IBM uai tamp^a MOW

THE LIBRARY

THE UNIVERSITY
OF CALIFORNIA

LOS ANGELES

SUGGESTIONS FOR EXAMINING "ACCOUNTANCY AND BUSINESS MANAGE-
MENT" PART ONE

1. The Preface is the authors' "platform." It discusses the point of view from which
the course of study contained in the text and the accompanying Laboratory Unit was written.

2. The "Introduction to Bookkeeping" supplies a topical development of the beginning
work, with short exercises which permit of the teaching of one basic principle or bookkeeping
procedure at a time. See pages 1 to 47.

3. Observe the skillful teaching procedure in this beginning work, which is characteristic
of the entire course. Note the following steps under the topic "Recording Purchases" on
page 1:

(a) Information the statement of a few facts of common knowledge in ^[1.

(b) Illustration reproduction of a purchases bill and a written-up purchases book.

(d) Investigation by means of analysis observe how the analysis questions on page 3
"draw out" information and develop reasoning about the subject being considered.

(e) Application and review exercise 1, page 4, and accompanying analysis.

4. Pages 47 to 122 provide instruction and exercise matter to correlate with Laboratory
Unit One, the text matter furnishing the material for class recitations, and Laboratory Unit
One the application of accounting principles in a set of books.

5. Ledger account method. If it is desired to begin the study of bookkeeping by this
method, pages 47 to 122 the Elementary Accounting Section of the text supply the neces-
sary material. Notice how clearly principles are developed, the frequency with which they
are restated, and the manner in which their application is stressed.

6. Paragraphs 26, 34, 61 and 100 are examples of the extreme simplicity and clearness of
the language of instruction.

7. Observe how the division of the text material under topical headings adapts the book
to the class method of teaching.

8. Observe particularly the following features:

(a) Model Set, pages 14-15.

(b) Three short practice sets without vouchers, pages 16-17, 23-24, and 40-42.

(d) The introduction of the journal at the logical time, and the analogy between it and
other books of original entry, pages 33-36.

(e) Gradual expansion of the content of cash book entries, pages 37-40.

(f) The journalizing exercise and the comparison of classified and journalized sets,
page 46.

(g) The simple yet comprehensive treatment of general ledger accounts, the clear exposi-
tion of the principles underlying account classification, and the brief and simple statement
of rules.

(h) The manner in which rules are developed as the natural outgrowth of basic principles.

(i) The "Construction and Interpretation of the Income and Profit and Loss Statement,"
pages 100-103; and the corresponding treatment of the Statement of Assets, Liabilities, and
Capital, pages 105-108, with the accompanying treatment of accounts by groups.

(j) Closing the ledger through the Profit and Loss Summary Account, with separate
closing enb00P^ 'clearing" individual accounts, pages 110-114.

(k) TTfe "Recapitulation of Principles," pages 119-122.

(1) The Review Exercises, pages 123-127.

9. Finally, observe how the subject is stripped of its traditional mass of complicating
detail and minute discussions of routine practices that are not basic. Note how the text on
the other hand gets immediately to the heart of the subject in every topic presented.

THE H. M. ROWE COMPANY
CHICAGO BALTIMORE SAN FKANCISCO

Library

Graduate Sch ol of Business Admini strati on
University of California

T./-\o Annual QO 9/1 Pol ^ ^/">vin4 A

ACCOUNTANCY

AND

BUSINESS MANAGEMENT

PART ONE

HARRY M. ROWE, PH.D.

ASSISTED BY

HARRY M. ROWE, JR.

Script by the late C. P. Z^NER AND BY E. A. LUPPBB

SOUTHERN BRANCH

UNIVERSITY OF CALIFORNIA,

LIBRARY,
ANGELES, CALIF.

; -1922 'EDITION !' .*. ? ! ' ' '

43257

THE H. M. ROWE COMPANY

CHICAGO BALTIMORE SAN FRANCISCO

In keeping with the modern trend in business
.and in accounting practice, all rulings in books of
entry and ledger accounts in the illustrations in
this book are in black ink. The author recom-
mends the disrontinuanre of the use of red ink
for bookkeeping purposes in schools in the interest
of efficiency and economy.

BY
HARRY M. ROWE

StofoWi* 'pF<Jtecte t aiK l te>tGpyrigh table icm-

ponent parts of this work and prohibits all unlaw-
ful use of its composition, illustrations, methods,
eti. Infringers will be punished to the full extent
of the law.

lius. Aomin.
Library

56
*??>'

V, I

PREFACE

The course of study provided in "Accountancy and Business Management,"
and in the laboratory practice units which accompany it, is based to some extent
upon the author's previous work, "Howe's Bookkeeping and Accountancy."
However, a number of important changes in the teaching plan and in the selection
and arrangement of subject matter make the present course of study substantially
a new and original work.

The most important new features are:

(a) An Introduction to Bookkeeping at the beginning of the text, in which the
fundamental concepts of accepted accounting principles and business operations
are presented in an exceedingly simple and logical manner.

(b) The opportunity provided throughout the course of study for teaching by
the class method when this method is preferred. The teaching plan is so elastic,
however, as to permit the instructor to exercise his personal preference and
judgment as to methods of presentation.

(c) A minimum use of the reference feature contained in the author's former
works, with no references to topics other than those under immediate consideration.

(d) The separation of the material of the text into consecutive parts to cor-
respond with the material in the laboratory practice units. Each part of the text
and the accompanying practice unit can be completed in one semester in the high
school, or in the equivalent of that time in commercial and other schools.

(e) The laboratory units are relatively short and can be completed in about
one-half of a semester, or the equivalent of that time in the business school. They
contain fewer routine bookkeeping transactions, less detail and repetition in office
practice matter, and consequently fewer business papers and forms. Emphasis
is placed upon principles and the more constructive features of accounting practice.

(f) The inclusion of lessons in business management based upon the transac-
tions in the laboratory units. These lessons are really brief lectures on business
management and administration which emphasize, as does the text, the ultimate
aims of the study of accountancy and the more enduring educational benefits to be
derived from it.

Throughout the course the principles and practices of the subject and the
various steps taken in the entire cycle of accounting procedure have been developed
as topics for study and recitation on the lesson unit plan to the extent that the
subject permits of this method of treatment. The practice exercises following

IV PREFACE

oach topic or principle presented in a lesson arc short, and as a rule, can be com-
pleted easily within one daily period. Class instruction will be supplemented by
individual instruction to correct the deficiencies of students as they develop in the
work of the class. Individual instruction may be employed to any extent desired.

This book is intended for use in commercial courses in all types of schools
teaching business subjects to beginners. It will prove to be effective and entirely
satisfactory both in the private school and in the high school because of the recogni-
tion which is more and more being given to the greater efficiency of the class
method of teaching. \Its material and teaching plan are adapted to the require-
ments of all students taking up the subject for the first time, regardless of whether
it is their purpose to become bookkeepers, to engage in business for themselves,
or to pursue advanced courses in accounting and business administration
leading to professional degrees. It emphasizes principles and requires what
the author believes to be the minimum amount of practice work necessary to
provide the training which the student must secure to make him vocationally
efficient in his knowledge of the subject, no matter whether he may desire to
follow the occupation of bookkeeper, business manager, or accountant.

Unless the principle is conceded that the minimum aim of the bookkeeping
course is to qualify young people to start a business career, there can be no
justification whatever for teaching utilitarian subjects, and the remarkable growth
and development of commercial courses in public and private schools, which has
been the outstanding feature of educational progress in recent years, must be
pronounced a serious blunder. In face of the insistent and ever-increasing demand
for education which fits for commerce and industry, and the esteem in which such
practical education is held by educators and the general public, such a conclusion
cannot be maintained successfully.

The author's view is that the vocational value of a knowledge of book-
keeping and accounting is merely the immediate object to be served in offering the
course to students of business subjects. On the other hand, he contends that if the
aim of the bookkeeping course were merely to train for bookkeeping positions, that
aim could not be realized without at the same time teaching students much of what
constitutes an elementary course in business management. Such information
will in any case be absorbed unconsciously to a considerable degree by pupils from
their study of business transactions and their records in books of account, whether
the teacher attempts to emphasize the broader aspects of the subject or not. Since
both the educational and vocational interests of students in high schools and
private schools can be served by a properly constructed course of study, any
attempt to differentiate between their needs in the selection and arrangement of
text material is unnecessary and unwarranted, and would discriminate against

PREFACE V

those whose immediate interests may be of a vocational character. Therefore,
while the inclusion of bookkeeping in the curriculum of any school teaching business
subjects to beginners is not justified unless it does make them vocationally efficient,
its chief value lies in the training it imparts in the principles and methods of
conducting business enterprises. No subject in the commercial course is so
valuable as the subject of bookkeeping with respect to the opportunities and wealth
of material if affords for teaching young people how business is transacted. The
ultimate aim, therefore, of a course of study in this subject should be to supply a
comprehensive training in the uses to which accounting records and information are
put by business executives in managing and directing commercial and industrial
enterprises, rather than to qualify merely for keeping a set of books. Accounting,
accordingly, has been coordinated in this text with business management, and it
has been the purpose of the author to emphasize the importance of accounting
as an aid to intelligent business administration.

