash 18,626 25 
 
 Bills Receivable 2,500 00 
 
 Plant and machinery . . . 4,000 00 
 Merchandise acc't (stock) 7,500 00 
 
 To Sundries, 
 
 Accounts payable $3,465 26 
 
 Bills payable 6,700 00 
 
 Capital stock 32,960 99 
 
 Accounts receivable and payable are ticked because they 
 are already posted. The ledger will now be " in balance " 
 and such expense accounts, &c., may be opened as are 
 necessary. 
 
 143. What is the purpose of a private ledger? What 
 accounts are usually kept in the private ledger? 
 
122 
 
 The purpose of a private ledger is to enable the principal 
 of a firm to keep such information as he deems expe- 
 dient private, and accessible only to himself or his con- 
 fidential assistant. By it he is also able to control the gen- 
 eral accuracy of the general trial balance by keeping in 
 his own hands the balance total of his private ledger debit 
 or credit. If the totals handed in from the general trial 
 balance are incorrect he can immediately detect same by 
 adding the total of his own ledger. This check is unfortu- 
 nately too often overlooked. The accounts usually kept in 
 the private ledger are Capital Account, Profit and Loss 
 Account, and Investment Account ; also records of personal 
 drawings, and salaries. 
 
 144. What difference, if any, should be made between 
 the accounts of a firm and the accounts of a corporation in 
 the same line of trade and doing about the same amount of 
 business ? Explain. 
 
 None, except as to the capital stock account, which 
 is not (as in a firm) increased or decreased by profit or 
 loss. The journal of a corporation should always contain 
 specific reference to the minute book for declarations and 
 payments of dividends, terms of contracts, &c. 
 
 145. In preparing accounts for a manufacturing com- 
 pany, on what principle should expenses be divided as be- 
 tween the manufacturing account and profit and loss? 
 Give examples. 
 
 All DIRECT expense incurred in the actual manufac- 
 
123 
 
 ture of goods should be charged to manufacturing account 
 as contributing to cost. General expenses and expenses at- 
 tending sales should go to profit and loss. Labor, raw ma- 
 terials, freight inwards, fuel, light, depreciation of plant, 
 &c., should go to manufacturing account. Salaries, print- 
 ing and stationery, commission, &c., should go to profit and 
 loss. 
 
 146. In designing a set of accounts for a business, how 
 might provision be made for a constant showing of the ag- 
 gregate sum owing by customers and the aggregate sum 
 owing to creditors, without the necessity of preparing a 
 schedule of the accounts of such customers and creditors? 
 
 By constructing controlling accounts in the general 
 ledger and making every other ledger "self balancing/' 
 Take first the "bought ledger," which should contain ac- 
 counts with creditors. The total amount of purchases cred- 
 ited should be charged to an account opened in this ledger 
 called " General Ledger Account," and the total amount 
 of cash charged to creditors should be credited to it. The 
 ledger will balance by itself and the debit balance of the 
 " General Ledger Account " will make a continuous show- 
 ing of the aggregate amount due to creditors without the 
 necessity of preparing a detailed schedule. The same prin- 
 ciple should also be applied to the " Sales Ledger." 
 
 147. In making up the cost accounts on goods produced 
 by a factory, what items of expenditure are to be consid- 
 ered? How should these be combined to show the actual 
 cost of any specified product? 
 
124 
 
 In making up cost accounts of goods produced by a fac- 
 tory the principal items of expenditure to be considered 
 are: (1) raw material; (2) labor. In addition to these: 
 (3) proportion of rent of factory ; (4=) light; (5) heat; (6) 
 power; (7) supervision; (8) depreciation of machinery; 
 (9) incidental expenses. 
 
 In order to show the actual cost of any specified product 
 the actual cost of material used and of labor expended upon 
 its conversion would first have to be calculated and to it 
 should be added the proper percentage (based upon a time 
 calculation) of the attendant expenses above enumerated. 
 These would scarcely be the same in any one business, but 
 the general principle would be identical. 
 
 148. Draft a form of cash book to be used where all 
 receipts are deposited in bank and all payments are made 
 by check. Illustrate the use of this book by three or more 
 entries. 
 
 DR. CASH. 
 
 CASH. CR. 
 
 Data 
 
 
 U 
 
 3* 
 
 Re- 
 ceipts 
 
 Bank 
 
 Date. 
 
 
 Ck. 
 No. 
 
 f! 
 
 'PV 
 I ment 
 
 July 1 
 
 To Balance 
 
 
 
 
 1000 
 
 00 
 
 
 
 
 
 ! 
 
 
 JulyS 
 
 A. B. 
 
 64 
 
 500 
 
 00 
 
 
 
 July 1 
 
 L. S. 
 
 54 
 
 52 
 
 640 
 
 00 
 
 " 7 
 
 J. C. 
 
 53 
 
 250 
 
 00 
 
 750 
 
 00 
 
 
 S. V. 
 
 55 
 
 57 
 
 50 
 
 00 
 
 14 9 
 
 S. T. 
 
 64 
 
 450 
 
 GO 
 
 
 
 
 P. R. 
 
 56 
 
 50 
 
 700 
 
 00 
 
 On the debit side a special column is headed " Bank," to 
 which is extended the total amounts of first column as de- 
 
135 
 
 posited. As all payments are made by check, by deducting 
 the total of the credit side from the bank column total, the 
 bank balance is ascertainable at any time. 
 
 149. What is meant by a consignment account? How 
 should a consignment account be stated in a balance sheet ? 
 
 A consignment account records the amount of the . 
 temporary transfer of the custody of one person's goods 
 to another. The person who so transfers his goods is called 
 the consignor ; the person to whom they are transferred the 
 consignee. The consignor credits his merchandise account 
 and opens an account with consignee to whom he charges 
 the total amount of goods consigned. The account is 
 charged with the expenses and credited with the remit- /' 
 tances 1 the difference showing the profit or loss on the con- 
 signment. 
 
 In a balance sheet goods on consignment should be stated 
 as such and on no account should appear under the title of 
 Accounts Receivable. 
 
 150. From what accounts is a profit and loss account 
 prepared? In what way is its accuracy proved? 
 
 Profit and Loss Account is prepared from the Mer- 
 chandise Account and the various nominal accounts, and 
 should include such charges as are necessary if deducted 
 from the value of the assets, e. g., depreciation, reserve for 
 bad debts, etc. The accuracy of the Profit and Loss Ac- 
 count is proved by the balance sheet, which arrives at the 
 same results in a different manner. 
 
126 
 
 151. Robinson & Co., wholesale dealers in notions, 
 whose books have not been kept by double entry, wish to 
 improve their system of bookkeeping. Write a brief re- 
 port, advocating double entry, setting forth the superiority 
 of that method generally, and showing by specific refer- 
 ences to the mode of bookkeeping employed by them, the 
 advantages that will accrue from the change. 
 
 MESSRS. ROBINSON & Co., 
 Dear Sirs: 
 
 In accordance with your request, I have made an ex- 
 amination of your books for the year ending December 
 31st, 1901, and beg to report that a net profit of $97,065.03 
 has been earned during this period, in support of which I 
 present a statement of resources and liabilities. While 
 the various schedules have been made up with great care, 
 and while I can vouch for the accuracy of the result shown, 
 the confirmatory proof through the medium of the profit 
 and loss account is lacking, because the various nominal 
 accounts necessary to its preparation have not been kept. 
 For this and other reasons set forth below, I strongly advo- 
 cate the immediate introduction of the double entry sys- 
 tem of bookkeeping. A trading account will be opened, 
 which, when the inventory is taken, will show the amount 
 of gross profit earned i. e., the excess of selling price over 
 cost price of goods actually sold. The percentage of gross 
 profit can be readily seen, and any considerable fluctuation 
 in the rate from year to year noted. Your expenses can 
 be divided up under as many headings as may be necessary 
 
127 
 
 to afford detailed information; and with columnar cash 
 books, journals, etc., the mechanical labor of posting can 
 be reduced to a minimum. Inasmuch as every amount is 
 entered on both sides of the ledger, the correctness of the 
 posting of the accounts can be demonstrated monthly in a 
 trial balance. I should recommend that there be opened 
 a General Ledger, Purchase Ledger and Sales Ledger. 
 Each of these can be made self-balancing, and the opening 
 of controlling accounts in the general ledger will enable a 
 financial statement to be readily made up without waiting 
 for the schedule of accounts from the other ledgers. By 
 introducing a proper system of internal check the danger 
 of irregularities will be greatly reduced, and the work of 
 the auditor considerably lightened. The introduction of 
 this system would only be a matter of a few days' work, as 
 the details can be carried out by your staff under by super- 
 vision. 
 
 Yours truly, 
 
 C. P. A. 
 
 152. Your suggestions (see question I) as to a change 
 of method having been approved by Robinson & Co., you 
 have been instructed to make the change at the close of 
 the fiscal year ; state in detail how you would proceed from 
 start to point of proof. 
 
 In the general ledger I should open a Cash Account, and 
 debit it with the balance on hand December 31st. The 
 Merchandise Account should come next, being charged with 
 
128 
 
 the total amount of inventory at that date. The various 
 real accounts should then be opened, each one being 
 charged with the amount shown on the balance sheet. 
 After this, such nominal accounts should be opened as 
 would be necessary to afford the fullest information as to 
 sources of profit and loss. Controlling accounts should 
 then be opened, containing the totals due by debtors, and 
 due to creditors. Finally, the capital account should be 
 credited with the amount shown December 31st. If the 
 posting has been correctly performed, this ledger will now 
 balance by itself. It should be tested by actually taking 
 off a trial balance. The Customers' Ledger (including Bills 
 Eeceivable Account) should then be opened, and the bal- 
 ance due by each customer charged to him. A balance ac- 
 count should then be opened and this ledger should also 
 balance independently. The work should be proved by 
 taking off a trial balance. Lastly, the purchase ledger 
 should be opened and treated in the same way. A type- 
 written list of instructions should be handed to each ledger 
 keeper and the system of handling cash and collections 
 should receive careful attention. A proper system of 
 vouchers should be arranged for, and also a proper method 
 for handling the petty cash. Returned merchandise out- 
 wards and inwards, should have separate journals, and 
 supporting vouchers be arranged for every entry. In this 
 way the following results have been provided for: Classi- 
 fication, explicitness, the minimum amount of posting, and 
 the prevention of irregularities on the part of employes. 
 
129 
 
 153. By analysis the debit side of merchandise account 
 shows purchases $60,000, returns to us $4,000, entries off- 
 setting errors in sales extensions $2,000, trade discounts 
 to customers $13,500, balance profit $27,000; the credit 
 side shows sales $90,000, returns by us $5,000, allowances 
 to us $1,500, inventory at close of year $10,000. Suggent 
 such change in the method of recording the foreging 
 statement as would readily show (a) net amount of pur- 
 chases, (b) net amount of sales, (c) percentage of profit. 
 
 154. State generally how the books of a firm doing a 
 manufacturing business would differ from those kept by 
 a trading concern as to (a) books of record, (6) ledger 
 accounts. 
 
 (a) The books of record kept by a firm doing a manu- 
 facturing business would differ from those kept by a trad- 
 ing concern because a proper cost system should be kept 
 enabling the exact cost of each article manufactured to be 
 readily ascertained. The additional books required would 
 ordinarily be, the record for 
 
 (1) Raw material purchased, quantity, price, quantity 
 consumed, inventory. 
 
 (2) Labor or Pay Roll books, by departments. 
 
 (3) Job or cost account books to record quantity of 
 material and labor consumed, time taken, quantity manu- 
 factured, etc. 
 
 (4) Manufactured Goods book to contain: Record of 
 goods manufactured, and cost price of same. 
 
 (5) Materials and Supplies, to enable record of their 
 use to be kept, and a check maintained upon the inventory. 
 
130 
 
 Account as stated. 
 Purchases .... $60,000.00 
 
 Returns 4,000.00 
 
 Sales Errors . . 2,000.00 
 
 Discounts 13,500.00 
 
 Profit 27,000.00 
 
 Sales $90,000.00 
 
 Returns 5,000.00 
 
 Allowances . . 1,500.00 
 
 Inventory . . 10,000.00 
 
 $106,500.00 $106,500.00 
 
 (a) Net amount of purchases: 
 
 Purchases $60,000.00 Returns $5,000.00 
 
 Allowances 1,500.00 
 
 Net amount of 
 purchases . . 
 
 $60,000.00 
 
 (&) Net amount of sales: 
 
 Returns $4,000.00 Sales 
 
 Errors 2,000.00 
 
 Discounts 13,500.00 
 
 Net amount of ) 70 ^00.00 
 
 ,000.00 
 
 j- 53,500.00 
 $60,000.00 
 
 ,$90,000.00 
 
 (c) Percentage of profits : 
 Purchases (net) $53,500.00 Sales (net) 
 Less inventory.. 10,000.00 
 
 $90,000.00 
 
 ..$70,500.00 
 
 Profit 
 
 $43,500.00 
 27,000.00 
 
 $70,500.00 
 
 $70,500.00 
 
 705 
 
 = 62 per cent. 
 
 435 
 
131 
 
 (b) With regard to ledger accounts the manufacturing 
 firm would keep in addition to those kept by a trading 
 concern. 
 
 (1) A Manufacturing Account to record cost of goods 
 manufactured. 
 
 (2) Labor or Pay Roll Account. 
 
 (3) Accounts for different classes of raw materials and 
 supplies purchased. 
 
 (4) Plant and Machinery Account. 
 
 155. What differences in books and accounts would 
 exist between a partnership and an incorporated company 
 carrying on a similar business? 
 
 A corporation, in addition to the usual books kept by 
 a firm, should keep a stock, or shares, ledger, transfer 
 book, and minute book. 
 
 As to accounts, the capital of a corporation does not 
 vary, and profits earned instead of being credited to Capital 
 Stock Account should be transferred to Surplus Account. 
 When the profit is distributed in the form of dividends, the 
 total amount declared should be charged to Surplus Ac- 
 count and credited to Dividend Account, which in turn 
 should be charged with the amounts of checks as paid out 
 to stockholders. By Surplus Account here, is meant such 
 undistributed profits as are not required to be kept intact 
 by law. 
 
 156. State the scope and value of the trial balance. In 
 case of failure to prove, how would you proceed to locate 
 the difference? 
 