Attention is invited to the method which is consistently followed in pre-
senting a new topic for the student's consideration. Reason has been substituted
for rule in preparing the pupil's mind for that which is to be learned. The opening
statement of a few simple facts in connection with the topic under consideration is
followed by an illustration that is made the basis of an analytical investigation
which discloses the principles to be learned. The results of the analysis are then
summarized in a statement of principles and recapitulation of facts, from which
a brief and simple working rule is deduced. Each rule is essentially a summariza-
tion of the instruction on the topic or principle to which it applies.

In arranging the first year course in the high school, teachers will have con-
siderable latitude in the use to be made of Part One of the text and of Laboratory
Unit One. The Introduction to Bookkeeping, covering the first forty-six pages
of the text, is recommended by the author as the first work to be given to all
beginning students. It is estimated that it will require approximately six weeks
of the first semester to cover this material. The work of Unit One may then be
started and completed by the end of the first semester. If the students are im-
mature or if it seems desirable for any reason not to start work on a practice set
until the second semester, the material in Part One of the text devoted to Elemen-
tary Accounting, pages 47 to 127 inclusive, may be studied by the class method
during the remainder of the first semester. This section presents the subject
according to the ledger account method and provides an elementary treatment
of trial balances, statements, and the adjustment and closing of accounts.

If the first semester's work is confined to Part One of the text as suggested
;il>ove, Laboratory Unit One will be started at the beginning of the second semester.
In this case sufficient time will be available in the second semester to make an

VI PREFACE

introductory study of Part Two of the text, which treats of wholesale and partner-
ship accounting, as a preparation for Laboratory Unit Two, which will be used in
the third semester. In like manner, there will be time in the third semester to make
a preliminary study of Part Three, which is devoted to corporation accounting, as
a preparation for Laboratory Unit Three. This unit presents corporation and
general mercantile accounting, and will be used in the fourth semester. Laboratory
Unit Four treats of cost accounting for manufacturers, and provides a fifth semes-
ter's work. Of course, if Unit One is used in the first semester, the four units will
require four semesters instead of five in which to be completed. Thus the text
and four units provide a two year, or a two and a half year course, according to
the manner in which the material is used.

The author also recommends that students in private commercial schools be
started in the Introduction to Bookkeeping, which should be followed by the four
laboratory units referred to in the preceding paragraph. Students may be started
immediately, however, with, the work of Laboratory Unit One when it is preferred
to begin the course with a practice set. The importance of introducing the class
method of teaching as it is adapted to the subject matter of this course is suggested
to teachers in private commercial schools in order to realize as fully as possible the
educational benefits to which all young people who are preparing for business life
arc justly entitled.

The recognition accorded to my previous works on this subject by teachers,
students, accountants, and the business public encourages me to believe that this,
my latest and perhaps my last contribution in this form to the young people of
the country whose interests have always been paramount and nearest to my heart
in all of my educational activities, will be received with the same cordial interest.

H. M. ROWE.

Baltimore, 1922.

PART ONE

INTRODUCTION TO BOOKKEEPING
RECORDING PURCHASES

1. A merchant must buy goods before he can sell them. When goods are
purchased, they are usually accompanied by a bill which shows the amount of the
purchase. If the goods are not paid for at once, the bill shows the amount the
purchaser owes the seller. The following illustration shows a bill received by
Mr. Rogers for merchandise he purchased from Mr. Walton.

ILLUSTRATION 1 BILL

BALTIMORE. MD.. J an -1- 19.....

CARPENTER TOOLS *** ^' WALTON CUTLERY

GARDEN TOOLS WHOLESALE HARDWARE PAINTS

219 LOMBARD ST. VARN.SHES

SOLD TO c - E - Rogers,

TERMS

1220 N. Charles St. ,

.. 30 day.s City

2 Doz. Monarch Hatchets 9.00

1800

3 ' " Spades 17.50

5250

10 Gal. Oriole Flat White 2.60

2600

2. Notice that the bill gives the date of the purchase, the name and address
of the purchaser, the terms of the purchase, the quantity of each item purchased, the
price of each item, and the total amount of the bill. 'Terms 30 days" means that
this bill becomes due and payable thirty days from its date. Bills are prepared
by the seller and are received by the buyer. It is from the bills received by the
buyer that a record of his purchases is made in the book which is kept for that
purpose. It is called the purchases book, and only this one class of transactions
is entered in it.

2 ACCOUNTANCY AND BUSINESS MANAGEMENT

3. The following illustration shows Mr. Rogers' purchases book containing
the entries for five purchases which he made during the month of July. Notice
that the total purchases are entered and that the book is ruled to show that all
the entries of this class have been made for the month. The first entry is for
the bill shown in illustration 1.

ILLUSTRATION 2 PURCHASES BOOK

Lbz^ls. I
[^Gl^v!^

G&^tS

Note: The purpose of the column to the right of the date column will be explained later.

How TO INTERPRET PURCHASES BOOK ENTRIES

4. Refer to illustration 1. Mr. Rogers' bookkeeper would read this bill as
follows: "Mr. Rogers has purchased from J. R. Walton, 219 Lombard St., a bill of
goods dated January 1, amounting to $96.50, to be paid for in thirty days." He
would pay no attention to the fact that Mr. Walton was a wholesale hardware
merchant dealing in tools. Neither is the other information on the bill necessary
to the record of the essential facts of the transaction with Mr. Walton. If he were
asked to write a memorandum of the transaction, he would write it about as
follows: "Purchased from J. R. Walton, 219 Lombard St., bill of merchandise
dated January 1, terms 30 days, amounting to $96.50."

5. By referring to illustration 2 it will be seen that all the essential facts in
this statement are included in the entry for this bill, dated January 2, the date on
which it was received. The items included in purchase bills are omitted from the
entries because such bills are kept on file and can be referred to for the items at
any time. If the bookkeeper were asked when this bill would become due, he
would say, "Thirty days after the date of the bill, or January 31," which means
that it should be paid on or before that date. Bills begin to mature from the date
of the bill and not from the date of their entry. In the entries for the second and
subsequent purchases from the same person, the address is omitted.

INTRODUCTION TO BOOKKEEPING 3

ANALYSIS OF PURCHASES BOOK RECORD

6. Analyze the transactions recorded in the purchases book shown in illus-
tration 2 by answering the following questions. Write the answers in the form
suggested in illustration 3 below. Mr. Rogers is transacting the business and the
transactions are to be studied from his viewpoint. In other words, the student is
acting as his bookkeeper,

ANALYSIS

1. What were Mr. Rogers' total purchases for the month, and how is the
amount found?

2. If at the end of the month he had paid none of these bills, how much
would he have owed?

3. According to its terms, the bill for the first purchase from J. R. Walton
was due and payable in 30 days. When was it due?

4. What were the due dates of the bills entered on the 6th, llth, 19th,
and 27th?

5. Which one of the bills owed to Mr. Walton became due first?

6. If Mr. Rogers had paid each bill as it fell due, how much cash would
have been required to pay those that matured during January?

7. If all bills maturing during the month were paid, how much did he owe
at the end of the month, whom did he owe, and how much to each?

ILLUSTRATION 3

ANSWERS TO ANALYSIS OF PURCHASES BOOK RECORD

1 . $751 .60. The amount is found by taking the sum of the items entered.

2. $751.60.

3. Jan. 31.

4. Jan. 15; Jan. 24; Feb. 7; Feb. 25.

5. The bill of Jan. 9, due Jan. 24.

6. $ 96.50

101.20
221.80
$419.50 Total cash required.

7. Mason & Weller $182.40
R. C. Jones & Co. 149.70

$332.10 Amount owed at the end of the month.

ACCOUNTANCY AND BUSINESS MANAGEMENT

EXERCISE 1

W. H. Clark conducts a butter and egg business. He buys from farmers
and poultrymon and sells to grocers and other retailers. He received bills during
the month of August for the following purchases:

Aug. 1 John Holmes, Woodlawn, Md., July 30, 15 days, $175.00.

5 W. J. Dixon, Catonsville, Md., Aug. 4, 20 days, $155.40.

14 John Holmes, Aug. 11, 30 days, $211.50.

17 L. N. Wilson & Sons, Catonsville, Md., Aug. 16, 10 days, $98.70.

21 W. J. Dixon, Aug. 20, 15 days, $74.85.

24 John Holmes, Aug. 24, 30 days, $122.80.

27 Walter Crampton, Ellicott City, Md., Aug. 27, 10 days, $74.20.

With the purchases book shown in illustration 2 as a guide, write the entries
for the above transactions on a sheet of journal paper. Rule the two additional
perpendicular lines shown in the illustration. When the seven items have been
entered, find the total purchases and enter the amount in the second column.

In recording these transactions be careful to make the writing neat and uni-
form in size. Write the figures plainly and distinctly. Do not make the capital
letters too high. They must be written within the ruled lines on the paper. When
completed, present to the teacher for examination and criticism.

ANALYSIS

On the bottom of the page containing the purchases book, tabulate the
answers to the following questions:

1. What were Mr. Clark's total purchases for the month?

2. If on August 31 he had paid none of the bills for goods purchased during
August, how much would he have owed?

3. Do the total amount of purchases and the amount he would have owed
agree?

4. What bills became due and payable during the month?

5. If Mr. Clark paid these bills as they became due, how much did he owe
on unpaid bills on August 31?

6. How much did his purchases from each person amount to during the
month?

7. If he had paid the bills as they fell due during the month, whom did
he owe on August 31, and how much to each?

8. How much cash was required to pay the bills that matured during the
month?

INTRODUCTION TO BOOKKEEPING 5

RECORDING SALES

7. After goods have been purchased and placed in stock, they are then ready
for sale. As they are sold they are billed by the seller to the buyer. The following
illustration shows a bill sent by Mr. Cook to Mr. Hart for goods which were sold to
him.

ILLUSTRATION 4 BILL

ALL FRUITS AND

VEGETABLES

IN SEASON

ROBERT A. COOK

FARM PRODUCE AND PROVISIONS
9 EXCHANGE WAY

FLOUR, FEED,
AND GRAINS

PHILADELPHIA, PA.. .... . ......! 19

Aug. 1

SOLD TO

B. F. Hart

145 Walnut St. ,
...30...days City....

10 Brls. Harvest Apples 3.50

8. Notice that this bill gives all the details of the sale and is similar in gen-
eral form to bills for goods purchased. A record of each bill of goods sold is made
in a book kept for that purpose, called the sales book. Sales entries are therefore
another class of entries in keeping books.

The illustration on the next page shows Mr. Cook's sales book containing en-
tries for seven sales he made during August, with the total sales entered and the
book ruled to show that all the entries for the month have been made. The
first entry is for the bill shown in illustration 4.

9. The form of the sales book differs little from that of the purchases book.
However, since bills for sales are sent to the buyers, the items of each sale are
included in the sales book entry so that they may be referred to at any time for
quantities, grades, prices, and other information. As already stated, this is not
necessary in entering purchase bills because the bills received are kept for such
information. Sales are entered under the date they are billed, and the due date is
determined from the date of the bill.

G ACCOUNTANCY AND BUSINESS MANAGEMENT

ILLUSTRATION 5 SALES BOOK

/t /cs /9 s^/ .

[s^r^t^ac^tslfs / . /$

2-7

J. C,0

.22

.2S

3 6,0
-72f.

fJ
33

z/z

oo
CO

23-

6,0

so
6,0

ANALYSIS OF TRANSACTIONS

The purpose in analyzing transactions is to develop a thorough under-
standing of the relations established between the parties to them. Such an
understanding will greatly simplify the work later on in the course.

INTRODUCTION TO BOOKKEEPING 7

In each analysis the questions presented should be considered from the view-
point of the person whose books are being kept and not from the standpoint of the
other parties to the transactions.

ANALYSIS

1. What were Mr. Cook's total sales for the month, and how is the amount
found?

2. If none of these bills had been paid, how much would his customers have
owed him at the end of the month?

3. Who owes for these sales, Mr. Cook or the purchasers?

4. What were the due dates of the bills for goods sold?

5. What was the sum of the amounts due from Mr. Cook's customers for
bills maturing in August?

6. What is the sum of the amounts not due until the following month?

7. If Mr. Hart paid his bills when they became due, how much cash did
Mr. Cook receive from him during August?

8. If all bills falling due in August were paid, which customers continued
to owe Mr. Cook on August 31, how much did each owe, and what was
the total owed to him at the end of the month?

9. Explain the difference between the expressions, "One who is owed"
and "One who owes."

EXERCISE 2

J. R. Carter is a wholesale dealer in grain and feed. He buys from farm-
ers and sells to liverymen, users of horse-drawn vehicles, and others who buy
grain in small quantities. His sales for the month of April are given below:

April 3 J. C. Warren, 211 Second St., 10 days, 50 bu. Oats @ 90^.

5 City Livery Co., 12 Market Place, 15 days, 100 bu. Oats @ 90^;

20 bu. Corn@ $1.05.

9 John H. Homer Co., 472 High St., 20 days, 3 tons Hay @ $21.50.

14 J. C. Warren, 15 days, 5 tons Straw @ $14.25; 10 bu. Corn @ $1.10.

17 John H. Homer Co., 30 days, 100 bu. Oats @ 92|<z<.

18 J. C. Warren, 30 days, 3 tons Hay @ $22.50; 25 bu. Wheat @ $1.15.
23 City Livery Co., 30 days, 6 tons Straw @ $14.00; 10 tons Hay @

$22.00.
26 Walker & Sons, 126 Paca St., 30 days, 125 bu. Oats @ 900 ; 50 bu.

Corn @ $1.10; 2 tons Hay @ $20.00.
29 John H. Homer Co., 15 days, 50 bu. Oats @ 950.

8 ACCOUNTANCY AND BUSINESS MANAGEMENT

Record these sales in a sales book, using a sheet of journal paper. Foot
and rule the book in the manner illustrated.

ANALYSIS

1 . What were Mr. Carter's total sales for the month?

2. If on April 30 none of the bills for goods sold had been paid, how much
would his customers have owed him on that date?

3. Do the total sales and the amount that would be owed to him agree?

4. What bills became due during the month?

5. If each bill had been paid when due, how much would his customers
have owed him on April 30?

6. What were his total sales to each customer during the month?

7. Assuming that bills maturing during the month were paid, how much did
each customer owe him on unpaid bills on April 30?

8. If Mr. Warren paid his bills as they became due, how much of his indebt-
edness to Mr. Carter did he cancel?

9. If all bills falling due in April had been paid, how much cash did he
receive from his customers?

10. If the John H. Horner Co. had made no payments during the month
except $100.00 to apply on their account, how much of their indebtedness
to Mr. Carter would have remained uncanceled on April 30?

CASH RECEIPTS AND PAYMENTS

10. Cash is received and paid in making settlements for goods bought and
sold. Recording receipts and payments of cash is therefore another important
part of a bookkeeper's work. Cash receipts and payments are recorded in the
cash book.

RECORDING CASH RECEIPTS

11. Cash receipts are entered on the left-hand side of the cash book. Each
entry includes the amount (which should be written first), the date, the name of the
party from whom the cash is received, and a brief explanation of the entry. Illus-
tration 6 shows the entries for the cash received 'by A. S. Parker during the
month of January.

INTRODUCTION TO BOOKKEEPING
ILLUSTRATION 6 CASH BOOK RECEIPTS

^7
3o

/ '.2.6

ANALYSIS

1 . What was the total amount of Mr. Parker's cash receipts for the month?

2. What was the total amount of cash received from Walter Brown and
from Herrick & Co. during the month?

3. The last receipt of cash from Martel & Son being in full, what was the
total amount of the bill sold to them, if the date of the bill was Jan. 3?

4. How much cash was received for bills sold in December?

5. How much was received for bills sold in January?

6. How much of Mr. Dixon's indebtedness was canceled during the month?

7. If Mr. Parker paid out $500.00 of the total amount of cash received,
what was the balance of cash on hand January 31?

EXERCISE 3

Rule the two additional lines shown in illustration 6 on a sheet of journal
paper; then enter the following items of cash received by R. F. Emerson during
the month of July. Foot the column in pencil and then prove the addition. Next
write the total in ink and rule the book as shown in illustration 6.

July 2 F. B. Nelson, bill June 22, $95.40.

6 R. A. Fisher & Co., bill June 12, $125.12.

10 T. E. Young, bill June 12, $57.50.

12 F. B. Nelson, bill June 11, $176.19.

17 Carter & Harris, on a/c bill July 7, $100.00.

20 R. A. Fisher & Co., bill July 3, $117.20.

25 T. E. Young, bill July 9, $67.28.

28 G. E. Emery, bill June 28, $189.45.

31 Carter & Harris, in full bill July 7, $76.20.

AtVOrNTANCY AND WSIXKSS MANACKMKNT

ANALYSIS

1. What were the total receipts of cash for the month?

2. What were the amounts of cash received from F. B. Nelson, Fisher & Co.,
T. E. Young, Carter & Harris, and G. E. Emery?

3. If F. B. Nelson owed R. F. Emerson $345.12 on July 1, how much did
he owe on July 31?

4. If T. E. Young owed $124.78 on July 1, how much did he owe on July 31?

5. How much of the cash received from Fisher & Co. canceled their in-
debtedness on June bills? On July bills?

6. If the cash received from G. E. Emery on July 28 was received on the
day the money was due, what were the terms of the bill?

7. How much did Carter & Harris owe on the bill of July 7 after their
. payment of July 17 was received?

8. How much of the cash received applied on June bills? On July bills?

9. What is the difference in the meaning of "on a/c" and "in full of a/c"?
10. If Mr. Emerson had paid out $425.50 of the cash received during the

month, what was the balance left on hand July 31?