132 
 
 The trial balance is an extract from the ledger, of bal- 
 ances of every open account. If the debit totals equal the 
 credit totals, the ledger is said to be in balance. If the 
 accounts be properly arranged in order, as soon as the in- 
 ventory is supplied, it is possible to make up a balance 
 sheet or financial statement expeditiously. Per se, the 
 trial balance only demonstrates one fact, i. e. } that the 
 amounts have been correctly posted. It is quite possible 
 to conceive of a proper trial balance with every amount 
 posted to a wrong account. The correctness of the items 
 contained in the accounts must always be a matter for the 
 auditor. In spite of the trial balance the bookkeeping 
 may be full of technical errors, errors of principle, and 
 fraudulent errors, the correction or detection of which is 
 obviously the duty of the auditor. Supposing the trial 
 balance does not prove, the ledger footings should be gone 
 over, the balances checked on to the trial balance sheets, 
 and the totals of the sheets themselves re-added. The 
 footings of the books of original entry should be proved and 
 finally the postings checked. If the ledgers are divided 
 up, and controlling accounts are kept in the general ledger, 
 the work can be materially shortened, inasmuch as the 
 error can be localized, and only that particular ledger be 
 checked wherein the mistake has been made. Even where 
 controlling accounts are not kept, it is nearly always pos- 
 sible to construct one, so as to find out exactly where the 
 error has been made. There are various " Short Cuts " 
 suggested but it is invariably found that a great deal of 
 
133 
 
 time is wasted in applying the tests, and after all recourse 
 is perforce finally taken to the good old-fashioned way of 
 "calling over/' 
 
 157. The building of an insurance corporation valued 
 at $500,000 is mortgaged for $300,000. The rental value 
 of the portion occupied by the corporation is $3,500 a year, 
 and there are sixty other tenants in the building. Mention 
 such accounts as should be kept and state the class of trans- 
 actions to be recorded in each. In what manner and to 
 what extent would the building enterprise be included in 
 the annual financial statement of the corporation? 
 
 A " Building Account" should be charged with $500,000 
 and a Mortgage Account credited with $300,000. A 
 " Building Eevenue Account " should be opened and cred- 
 ited with $3,500 annually as rent from the corporation, and 
 also with the rents of the sixty other tenants. This ac- 
 count should also be charged with all fixed charges such as 
 interest on mortgage and taxes; also with the operating 
 expenses of the building. The next revenue should be 
 credited periodically to the General Eevenue Account of 
 the corporation. 
 
 In the annual financial statement should appear $500,- 
 000 as an asset; $300,000 as a liability, and the net build- 
 ing revenue should appear as a separate item in the General 
 Eevenue Account. 
 
 158. Outline a statement of assets and liabilities and 
 an annual statement of operations of a manufacturing 
 corporation. State how you would treat each of the fol- 
 
134 
 
 lowing items: (a) interest paid in advance not fully 
 earned, (b) insurance unexpired, (c) interest accrued, (d) 
 outlay of labor and material on goods not fully manufac- 
 tured, (e) material to be delivered to complete contracts 
 charged up in full, (/) depreciation of plant, (g) pro- 
 vision for future losses on present outstandings. 
 
 BALANCE SHEET. 
 
 ASSETS. 
 
 Cash. 
 
 Notes Receivable. 
 
 Accounts Receivable. 
 
 Inventory. 
 
 Raw Materials. 
 
 Manufactured Goods. 
 
 Goods in Process of Manufacture. 
 
 Plant and Machinery. 
 
 Prepaid Charges. 
 
 LIABILITIES. 
 
 Notes Payable. 
 Accounts Payable. 
 
 Reserve for . 
 
 Capital Stock. 
 Surplus. 
 
 (a) Interest paid in advance not earned should appear as 
 an asset. 
 
 (6) Insurance unexpired should appear on the balance 
 sheet as an asset under the head of prepaid charges. Only 
 that portion which has actually expired should be charged 
 to profit and loss. 
 
 (c) Accrued Interest should be charged to profit and 
 loss, and credit to interest accrued accounts. It should 
 appear on the balance sheet as a liability. 
 
 (d) Outlay of labor and materials on goods not fully 
 
135 
 
 manufactured should appear as such in the inventory at 
 cost appearing on the balance sheet as an asset. 
 
 (e) Material to be delivered to complete contracts 
 charged up in full should be charged to Manufacturing 
 Account and either deducted from the inventory or appear 
 on the balance sheet as a liability. 
 
 (/) Depreciation of plant should be charged to profit 
 and loss account, and credited to plant account, or to 
 depreciation account. 
 
 (g) Provision for losses on present outstandings should 
 be made by charging the profit and loss account and credit- 
 ing reserve for bad debts. On the balance sheet the amount 
 reserved may appear as a liability or may be deducted 
 from the accounts receivable. 
 
 159. Describe the following accounts and state where 
 and how they are employed: surplus, goodwill, treasury 
 stock, maintenance, suspense, dividend. 
 
 Surplus account should contain the undistributed profits 
 of a corporation. When the amount of profit is arrived at 
 through the profit and loss account, it should be charged at 
 once to profit and loss account and credited to surplus ac- 
 count. In the case of monetary corporations, the accumu- 
 lation of a certain surplus is obligatory and this surplus 
 must be preserved intact, not being available for dividends. 
 
 Good Will is the capitalized value of the net earnings of 
 a business for a number of years. The determination of 
 
136 
 
 its value is of importance where a business is sold. The 
 amount paid for it would figure as an asset. 
 
 Treasury Stock is that portion of the capital stock of a 
 company which has not been issued. It should appear 
 as an asset. 
 
 Maintenance is the term applied to the cost of keeping 
 plant, machinery, roadbed, rolling stock, etc., in good order. 
 
 Suspense is an account opened to which all doubtful ac- 
 counts are transferred. If a client becomes insolvent, his 
 balance should at once be transferred to this account. 
 When final settlement is made, the amount received, is 
 credited to Suspense Account and the balance transferred 
 to bad debt account. 
 
 Dividend Account is credited with the total amount of 
 dividend declared, and charged with checks sent out to 
 stockholders in payment of same. 
 
 160. In a statement of a railway corporation, what is 
 meant by fixed charges, funded debt, floating indebtedness, 
 maintenance of way, maintenance of equipment ? 
 
 Fixed charges such as interest on bonds, taxes, etc., are 
 a first charge against income after operating expenses. 
 They recur at regular intervals, and do not vary materially 
 in amount. 
 
 Funded Debt is the amount of the bonded indebtedness. 
 
 Floating indebtedness is all other forms of liability of 
 accounts payable, notes payable, etc. 
 
137 
 
 Maintenance of way is the cost of keeping rails, etc., in 
 good order. 
 
 Maintenance of equipment is the cost of keeping sta- 
 tions, rolling stock, etc., in first-class condition. 
 
 161. What is the best way of recording customers' notes 
 so that the true condition of each account may be shown? 
 What is the most approved way of treating the note re- 
 ceivable account (a) in the ledger, (b) in a statement of 
 affairs ? 
 
 As soon as a note is received from a customer it should 
 be entered in the Bills Eeceivable book, and posted at once 
 to his credit. The due date for each note should also be 
 noted in an inner column. As a note is paid the due date 
 in the customer's account should be crossed through with 
 red ink. By the adoption of this plan, the aggregate 
 amount of any customer's indebtedness on open account, 
 and on paper can be readily perceived. 
 
 The best way to treat the note receivable account in tbe 
 ledger is to charge each note singly to the account, insert- 
 ing the due date in an inner column. As each note is 
 paid, the amount should be posted opposite the charge. By 
 this method a complete schedule will be constantly main- 
 tained, and the chances of error materially lessened. 
 
 In a statement of affairs notes receivable should appear 
 in schedule form, giving name of maker, date, and due 
 date. If notes have been discounted there is a contingent 
 liability on same, and such notes should appear amongst 
 the liabilities. 
 
138 
 
 If notes have been endorsed over to creditors in settle- 
 ment of accounts, they should appear under the heading 
 of contingent liability. 
 
 162. Arrange a plan for keeping a private ledger with 
 which the general ledger will agree and yet in no way re- 
 veal the contents of the private ledger. What matters are 
 usually recorded in the private ledger ? 
 
 The totals of the various accounts in the private ledger 
 should be added, and the total balance of all the accounts 
 should appear as one item, under the head of " private 
 ledger " in the general trial balance effecting a complete 
 proof. 
 
 It is usual to keep in the private ledger, profit and loss 
 account, capital investment account, personal drawings, 
 loans and investments, in fact, all such matters as are de- 
 sired to be kept from the knowledge of the general office 
 staff. 
 
 163. Suggest one or more plans by which an inven- 
 tory may be corroborated or impeached. 
 
 If the percentage of gross profit compared with former 
 years, as shown by the merchandise or trading account is 
 considerably greater or considerably less, there is a prima 
 facie ground for impeaching the accuracy of the inven- 
 tory, unless valid reason can be assigned for such change. 
 Supposing there is a very marked fluctuation in the per- 
 centage of gross profit say a large increase the inven- 
 
139 
 
 tory at the commencement may have been taken at too lo\v 
 a figure, or that taken at the end at too high a figure. 
 Goods may have been returned by customers which have 
 been taken into stock, and have not been credited on the 
 books. Again merchandise may have been purchased, 
 and taken into stock, which has not been credited on the 
 books. If the percentage of gross profit is considerably less 
 the opposite course may have been pursued, or the firm 
 may have been robbed. 
 
 164. Describe several economies in accounting made 
 possible by the introduction of special columns in books of 
 original entry. 
 
 By the introduction of special columns in books of origi- 
 nal entry, the following economies in accounting are made 
 possible : 
 
 (a) Complete and exhaustive analysis of income and ex- 
 penditure under classified headings is obtainable by post- 
 ing totals instead of items. 
 
 (b) The profit or loss on any department of a business 
 can be shown clearly. 
 
 (c) The profit or loss on every class of goods manufac- 
 tured or sold can be determined. 
 
 (d) By means of a voucher record system the necessity 
 of keeping accounts with individual creditors is entirely 
 obviated. 
 
 165. State the full procedure leading up to the entry 
 of the following transactions in the shares of a corpora- 
 tion, the par value of which is $100 : 
 
140 
 
 April 5, 1901. James Williamson receives certificate 
 No. 75 for 100 shares full paid. 
 
 May 3, 1901. James Williamson requests a transfer to 
 George T. Jenkins of 30 of his 100 shares. 
 
 Outline a form of stockholders' ledger and properly enter 
 the above items therein. 
 
 CASH BOOK. 
 Dr. 
 1901. 
 
 April 15. Jamee Williamson, subscription a/c., $10,000. 
 This should be credited to Subscription Account, and 
 James Williamson would then receive his certificate for 
 100 shares. 
 
 DR. 
 
 JAMES WILLIAMSON. 
 
 CR. 
 
 Date 
 
 Certificate 
 
 *OJ3 
 
 I* 
 
 Par 
 
 Value 
 
 Date 
 
 Certificate 
 
 J! 
 
 Par 
 Value 
 
 1901 
 May 
 
 ;?" 
 
 3 
 
 Renewed 
 by 80 
 Transfdto 
 G. T.Jen- 
 kins 81 
 
 70 
 30 
 
 7000 
 3000 
 
 00 
 00 
 
 1901 
 April 
 
 May 
 
 
 
 3 
 
 No. 75 
 No. 80 
 
 100 
 
 10000 
 
 
 
 
 70 
 
 7000 
 
 DR. 
 
 GEORGE T. JENKINS. 
 
 CR. 
 
 
 
 - g 
 
 
 
 
 s 
 
 
 Date 
 
 Certificate 
 
 C3 
 OGQ 
 
 Par 
 
 Value 
 
 Date 
 
 Certificate 
 
 sj 
 
 OOQ 
 
 Par 
 
 Value 
 
 
 
 
 
 
 
 1901 
 
 
 
 
 
 
 
 
 
 
 
 May 
 
 
 
 No. 81 
 
 30 
 
 3000 
 
141 
 
 166. On what general principles is double-entry book- 
 keeping based? State briefly a general formula for the 
 correct recording of business transactions. 
 
 The general principles on which double-entry-bookkeep- 
 ing is based are: (a) That as every transaction involves 
 a transfer of money or money's worth, every entry must be 
 made twice once on the debit and once on the credit side 
 of the ledger, (b) That the records of profit or loss dis- 
 closed in the nominal accounts must be confirmed by the 
 increase or decrease over liabilities exhibited in the 
 balance sheet, (c) That as a result the total debits in the 
 ledger should always equal the total amounts of the credits 
 the proof of which is demonstrated in the trial balance. 
 A general formula for the correct recording of business 
 transactions would be : Whenever an asset is created or an 
 item of expense is to be recorded^ debit; whenever a lia- 
 bility is created or an item of profit or income to be re- 
 corded, credit. 
 
 167. Two persons exchange with each other their re- 
 spective notes for $1,000 each; what would be presumably 
 the object of such exchange? What is the risk and the 
 limit (in amount) of risk of each party to the transaction? 
 How should such a transaction be recorded? 
 
 The exchange would presumably be for the benefit of 
 one party, but might be for both. A, being short of cash 
 asks B for an accommodation note of $1,000, payable in 
 thirty days, and gives him his own note for the same 
 
142 
 
 amount, payable on the same date. A endorses B's note 
 and discounts same at his bank. If B fails to pay the 
 note at maturity, A must pay it, i. e., he must repay out of 
 his own pocket the $1,000 he received from the bank. If 
 B has discounted A's note and cannot repay A, A must 
 pay the $1,000. The limit in amount of each party is 
 $1,000. A's books : Bills Receivable, Dr. $1,000 To Bills 
 Payable $1,000, with full explanatory notes would record 
 the transaction properly. 
 
 168. A retail bookstore agrees to deliver certain sets of 
 books at $20, on payment of $2 down, the purchaser agree- 
 ing to make $3 payments for each of the six months next 
 following. It is expected that sales on this plan will ag- 
 gregate several hundred sets. Suggest a method of keep- 
 ing the accounts, so that results may be readily shown. 
 
 Enter every contract ^for $20, as received in a sales book 
 ruled with seven columns. In the first column charge $2 
 to each customer. Open a sales ledger, charge each cus- 
 tomer from sales book and credit, at end of month the total 
 of the column to a " general ledger account/' Have a col- 
 umn for these receipts in the cash book and enter amounts 
 received. Credit to each customer in sales ledger and 
 charge total at end of month to " general ledger account." 
 Sales ledger will then be self balancing. 
 
 The total number of contracts received multiplied by $20 
 should be credited monthly to merchandise account in the 
 General Ledger and charged to a Subscription Account. 
 This latter should monthly be credited with the total in- 
 
143 
 
 stallments charged in sales ledger through sales book and 
 charged to a " Subscription Ledger controlling account." 
 Total cash received monthly should be credited to con- 
 trolling account, which would then show monthly amount 
 due for subscriptions in the sales ledger, while the Sub- 
 scription Account would show the balance of amounts sold 
 on contracts, but uncharged to customers, because not due. 
 
 169. Give all the stages in closing the books of a mer- 
 cantile corporation from the time they are fully posted to 
 the completion of the financial statement. 
 
 (a) Credit inventory to merchandise account. 
 
 (&) From this account determine amount of gross profit. 
 Charge the account and credit profit and loss with the 
 amount of gross profit and bring down the inventory. The 
 merchandise account being at rest, will now be a real ac- 
 count. 
 
 (c) Charge profit and loss account and credit nominal 
 accounts with debit balances ; charge nominal accounts with 
 credit balances and credit profit and loss. 
 
 (d) Examine all real accounts and charge off an ade- 
 quate percentage for depreciation from all subject to wear 
 and tear. 
 
 (e) Examine the accounts receivable; close out those 
 that are uncollectable and create a sufficient reserve for 
 bad debts. 
 
 (/) Charge profit and loss and create reserves for dis- 
 counts, etc. 
 
144 
 
 (g) Credit surplus account and charge profit and loss 
 with the net profit and show same on balance sheet. 
 
 170. Describe several methods of recording discounts on 
 accounts as paid, avoiding misstatement of receipts and 
 disbursements. State the advantages or disadvantages of 
 the methods proposed. 
 
 (a) Credit cash received in one column of cash book and 
 discount allowed in another. Post 'same into ledger sep- 
 arately. This will serve as a check on any cash being appro- 
 priated and discount made to cover the defalcation. 
 
 (b) Credit both cash and discount as before and post 
 the total from a third column of cash book to which the 
 totals of cash and discounts are carried. This lessens the 
 amount of posting but as both items appear under one 
 title in ledger as " Sundries " the check in method (a) is 
 wanting. 
 
 (c) Treat discount as cash by crediting total amount of 
 cash and discount as cash, and crediting each with discount 
 on the opposite side. This also shortens the work but 
 does not record actual facts as the amount credited to the 
 customer was not received as posted. 
 
 (d) Another method is to pass all discounts through the 
 journal. But this doubles the work and only accomplishes 
 the result^shown in method (a) which is recommended as 
 the best. 
 
 171. Outline an entry recording bond interest due but 
 not paid at time of making the entry. What are the ad- 
 vantages of such an entry? 
 
145 
 
 Accrued Interest, Dr. 
 
 To Interest act. 
 
 The advantage of the entry is this : That as the balance 
 sheet is designed to show the state of affairs of a business at 
 a given moment of time, all assets should appear, and all 
 income applicable to the period covered by the balance sheet 
 should be taken credit for. 
 
 172. Mention other items which could be treated in a 
 way similar to that suggested for interest in question 6 and 
 state the advantages of such treatment. 
 
 Interest on loans accrued but unpaid, prepaid taxes, in- 
 surance, etc., should be treated similarly and for the same 
 reason. 
 
 173. Give several methods of keeping the records of 
 petty accounts and accounts with infrequent customers. 
 
 One method would necessitate keeping a petty ledger. 
 The books of original entry should each have a special col- 
 umn allotted to this ledger, and a petty ledger controlling 
 account could be opened in the general ledger which would 
 show the aggregate amount due by customers in the Petty 
 Ledger. This would greatly expedite the taking off of a 
 trial balance. A second way would be to have the first 
 few pages of the customers' ledger alphabetically indexed. 
 Charge each customer under index letter on one line and 
 credit cash as received on the same line on the opposite 
 side. Creditors' accounts could be kept in the same way. 
 
146 
 
 The third method would be the voucher system, which 
 might be adapted for both charges to infrequent customers 
 and small purchase accounts. 
 
 174. What should be the procedure in stating the value 
 of stock on hand at the time of a fire, the financial books 
 being intact and showing the amount of an inventory taken 
 four months previous to the fire? 
 
 The procedure would be the same as is customarily 
 adopted when it is desirable to arrive at the amount of the 
 inventory without taking stock. In this case find out the 
 average gross profit for several years on sales. Those for 
 the four months in question will be on record, and the 
 amount will contain purchase price plus the average per- 
 centage of gross profit. Divide total sales by one hun- 
 dred plus the ascertained percentage, and the quotient will 
 give cost price of goods actually sold. Deduct this from 
 the inventory at commencement of the period plus the pur- 
 chases for the four months, and the difference will be the 
 value of stock on hand at the time of the fire. 
 
 175. Give cases where it is proper to include in a state- 
 ment of assets and liabilities certain receipts and disburse- 
 ments not occurring in the period under review. 
 
 If by " receipts and disbursements " is means actual pay- 
 ments and receipts of cash, it is difficult to see how they 
 could appear in a statement of assets and liabilities. They 
 must have occurred prior to, or subsequent to the making 
 up of the statement; and they would certainly have no 
 
147 
 
 place as such in a balance sheet. But if what is meant is 
 "income and expenditure/' then, as to expenditure pre- 
 paid charges not applicable to the period under review 
 might appear as assets: e. g., taxes and insurance. As to 
 income: items due, but not received could also appear as 
 assets e. g., interest on investments. On the other hand, 
 as liabilities might appear, items due but unpaid. 
 
 176. On what are the accounts of an executor based ? In 
 preparing his account, with what does the executor charge 
 himself and for what does he claim credit? 
 
 The accounts of an executor are based upon the inven- 
 tory filed by him containing the appraised value of the 
 property he administers. 
 
 He charges himself with Principal as per inventory; 
 with any accretions thereto; and with the income of the 
 estate up to the date of his accounting. He credits him- 
 self, as to principal, with any expenditure directly charge- 
 able against it such as funeral expenses, inheritance tax, 
 and expenses attending the care of the estate. As to in- 
 come, he credits himself with all other expenditures. 
 
 177. How should entries be made of notes receivable in 
 the account of a customer whose credit is limited to a fixed 
 maximum, so that his account will show at all times the 
 amount for which his order may be accepted? 
 
 All notes as received should be credited to him being 
 posted in the ledger account in red ink. When paid, a 
 black mark X should be placed against the entry. The 
 
148 
 
 amounts in red ink added to the debit balance of the ac- 
 count will at all times show his indebtedness. A special 
 note credit account might be opened instead, but it is 
 believed that the first method is simpler and achieves the 
 same result. 
 
 178. How should entries be made of the discount at 
 the bank of notes received under circumstances outlined 
 in question 177? What entry should be made as the notes 
 are paid at maturity ? 
 
 Notes as received should be debited to Bills Eeceivable 
 Account, with name of the customer and due date. When 
 the note is discounted at the bank the cash should be cred- 
 ited to Bills Receivable Account on the same line and the 
 cash marked in red ink " d." When the note is paid at 
 maturity a black ink mark should be made through it. 
 By this method the total amount of contingent liability on 
 notes discounted by a firm can be ascertained in a few 
 minutes. It also obviates the necessity of opening contin- 
 gent liability ledger account. 
 
 179. State cases where the condition known as "di- 
 minishing assets " is likely to arise. How should such cases 
 be treated? 
 
 All assets which are subject to wear and tear diminish 
 in value, e. g. } plant and machinery, furniture, fixtures, 
 etc., and this is provided for by writing off. as depreciation, 
 and charging to profit and loss account such an amount 
 
149 
 
 periodically as will after a given time leave the residual 
 or break up value. Such cases should be treated by writ- 
 ing off -the customary percentage for depreciation period- 
 ically until the residual value is arrived at. This can be 
 done in two ways : ( 1 ) by writing off a fixed percentage 
 of the original cost periodically until the residual value is 
 reached. In this instance a lighter rate is sufficient than 
 when depreciation is calculated on a diminishing value; 
 (2) by writing off a fixed percentage off the diminishing 
 value. Here, the percentage will be lighter from year to 
 year, but the offset is that the expense of repairs will be 
 greater. 
 
 180. You are called on to assume the duties of general 
 clerk and bookkeeper in an establishment where the ac- 
 counting has been very meagre and primitive; state the 
 steps that you would take to reform existing conditions. 
 
 The cash on hand should be counted and the pass book 
 sent to the bank to be balanced. An inventory should be 
 taken of stock and complete schedules of all assets and lia- 
 bilities should be prepared from the books, bills, letters, 
 etc. A balance sheet should next be prepared and a new 
 set of books opened to record all transactions by double 
 entry. The work should be laid out for the clerks in sys- 
 tematic order, and such original books of entry provided 
 as would insure the accurate entry of all transactions so 
 as to afford the fullest detailed information with a mini- 
 mum expenditure of labor. 
 
150 
 
 181. Write from memory the form of a bond 
 coupon. For what purpose are such coupons employed and 
 how are they used? Describe a plan for the care of paid 
 coupons and give reasons for the use of such a plan. 
 
 Form: 
 
 On the first day of February, 1912, upon surren- 
 der of this coupon, The Company 
 
 will pay to bearer Thirty Dollars ($30.00) in gold 
 coin of the United States, being six months' in- 
 terest then due on its coupon bond. 
 No.- JOHN BROWN, 
 
 Treasurer. 
 
 Such coupons are virtually promissory notes, evidencing 
 the indebtedness of the corporation issuing the bonds for 
 the payment of a specified amount of interest periodically 
 at a certain definite place. As a coupon falls due it is 
 detached from the bond and deposited in the holder's bank 
 for collection just like an ordinary check. 
 
 Coupons when paid are returned to the corporation. 
 They should be punched and pasted into a coupon book 
 ruled with as many spaces on each page as there are 
 coupons attached to a bond. The "punching" would 
 prevent their repayment if lost or stolen; the pasting then 
 in book would facilitate reference and record coupons paid, 
 and due but unpaid. 
 
 182. What is a contingent liability? Give three ex- 
 amples. For what purpose and in what form should such 
 liabilities appear in a financial statement? 
 
151 
 
 A contingent liability is one which may become 
 an actual one in the event of a certain occurrence. (1) 
 When a merchant discounts a customer's note at a bank, 
 in the event of its not being paid at maturity, the mer- 
 chant has to take it up. The note discounted is a con- 
 tingent liability. 
 
 (2) Arrears of cumulative preferred dividends: here 
 if sufficient profit has not been earned in one fiscal period 
 it must be paid (if earned) in succeeding ones i. e. f the 
 dividend is a contingent liability the contingency being 
 the earnings being sufficient to pay. 
 
 (3) Disputed claims: in this case should there be reason 
 to suppose that any portion will become absolute and have 
 to be paid, provision for estimated amount by establish- 
 ing a contingent liability account. 
 
 Cases one and two would be noted at the foot of a finan- 
 cial statement; case three would appear on the balance 
 sheet. 
 
 183. Define the following terms as relating to munic- 
 ipal corporations, and outline transactions that would 
 necessitate debits and credits in each case: (a) appropri- 
 ation accounts, (&) assessment accounts, (c) bond accounts, 
 (d) trust funds. 
 
 (a) Accounts set aside from general tax revenues for 
 specific purposes ; e. g., police department, fire department, 
 &c. 
 
 (1) Amounts assessed or charged to individuals for 
 
153 
 
 the performance of certain work by which the property 
 of parties assessed is benefited. 
 
 (c) Bond accounts are designed to set forth total indebt- 
 edness of a municipality for money borrowed on which 
 bonds have been issued in evidence. 
 
 (d) Trust funds are monies invested under the control 
 of parties generally designated " sinking fund commis- 
 
 184. Distinguish between artificial profits and real 
 profits. Give examples of each. 
 
 Real profits are those made in the ordinary way of busi- 
 ness: e. g., trading the real profit being excess of selling 
 price over cost plus expenses. Artificial profits are made 
 as it were "ab extra " ; e. g., real estate standing on books 
 at cost value $5000 sold for $10,000. The $5000 excess 
 of sale price over purchase price is an artificial profit. 
 
 185. What are secret reserves? Show at least two 
 instances,, illustrating the reasons for their creation and the 
 methods of establishing them. 
 
 Secret reserves are excess of assets valuation over what 
 appears on the books as such. Take the case of a bank 
 owning its own building and site. The value appears on 
 the books at cost (20 years ago) ; the present appraised 
 value is fifty times the cost value. The excess of the present 
 value over cost constitutes a secret reserve; for the in- 
 creased value might be written up and a corresponding sur- 
 
153 
 
 plus created. This reserve is self-established by accretion 
 of value. A second case would be where excessive de- 
 preciation has been written off plant, &c. the book value 
 is thus less than real value and a secret reserve is thus 
 created. Such a reserve would be established for con- 
 tingencies. 
 
 186. An inventory of a going concern, taken under your 
 supervision and direction and requiring two weeks to com- 
 plete, is commenced one week prior to the close of the fiscal 
 period under review. How would you instruct, as to (a) 
 the general care and custody of stock under inventory, (6) 
 the recording of incoming and outgoing goods during 
 stock taking ? 
 
 (a) Stock going out prior to completion to be handled 
 as usual stock going out one week after to be specially re- 
 corded. 
 
 (&) The record of incoming and outgoing goods during 
 stock-taking is explained above. The second week's pur- 
 chases should be kept distinct from general stock book 
 entries. 
 
 187. Describe a method of recording periodically the 
 losses of a corporation with a view to preventing the pay- 
 ment of dividends till profits subsequently earned make 
 dividends legal. 
 
 The losses of a corporation should be charged against 
 surplus account (if one exists) ; if not, to Deficiency Ac- 
 count. No dividends could then be legally paid until the 
 
154 
 
 profits subsequently earned amounted to enough to wipe 
 out the deficit and to create a surplus sufficiently large 
 to make dividends legal and warrant (in the estimation) 
 of the directors) their payment. 
 
 188. In valuing for inventory should such items as rent, 
 interest, insurance, salaries and expenses of management 
 ever be included, and if so under what circumstances ? 
 
 They should. 
 
 Rent when paid in advance. 
 
 Interest when accrued but not received. 
 
 Insurance the unexpired portion when paid in advance. 
 
 Salaries and expenses of management up to date of 
 closing where same are charged to cost. In this case, pro- 
 vision would have to be made for their payment by the 
 creation of a liability under the head of "Salaries and 
 expenses management unpaid." 
 
 189. In determining who are entitled to participate in 
 dividends of a corporation, what general rule governs ? To 
 what dividends is a purchaser of shares entitled ? 
 
 The participants in dividends of a corporation are the 
 stock-holders of record on the date of closing the transfer 
 books. 
 
 The general rule that governs is that the stock is sold 
 " ex dividend " after the transfer books are closed. If 
 he purchases the share prior to the closing of the transfer 
 books he is entitled to the dividend declared and unpaid; 
 
156 
 
 if, subsequent to that event he is not entitled to the divi- 
 dend. 
 
 190. Distinguish between fixed capital and floating 
 or circulating capital. Give illustrations of each. 
 
 Fixed capital is that which does not vary in amount; 
 floating or circulating capital does. Defining capital as the 
 excess of assets over liabilities the difference in the case 
 of an individual or of a partnership would be the amount 
 due by the business to them. This, while varying from 
 to-day, as profits or losses are made is only adjusted and 
 allotted periodically so the capital will vary in amount. 
 But in the case of a corporation the amount of the capital is 
 fixed, i. e., it does not increase or decrease. 
 
 Floating or circulating capital is what is brought into 
 the business from time to time, and varies considerably. 
 
 But, considering capital as an asset fixed capital 
 would be those items not usually available for trading 
 such as real estate, plant and machinery. On the same 
 hypothesis floating or circulating capital would be that 
 portion consisting of notes receivable, accounts receivable, 
 merchandise, &c. which would naturally vary from day 
 to day. 
 
 191. A wholesale grocery house has several outdoor 
 salesmen, both in and out of the city, who are paid 
 commissions on their sales. What are the danger points 
 to be noted, and how would you arrange the books and 
 accounts to protect your client against the payment of 
 commissions not earned? 
 
156 
 
 The danger points to be noted and guarded against 
 are the payments of commissions unearned; the failure 
 to record and charge back against commissions credited 
 to salesmen a pro rata amount for goods returned; reck- 
 less sales to persons of unknown credit by unscrupulous 
 salesmen; overdrafts against commissions credited. 
 
 A sales journal ruled with a sufficient number of col- 
 umns to contain the separate individual sales of each 
 salesman would furnish by monthly total the amount upon 
 which the commissions due could be figured and from 
 thence checked into the salesmen's ledger accounts. The 
 same arrangement could be made in the return sales book. 
 The passing of every order through the hands of a trust- 
 worthy credit man would speedily stop injudicious sales; 
 and the periodical inspection of the ledger accounts of the 
 salesmen by cashier and bookkeeper would serve as an 
 effective check on the overdrawal of commission accounts. 
 