RECORDING CASH PAYMENTS

12. Cash payments are entered on the right-hand side of the cash book. The
entries include the amount (which should be written first) , the date, the name of the
party to whom the cash is paid, and a brief explanation of the entry. Illustration 7
shows the cash payments made by Brown & Co. for the month of February.

ILLUSTRATION 7 CASH BOOK PAYMENTS

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INTRODUCTION TO BOOKKEEPING 11

ANALYSIS
I

1. What was the total of Brown & Co.'s cash payments for the month?

2. What was the total amount paid to each party?

3. The last payment to Hill & Myers being in full, what was the amount of
the bill purchased from them?

4. How much cash was paid for bills purchased in January?

5. How much was paid for bills purchased in February?

6. How much of Brown & Co.'s indebtedness to Mr. Allen was canceled
during the month?

7. If the cash receipts for the month were $1,892.75, what was the cash
balance on February 28?

EXERCISE 4

The following are the cash payments of John C. Watson for the month of
July. Enter them in a 'cash book in the manner shown in illustration 7, ruling
on a sheet of journal paper the two additional lines required. Then foot and rule
the book.

July 1 Henry Miller, bill June 5, $27.80.

3 A. M. Gordon, bill June 16, $36.25.

7 Barnes & Co., to apply on June bills, $100.00.

12 Henry Miller, bill June 14, $52.28.

16 G. W. Richards & Co., on a/c bill July 1, $125.00.

19 Barnes & Co., in full of a/c, $89.23.

25 Blake Bros. Co., bill July 7, $142.82.

27 A. M. Gordon, bill June 22, $59.20.

28 G. W. Richards & Co., in full bill July 1, $69.90.

29 Henry Miller, bill July 12, $97.50.

30 L. 0. Cummins, bill June 30, $105.60.

ANALYSIS

1. What were the total payments for the month?

2. What were the total payments to Henry Miller, A. M. Gordon, Barnes
& Cp., G. W. Richards & Co., Blake Bros. Co., and L. O. Cummins?

3. If Mr. Watson owed A. M. Gordon $95.45 on July 1, what did he owe
on July 31?

4. If Mr. Watson owed Henry Miller $211.85 on July 1, how much of this
indebtedness remained uncanceled on July 31?

5. How much did Mr. Watson owe Barnes & Co. on July 15?

12 ACCOUNTANCY AND BUSINESS MANAGEMENT

6. If L. O. Cummins was paid on the day his bill became due, what were the
terms of the bill?

7. How much did Mr. Watson owe G. W. Richards & Co. on the bill of
July 1 on July 31? On July 20?

8. How much of the cash paid canceled June bills? July bills?

9. If Mr. Watson's cash receipts during the month were $972.66, what was
the balance on hand July 31?

REVIEW QUESTIONS

1 . Who prepares bills for goods purchased and who receives them?

2. Who prepares bills for goods sold and who receives them?

3. What does "terms 30 days" mean?

4. What is the purpose of the purchases book? Of the sales book?

5. Why are the items omitted in purchases book entries?

6. Why are they included in sales book entries?

7. From what date is the due date of a bill of goods purchased determined?

8. From what date is the due date of a bill of goods sold determined?

9. What is the purpose of the cash book?

10. Where are cash receipts entered? Cash payments?

11. What data does a cash book entry include?

12. What does "he canceled his indebtedness to me" mean?

CLASSIFICATION OF TRANSACTIONS

13. The transactions presented up to this point have been grouped in four
classes, namely: purchases, sales, cash receipts, and cash payments. These four
classes include by far the larger number of transactions met with in lines of busi-
ness in which profits are derived from the buying and selling of merchandise.

14. Grouping or classifying transactions is a part of the work of the book-
keeper. The transactions which follow are listed in the order in which they
occurred without regard to their classification. They are classified and recorded
properly in the purchases, sales, and cash books in the model set on pages 14 and
15. The transactions are those of J. M. Fuller for the month of January. He is
a dealer in farm products.

TRANSACTIONS MODEL SET

Jan. 2 Bought of Samuel Howe, Greenfield, Pa., per his bill of December 31,
terms 30 days, $125.00.

INTRODUCTION TO BOOKKEEPING 13

3 Sold to W. C. Archer, 12 Penn St., terms 10 days, 40 brls. Winter

Apples @ $3.40; total $136.00.
5 Bought of J. K. Todd, Columbia, Pa., per his bill of Jan. 4, terms 30

days, $100.00.
8 Sold to Harry Carter, 219 Central Ave., terms 10 days, 15 brls.

Winter Apples @ $3.45, $51.75; 40 bu. Potatoes @ $1.25, $50.00;

total $101.75.

10 Received cash from W. C. Archer to cancel bill of Jan. 3, $136.00.

1 1 Sold to W. C. Archer, terms 30 days, 10 brls. Winter Apples @ $3.50,
$35.00; 25 bu. Potatoes @ $1.25, $31.25; total $66.25.

16 Bought of Samuel Howe per his bill of Jan. 15, terms 20 days,
$156.00.

17 Received cash from Harry Carter in part payment of bill sold him
Jan. 8, $75.00.

21 Sold Wm. Martin, 925 Elm St., terms 15 days, 50 bu. Potatoes @
$1.22; total $61.25.

22 Sold to Harry Carter, terms 20 days, 15 bu. Potatoes @$1.30, $19.50;
30 brls. Winter Apples @ $3.50, $105.00; total $124.50.

24 Paid J. K. Todd to cancel bill of Jan. 4, $100.00.

27 Received cash from Wm. Martin in partial cancelation of his bill of
Jan. 21, $35.00.

28 Paid Samuel Howe in full to cancel bill of Dec. 31, $125.00.

31 Sold to W. C. Archer,- terms 30 days, all of the stock remaining on
hand, 5 brls. Winter Apples @ $3.40; total $17.00.

FOOTING AND RULING BOOKS IN MODEL SET

15. Notice that the purchases and sales books are footed and ruled in the
same manner as formerly. In footing and ruling the cash book, however, the
cash balance, which is found by taking the difference between the total receipts and
total payments, is entered on the payments side and added to the total payments,
as illustrated in the model cash book. This is done in order to show that the
sum of the payments and the balance is equal to the total receipts. This process
is called "balancing" the cash book. The footings showing this equality should
always be entered on the corresponding line on the two sides of the book, even if
several lines on one side or the other must be left blank in order to do so. The
balance is then brought down to the receipts side under the footing.

ACCOUNTANCY AND BUSINESS MANAGEMENT

ILLUSTRATION 8 PURCHASES BOOK MODEL SET

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ANALYSIS OF MODEL SET ENTRIES

By following the analysis below, trace each transaction on pages 12 and 13 to
the corresponding entry in the books.

Jan. 2 In this transaction merchandise is purchased; therefore the entry is

made in the purchases book, where such transactions are recorded.
3 In this transaction merchandise is sold; therefore the entry is made

in the sales book, where such transactions are recorded.
5 Merchandise is purchased purchases book.
8 Merchandise is sold sales book.

10 In this transaction cash is received ; therefore the entry is made on the
receipts side of the cash book, where such transactions are recorded.

1 1 Merchandise is sold sales book.

16 Merchandise is purchased purchases book.

17 Cash is received cash book, receipts side.

2 1 Merchandise is sold sales book.'

22 Merchandise is sold sales book.

24 In this transaction cash is paid; therefore the entry is made on the
payments side of the cash book, where such transactions are recorded.

27 Cash is received cash book, receipts side.

28 Cash is paid cash book, payments side.
31 Merchandise is sold sales book.

ILLUSTRATION 9 CASH BOOK RECEIPTS MODEL SET

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INTRODUCTION TO BOOKKEEPING

ILLUSTRATION 11 SALES BOOK MODEL SET

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ANALYSIS QUESTIONS >

1. What were Mr. Fuller's total purchases from Mr. Howe for the month?
What were the total payments to him? How much did Mr. Fuller owe Mr. Howe
onJanuarySl? '+'. ^>,

2. What were Mr. Fuller's total sales to Mr. Archer? How much cash was
received from him? How much did Mr. Archer owe Mr. Fuller on January 31?

3. Which bill was canceled by the cash receipt entered on January 17?

ILLUSTRATION 10 CASH BOOK PAYMENTS MODEL SET

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Iti ACCOUNTANCY AND BUSINESS MANAGEMENT

4. Which bill was canceled by the payment entered on January 24?

5. Who received the money for the cash payment entered on January 28?
Who paid it?

6. Who received the money for the cash receipt entered on January 27?
Who paid it?

SET 1

COUNTRY PRODUCE AND PROVISION BUSINESS

R. L. Clark began business in Springfield, Mass., on January 1, as a dealer
in country produce and provisions. He entered into a contract with John
Reed, a farmer of Fairview, Mass., to supply him with fruits and vegetables for
which Mr. Clark is to pay as soon as he receives returns from sales of these
goods. Although he has no ready money to invest in his business, he hopes soon to
accumulate out of his profits a sufficient cash capital with which to finance it.