 192. Describe what is known as the voucher system of 
 bookkeeping and state some features of this system which 
 in your opinion make it desirable. 
 
 Several good and exhaustive answers to this question 
 have been made in several pages of this book for the details 
 of which the student is referred to the index. 
 
 193. Is depreciation of plant a legitimate element of 
 the cost of goods produced? Explain the method em- 
 ployed to keep plant in efficient condition out of earnings. 
 
157 
 
 It is: for it depreciates in value through use, and it is 
 used to manufacture goods produced. 
 
 A certain amount should be charged periodically to 
 profit and loss account and credited to repairs fund ac- 
 count, against which all expenditure under this heading 
 should be debited. 
 
 194. Draw up a form of self-proving pay-roll which 
 will provide for the determination of the exact number of 
 bills and pieces of currency required for its liquidation. 
 Show wherein such a pay-roll is convenient and efficient. 
 
 PAY-ROLL BOOK. 
 WEEK ENDING MAY 23, 1908. 
 DEPARTMENT A 
 
 Jones ................................... 25 
 
 Brown .................................. 12.23 
 
 Thompson .............................. 3.72 
 
 Willis .......................... . ....... 6.25 
 
 47.20 
 
 DEPARTMENT B 
 
 Robinsc 
 Adams 
 Johnsoi 
 
 MAY 
 
 )n _ 19.18 
 
 30 10 
 
 i , 6.29 
 
 23, 1908. 
 
 68.78 
 
 $115.98 
 
 SUMMARY. 
 
 5 
 
 1 
 
 50 c. 
 
 25 c. 
 
 10 c. 
 
 5c. 
 
 lo. 
 
 8 X10= 80.00 
 4 X 5= 20.00 
 14 X 1= 14.00 
 50c.X 1= .50 
 25c.X 2= .50 
 lOc.X 8= .80 
 5c.X 1- .05 
 lc.Xl3= .13 
 
 2 
 2 
 
 6 
 8 
 
 1 
 
 1 
 1 
 
 4 
 
 4 
 
 ' i 
 
 5 
 8 
 
 4 
 
 14 
 
 1 
 
 2 
 
 8 
 
 1 
 
 13 
 
 $115.98 
 
 A check should be made out for the total amount of 
 
158 
 
 the pay-roll and the summary attached. The first col- 
 umn shows the number of, the second the denomination of 
 the bills and coins required. Such a pay-roll is efficient 
 because there is a check on the footings of the pay-roll 
 book by departments, and the exact number of bills and 
 coins of each denomination to be procured from the bank 
 so that each pay envelope can be filled without the neces- 
 sity of "making change." 
 
 Each man's name should be written on a separate pay- 
 envelope and the amount due him as per pay-roll. En- 
 velopes should be arranged in the order in which the 
 names appear in the pay-roll book. The check having 
 been cashed at the bank, the money should be carefully 
 counted to see that the amounts actually tally with the sum- 
 mary. It is advantageous to have two clerks employed. 
 One takes the pay-roll book and the money. He calls out 
 the first name, collects the money together necessary 
 to make up the amount of wages and places it beside him. 
 The second clerk takes the money, counts it, sees that it 
 corresponds with the amount noted on the pay-envelope, in- 
 serts same and seals envelope. If this procedure is fol- 
 lowed and no mistakes made, the last envelope will call 
 for the last of the cash. If the cash is over or short, the 
 distributors of the envelopes should open each one in the 
 presence of the workman, count contents, and see that 
 they agree with the amount marked outside. It is a good 
 plan to send two or more men to the bank for the cash; 
 two others to count and compare same with summary; 
 
159 
 
 and the actual distribution of envelopes by as many men 
 as there are departments. 
 
 195. Define and give an example of (a) capital assets, 
 (b) current assets. 
 
 (a) Capital assets are those whose retention is neces- 
 sary for the carrying on of a business: e. g., plant and 
 machinery. 
 
 (b) Current assets are items varying in amount and 
 nature from time to time: e. g., notes and accounts re- 
 ceivable. 
 
 196. How do the accounts of a corporation and of a 
 co-partnership differ in the statement of (a) investments, 
 
 (b) operation of business and determination of profits, 
 
 (c) division and distribution of profits? 
 
 (a) Investments: the investments of stockholders of a 
 corporation are not credited to them on the ledger indi- 
 vidually; they appear in one account capital stock. In 
 the case of a co-partnership the amounts invested by the 
 partners are credited to their individual capital accounts. 
 
 (b) In the operation of business and determination of 
 profits the accounts of a corporation do not differ from 
 those ordinarily kept by partners. 
 
 (c) In the division and distribution of profits the part- 
 ners are bound by the terms of the articles of co-partner- 
 ship, whereas a corporation is governed by the acts of 
 its directors as to distribution, while the division is al- 
 ways in the form of a certain percentage of dividend de- 
 
160 
 
 clared by the directors and paid to stockholders of record 
 in proportion to the amount of capital stock held. In the 
 case of a co-partnership profits when distributed are placed 
 to the credit of the individual partners' capital accounts, 
 while the profits of a corporation are placed to the credit 
 of surplus, from which dividends are declared. 
 
 The capital stock account of a corporation does not vary 
 as to amount whether profits are made or losses; the capi- 
 tal of partners varies from day to day as profits or losses 
 are made; the accounts also alter in amount as soon as 
 closing entries are made and capital accounts adjusted. 
 
 197. Define floating debt, funded debt, and state in 
 what respects they differ. Give an example of each. 
 
 Floating debt is another term for current liabilities as 
 distinguished from funded debt which has to be paid 
 at a certain date. Examples of the former are notes and 
 accounts pa} T able; of the latter bonds and mortgages. 
 
 198. Define and differentiate revenues, receipts, ex- 
 penses, disbursements. 
 
 Revenues incomes earned but not necessarily received. 
 Receipts actual cash income. 
 Expenses outlays whether actually paid or not. 
 Disbursements actual cash payments. 
 
 199. In arranging a system of accounts for a firm en- 
 gaged in manufacturing furniture how would you be 
 guided in your selection of accounts and books? Outline 
 a simple arrangement. 
 
161 
 
 The various items entering into cost of manufacture 
 should be entered in a columnar journal and charged to 
 the several accounts in the ledger. Pay-roll should be 
 divided into as many parts as there are manufacturing 
 departments. From these it would be easy to devise a sim- 
 ple series of cost accounts to arrive at the prime cost of 
 the output of the various departments of the factory. 
 Stock books should be kept. The remaining books and 
 accounts kept would be the same as in any ordinary busi- 
 ness. 
 
 200. State two methods of dealing with items accrued 
 and due (such as rent, commission and salaries) on both 
 the ledger and the balance sheet, when closing the ac- 
 counts of a business at the end of a fiscal period. 
 
 Said items might be charged to their proper accounts and 
 credited to individual to whom due on the ledger. They 
 would appear there as accounts payable. 
 
 Again they might be charged and credited to expense 
 accounts on ledger and left outstanding as credited 
 balances. They would then appear on the balance sheet as 
 accrued charges under the head of Liablities. 
 
 201. The ledger of a corporation has an account en- 
 titled "First Mortgage Bond Script," showing a credit 
 balance of $967.54. What does this balance represent, 
 and how would you treat the item in the balance sheet ? 
 
 The item indicates that instead of interest on bonds 
 being paid at due date scrip equivalent to Bills Paya- 
 
162 
 
 ble bearing interest was issued instead redeemable at 
 will of parties issuing same. The amount would appear 
 on the balance sheet amongst the liabilities as " Scrip " 
 First Mortgage Bonds outstanding. 
 
 202. Describe the following business forms and state 
 how they relate to and affect your books of account: (a) 
 domestic draft drawn at 10 days sight and duly accepted, 
 (b) an invoice, (c) a bill of lading, (d) an account sales, 
 (e) an account current. 
 
 (a) Such a draft is virtually a Note Eeceivable in the 
 hands of the drawer and should be so treated. Suppos- 
 ing the draft to be drawn by Henry Brown of New York 
 (to his own order) on William Stubbs of Albany. On 
 receipt of the accepted draft Brown enters same under 
 due date in his Bills Eeceivable book and deposits it for 
 collection in his bank. On notification from the bank that 
 the draft has been paid he credits Stubbs with the amount 
 through the cash book and debits cash. 
 
 (6) An invoice is a bill of particulars of goods sold by 
 one person to another. It contains date of sale, name of 
 seller, name of purchaser, particulars of quantities, prices, 
 amounts, and total of amount of the various extended 
 items. The bill is copied into a Sales Book and the total 
 charged to the ledger account of the purchaser. If a 
 single journal entry were made of the transaction the 
 entry would be : 
 
 Purchaser, Dr., 
 
 To Merchandise Account. 
 
1C3 
 
 203. What are controlling accounts? For what pur- 
 pose are they employed and how are they conducted? 
 Give three examples, with clear explanation of each. 
 
 Controlling accounts are kept in the general ledger to 
 total balances of all accounts kept in other ledgers. As the 
 general ledger is kept by one person and other ledgers are 
 kept by perhaps several bookkeepers, the correctness of the 
 total contents of these several ledgers exhibited by the 
 totaled schedules of balances furnished are controlled by 
 the balances of the controlling accounts in the general 
 ledger. 
 
 These accounts are employed for two purposes: (1) to 
 enable the keeper of the general ledger to take off a com- 
 plete trial balance at the end of a month from his own 
 book without waiting for the proved correct trial balances 
 taken from all the other ledgers; (2) to enable the general 
 ledger bookkeeper to control the correctness of the totals 
 furnished him by the keepers of the other ledgers as if 
 wrong figures are submitted no correct totals of contents 
 of balances he is able immediately to detect the error. 
 This, of course, presupposes that the general bookkeeper 
 has proved the cash balance and has checked the footings 
 of the books of original entry, and his own postings of the 
 totals. His own ledger (the general) being in balance he 
 can safely then rely on the accuracy of the amounts called 
 for from all other ledgers by his controlling account. 
 
 Three examples : 
 
1G4 
 
 Controlling Account (customers). 
 Controlling Account (creditors). 
 Controlling Account (Bills Receivable). 
 
 As a full explanation of these accounts and the method 
 of conducting them has been already given in the answers 
 to questions 7, 97, 230 and 231, the author has not con- 
 sidered it necessary to go into the matter in further detail. 
 The Bills Receivable controlling account presupposes the 
 existence of a Bills Receivable ledger, and a special column 
 in the cash book in which is entered all amounts received in 
 payment of notes. 
 
 204. Purchases, sales, returns and allowances are fre- 
 quently posted in common to an account called Merchan- 
 dise. Describe fully the limitations of an account so kept, 
 and suggest, with reasons in support thereof, an improved 
 method of keeping records of such transactions. 
 
 An account so kept has been aptly described as non- 
 descript, as it is partly real and partly nominal the bal- 
 ance until the amount of the inventory on hand has been 
 added to the credit side or deducted from the debit side 
 being meaningless; in other words, it gives no details of 
 value. The account should be divided thus: 
 
 Merchandise a/c (Inventory at beginning). 
 (Purchases). 
 (Returned Purchases). 
 (Sales). 
 " (Returned Sales). 
 
165 
 
 These balances entered in the trial balance monthly 
 would furnish valuable data for the compilation of com- 
 parative statistics. 
 
 205. In a certain business the cash receipts are em- 
 ployed in part to defray current expenses. Other dis- 
 bursements are by check against funds deposited. In ar- 
 ranging books of account for such a business how would 
 you provide a clear, direct and labor-saving record of all 
 cash receipts and disbursements? Show the advantages 
 of this plan. 
 
 All checks received should be posted in one column of 
 the Cash Book; all cash receipts in another. On the 
 other hand cash payments could be separated from pay- 
 ments made by check by the use of separate columns on 
 the other side of the cash book. The difference of the 
 totals would show the actual amount of cash on hand, while 
 checks could be verified by stubs of check book and pass 
 book. No especial arrangement of books of account need 
 necessarily be made. 
 
 206. If your trial balance shows an account having a 
 debit excess what does the circumstance signify? Does the 
 debit balance shown by the trial balance indicate the true 
 status of the account? Explain. 
 
 The significance of the debit excess may be threefold: 
 Personal accounts: debit balances indicate the amount 
 charged to and unpaid by customers; in the case of credi- 
 tors (as sometimes happens by carelessness) the cash paid 
 
166 
 
 in settlement of an account before the bill has been credi- 
 ted on the ledger. 
 
 Impersonal accounts (1) Real here the debit balance 
 indicates capital expenditure which appears as an asset 
 on the balance sheet. (2) Nominal the balance shows 
 income expenditure or the excess of income expendi- 
 ture over revenue receipts where both are kept in 
 one account, e. g. } interest, discount. 
 
 Merchandise a/c debit balance, as previously stated, at 
 any time prior to closing indicates the fact that the in- 
 ventory at the beginning of the period plus purchases and 
 returned sales exceeds the sales and returned purchases to 
 date. The debit balance does not always indicate the true 
 status of the account as has been just pointed out, i. e., 
 Merchandise Account. 
 
 Again, to show the true status of Real Accounts such 
 items as depreciation, &c., would have to be taken into 
 consideration ; and the case of personal accounts, discounts, 
 and bad debts must not be overlooked. 
 
 207. What are auxiliary books as understood in ac- 
 counting terminology? Mention three books of this class 
 and explain their use. 
 
 *! 
 
 Auxiliary books are those used to record transactions 
 in detail which do not appear in the ordinary financial 
 books of a business (cash book, ledger, journal, &c.). 
 
 Three books of this class are : ( 1 ) Stock Ledger to con- 
 
167 
 
 tain names and amount of individual holdings of stock- 
 holders of a corporation. 
 
 (2) Transfer book to record names of buyers and sellers 
 of capital stock, number of shares transferred, &c. 
 
 (3) Minute book in which is entered particulars of pro- 
 ceedings at directors' and stockholders' meetings, &c. 
 
 208. The by-laws of a national fraternal organization 
 provide that all receipts shall be remitted to the secretary 
 who shall transmit the same to the treasurer. All dis- 
 bursements are made by the treasurer on warrants of 
 the secretary, properly countersigned. The treasurer 
 (located in Chicago) receives no money except such as is 
 sent to him by the secretary, whose location is Boston. How 
 should interest on the treasurer's bank balances, allowed 
 by the Chicago bank, be treated and recorded? Explain, 
 and give reasons for your answer. 
 
 All cash remitted to the treasurer by the secretary, as 
 received by secretary would be charged to his own cash 
 account and credited to the persons from whom received. 
 When remitted to treasurer cash would be credited and 
 treasurer charged. The treasurer on receipt of remittances 
 from secretary would debit his own cash account and credit 
 secretary. The treasurer's debit account on secretary's 
 books would thus correspond with the secretary's credit 
 balance on treasurer's books. When the treasurer's pass 
 book is credited with interest by Chicago bank he should 
 request a credit memorandum from the bank for the 
 amount of interest allowed which he should forward to 
 
168 
 
 the secretary at Boston. Treasurer would credit interest 
 account and debit cash. Secretary would charge treasurer 
 and credit interest. 
 