While Mr. Clark is beginning business without any capital, such as money,
property, etc., which is the accumulated profits of previous industry, he has the
advantage of a good credit. Credit consists of a good name a reputation for
honesty, ability, and trustworthiness. A good credit is essential in successfully
operating most business enterprises because a large part of the world's commerce
is conducted on a credit basis. In this instance, Mr. Clark's good reputation
enables him to start in business for himself. If he is successful in his venture and
through his industry earns profits and saves them, he will thus accumulate capital,
or wealth.

The following is a memorandum of the business Mr. Clark transacted in
January. Record these transactions properly in a set of books. Using a double
sheet of journal paper, open the purchases book on the front outside page (page 1),
the cash book on the two inside pages (pages 2 and 3), and the sales book on the
back outside page (page 4). Rule the additional perpendicular lines required as
instructed in previous exercises.

TRANSACTIONS SET 1

Jan. 2 Bought first bill of fruits and vegetables from John Reed, Fairview,

Mass., dated Dec. 30, terms 30 days, $180.00.
3 Sold W. B. Morgan, 240 Second Ave., terms 10 days, 25 brls. Baldwin

Apples @ $3.30.

5 Bought of John Reed, bill of Jan. 4, terms 30 days, $95.00.
8 Sold Heald & Co., 9 Exchange Way, terms 10 days, 50 bu. Potatoes

@ $1.20; 30 brls. Baldwin Apples @ $3.50.
13 Received cash from W. B. Morgan to cancel bill of Jan: 3, $82.50.

INTRODUCTION TO BOOKKEEPING 17

14 Sold W. B. Morgan, terms 20 days, 10 brls. Baldwin Apples @ $3.35 ;

20 bu. potatoes at 95jf.

17 Bought of John Reed, bill of Jan. 16, terms 30 days, $167.50.
17 Received cash from Heald & Co. to cancel bill of Jan. 8, $165.00.
20 Sold Walter Williams, 316 Washington St., terms 10 days, 45 brls.

Baldwin Apples @ $3.30; 60 bu. Potatoes @ 97^.
23 Bought of J. H. Cooper, Merrick, Mass., bill of January 16, terms 10

days, $27.00.

25 Received cash from Walter Williams to cancel bill of January 20,
$206.70.

26 Paid cash to J. H. Cooper to cancel bill of Jan. 21, $27.00.
30 Paid John Reed cash to cancel bill of Dec. 30, $180.00.

30 Sold remainder of goods on hand to Walter Williams, terms 30 days,
50 bu. Potatoes @ 95^; 15 brls. Baldwin Apples @ $2.42.

31 Paid cash to John Reed to cancel bill of Jan. 4, $95.00.

FOOTING AND RULING BOOKS

Foot and rule the purchases and sales books as instructed previously. In
the cash book enter the total receipts and total payments in the right hand money
columns as formerly. Subtract the payments from the receipts to find the
"balance" of cash on hand, enter it on the payments side, write the footings, rule the
book, and bring down the balance in the manner shown in the cash book of the
model set.

ANALYSIS OF SET 1

1. What were the total purchases from John Reed during the month? What
were the total payments to him? How much did Mr. Clark owe him on Jan. 31?

2 What were the total purchases from Mr. Cooper? What were the total
payments to him? How much did Mr. Clark owe him on January 31?

3. What were the total sales to Mr. Morgan? What were the total receipts
of cash from him? How much did he owe Mr. Clark on January 31?

4. What were the total sales to Heald & Co? What were the cash receipts
from them? How much did they owe Mr. Clark on January 31?

5. What were the total sales to Walter Williams? What were the cash
receipts from him? How much did he owe Mr. Clark on January 31?

6. What bill was canceled by the cash payment entered on January 30?

7. What bill was canceled by the cash receipt entered on January 25?

8. For what amount did Mr. Clark become indebted to Mr. Reed and how
much of this indebtedness did he cancel during the month?

Note: The teacher should retain all papers handed in by students for this and succeeding sets because they must
be returned (o the pupijft later on when additional work on the sets is called for.

18 ACCOUNTANCY AND BUSINESS MANAGEMENT

GROUPING TRANSACTIONS WITH PERSONS

16. In making the analysis of the transactions for the model set and set 1,
called for on pages 14 and 17, it was necessary to refer to the purchases, sales, and
cash books for the different items of merchandise bought and sold and of cash
received and paid, and to make separate calculations to determine the final result
of the transactions with each party. This work would have been greatly simpli-
fied if a separate record grouping all of the transactions with each party had been
kept. Such a record is provided in bookkeeping by keeping an account with each
party with whom business is transacted in a book called the ledger. Accounts
show similar items arranged in the most convenient form for arithmetical solution
and analysis, The ledger is the book of accounts.

PERSONAL ACCOUNTS

17. Personal accounts are records kept in the ledger with parties with whom
business is transacted. The object in keeping personal accounts is to ascer-
tain the amounts others owe to us on account, and the amounts we owe to others
on account at any given time. All accounts with individuals, firms, or corporations
showing amounts owed to or by them are classed as personal accounts for book-
keeping purposes.

18. Personal accounts are divided into two classes: (a) those showing what
others owe to us, which- are known as accounts receivable; and (b) those showing
what we owe to others, which are known as accounts payable.

POSTING

19. Any book which receives the first entry of a transaction, such as the
purchases, sales, and cash books, is a book of original entry. The entries in books of
original entry are transferred to the accounts in the ledger by a process called
posting. The ledger is the book of final entry.

POSTING FROM THE PURCHASES AND SALES BOOKS

20. Illustration 12 shows the postings to the personal accounts in the ledger
of the entries contained in the purchases book (illustration 8) and sales book (illus-
tration 11) of the model set on pages 14 and 15. Notice that all entries in the
purchases book are posted to the right-hand side of the ledger accounts of the
persons from whom goods were purchased, and that all entries in the sales book are
posted to the left-hand side of the accounts of the persons to whom goods were sold.

INTRODUCTION TO BOOKKEEPING
ILLUSTRATION 12 LEDGER MODEL SET

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21. As each entry is posted the initial and page number of the book of
original entry are entered in the ledger account as shown above. The page
number of the ledger account to which the item is posted is entered in the page
column of the book of original entry. See illustrations 8 and 11.

ANALYSIS OF POSTINGS FROM PURCHASES AND SALES BOOKS

1. From what book is the credit of $125.00 to Mr. Howe's account posted?

2. What book contains the original entry for the posting to Mr. Howe's
account dated January 16?

3. Where is the purchase item of January 5 posted?

4. From what book are the debit items to Mr. Archer's account posted?

5. What book contains the original entries for the items posted to the debit
side of Mr. Carter's account?

6. From what book is the posting to Mr. Martin's account dated January 21
made?

7. What do "S 4" and "P 1" in the above accounts mean?

20 ACCOUNTANCY AND BUSINESS MANAGEMENT

DEBITING AND CREDITING PERSONAL ACCOUNTS
FROM THE PURCHASES AND SALES BOOKS

22. Parties from whom goods are purchased on account are creditors of the
buyer because he owes them until the goods are paid for. The buyer therefore
credits the parties from whom he buys on account, and the entries for such transac-
tions in the accounts which he keeps with his creditors are credit entries. These
credits record the buyer's indebtedness to his creditors. It is the universal custom
to record credits on the right-hand side of ledger accounts.

23. Parties to whom goods are sold on account are debtors of the seller because
they owe him until the goods are paid for. The seller therefore debits the parties
to whom he sells on account, and the entries for such transactions in the accounts
which he keeps with his debtors are debit entries. These debits record the debtor's
indebtedness to the seller. It is the universal custom to record debits on the

left-hand side of ledger accounts.

POSTING FROM THE CASH BOOK

24. The model ledger on the next page shows the postings of the entries
from the cash book in the model set (illustrations 9 and 10) in addition to the
postings from the purchases and sales books shown in illustration 12. Note that
all entries on the receipts side of the cash book are posted to the right-hand side
of the accounts in the ledger of the persons from whom the cash was received, and
that all entries on the payments side are posted to the lejt-hand side of the
accounts of the persons to whom payments were made.

ANALYSIS OF POSTINGS FROM CASH BOOK

1. Where is the original entry for the debit of $125.00 to Samuel Howe's
account?

2. Where is the original entry for the credit of January 9 in Mr. Archer's
account?

3. To what account and which side is the cash payment of January 24 posted?

4. To what account and which side is the cash receipt of January 17 posted?

5. Where is the original entry for the credit of $35.00 to William Martin's
account?

DEBITING AND CREDITING PERSONAL ACCOUNTS FROM THE CASH BOOK

25. When cash is received from a debtor in full for a sum owed by him, the
payment cancels the indebtedness, the party who makes payment ceases to be
a debtor, and the parties stand in the same financial relation to each other as they

INTRODUCTION TO BOOKKEEPING
ILLUSTRATION 13 LEDGER MODEL SET

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did before they transacted business. The amount of the payment is entered in
the cash receipts book and is posted to the debtor's account in the ledger on the
side opposite the debit entry to show that the indebtedness has been canceled and
that the item has been closed out of the account.