 The reason for this is that the entries of total cash re- 
 ceived and paid on books of treasurer and secretary should 
 exactly correspond and cross check. 
 
 209. In a certain work on bookkeeping this paragraph 
 appears : " When we get a note discounted in the bank 
 the note is paid so far as we are concerned, so we must 
 credit Bills Receivable for the full face of the note on the 
 debit side of the cash book and debit Interest on the oppo- 
 side of the cash book for the amount of the dis- 
 count." Having in mind the axioms that "bookkeeping 
 is a faithful record of business transactions " and that 
 " a financial statement should reveal the true condition 
 of any concern," do you accept or reject the foregoing 
 statement ? Give detailed reasons for your answer. 
 
 The statement is erroneous; the method of recording 
 the transaction is open to serious objections; and a finan- 
 cial statement made up from such figures would not reveal 
 "the true condition of any concern." 
 
 For (1) while it is true that when the note is discounted 
 it is paid, it is not paid by the maker, but by the bank; 
 so that in the event of its not being met at maturity by 
 the maker "we" should have to repay the face value of 
 the note to the bank, plus protest fees, &c. Notes dis- 
 counted should be credited then to a contingent liability 
 account the total amount of which would appear as 
 such at the close of a particular fiscal period. 
 
169 
 
 (2) The cash book entry would not be "a faithful rec- 
 ord" of the transaction, for (a) the face value of the 
 note was not received when discounted, but only the face 
 value less discount; and (b) the total cash receipts at the 
 end of the month as shown in cash book would be incor- 
 rect. 
 
 210. Where and how would you record a customer's 
 promissory note when (a) received, (&) discounted, (c) 
 protested? State fully the object and effect of each entry 
 on the account involved. 
 
 (a) When received, the note should be entered in the 
 Bills Receivable book, stating date of note, due date, 
 amount, where payable. It should then be posted to the 
 credit of the customer's account in the ledger, and at 
 end of every month the total amount of notes receivable 
 recorded in the bill book should be posted to the Dr. of 
 Bills Receivable Account in the ledger. 
 
 (b) When discounted "discounted bank" date, &c., 
 should be noted against the amount of note in the bill 
 book, and bills receivable account (contingent liability) 
 in the ledger credited. When paid by the maker at ma- 
 turity, a journal entry should be made as follows: 
 
 Bills Receivable (contingent liability a/c) Dr. 
 
 To Bills Receivable Account. 
 Note of A. B. reported by bank paid. 
 
 (c) When protested the face value of note plus protest 
 fee would have to be paid to bank by the party who dis- 
 
170 
 
 counted same. Through journal Bills Eeceivable (contin- 
 gent liability a/c) should be debited and Bills Eeceivable 
 Account credited. Through cash book the maker's per- 
 sonal account should be charged with the face value of the 
 note plus protest fee, &c. 
 
 (d) The object and effect of entering note in the bill 
 book is to record particulars in detail and afford facility 
 for reference; in the bills receivable account to show the 
 total amount due on notes; to the credit of the customer's 
 account to show that the account is no longer collectable 
 as " open " but has been closed by a promise to pay on 
 a certain day evidenced by a note recorded in the bill 
 book. 
 
 (e) When discounted, cash is debited because the amount 
 less discount is received from the bank; bills receivable 
 account (contingent liability a/c) is credited, because if 
 the maker does not pay " we " must provision is made 
 for this contingency (and it very frequently so happens) 
 by thus recording the transaction. It must be borne in 
 mind that all assets are relatively " contingent " but in 
 this case the asset (note Eeceivable) becomes an actual 
 contingent liability. 
 
 (/) When protested, and repaid to the bank by the party 
 who discounted the contingent liability (having become 
 actual) is discharged, and the note appearing in bills receiv- 
 able account is charged back to the customer. 
 
 211. What do you understand by comparative statistics 
 as applied to accounting? When, to what extent and in 
 
171 
 
 what particulars would you make use of your knowledge 
 of this branch of commercial science? 
 
 By comparative statistics is meant the comparing (by 
 placing side by side) the totals of items of revenue expen- 
 diture or income for any specified period. They can be 
 used in any kind of business, and if proper records are 
 kept in detail, data can be obtained, by which compari- 
 sons may be made of subsidiary accounts. 
 
 In an ordinary trading business comparison may be 
 made of the percentage of gross profit as shown by the 
 merchandise accounts ; of net profit through the profit and 
 loss accounts. Where departmental accounts are kept the 
 percentage of profits earned may be compared month by 
 month or year by year; the expenses and wages also 
 shown. 
 
 In manufacturing accounts where proper cost books are 
 kept and results tabulated, comparative statistics as to 
 cost and proceeds can be obtained. In railroad accounts 
 gross and net earnings can be compared month by month 
 with corresponding months of former years. In short, a 
 knowledge of " this branch of commercial science " may be 
 made use of in almost every kind of business. 
 
 212. The following are accounts mommonly employed 
 in brewery bookkeeping: cooperage, capital stock, brewing 
 materials, customers' loans, revenue stamps, notes payable, 
 wages (brewery-men), advertising, repairs, fuel, collection 
 expense, salaries (official and clerical), stable supplies and 
 expense, sales, cash, freight and cartage (inward), re- 
 
172 
 
 turned beer, wages (drivers and stable-men), freight and 
 cartage (outward), interest, manufacturing expense, in- 
 surance, profit and loss, real estate, bonded debt. Classify 
 the above mentioned accounts for ledger and financial 
 statement purposes. 
 
 LEDGER PURPOSES AND" FINANCIAL STATEMENTS. 
 
 DR. 
 
 Cash a/c 
 Real Estate 
 Customer's Loans 
 Brewing Materials 
 
 CR. 
 
 Notes Payable 
 
 Bonded Debt 
 
 Capital Stock 
 
 Surplus (Profit and Loss a/c) 
 
 The above are Assets and Liabilities appearing in the 
 Balance Sheet. 
 
 DR. 
 
 Brewing Materials (used) 
 
 Wages (Brewery Men) 
 
 Repairs 
 
 Fuel 
 
 Freight and cartage (inward) 
 
 Manufacturing Expense 
 
 CR. 
 
 The above are items of manufacturing cost. 
 
 DR. 
 
 Cooperage 
 
 Revenue Stamps 
 
 Advertising 
 
 Collection Expenses 
 
 Salaries (O. and C.) 
 
 Stable Supplies and Expenses 
 
 Returned Beer 
 
 Wages (D. & S.) 
 
 Freight and Cartage (outward) 
 
 Interest 
 
 Insurance 
 
 CR. 
 
 Sales 
 
173 
 
 The above items added to cost of manufactured goods 
 sold deducted from sales gives the net profit on trading. 
 
 213. Detail a scheme for keeping shipping accounts so 
 that the true and exact condition of each venture can be 
 shown at any time. Give entries for every phase of ship- 
 ping transactions, including advances to shipper by con- 
 signee, and state the object and effect of each entry. 
 
 This question can be answered best by means of an ex- 
 ample : 
 
 J. Brown of New York ships to A. Jones in New Orleans 
 merchandise (cost value $5,000) on consignment, agreeing 
 to pay him ten per cent commission on the gross sales. 
 Brown draws on Jones at sight from time to time for sums 
 amounting to $1,000, said drafts being duly paid. Jones 
 having disposed of the merchandise renders an account 
 sales to Brown, showing sales $9,000 as against cost, $5,000, 
 .freight paid by him $100, expenses $300, commission 
 $900, and forwards a check for $6,700 to balance. 
 
 BROWN'S LEDGER. 
 MERCHANDISE ACCOUNT. 
 
 | By consgt. Jones 
 
 $5000.00 
 
 A. JONES, SHIPMENT ACCOUNT, A/C SALES 
 
 To Consignor 5000.00 
 
 "Freight 100.00 
 
 ' ' Expense 300.00 
 
 ' ' Commission 900.00 
 
 " P. &L. a/c (Profit of 
 
 shipment) $2700.00 
 
 $9000.00 
 
 By Sales as per a/c 
 
 rendered by Jones $9000.00 
 
 $9000.00 
 
174 
 A. JONES, CONSIGNMENT A/C. 
 
 To Sales as per a/c 
 rendered $9000.00 
 
 By cash on a/c 
 " Freight 
 
 $1000.00. 
 100.00 
 
 
 11 Expense 
 ' ' Commission 
 
 300.00 
 900.00 
 
 
 " Cash 
 
 6700.00 
 
 $9000.00 
 
 
 $9000.00 
 
 CASH BOOK. 
 
 DR. 
 
 To A. JONES, 
 
 $1000.00 
 6700.00 
 
 CR. 
 
 All other entries on Brown's books would be posted 
 through the journal. 
 
 LEDGER A/C OF A. JONES. 
 J. BROWN (Consignment). 
 
 To Cash, 
 
 ( i 
 
 $1000.00 
 6700.00 
 
 By Mdse., $5000.00 
 " Balance, a/c sale 2700.00 
 
 
 $7700.00 
 
 $7700.00 
 
 J. BROWN, 
 
 CONSIGNMENT, a/c SALES. 
 
 To Mdse., 
 " Freight. 
 " Expense, 
 ' ' Commission 
 " Balance 
 
 $5000.00 
 -100.00 
 300.00 
 900.00 
 2700.00 
 
 By Sales, $9000.00 
 
 $9000.00 
 
 $9000.00 
 
175 
 CASH BOOK. 
 
 DR. 
 
 To Sales, $9000.00 
 
 By J. Brown, 
 (i 
 
 11 Freight, 
 " Commission, 
 " Expense, 
 
 CR. 
 
 $1000.00 
 .6700.00 
 100.00 
 900.00 
 300.00 
 
 $9000.00 
 
 
 $9000.00 
 
 J. JONES (personal a/c). 
 
 To cash, $900.00 
 
 By Commission, $900.00 
 
 By a consignment or shipment is meant the transfer of 
 the custody (but not the title) of merchandise by one 
 party called the consignor, to another called the consignee. 
 The consignor allows commission on sales and receives 
 cash for proceeds less expenses incurred in the transac- 
 tions, commission, &c., so set forth in the " account sales " 
 rendered by the consignee when the merchandise has been 
 disposed of. 
 
 214. Examination of the books of a plumbers' supply 
 house shows that all outgoing bills are press copied and 
 posted individually to Customers' accounts, the monthly 
 aggregate of sales being credited to Merchandise account. 
 Many customers have charges daily or oftener. What 
 change in method can you suggest that would lead to a 
 more intelligent statement of results, save labor and avoid 
 congestion ? 
 
176 
 
 The introduction of what is known as an Invoice Sales 
 book would have the desired effect. In a bound book 
 invoice forms are attached to stubs. The sales ticket is 
 copied on to a stub the invoice attached being made out 
 from the stub at any time required. If there were 20 
 different charges during the month to a customer the 
 sales tickets would all be copied on to the same stub 
 and the invoice made out therefrom. At the end of the 
 month the bill and stub would but be footed and totals 
 should agree. The total of each stub would be charged 
 to customer's account in ledger; the total of all the stubs 
 to the credit of merchandise account. The invoice book 
 should be indexed and the ledger folio of each customer 
 noted on stub and on invoice. This does away with 
 the necessity of press-copying bills and necessitates the 
 posting to customer's a/c of only one amount monthly 
 instead of possibly twenty or thirty. 
 
 215. What results are sought to be secured in the keep- 
 ing of accounts with Branch Houses? Under what cir- 
 cumstances would you debit or credit such accounts? 
 What would the balance of any such account show? 
 
 (a) Results sought: particulars of amount of cash re- 
 ceived and paid and balance on hand at any given time; 
 amounts of sales credit and cash and amount of cus- 
 tomer's account outstanding; amount of purchases credit 
 and cash and amount owing to creditors; amount of stock 
 on hand ; expenses ; and profit or loss for any given period 
 of each branch. 
 
177 
 
 (b) Example: supposing there is a debit balance against 
 a branch establishment at the end of a fiscal period this 
 would show the amount of the investment in a particular 
 branch consisting of assets less liabilities due the head 
 office. If a Profit and Loss a/c be rendered by the branch 
 house showing a profit, a journal entry would be made 
 on books of head office debiting branch house and credit- 
 ing P. and L. a/c. The branch office would have a credit 
 balance due head office, and on closing the books it would 
 debit its P. & L. a/c and credit head office account. 
 Thus the head office credit balance on branch books would 
 always equal branch office debit balance on head office 
 books. 
 
 216. Define the following accounts: franchise, patents, 
 equipment, construction. State in what line of business 
 such accounts occur, for what purpose they are employed 
 and how they are generally treated. 
 
 Franchise: the right to operate a rail-road, street-car 
 line, telephone wires conferred by legislature. 
 
 Patents: the virtual lease of a monopoly for a term 
 of years the right to manufacture and sell exclusively 
 certain articles. 
 
 Equipment: cost of locomotives, cars, cost of furniture 
 in station houses, fixtures, tools, &c., would all come under 
 this heading. 
 
 Construction: in railroads this includes original cost of 
 tracks, structures, right of ways, expenses in negotiating 
 
178 
 
 sales of stocks and bonds, discount on sales of securities, 
 &c. 
 
 All of these accounts occur in rail-road business. 
 
 Purposes : (a) Franchise to show cost of obtaining right 
 to operate. The a/c is charged with amounts paid. 
 
 (b) Patents: cost of obtaining right to manufacture a 
 certain article exclusively. It is charged with cost and 
 written off periodically in amounts, the total of which 
 will amount to original cost at the time the patent ex- 
 pires. Equipment a/c shows cost of all items coming 
 under this particular heading the expense of maintaining 
 or replacing same when worn out would have to be charged 
 against "operating expenses." 
 
 Construction a/c: includes initial costs as above stated. 
 Maintenance would be charged against operating expenses, 
 while extensions and improvements would be charged 
 against construction. 
 
 217. A merchant draws a draft of $1,000 at four 
 months on a customer who owes him on open account and 
 the draft is accepted on February 2, 1905. On March 
 13, 1905 he discounts the draft at a bank at 6 per cent per 
 annum. What entries should be made on the merchant's 
 books to record properly the transactions? 
 
 On receipt of the accepted draft the customer's account 
 should be credited with its face value and Bills Eeceivable 
 account debited; detailed particulars entered in the Bills 
 
179 
 
 Receivable book. The ledger entries would be effected 
 by means of the journal; the usual form being, e. g., 
 
 Bills Receivable, Dr., $1,000.00. 
 
 To A. B. $1,000.00. 
 
 " Accepted draft received from A. B. dated , due 
 
 , in settlement (or on a/c) of account due. 
 
 When the draft is discounted at a bank, cash and the 
 amount of the interest are debited in the Cash Book in 
 separate columns and credited in one amount to Bills 
 Receivable (contingent liability account). 
 
 As soon as the bank sends notification of the payment 
 of the draft by the drawer a journal entry should be made 
 debiting Bills Receivable (contingent liability account) and 
 crediting Bills Receivable account. The transaction is 
 thus only recorded and closed. 
 
 218. Define the term depreciation and give generally 
 your method of determining the amount to be charged 
 against income. 
 