26. When cash is paid to a creditor in full for a sum owed to him, the pay-
ment cancels the indebtedness, the party who receives payment ceases to be a
en- -liter, and both parties stand in the same financial relation to each other as

did before they transacted business. The amount of the payment is entered
in tin cash payments book and posted to the creditor's account in the ledger
on the side opposite the credit entry to show that the indebtedness has been can-
((lc- 1 an 1 that the item has been closed out of the account.

27. If a partial payment of an amount previously debited or credited to a
>nal account is made, such payment partially cancels the original debt, and the

(lifTcronro between the two amounts shows the balance still due on the original
debt. This is illustrated in the account of William Martin.

22 ACCOUNTANCY AND BUSINESS MANAGEMENT

RULING OUT CANCELING ITEMS IN PERSONAL ACCOUNTS

28. Notice how the canceling items in the accounts in illustration 13 are
ruled out. Such items could be canceled by erasing the original debit or credit,
writing "Paid" alongside of it, or ruling a line through it. The first method
would destroy the record entirely, and the second and third methods would invite
errors and confusion because one debit or credit might be canceled by two or more
items. The method of entering canceling items on the opposite side of an account
and ruling them out has therefore been adopted to provide a convenient and
permanent record.

BALANCING PERSONAL ACCOUNTS

29. The balance of an account is found by taking the difference between the
sum of the debits and the sum of the credits. When there are two or more unpaid
items on either side of an account, as in Mr. Archer's account, the items are added
and the total is written in small pencil figures directly underneath the last item.
The balance is entered in the explanation column of the larger side on the line on
which the last entry is made. If the debit side is the larger, the party owes the
proprietor the amount of the balance. If the credit side is the larger, the pro-
prietor owes the party the amount of the balance.

SET 1 CONTINUED

On a single sheet of ledger paper open the personal accounts required for
set 1, allowing six lines for each account, and post the entries from the purchases,
sales, and cash books in the order named.

PROCEDURE IN POSTING
The following procedure should invariably be followed in posting:

1. Post the amount first.

2. Next post the date, and explanation if any. Make it a rule upon opening
an account to write immediately the year date in the date columns.

3. Enter in the ledger account the initial and page number of the book of
original entry from which the item is posted.

4. Write in the folio column of the book of original entry the ledger page
number of the account to which the item is posted.

5. Rule out canceling items as they are posted.

When the posting is completed, present the books of original entry and the
ledger to the teacher for approval. This completes the work of set 1.

INTRODUCTION TO BOOKKEEPING 23

SET 2
GRAIN AND FEED BUSINESS

Adam Richards, of Marshalltown, Iowa, has made an arrangement with his
friends among the farmers in his community to cooperate with them in securing
satisfactory prices for their crops. As he does not have any capital, they agreed
to send him their grain, fruits, and vegetables on open account at prices sufficient
to cover the cost of production and a fair profit. Mr. Richards on his part agreed to
devote all of his time to finding a market for the crops at prices which will enable
him to make a profit over and above the cost to him and the value of his time and
labor. He has further agreed to pay the farmers as soon as he receives returns
from the products sold.

His transactions for the month are given below. Record them in the proper
books, using a double sheet of journal paper as in set 1. After all entries are made,
total and rule the books of original entry. Then post the items from the books of
original entry to the ledger in the following order purchases book, sales book, and
cash book. Use a single sheet of ledger paper, allowing six lines for each account.
Rule out balancing items as they are posted ; then enter the balances of the open
accounts in pencil figures on the proper side. When completed, present the work
to the teacher for approval.

TRANSACTIONS SET 2

Oct. 1 Received shipment of wheat, corn, and oats from J. H. Burch,
^Albion, Iowa, per his bill of Sept. 28, on account, $232.50.

2 Sold Frank J. Darling, 12 Main St., on account ten days, 25 bu.
wheat @ $1.60; 50 bu. oats @ 75

3 Sold Muscatine Flour Mills, Muscatine, Iowa, on account 15 days,
125 bu. wheat @ $1.58; 20 bu. corn @ $1.25.

6 Received shipment from John Roberts, Marietta, Iowa, per his bill
of Oct. 5, on account, $249.00.

10 Sold Henry Miller, Melbourne, Iowa, on account 15 days, 5 tons
baled hay @ $21.50; 50 bu. rye @ $1.85; 40 bu. corn @ $1.27.

1 1 Received from Frank J. Darling cash for bill of Oct. 2, $77.50.

17 Received cash from Muscatine Flour Mills in full of account, $222.50.

18 Paid J. H. Burch on account, $100.00.

20 Sold Frank J. Darling, on account 15 days, 50 bu. oats @ 77|ff;
3 tons baled hay @ $21.50.

24 ACCOUNTANCY AND BUSINESS MANAGEMENT

21 Bought from Evan Douglas, Three Hills, Iowa, per his bill of Oct. 9,
on account, $47.50.

22 Received cash from Henry Miller to apply on bill of October 10,
$200.00.

23 Sold Henry Miller, terms 15 days, 30 bu. wheat @ $1.61; 15 bu.
corn @ $1.25.

25 Paid John Roberts on account, $150.00.

26 Sold Muscatine Flour Mills, on account 30 days, 50 bu. corn @ $1.20.

27 Paid J. H. Burch on account, $75.00.

28 Received cash from Henry Miller on account, $100.00.

29 Paid Evan Douglas in full for bill of October 19, $47.50.
31 Paid John Roberts on account, $50.00.

IMPERSONAL ACCOUNTS

30. So far the only ledger accounts considered have been accounts \vith
persons; that is, personal accounts. In modern bookkeeping, records of the cost of
merchandise purchased, the income from merchandise sold, the receipts of cash,
the payments of cash, and of the expenses of doing business are also kept in the
ledger. These records are kept in the purchases, sales, cash, and expense accounts.
Such accounts are impersonal accounts. Taken together, they show on one side
the costs and receipts, and on the other the incomes and expenditures resulting
from conducting a business. It is from their results that the final profit or loss is
determined. Illustration 14 shows, in addition to the personal accounts pre-
viously illustrated, the impersonal accounts required in the ledger^For the model
set on pages 14 and 15.

31. The item on the debit side of the purchases account is the posting of the
total purchases from the purchases book. The item on the credit side of the sales
account is the posting of the total sales from the sales book. The debit item in the
cash account is the posting of the total receipts from the cash book, and the credit
item is the posting of the total payments. As no expenses are recorded in the
model set, no expense account is required in the ledger.

DEBITING AND CREDITING IMPERSONAL ACCOUNTS

32. Purchases are invariably debited to purchases account. Sales are
always credited to sales account. The merchandise for which these accounts are
debited and credited respectively consists exclusively of the commodities dealt in.
Merchandise is the name given to commodities which are purchased for the pur-
pose of selling them at a profit.

INTRODUCTION TO BOOKKEEPING
ILLUSTRATION 14 LEDGER MODEL SET

33. The total receipts of cash are invariably debited to cash account, and the
total payments are always credited to that account.

34. We have learned that we debit persons when they owe us, and we credit
them when we owe them. It should be clearly understood that the terms debit
and credit are used in connection with impersonal accounts only as convenient
terms to indicate which side of such accounts is referred to. Only persons can
owe or be owed. The purchases and sales accounts represent inanimate things
which have no power to owe or be owed, and therefore cannot be debited or credited
for the reasons that personal accounts are debited and credited. The same is true

ACCOUNTANCY AND BUSINESS MANAGEMENT

of the cash and expense accounts. The student should understand at once that
nveipts, costs, and expenses arc merely listed on the debit side of impersonal
accounts, and that expenditures, returns, and incomes are listed on the credit side.

SET 2 CONTINUED

Open the purchases, sales, and cash accounts in the ledger for set 2 and post
to them the totals of the purchases, sales, and cash books. As the totals are
posted, enter in the folio column of the ledger the page number of the book of
original entry from which the items were posted. Then enter in the book of
original entry the page number of the ledger to which the postings were made.
When completed, present the books of original entry and the ledger to the teacher
for approval.

. EQUALITY OF DEBITS AND CREDITS

35. Refer to the purchases book (illustration 8) and the ledger (illustration 14)
of the model set, and notice that the sum of the three items posted to the credit
of personal accounts from the purchases book is equal to the debit to the pur-
chases account for the posting of the total purchases. The entries in the
purchases book, as posted to the ledger, expressed in itemized ledger form are
therefore equivalent to the third illustration below:

Purchases Book

Samuel Howe 125.00
J. K. Todd 100.00
Samuel Howe 156.00

Total Purchases

Ledger as posted
Samuel Howe

Which is equivalent to
Samuel Howe

381.00

125.00
156.00

J. K. Todd

100.00

Purchases

381.00

125.00
100.00
156.00

Total
debits
381.00

Total
credits
381.00

Total
debits
381.00

Total
credits
381.00

INTRODUCTION TO BOOKKEEPING

36. Posting the total of the purchases book to the purchases account, instead
of posting each item separately, saved two postings. If there had been one hundred
purchases during the month instead of three, ninety-nine postings would have
been saved.

37. In like manner, the sum of the six debits to persons posted from the
sales book is equal to or balanced by the total sales posted to the sales account, and
five postings are saved by posting the total instead of posting each item. Thus :

Sales Book

W. C. Archer 136.00
Harry Carter 101.75
W. C. Archer 66.25
William Martin 61.25
Harry Carter 124.50
W. C. Archer 17.00

Total Sales

Ledger as posted
W. C. Archer

Which is equivalent to
W. C. Archer

136.00
66.25
17.00

Harry Carter

136.00
66.25
17.00

Harry Carter

506.75

101 . 75
124.50

William Martin

101.75
124.50

William Martin

61.25

Sales

506.75

136.00

101.75

66.25

61.25

124.50

17.00

Total

debits

credits

debits

credits

506.75

38. Similarly, the three credits to personal accounts posted from the cash
receipts book are balanced by the total receipts posted to the debit of cash account,
and the two debits to personal accounts posted from the cash payments book are
balanced by the total payments posted to the credit of that account. If each item
of cash received and paid had been posted separately to the cash account, five
pn-tings would have been required instead of two postings for the totals, or three
additional postings as illustrated on the next page ;

ACCOUNTANCY AND BUSINESS MANAGEMENT

Cash Receipts

W. C. Archer 136.00
Harry Carter 101.75
William Martin 35.00

Total Receipts

Cash Payments
J. K. Todd 100.00
Samuel Howe 125.00

Ledger as posted
Samuel Howe

Which is equivalent to
Samuel Howe

272.75

225.00

125.00
J. K.

Todd

100.00
W. C.

Archer

Harry

136.00
Carter

Williarr

101.75
i Martin

35.00

125.00

J. K. Todd

100.00
W. C. Archer

136.00
Harry Carter

101.75
William Martin

35.00

Cash

136.00

100.00

101.75

125.00

35.00

Total

debits

credits

497.75

272.75 225.00

Total Total

debits credits

497.75 497.75

39. One of the objects therefore in classifying and recording transactions
in the purchases, sales, and cash books is to reduce posting to the minimum, since
the totals instead of the individual items can be posted to the purchases, sales,

and cash accounts.

40. If all the debit and credit items included in the three center illustrations
above are brought together in their respective accounts, the accounts will appear *
exactly as they are in the model ledger. The three right-hand illustrations show
a detailed analysis of the postings in the model ledger.

41. It follows from the above that when all items and totals in the books of
original entry have been correctly posted to the ledger accounts, the total debits will
equal the total credits. It is for this reason that this method of keeping books is
called double entry bookkeeping; that is, for each debit entry there are one or more
credit entries of equal amount, or vice versa.

INTRODUCTION TO BOOKKEEPING

THE TRIAL BALANCE

42. Since the debit and credit items posted from each book of original entry
are equal, it follows that after all balancing items have been ruled out of the
accounts, the sum of the debit balances must equal the sum of the credit balances,
as shown by the following list of accounts, with their balances, taken from the model
ledger (illustration 14).

Samuel Howe 156.00

W. C. Archer 83 25

Harry Carter 124 . 50

William Martin 26.25

Purchases 381.00

Sales 506.75

Cash 47.75

662.75 662.75

43. A trial balance is a' list of open accounts in the ledger, with the balance
of each account set opposite its name, showing that the sum of the debit balances
is equal to the sum of the credit balances. The above list of balances is in reality
a trial balance. Accounts that are in balance are not included in the trial balance.
Illustration 15 shows the balances of the accounts in the model ledger set up in
the regular form of a trial balance. The figures in the folio column are the ledger
page numbers of the accounts.

ILLUSTRATION 15 TRIAL BALANCE MODEL SET

3-C,

RESULTS SHOWN BY TRIAL BALANCE

The above trial balance shows the following results:

1. J. M. Fuller, the proprietor, owes Samuel Howe $156.00. Amounts owed
by us to others are liabilities.

2. Mr. Archer owes Mr. Fuller $83.25. Amounts owed to us by others are
assets.

ACCOUNTANCY AND BUSINESS MANAGEMENT

3. Mr. Carter owes Mr. Fuller $124.50, which is an asset.

4. Mr. Martin owes Mr. Fuller $26.25, which is an asset.

5. Mr. Fuller's purchases for the month cost him $381.00.

6. His sales for the month were $506.75.

7. His cash balance is $47.75, which is an asset. Assets also include what a
person owns or possesses.

STATEMENT OF INCOME

44. Since all the merchandise Mr. Fuller bought during the month was
sold, the cost of purchases as shown by the balance of the purchases account,
$381.00, is therefore the cost of goods sold. Since the income from goods sold, as
shown by the balance of the sales account, is $506.75, the profit is the difference
between these two amounts, thus:

Income from Goods Sold $506.75
Cost of Goods Sold 881.00

Profit 125.75

This statement would be set up in bookkeeping form as follows:
ILLUSTRATION 16 STATEMENT OF INCOME

45. The profit is designated as the gross trading profit because it is the profit
which results from the buying and selling of or trading in merchandise. Gross trad-
ing profit is defined as the difference between the income from safes and the cos of
goods sold. If the cost of goods sold exceeds the income from sales, the difference
is the gross trading toss.

46. It will now be of interest to ascertain where this profit of $125.75 is.
As Mr. Fuller began business without capital and now has a cash balance of $47.75,
which is so much capital, that much of his profit is accounted for in his cash account,
leaving $78.00 still unaccounted for. The trial balance shows that three of his
customers still owe him for goods sold, and that he owes one creditor for goods
purchased, the amounts being as follows:

INTRODUCTION TO BOOKKEEPING

Amounts Owed to Mr. Fuller (Assets)
W. C. Archer $83.25

Harry Carter 124.50

William Martin 26.25

Total

Amount Owed by Mr. Fuller (Liabilities)
Samuel Howe

Net Amount Owed to Mr. Fuller

234.00

156.00
78.00

47. It will thus be seen that the remainder of Mr. Fuller's profit is repre-
sented in the difference between what others owe him and what he owes others.
This exact amount would have been realized in cash if all sums owed to him and the
sums he owed to others had been paid on or before January 31.

STATEMENT OF ASSETS AND LIABILITIES

48. When profits are determined, it is also customary to ascertain one's
financial standing by preparing a statement of assets and liabilities. This statement
is prepared from the accounts in the trial balance which show assets and liabilities.
If the cash balance were included, the above tabulation of amounts owed to and
by Mr. Fuller would be a statement of his assets and liabilities. A complete
statement, arranged in proper bookkeeping form, appears below.

ILLUSTRATION 17 STATEMENT OF ASSETS AND LIABILITIES

[j^^^^^^^^^-i^^^^ ^ubsti^^z>t^-,?/ t /<? . Q /fai-LsJ'A^

f J " . -- -jT j --/ -jr -"<<"

1C,

49. The difference between the sum of the assets and the sum of the liabilities
is the net assets. Capital consists of assets. The net assets constitute the pro-
prietor's capital investment, or net capital. In this instance the net assets are repre-
sented by and are equal to the profit for the month. It will thus be seen that
capital is accumulated out of profits. Losses, on the other hand, decrease capital.

32 ACCOUNTANCY AND BUSINESS MANAGEMENT

50. Profits may be withdrawn, or they may 'be allowed to remain in a busi-
ness as a part of its working capital. Could Mr. Fuller draw out his entire profit
in cash? Why not? How much of it could he draw out in cash? Under what con-
ditions could he have withdrawn his entire profit in cash?

51. If Mr. Fuller were to collect the debts due him and pay his liabilities,
and then withdraw his profit, his business would be left without any assets or
capital, which was the condition at the time he began business on January 1. As
a working cash capital to meet obligations when they fall due and to pay current
expenses will now be necessary in conducting his business, he has decided to allow
his profit to remain in the business for the present. In other words he has decided
to invest his profits in his business. The amount of the profit therefore becomes
his capital at the beginning of the next month's business. This capital will become
a cash capital as soon as his accounts receivable are converted into cash, out of
which, however, his liabilities will have to be paid. It will thus be seen that
capital consists of the profit from previous industry which has been invested in
an enterprise to promote it and produce additional prpfits in the future.

GROSS PROFITS AND NET PROFITS

52. If during the month Mr. Clark had paid various expenses, such as rent,
fuel, and supplies, out of his personal funds for which he had turned in no report,
amounting to $47.60, what would have been his net profit, and how would it have
been found? The answer would naturally be $73.40, found by taking the difference
between the gross trading profit and the total expenses. It should be observed
that there is a distinct difference between gross profits and net profits. The
gross profits are the difference between the total sales and the cost of goods
sold, while net profits are gross profits less expenses. There can be no gross profit
unless the goods are sold for more than they cost. There can be no net profit if
expenses are greater than gross profit. In such an instance the difference would be
a net loss,

SET 2 CONTINUED

On a sheet of journal paper prepare a trial balance from the ledger of set 2
and present it to the teacher for approval. Then prepare a statement of income,
and a statement of assets and liabilities, and present them for approval. This
completes the work of set 2.