 All articles subject to "wear and tear" depreciate in 
 value from usage sometimes also from non-usage: fa- 
 miliar items being Plant and Machinery, Furniture and 
 Fixtures, &c. If provision is not made for replacement 
 when worn out, it is clear that at the expiration of the 
 life of the articles, fresh capital will have to be brought 
 into the business wherewith to purchase new ones, inas- 
 much as the initial installation was " capital expenditure/' 
 
180 
 
 ranking on the balance sheet as " capital assets." To pro- 
 vide for this replacement, it is usual to periodically charge 
 against income and credit to " reserve for depreciation " 
 account such an amount as will, coincidently with the ex- 
 piration of the life of the items subject to wear and tear, 
 equal the original values charged and standing open on 
 the books as assets. 
 
 To determine the amount to be charged against in- 
 come, find out the average life of the article subject to 
 depreciation; divide cost value by the number of years of 
 life ; the quotient will give result required. 
 
 219. Show the form of a purchase ledger for a mer- 
 cantile concern, and state whether you would recommend 
 
 the use of a bound or loose leaf book, 
 your answer. 
 
 Purchase Ledger (form). 
 
 Give reason for 
 
 PURCHASE LEDGER (FOBM) 
 1908 DE 
 
 1908 
 
 CR. 
 
 July 
 
 31 
 
 To CashC. 
 
 40 ! 
 
 300 
 
 
 I June 
 
 30 
 
 ByMdse.J. 
 
 20 
 
 300 
 
 
 The author, personally, speaking from an auditor's 
 standpoint, is strongly in favor of bound books. Loose 
 leaves are easily removable and to a certain extent facili- 
 
181 
 
 tate irregularities on the part of careless or dishonest em- 
 ployees. Moreover the absence of ledger indexes enhances 
 considerably the auditor's work in checking postings. On 
 the other hand the system seems to meet with the approval 
 of the majority of bookkeepers as doing away with the 
 necessity of opening new ledgers and transferring accounts. 
 Only active accounts are kept in the loose-leaf ledger fol- 
 der and it is justly claimed that the bookkeeper's work 
 is curtailed materially by this method. 
 
 220. Define fixed assets, current assets. Give two ex- 
 amples of each class. 
 
 Fixed Assets are those items which while necesasry to 
 the successful conduct of a business are not available for 
 trading purposes, i. e., cannot ordinarily be converted into 
 cash for the purpose of buying, and selling merchandise 
 at a profit. 
 
 Current Assets fluctuate from day to day in transacting 
 business and represent cash or what can be realized as such. 
 
 Two examples of each class: 
 
 Fixed Assets: Real Estate. 
 
 Plant and Machinery. 
 
 Current Assets: Cash. 
 
 Bills Receivable. 
 
 221. A grocery house employs a number of salesmen 
 who act as collectors. Suggest a system that would tend 
 to prevent defalcations on their part. 
 
182 
 
 It may be broadly stated that no known system of ac- 
 counting will prevent defalcations; but one may be de- 
 vised such as to render their detection by an audit inevita- 
 ble. Assuming that each salesman collects only from 
 those firms to which he personally sells, a columnar sales 
 journal should be used, the columns being headed with the 
 names of each salesman, and all goods sold charged to 
 the customer in the column of the person effecting the 
 sale. The cash book should be similarly ruled and cash 
 received from each collector by the cashier similarly 
 treated. Each sales account in the ledger should have 
 salesman's number or initial entered after the customer's 
 name at the head of the page and thus the responsibility 
 for the collection of any single account located. Each 
 salesman should be provided with a numbered receipt 
 book stub number and detachable receipt form being 
 both consecutively numbered. The stubs contain particu- 
 lars of namerf of customers from whom collection was made, 
 date and amount. These particulars are recorded in the 
 cash book by the cashier daily and the amount of cash 
 turned in balanced with the stubs which should each be 
 initialed by him. All customers should be notified that a 
 printed receipt is to be furnished by the collector and 
 monthly statements should be mailed direct to the cus- 
 tomer by the bookkeeper, accompanied by a printed notice 
 requesting verification of the amount of balance outstand- 
 ing and immediate notification to the head office of any 
 apparent discrepancy. As a further safeguard, an addi- 
 
183 
 
 tional collector should be employed to make occasional col- 
 lections for the regular salesman. 
 
 222. Give the advantages and the disadvantages of a 
 voucher system of accounts. 
 
 Advantages: The facility with which a continuous 
 analysis of expenditure can be kept by means of the col- 
 umnar system; the very considerable saving of time in 
 doing away with detailed posting ; the elimination of credi- 
 tor's individual ledger accounts; the ability to ascertain 
 the gross amount due to creditors by means of the 
 "vouchers payable" account balances, obviating the neces- 
 sity of taking off a trial balance to prove correctness. 
 
 Disadvantages: The constant liability of items being 
 entered in wrong columns; the possibility of accounts 
 being paid twice; the inability to determine by record in 
 ledger details of past transactions, or total purchases made 
 from a particular firm for any specified period. 
 
 223. What is the difference between a trial balance 
 and a balance sheet? 
 
 The difference is this: while the trial balance contains 
 the balances of all the accounts standing open on a given 
 date real, nominal and personal, the balance sheet em- 
 braces only assets and liabilities the nominal accounts 
 having been closed out into the profit and loss account, 
 and the balance of this transferred (whether profit or loss 
 is made) to capital account, or if a corporation to sur- 
 plus account. 
 
184 
 
 224. In what order should the assets in a balance sheet 
 be set out? Give reasons. 
 
 There is no hard and fast rule on the subject in actual 
 practice, as may be seen by the various printed forms of 
 order used by public accountants in the statements certi- 
 fied to by them as correct in their capacity as auditors; 
 and so far as a logical reason can be adduced in support 
 of the form used the order of the items is of no particular 
 moment. It would seem fairly reasonable to adopt the 
 following : place the assets in the order of their realization, 
 i. e., the facility with which they could be converted into 
 cash. Cash being on hand would naturally come first. 
 Notes receivable could probably be discounted would come 
 next; followed by accounts receivable which could be col- 
 lected. The fixed assets would come last. 
 
 On the other hand liabilities should appear in the order 
 of their liquidation, i. e., the order in which they would 
 ordinarily have to be paid. Notes payable, accounts paya- 
 ble, dividends declared and unpaid, accrued liabilities, 
 capital, undivided profits or surplus is the natural order 
 and meets with fairly general acceptance and approval. 
 
 One important factor not to be overlooked in the adop- 
 tion of this order is that if the ledger accounts be cor- 
 respondingly arranged, as soon as the inventory is taken 
 and closing entries made the balance sheet can be con- 
 structed with a minimum expenditure of time and labor. 
 
 225. What governs the distribution of profits in (a) 
 a partnership, (I) a corporation? 
 
185 
 
 (a) Partnership : The distribution of profits is governed 
 by the co-partnership articles of agreement which usually 
 specify the proportion to which each partner is entitled. 
 Where no such terms are stated in the agreement it is 
 asumed that the profits are to be divided equally, irre- 
 spective of the amount of invested capital standing to the 
 credit of individual partners. 
 
 (b) Corporation : In this case the profits should be 
 credited to surplus account and it is from this balance that 
 the directors of a corporation distribute profits amongst 
 tne stockholders of the company in the form of dividends. 
 
 Thus, supposing the capital stock of a corporation is 
 $1,000,000.00, and there be a considerable amount stand- 
 ing to the credit of surplus account, the directors might 
 agree that they would be justified in distributing a por- 
 tion of it amongst the stockholders. If a dividend of six 
 per cent were made, surplus account would be debited 
 with $60,000.00 and dividend account credited with a like 
 amount. Dividend account would be charged and cash 
 credited with this amount; checks being mailed to the 
 stockholders of record (at the time of closing the transfer 
 books) for the amount due them computed on the basis 
 of the number of shares held by individual holders. 
 
 226. Give fully your understanding of (a) revenue, 
 (b) receipts. Show wherein they differ. 
 
 (a) Revenue literally means something that comes back. 
 Money is generally invested in real estate, in business 
 
186 
 
 ventures, and in corporate undertakings with the object 
 of obtaining a return for its use. Thus the income from 
 the real estate, the profits earned by a business, the divi- 
 dends received from corporate investment is termed Rev- 
 enue, or more properly net Ee venue. For we use the 
 terms revenue receipts, and revenue expenditure; the ex- 
 cess of the former over the latter constituting net revenue. 
 (&) Receipts (cash) means cash actually received; cash 
 expenditure being cash actually paid out the excess of the 
 former over the latter being the amount of cash on hand 
 at a certain date. The difference between revenue and 
 receipts is this: that while revenue discloses the amount 
 of profit or net earnings, or net returns for a given period, 
 the cash for same need not (and as a matter of fact seldom 
 is) have been actually received at the time the statement 
 is made up consisting as it does of outstanding accounts, 
 &c., receipts (cash), indicate in total the amount of cash 
 actually received, with details of the sources from which 
 they came. 
 
 227. Are there any unalterable rules governing the 
 trading and the profit and loss accounts ? Give the general 
 acceptation of the terms. 
 
 No not as to their division; for there is no subject on 
 which bookkeepers and accountants differ so much. On 
 the other hand there are certain basic principles on which 
 there is a fairly general consensus of opinion. These may 
 be briefly stated as follows: The merchandise account is 
 
187 
 
 supposed to show the gross profit on trading, t. e. f the ex- 
 cess of the selling price over purchase price of goods; the 
 profit and loss account the net profit. Immediately these 
 elementary propositions are accepted as correct and prog- 
 ress is made towards exact definition, differences of 
 opinion as to treatment arise. It appears to the author 
 that the simpler the merchandise account is kept, the better 
 for the percentage of gross profit can be readily deter- 
 mined from it if variable charges are excluded. 
 
 Merchandise account is usually charged with Inventory 
 at the beginning of a fiscal period, with goods returned 
 by customers, with freight, and discounts allowed. It is 
 credited with sales, with goods returned to creditors and 
 with discounts allowed by them; with the Inventory on 
 hand at end of period. The excess of credit over debit 
 side is called the gross profit on Merchandise or Trading 
 Account. The balance is transferred to Profit and Loss 
 account which (the P. & L. a/c) is also charged and credi- 
 ted and the balances of the revenue accounts and so the 
 net profit arrived at. 
 
 228. Suggest books for a sanitarium that is supported 
 by public charity. 
 
 The books kept should be of such a character as to dis- 
 close the fullest details of income and expenditure; admit 
 of rapid audit ; and disclose the financial position of the in- 
 stitution at any time. 
 
 The income being derived from public charity its 
 
188 
 
 sources might be recorded under these headings: Annual 
 subscriptions; legacies; donations. The expenditure 
 might be classified as follows : Food, medicines, Doctors' 
 fees, supplies, salaries and wages, laundry, repairs, &c. 
 Books suggested : Cash Book, Journal, Ledger, Vouchers 
 Payable, Receipt books with stubs consecutively numbered. 
 Legacies and donations received should each be entered in 
 separate columns of cash book as received ; annual subscrip- 
 tions should be charged to each subscriber in a Subscription 
 Ledger through the Journal and the total posted to the 
 debit of Subscription a/c (controlling) in the General 
 Ledger. Subscriptions received should be entered in a 
 separate column in the Cash Book and the total posted 
 monthly to the credit of subscription controlling a/c; the 
 balance of the account would show the amount of annual 
 subscriptions due. The amounts received should be posted 
 in the Subscription Ledger to the credit of the subscriber. 
 A Vouchers Payable account should be opened in the 
 General Ledger and the voucher record kept in the usual 
 manner. All receipts should be checked with receipt stubs 
 through Cash Book into the bank, and all payments covered 
 by returned checks and receipted vouchers. 
 
 229. In what books should an administrator keep his 
 accounts? What, if any, special rulings would you sug- 
 gest ? Illustrate and give reasons. 
 
 The following books should be kept by an administrator : 
 Minute Book to contain copy of Will and notes of court 
 
189 
 
 proceedings; Cash Book with separate column for princi- 
 pal and income receipts and expenditure; Check Book 
 the stubs of which may form a subsidiary journal ; Journal 
 and Ledger with the ordinary rulings. The method 
 adopted should naturally be double entry with such ac- 
 counts under properly classified headings as would disclose 
 readily the administrator's financial transactions, and 
 facilitate the rendering of " an accounting " at any time 
 called for. 
 
 230. What are the advantages of purchase journals and 
 sales journals ? How are the transactions that are recorded 
 in such journals brought into the general ledger? 
 
 The advantages are that the total purchases can be 
 charged monthly to the Merchandise account in the general 
 ledger and credited to the Purchase ledger controlling 
 account. The various items in the journal can be credited 
 to the individual creditors' accounts in the purchase ledger 
 and the total debited to an account called " general ledger 
 account"; the purchase ledger being thus rendered self- 
 balancing, as the total debit balance of the " general ledger 
 account " will agree with the total balances of the creditors 
 accounts and also with the purchase ledger controlling 
 account in the general ledger. By the aid of separate 
 columns in the journal and cash book all note transac- 
 tions, discounts, allowances, and returned purchases can 
 be brought into account in the same manner. The obvious 
 advantages are (a) considerable labor saved in posting; 
 
190 
 
 (b) the localization of errors in taking off trial balances; 
 
 (c) the ability of the general ledger keeper to take off a 
 complete trial balance and close the books without waiting 
 for the proof of the correct posting of the purchase ledger 
 as evidenced by the production of a correct trial balance of 
 the accounts in the purchase ledger. The important fact 
 is not to be overlooked that any attempt to " fix " a trial 
 balance by the purchase ledger keeper is at once detecta- 
 ble. 
 
 The reverse entries would be made in the case of sales 
 journals, ledger, and general ledger. 
 
 231. What is a controlling account? Give an example 
 of such an account. Answer fully. 
 
 A good answer to this question is contained in the last 
 paragraph; but for the sake of completeness an example 
 is appended. 
 
 Controlling accounts are kept in the general ledger 
 which show in totals the amounts due to creditors and by 
 customers as exhibited in the totals of individual accounts 
 kept in the purchase and sales ledger. The accounts are 
 called " controlling " because if the items appearing in the 
 subsidiary books have been correctly footed and posted 
 the total contents of each ledger must agree with the totals 
 called for by the general ledger accounts. 
 
 Take, for instance, the Sales Ledger. In the general 
 ledger an account is opened designated controlling account 
 (customers'). At the end of the month the total sales are 
 
191 
 
 credited to merchandise account and credited to the 
 controlling account: returns are credited to con- 
 trolling account and debited to merchandise; cash re- 
 ceived and discounts allowed are credited to controlling 
 account and debited to cash and discount accounts respec- 
 tively. The debit balance of the controlling account at the 
 end of every month will show the total amount due by cus- 
 tomers standing open to their respective accounts in the 
 Sales ledger. The general ledger keeper accordingly calls 
 on the Sales ledger keeper for an itemized list of amounts 
 due by customers which in total will exactly equal that 
 standing to the debit of the account in the general ledger. 
 On the other hand the Sales ledger bookkeeper debits cus- 
 tomers with their purchases and credits a "general ledger 
 account " in his own ledger. He credits them with cash 
 receiyed, discounts and allowances, returns, notes, &c., and 
 debits same in totals to the general ledger account in the 
 Sales ledger. When he takes off his list of balances the 
 total debits will agree (or should agree) with the total 
 credit balance of the general ledger account in his own 
 ledger, and also with the total debit balance of the cus- 
 tomer^ controlling account in the general ledger. So the 
 Sales ledger is self -balancing, i. e., the bookkeeper can 
 furnish proof of his own individual correctness. 
 
 232. What is a consignment account? How should it 
 appear on the books of the consignor ? 
 
 A consignment account is intended to show the profit 
 
192 
 
 or loss on goods sold by one person (the consignee) belong- 
 ing to another (the consignor). Ordinarily speaking, the 
 consignor credits Merchandise account with goods consigned 
 at cost and charges the amount to the consignment account. 
 When goods are reported sold the amount of sales is credi- 
 ted to the consignment account and charged to the con- 
 signee personally. His account is credited with expenses, 
 and commissions with cash remitted in settlement. The 
 consignment account is charged with consignee's expenses 
 and commission, and if the credit side exceed the debit 
 the balance is the profit on the consignment which is 
 closed into profit and loss account. 
 
 233. What is a sinking fund? How should the account 
 be treated on the books of a corporation? 
 
 A sinking fund is an amount accumulated for a specific 
 purpose by setting aside from time to time and investing 
 such a sum as will with interest in a given time equal the 
 total of a stated indebtedness which it was created to dis- 
 charge. 
 
 On the books of a corporation, the amount of the neces- 
 sary periodical contribution to the fund is first ascertained. 
 Then profit and loss account is charged (periodically) and 
 the Sinking Fund account credited with the amount so 
 ascertained. Cash is now credited the investment made 
 and Sinking Fund debited with same. When the fund 
 equals the amount projected the fund is credited (cash 
 having been realized on the investment),, cash debited. 
 
193 
 
 Next, cash is credited and the obligation indebtedness 
 debited on discharge of same. The Sinking Fund account 
 now can be closed out into surplus account. 
 
 234. In a set of books in which sales book and sales 
 ledger are used, how should a sale of merchandise be 
 treated when an accepted draft for the amount is given 
 by the buyer? 
 
 The sale would be entered in the sales book, credited to 
 merchandise account and charged to customer in the sales 
 ledger. The draft would be credited to customer's account 
 and charged to Notes Receivable Account in the general 
 ledger. This entry would be made in the journal with 
 full explanatory notes of the transaction. 
 
 235. Define and differentiate the following kinds of 
 statements: (a) trial balance, (b) balance sheet, (c) state- 
 ment of assets and liabilities, (d) statement of affairs. 
 
 (a) The trial balance contains the balances of all the 
 accounts in the ledger; it is designed to test the accuracy 
 of the posting from books of original entry. 
 
 (&) After the "closing entries" have been made a bal- 
 ance sheet is drawn up containing a list of all the assets 
 and liabilities of a concern ; if the closing entries have been 
 made correctly, the total of one side of the balance sheet 
 will exactly equal that of the other. 
 
 (c) Statement of assets and liabilities contains a list 
 (in detail) of amounts owned and collectable by a firm, 
 and also of all amounts owed and payable by a firm or 
 
194 
 
 corporation exclusive of capital and profits, or capital stock 
 and surplus. 
 
 (d) Statement of affairs: a good answer will be found 
 to this in the answer to question 2. 
 
 236. State briefly the proper manner of conducting 
 the following kinds of accounts: (a) bills receivable, (b) 
 bills payable, (c) shipment accounts. 
 
 (a) Bills receivable as received from customers should 
 be entered in note book and credited to personal account 
 at once and charged to bills receivable account. When 
 collected cash should be debited and bills receivable credi- 
 ted. If discounted a mark should be put against cash 
 credited to indicate contingent liability, in the manner 
 before indicated in this volume. 
 
 (b) Bills payable as uttered should be charged to 
 parties to whom given, entered in note book and credited 
 in the ledger to bills payable account. When paid cash 
 should be credited and notes payable account debited. 
 
 (c) Shipment accounts are simply a combination of 
 merchandise or trading account with profit and loss ac- 
 count and they should be treated accordingly. 
 
 237. In what order should the accounts be arranged 
 as they successively appear in (a) a ledger containing all 
 the accounts of a business, (b) a ledger containing ac- 
 counts of fixed assets and fixed liabilities, as well as special, 
 nominal and summary accounts? 
 
195 
 
 (a) Real accounts, nominal accounts, accounts receiva- 
 ble, accounts payable, capital accounts. 
 
 (b) Fixed assets, fixed liabilities, special, summary and 
 nominal accounts, accounts receivable, accounts payable. 
 
 The general principle which governs as to the order of 
 arrangement is that the one adopted most readily facilitates 
 the taking off of a trial balance from which a statement 
 of assets and liabilities can be accurately and expeditiously 
 made up. 
 
 238. Describe the method of determining the number 
 of shares of capital stock, both common and preferred, held 
 by each of the several stockholders of a corporation, giving 
 fully the titles of the books wherein the facts are registered 
 and stating how the books are opened and operated. 
 
 Stock certificate book stubs should be checked into stock 
 ledger, and transfer book. The individual account of each 
 stockholder will contain the amount of shares held and 
 from this the number of shares is determined. Separate 
 stock ledger, transfer book and stock certificate book is 
 of course provided for each class of stock. 
 
 239. Describe the process of closing the books of a cor- 
 poration at the end of a fiscal year, showing a Trading 
 account and a Profit & Loss account, and explaining the 
 treatment of reserves for depreciation and for bad debts, 
 as well as for the surplus or deficiency resulting from the 
 operations of prior years. 
 
 The trading account having been credited with the 
 amount of the inventory if the credit side exceed the 
 
196 
 
 debit a gross profit is indicated which is debited to trad- 
 ing account and credited to profit and loss account. The 
 net profit is determined next by charging and crediting 
 the profit and loss account with the debit and credit bal- 
 ances of the nominal accounts. 
 
 Depreciation is charged to Profit and Loss account 
 a proper percentage for all items subject thereto and either 
 deducted from the accounts or credited to a Reserve ac- 
 count for depreciation. Bad debts are provided for by 
 charging profit and loss and crediting a " reserve account 
 for bad debts." As an account is proved to be uncollecta- 
 ble, the reserve account is charged with the amount and 
 the bad account credited, wiping it off the books. 
 
 When provision lias been made for the various reserve 
 accounts, &c., the balance is transferred to surplus account 
 added to the balance brought forward from the close of 
 the last fiscal period. But if a deficiency account is in 
 existence then the balance from profit and loss account 
 would be credited to it either reducing or extinguishing 
 it. 
 
 240. A corporation is organized with an authorized 
 capital stock of $50,000 of which only $40,000 is sold, and 
 stock certificates issued therefor. Two conflicting methods 
 of recording the capital stock on the books are urged by 
 rival accountants as follows : (a) treasury stock to capital 
 stock $50,000, cash and properties to treasury stock 
 $40,000; (6) cash anql properties to capital stock $40,000. 
 Which method is the better and why '? 
 
197 
 
 The first method (a) is preferred, as the total 
 authorized capital stock is brought into account on the 
 books. 
 
 241. Explain the purpose and the manner of keeping 
 a private ledger as part of the financial books of a firm or 
 a corporation. 
 
 The purpose of keeping a private ledger is to keep from 
 the knowledge of the general office staff such details of 
 the business as may be deemed desirable. 
 
 It is kept by opening in the general ledger a private 
 ledger controlling account to which is posted the total 
 balance of those accounts which are posted in detail in the 
 private ledger. Separate columns in cash book, &c., 
 enable this to be done with facility. 
 
 242. A construction company contracts to erect build- 
 ings or works, charging in some instances a fixed price, 
 and in other instances the actual cost plus a fixed per- 
 centage thereon. How should the contract accounts for 
 each stated class of undertakings be conducted on the books 
 of the company, and in what manner should the unfinished 
 contracts at the close of each fiscal year be valued on the 
 balance sheet and treated in the Profit & Loss account? 
 
 In the first case a special contract account should be 
 opened for each job; charged with all cost outlays and 
 credited with the contract price excess of price charged 
 over costs is the profit on the contract and should be 
 credited to profit and loss account. The expenditure on 
 
198 
 
 any unfinished contracts of this class should only appear 
 on the balance sheet as " expenditure on contracts in prog- 
 ress." 
 
 In the second case the amount of percentage of actual 
 cost might be fairly credited to the contract the amount 
 of profit up to date arrived at and transferred to the credit 
 of profit and loss account. 
 
 243. Define and differentiate the following kinds of 
 accounts: (a) real and nominal, (b) personal and imper- 
 sonal, (c) current and summary, (d) controlling and 
 specific. 
 
 (a) Real things of value. 
 
 Nominal records of income and expenditure. 
 
 (b) Personal with persons. 
 Impersonal all others. 
 
 (c) Current running active. 
 Summary totals . 
 
 (d) Controlling totals of balances of other ledgers. 
 Specific exact real or personal. 
 
 244. How may a reserve account and a sinking fund, 
 both relating to the redemption of the same debt, be simul- 
 taneously operated ? What purpose is accomplished thereby 
 and how do said accounts respectively appear on the bal- 
 ance sheet? 
 
 A complete answer is given to this previously. Briefly 
 the fund represents value cash or investments, and is an 
 asset; the account is a liability and appears as such on the 
 
199 
 
 balance sheet. When the liability is discharged for which 
 the fund was created, the reserve account becomes surplus. 
 
 245. A manufacturer makes extensive investments in 
 stocks and bonds, buying and selling from time to time 
 as the market conditions warrant and clearing all such 
 transactions through his regular books of account. How 
 should such transactions be isolated from his manufactur- 
 ing operations and what books and accounts should he 
 employ to record the details of the principal and income 
 from such investments? 
 
 He should have a bonds and stocks ledger properly ruled 
 to record purchase sales price and interest. A controlling 
 account in the general ledger a separate column in the 
 general cash book and a stocks and bonds ledger. A 
 separate ledger account could also be opened for income. 
 
 246. A manufacturing concern having increased its 
 capital and invested considerable money in new machinery 
 and in the reconstruction of old machinery, removes to 
 a new location and charges the cost of moving and the 
 reconstruction of its old machinery to one account termed 
 " Installation." Explain fully how this account should 
 be treated in closing the books of the company and give 
 your reasons. 
 
 The lumping of the charges for moving expenses and 
 the cost of reconstructing the old machinery should not 
 have occurred at all. They should have been taken ac- 
 count of separately. However, as they are both included 
 in the " Installation account," it seems to me to be neces- 
 
200 
 
 to separate them,, writing off the expenses of moving 
 against the Revenue at once, and while the same procedure 
 should be followed with the Reconstruction items, except 
 that, if the amount should be considerable it could be 
 spread over a period of say four quarterly amounts, in- 
 stead of being written off at once, but it should be charged 
 against Revenue as soon as it can be done conveniently for 
 this reason, since no addition or improvement of the plant 
 is indicated. 
 
 247. In closing books how would you value the goods 
 owned by your client and consigned at selling prices to 
 customers of your client, under an agreement by which the 
 customers pay for the goods as used? Give reasons. 
 
 1 ***s 
 When the goods are consigned to a customer to be paid 
 
 for as used it would be best to debit a " consignment ac- 
 count" with the amount so consigned, and have the cus- 
 tomers render a statement either weekly or monthly, show- 
 ing (a) the amount on hand at the beginning of the period, 
 (b) the amount of sales during the period, (c) the amount 
 of merchandise on hand at the end of the period and have 
 them accompany the same with a remittance covering the 
 amount sold. It would then be easily ascertainable, for 
 inventory purposes, (a) what amount of goods had been 
 sold, against the original amount consigned, and (&) ex- 
 actly how much was " on hand " in the custody of the cus- 
 tomer. The main idea being that the client be fully aware 
 at the close of each period the exact amount of the goods 
 
'201 
 
 consigned, that had been sold, so as not to falsely or erro- 
 neously swell the sales a/c. 
 
 248. Name seven kinds of ledgers and briefly state the 
 use of each kind. 
 
 (a) General Ledger for recording the general results of 
 a business; the sales and purchases, and perhaps certain 
 special or private information being kept in other books 
 as hereafter described. 
 
 (b) Sales Ledger. Being a ledger kept for customers 
 accounts only and which can be balanced and controlled 
 by a controlling a/c in the general ledger. 
 
 (c) Purchase Ledger. A book kept for recording pur- 
 chase accounts of merchandise, &c., and also kept in the 
 general system by means of a controlling a/c. 
 
 (d) Private Ledger, for information as to partnership 
 settlements, capital investments, &c., which it is not desira- 
 ble for the office staff to see. 
 
 (e) Investment Ledger, for recording investments, 
 mortgages, stocks or bonds, (e) can also be combined 
 with (ft 7 ). 
 
 (/) Stock Ledger, used by corporations to record names 
 of stockholders and number of shares held by each, &c. 
 
 (g) Depositors' ledger, used by banks and trust com- 
 panies to record the accounts of customers of the bank. 
 
 249. Define cost accounts of a manufacturing business 
 and state what information they furnish. Distinguish 
 
202 
 
 between manufacturing or factory costs and commercial or 
 selling costs. 
 
 Cost accounts are a history of the various stages of man- 
 ufacturers' accounts, and the cost of manufacturing an 
 article, or articles of a certain class, from the receipt of 
 the raw material, up to ttie time of the arrival of the 
 finished product, at the salesrooms. Manufacturing cost 
 differs from selling costs in that the latter involves only 
 the costs of selling the finished product, such as rent of 
 salesroom, hire of clerks and salesmen, advertising, light- 
 ing and heating of the salesroom, and similar items re- 
 lating thereto. In the case of a concern doing its manu- 
 facturing and selling under the same roof great care must 
 be taken to obtain a proper and equitable distribution of 
 the expenses, so as to give both the manufacturing and the 
 selling departments their correct proportions. 
 
 250. What method would you recommend for record- 
 ing the cash receipts on the general cash book of a com- 
 pany operating 10 branch houses, each depositing its daily 
 receipts in a separate bank? Describe fully. 
 
 The best method would seem to be to have the cash 
 book ruled with 10 (extra) columns, one for each branch, 
 in addition of course to the regular columns, the totals 
 of these extra columns could then be posted at the end 
 of each week or month, as the case may be, and thus 
 achieve the same result with less labor. 
 
203 
 
 251. What are the principal differences between a trial 
 balance taken before the books are closed and one taken 
 directly after they are closed ? 
 
 The first is called a trial balance, and the latter a bal- 
 ance sheet, the distinction lying in the fact that the trial 
 balance merely presents a list of all the open accounts on 
 the ledger, at the time, the object being to ascertain if the 
 books are in balance which state of equilibrium is taken 
 to indicate that the mechanical part of the work under 
 review has been correctly performed. The Balance Sheet, 
 on the other hand, represents the open accounts on the 
 ledger, after the operating accounts, such as rent, salaries, 
 wages, light, heat, freight and express, interest, discount, 
 expense, &c., &c., have been written off to profit and loss 
 the object being to show nothing but assets on one side 
 and liabilities on the other. 
 
 252. Give the names of the general accounts to be used 
 and state briefly how you would proceed to open a set of 
 books for the receiver of a small manufacturing concern, 
 the court having issued an order that the receiver shall 
 continue manufacturing in order to utilize to the best ad- 
 vantage the work in process and the raw material. 
 
 The amount of raw material, and material in process of 
 manufacture being first ascertained, I would debit an ac- 
 count for Eaw material with the amount of same as dis- 
 closed by the inventory, and also open an account for 
 the work in process as the work was completed it would 
 
204 
 
 gradually find its way into the Finished Mdse. a/c which 
 would have to be opened, and the other two accounts 
 would thereupon gradually disappear. Accounts would 
 also have to be opened for salaries, wages, light, heat, and 
 other expenses incidental to the cost of manufacturing and 
 selling, and if it was necessary to show the separate cost 
 of manufacturing and selling great care would have 
 to be exercised in the distribution of these items to record 
 the results. 
 
 253. Would you consider it proper to include as an 
 asset the following items: insurance premium unearned, 
 taxes paid in advance, advertising expenses? Explain 
 briefly and give reasons. 
 
 Yes, because these items are usually paid long in ad- 
 vance, and it would be unfair for one quarter for instance 
 to carry the other three-quarters' share of these items. The 
 items ought to be taken into consideration unless they 
 should happen to be very small and unimportant, and no 
 objection is made by the persons interestod. 
 
 254. State how you would proceed to analyze the ac- 
 counts in a ledger, giving reasons for the methods you 
 would employ. 
 
 By analysis, I presume, is meant to dissect and arrange 
 the accounts in a ledger, on a separate sheet ruled with col- 
 umns as in a case, for example, where the books had 
 been carelessly kept. The mode of procedure is to take 
 each book of original entry and post the amounts there- 
 
205 
 
 from to this analysis sheet, under the name of the particu- 
 lar account affected; in a third column, or balance col- 
 umn, the excess of debits or credits should be stated and 
 these total amounts, after this method has been followed 
 out with all the other books of original entry plus the bal- 
 ance, at the starting point of the period under review, ought 
 to exactly balance. Errors or differences in the amounts 
 at the debit or credit of the various accounts can also be in- 
 stantly discovered, after an analysis has been made, but in a 
 case where there are a great many entries the process is a 
 most expensive one, and not often attempted for this 
 reason. 
 
 255. Describe a system of bookkeeping by which the 
 errors in a trial balance may be localized. 
 
 Errors in the trial balance, if they can be localized at all, 
 can only be localized to a certain extent by means of the 
 controlling account. By running a special column or col- 
 umns in the cash book, and in such other books of original 
 entry that may be benefited by the method, an error may 
 be traced to a particular book or books. 
 
 256. State briefly how, at the close of the fiscal year, 
 you would proceed to determine the value, for inventory 
 purposes, of the machinery and tools of a manufacturing 
 establishment. 
 
 They may be valued at cost, less a certain percentage 
 for Depreciation, which amount of depreciation ought to 
 be determined in each individual case by a careful consid- 
 
206 
 
 eration of the character of the machinery and tools, the 
 wear and tear that they are subjected to in the course of 
 their use, and the probable extent of their usefulness. 
 Another way would be to have an authority on such mat- 
 ters make a disinterested appraisal of their value. 
 
 257. In making up a statement of profit and loss, where 
 would you show (a) cash discount allowed customers for 
 the prompt payment of bills, (b) cash discount deducted 
 in payment of invoices by your clients? Explain briefly 
 and give reasons. 
 
 Under modern accounting methods the proper way would 
 be to run a special column for discounts, on both sides of 
 the cash book (a) the one for cash discount allowed cus- 
 tomers ought to be on the debit side of the cash book, and 
 headed Discount Or.; at the end of the month the total 
 of this column should be posted to the debit of the Dis- 
 count Account, (b) Cash discount for invoices, should 
 be entered in the special discount column on the credit 
 side of the cash book, and at the end of the month the total 
 should be posted to the credit of the Discount Account in 
 the ledger. 
 
 258. In closing the books of a firm it is found that the 
 accounts receivable include $5,000 of worthless accounts 
 and $10,000 of doubtful accounts. The firm decides to 
 deduct from the gross profits $15,000 for these items. 
 What would you consider the best method of carrying these 
 items on the general ledger? 
 
 The $5,000 worth of "worthless accounts," being abso- 
 
207 
 
 lutely worthless, there is no object in giving them further 
 consideration; therefore a simple entry, such as: 
 
 Profit and Loss a/c, $5,000. To Accts. Rec., $5,000. 
 Stating the full particulars, of course, would seem to 
 meet this requirement. The $10,000 of Doubtful Ac- 
 counts, however, since the stipulation is made that they 
 are doubtful, ought to be charged to Profit and Loss but 
 credited to a Reserve for Bad Debts a/c, and as the items 
 which comprise the account are discovered to be really 
 worthless they could be written off. 
 
 259. A corporation authorizes an issue of $1,000,000 
 of bonds. The trust company issues and certifies $500,000 
 of these bonds to December 31, 1907. On this date the 
 company sells $200,000 of bonds, pledges $200,000 as col- 
 lateral security for the payment of its notes and has 
 $100,000 in the treasury. How should this issue of bonds 
 appear on the balance sheet of the corporation on Decem- 
 ber 31, 1907? 
 
 The bonds issued to the trust company should appear 
 as "Certified by - Trust Co/' The $200,000 
 
 worth that were sold will of course go to the credit of 
 the Treasury a/c, and appear in the cash balance by debit- 
 ing the cash. The $200,000 that was pledged as collateral 
 should be deducted from the liabilities and the balance 
 should appear just as it is, $100,000 Bonds in the Treas- 
 ury. No provision is made here either for premium or 
 discount so it is taken for granted that the bonds were 
 issued at par. 
 
08 
 
 260. Write out in detail the general instructions for 
 taking the inventory of raw materials, work in process 
 and finished goods of a small company manufacturing au- 
 tomobiles. Show the general divisions that the inventory 
 requires and provide against errors in recording the items. 
 
 Eaw material is to be valued at cost plus carriage 
 charges and labor, &c., in unpacking and putting in store- 
 house. 
 
 Work in process should be the raw material, plus what- 
 ever charges there are for salaries, wages, &c., to bring 
 it to the present stage of production (construction), as 
 well as such a proportion of Rent, Heat, Light, &c., as 
 may be deemed desirable to charge to this part of the 
 work. 
 
 The finished product should be valued at cost. 
 
 The general divisions that the inventory would require 
 are about as follows: 
 
 BLANK AUTOMOBILE CO. 
 
 Quantity. 
 
 Description. 
 
 Unit " 
 Price. 
 
 Amount. 
 
 Total. 
 
 
 Raw Material: 
 Merchandise 
 
 
 
 
 
 
 
 
 Freight, express, ?. . 
 Labor, handling, ?. 
 
 Work in Process: 
 Merchandise 
 Salaries, wages, ? . . . 
 Light, heat, rent, ? . 
 Other expenses 
 
 
 
 
 
 
 
 
 
 
 Finished Material: 
 ? Automobiles 
 
 
 
 
 
 Tools, implements 
 Lamps, horns, ? 
 
 
 
 
 
 
 
 
 
209 
 
 Of course no two cases are alike ; so each one would have 
 to be taken according to its own peculiar characteristics. 
 The only way to provide against error is to have one count 
 the items and compare the prices given with those on in- 
 voices, and another to extend and foot the sheets. 
 
INDEX. 
 
 Accounts : PAGE NOS. 
 
 Administrators' 188 
 
 Nominal 16, 17, 79 
 
 Personal 16, 78 
 
 Real 16, 17, 79 
 
 Kevenue 10, 16 
 
 Analyses of a ledger 17, 204 
 
 Assets : 
 
 Captial 59, 181 
 
 Cash 159 
 
 Current 117, 159, 181 
 
 Fixed 16, 60, 181 
 
 Floating 83 
 
 Passive 100 
 
 Permanent 83 
 
 Quick 100 
 
 Auditing Definition of 88 
 
 Auxiliary Books 166 
 
 Averaging Accounts 105 
 
 Eule for 105 
 
 Bad debts how disposed of 25 
 
 Balance Sheet 8, 118, 193 
 
 Continental form 83 
 
 English form 83 
 
 Description of 83, 193 
 
 Order of items 184, 195 
 
 210 
 
211 
 
 PAOB'NOS. 
 
 Bills Receivable 27, 56, 137, 194 
 
 Payable 27, 194 
 
 Bonds : 
 
 Debenture 48 
 
 Income . 47 
 
 Mortgage 48 
 
 Bookkeeping : 
 
 Definition of 88 
 
 Essential principles of double entry 7 
 
 Branch house account 176 
 
 Brewery bookkeeping 171 
 
 Change from single to double-entry ... 30, 64, 120 
 Advantages of single over double- 
 entry 73, 74, 85, 98, 115 
 
 Theory of 115 
 
 Capital : 
 
 Definition of 16, 19, 118 
 
 Expenditure 12 
 
 Fixed 100, 155 
 
 Floating 99, 155 
 
 Loan 16 
 
 Nominal 118 
 
 Receipts 12 
 
 Share 20 
 
 Stock 19, 47 
 
 Working 32 
 
 Cash: 
 
 Accounts 45 
 
 Assets 16 
 
 Books 26, 55, 124 
 
 Closing the books 108, 143, 195 
 
213 
 
 PAGE N08. 
 
 Columnar system 12, 24, 139 
 
 Cash book 96 
 
 Journal 96 
 
 Sales book 96 
 
 Commission Merchants' books 35, 76 
 
 Common Stock 67 
 
 Consignment accounts 125 
 
 Construction account 20, 79, 133, 177 
 
 Contingent fund 18 
 
 Contingent liabilities 105, 150 
 
 Controlling accounts 90, 163, 190 
 
 Customers' 14 
 
 Creditors' 14 
 
 Credit definition of 57 
 
 Creditor 57 
 
 Cost accounts 36, 69, 123, 129, 202 
 
 Current account 19 
 
 Deficiency 19 
 
 Account - 11 
 
 Debit definition of 57 
 
 Debtor 57 
 
 Depreciation 102, 179 
 
 Account 179 
 
 Fund 18 
 
 Diminishing assets 148 
 
 Dividend accounts 22, 135 
 
 Doubtful debts 25 
 
 Executors' accounts 72, 114, 147 
 
 Expense accounts 21 
 
213 
 
 PAGE NOB 
 
 Factory accounts 113 
 
 Fixed Capital 100 
 
 Fixed charges 16, 41, 136 
 
 Floating capital 100 
 
 Floating indebtedness 16, 40, 41, 136, 160 
 
 Franchise accounts 177 
 
 Funded debt 136, 160 
 
 Funds : 
 
 Contingent 18 
 
 Depreciation 18, 69, 102 
 
 Investment 18 
 
 Eedemption 68, 198 
 
 Reserve 68, 82, 102 
 
 Sinking 82, 89, 102, 192 
 
 Surplus 114 
 
 General Ledger 39 
 
 Good Will: 
 
 Definition of 38, 53, 118 
 
 How valued 38, 53, 110 
 
 Theory of 110 
 
 Gross Profit 99 
 
 Impersonal accounts '. . 16, 166 
 
 Income account 39 
 
 Bonds 47 
 
 Interest accounts 45, 117 
 
 Inventories how treated, etc 112, 138 
 
 Investment fund 18 
 
 Joint accounts ..... , 21 
 
214 
 
 PAGE NOS. 
 
 Journal use of 30 
 
 Purchase 189 
 
 Sales 189 
 
 Journalizing 97 
 
 Kule for 106 
 
 Ledgers : 
 
 Accounts how divided 116 
 
 Doubtful debts 25 
 
 Forms of 104, 201 
 
 General 39 
 
 Petty sales 145 
 
 Private 39, 81, 87 
 
 Purchase 39 
 
 Sales 39, 84 
 
 Self-balancing 124 
 
 Stock or shares 31, 39, 95, 103 
 
 Liabilities 60, 79 
 
 Current 118 
 
 Fixed 16 
 
 Floating 16, 40, 41 
 
 Passive 100 
 
 Loan capital 16 
 
 Maintenance account 20, 135, 136 
 
 Merchandise account 20, 29, 45, 74, 119 
 
 Minute book 112 
 
 Mortgage bonds 48 
 
 Net Profit 103 
 
 Nominal accounts . 16, 17 
 
215 
 
 PAOX N08. 
 
 Opening a set of books 101 
 
 Operating expenses 16 
 
 Original entry books of 108 
 
 Patents _ 16, 177 
 
 Pay-roll self-proving 157 
 
 Personal accounts 16 
 
 Petty cash system of handling 94 
 
 Use of 109 
 
 Preferred stock 19, 47, 67 
 
 Private Ledger 39, 81, 87, 121, 138, 197 
 
 Profit and Loss account 11; 42, 43, 81, 125, 186 
 
 Purchase Ledger 39, 180 
 
 Real accounts 16, 17 
 
 Eeal estate accounts 16, 17, 118 
 
 Eealization and liquidation accounts 8 
 
 Receipts and Revenue difference between 185 
 
 Reserve account : 
 
 Fund 18 
 
 Secret 152 
 
 Resources . . . 79 
 
 Revenue : 
 
 Account 10, 16 
 
 Description of 15, 185 
 
 Expenditure 15 
 
 Sales Ledger forms of 84 
 
 Self-proving pay-roll 157 
 
 Share, capital 20 
 
 Sinking fund 18, 192 
 
216 
 
 PAGE N08. 
 
 Statement of affairs 20, 193 
 
 Statement of assets and liabilities 133, 146, 193 
 
 Statement of income and expenditure 13 
 
 Statement of receipts and expenditure 13 
 
 Statistics comparative 171 
 
 Stock Ledger 31, 39, 95, 103 
 
 Subscription account 21, 80, 114 
 
 Surplus 102, 114, 119 
 
 Surplus account 19, 39, 69 
 
 Surplus fund 114 
 
 Suspense account 21, 40, 45, 135 
 
 Transfer book 167 
 
 Trading account 10, 79, 110, 186 
 
 Treasury stock 135 
 
 Trial balance 8, 74, 193 
 
 Description of 132 
 
 Detection of errors 28, 132, 205 
 
 Process of taking 48, 92 
 
 Venture account 21 
 
 Voucher record system 52, 70, 75, 156 
 
 Advantages and disadvantages 183 
 
 Description of 70 
 
 account 157 
 
 Watered stock 67 
 
 Working capital 32 
 
Certified Public Accountant 
 Examinations 
 
 FREDERICK S. TIPSON, C.P.A, 
 
 NEW YORK CITY 
 
 Is prepared to coach candidates for C. P. A. 
 examinations, New York State, and by corre- 
 spondence all States where 0. P. A. legislation 
 is in force. Fee for the full course, which 
 includes complete instruction in all subjects 
 covered by the examinations $100; payable in 
 four monthly installments of $25 each. 
 
Aids to Accountant Students 
 
 BY 
 
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 THE THEORY OF ACCOUNTS 
 
 PRICE, $3.00 
 
 COMMERCIAL LAW 
 
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 Contain all questions set at the New York State Certified 
 
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ERSITY OF CALIFORNIA LIBRARY 
 
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