REVIEW QUESTIONS

1. What is the object of keeping personal accounts?

2. Define a debtor ; a creditor.

INTRODUCTION TO BOOKKEEPING 33

3. What are books of original entry? Name those with which you are
familiar.

4. How are debit and credit items in the books of original entry transferred
to the ledger?

5. On which side of ledger accounts are debit items posted? Credit items?

6. To which side of the personal accounts are the individual entries in the
purchases book always posted? Are the personal accounts debited or
credited from this book?

7. To what account is the total of the purchases book always posted? Is
this total a debit or a credit item?

8. To which side of the personal accounts are the individual entries in the
sales book always posted? Are these accounts debited or credited?

9. To what account is the total of the sales book always posted? Is this
total a debit or a credit item?

10. To which side of the personal accounts are the individual entries in the
cash book always posted? Are these accounts debited or credited?

11. To what account are the totals in the cash book posted? Which total is
a debit item and which a credit item?

12. What result does the purchases account show? Sales account? Cash
account?

13. How is the amount of profit determined?

14. What is an asset?

15. What is a liability?

THE JOURNAL

53. Three books of original entry the purchases, sales, and cash books
have been introduced up to this point. In these books purchases, sales, and cash
transactions respectively are classified and recorded. Another book of original
entry, called the journal, is required in which to make entries for transactions
which cannot be classified in the above-named books. Examples of entries which
are made in the journal are :

(1) Entries for unusual transactions and transactions which do not occur
with sufficient frequency to justify the keeping of a special book in which
to classify them.

(2) Adjusting entries for goods purchased or goods sold which are returned
for credit.

(3) Adjusting entries for rebates and allowances on purchases and sales
resulting from errors in pricing, or from shortage and damage claims.

Illustration 18 shows the entries for C. D. Clarkson's unclassified transactions
for the month of April requiring adjustment entries in the journal.

1,0

(,0

54. A journal entry records separately both the debit and the credit items
arising out of a transaction, and includes an explanation of the entry. The amounts
of debit items are entered in the left-hand money column, and the amounts of
credit items in the right-hand column. The names of accounts to be debited are
placed just to the right of the second perpendicular line in the journal; that is, to
the right of the folio column. The names of accounts to be credited are indented
slightly as shown in illustration 18.

The journal entries in this illustration record the following transactions:

April 5 F. G. Allen returned to Mr. Clarkson for credit 5 brls. Red Seal
Flour, which were billed to him @ $6.50 per brl., the flour being
musty and therefore unsalable, $32.50.
6 Mr. Clarkson returned the musty flour to Forbes & Co., from whom

he purchased it, for credit at the cost price, $4.25 per brl., $21.25.
17 Arthur Wilkins claimed a shortage of ten gallons of vinegar in a
barrel sold him on April 14. As he was charged 15^ per gallon
Mr. Clarkson allowed him credit for $1.50.

21 Mr. Clarkson received a credit of $11.60 from the City Milling Co.,
being a rebate of 10^ per barrel on 116 barrels, for selling over 100
barrels of Snowflake Flour during April.

ANALYSIS OF MODEL JOURNAL ENTRIES

April 5 By returning this flour Mr. Allen has decreased, or partially canceled,
his indebtedness to Mr. Clarkson incurred when the flour was
sold to him. As Mr. Allen's account was debited at the time the

INTRODUCTION TO BOOKKEEPING 35

sale was made ; his account must now be credited for the flour
returned, at the selling price. As Mr. Clarkson credited his sales
account for the amount of the original sale, he must now debit that
account for the selling price of the flour returned because his income
from sales is decreased by that amount.

The original sale amounted to $100.00. After the required sales
book entry and above journal entry were made and posted to
Mr. Allen's account and the sales account, these accounts would
show a debit and a credit balance respectively of $67.50 as far as
these two transactions are concerned. Thus:

F. G. Allen Sales

100.00 32.50 32.50

100.00

April 6 By returning this flour to Forbes & Co. Mr. Clarkson has decreased,
or partially canceled, his indebtedness to them incurred when
he bought the flour. As Mr. Clarkson credited them at the
time he made the purchase, he now debits them for the flour re-
turned, at its cost price. As he debited his purchases account
when he bought it, he now credits that account because his cost of
purchases is decreased by that amount.

17 The shortage in the sale decreases or partially cancels Mr. Wilkins'
indebtedness to Mr. Clarkson, and therefore his account is credited.
Mr. Clarkson's income from sales is decreased, and therefore he
debits the sales account.

21 The rebate partially cancels Mr. Clarkson's indebtedness to the
City Milling Co., and therefore he debits them. The rebate
decreases the cost of his purchases, and therefore purchases account
is credited.

55. Each debit and credit item is posted separately from the journal to the
proper account in the ledger. It is not possible to post totals in a two column
journal because the items entered in this book are miscellaneous items affecting
various accounts; that is, they are not all of one class such as the transactions
grouped in the purchases, sales, and cash books.

EXERCISE 5
Make journal entries for the following transactions of C. B. Aiken:

Aug. 4 He allowed J. M. Rose credit for a shortage of 25 Ibs. Creamery

Butter @ 30ff, included in a sale to him on July 29, $7.50.
11 Clarke & Co. overcharged him 15 per brl. on 25 brls. Winter Flour

36 ACCOUNTANCY AND BUSINESS MANAGEMENT

he purchased from them July 28. He called their attention to it and
has received a credit of $3.75.

15 Melton & Dane returned for credit 10 doz. Canned Corn @ SI. 65 per
doz., which they ordered by mistake. Mr. Aiken has given them
credit for $16.50.

18 H. A. Rollins reports an overcharge of 25^ per brl. on 20 brls. Har-
vest Apples sold him on August 15. Mr. Aiken allowed him credit
for $5.00.

27 H. B. Knight returned one tub of rancid butter, which was unsalable.
Mr. Aiken gave him credit for 50 Ibs. @ 37?f, $18.50.

28 Mr. Aiken returned the rancid butter to Fitch & Sons, from whom he
purchased it, and received credit at the cost price, 27 per lb. } $13.50.

COMPARISON OF CLASSIFIED ENTRIES AND JOURNAL ENTRIES

56. Journalizing is determining the accounts to be debited and credited
in any transaction. It is closely related to determining the particular classifica-
tion to which a transaction belongs. For instance, when a purchase is made it
is classified as a purchase transaction and consequently is entered in the purchases
book. This is classification. As a result of this entry the party from whom
the purchase is made is credited in .his ledger account from the purchases book
for the amount, and purchases account will be debited for the same amount when
the footing of the purchases book is posted, since it is included in that footing.
This is journalizing .

57. It was originally the practice to enter all transactions in the journal.
This method required a separate debit for every purchase, a separate credit for
every sale, a separate debit foe every cash receipt, and a separate credit for every
cash payment. It also required separate postings to the ledger for all these
entries. This is unnecessary when the purchases, sales, and cash books are used.

58. It has been shown that posting the totals of the purchases, sales, and
cash books to the purchases, sales, and cash accounts in the ledger is equivalent
to posting each item separately. In other words posting these totals results in an
equality of debits and credits in the ledger. See pages 26, 27, and 28. It follows
that an entry in the purchases book, sales book, or cash book is equivalent to a
journal entry so far as the final result in the ledger is concerned. For this reason
these books are frequently referred to as the purchases journal, sales journal, and
cash journal. For instance, the entry in the purchases book for the first purchase
in the model set (illustration 8) is equivalent to the following journal entry

Purchases 125.00

Samuel Howe 125.00

INTRODUCTION TO BOOKKEEPING 37

The entry for the first sale is equivalent to this entry :
W. C. Archer 136.00

Sales 136.00

The entry for the first cash receipt is equivalent to this entry:
Cash 136.00

W. C. Archer 136.00

The entry for the first cash payment is equivalent to this entry:
Samuel Howe 125.00

Cash ' 125.00

59. Thus it will be seen that in whatever book of original entry transactions
may be recorded, when the items are correctly posted to the ledger the sum of the
debits will equal the sum of the credits; consequently an equality of debits and
credits will exist, and a trial balance can be taken from the ledger accounts.

CASH RECEIPTS AND PAYMENTS
AFFECTING PURCHASES, SALES, AND EXPENSE ACCOUNTS

60. The cash receipts and payments heretofore considered have been con-
fined to cash received or paid in settlement of personal accounts. In many busi-
nesses money is also frequently received for merchandise sold for cash. The
receipts from cash sales are usually placed in a cash register or drawer, and this
money is deposited in bank daily or at frequent intervals. As such deposits
afre made the total sales represented by the cash deposited are entered as one item
in the cash book, sales account being credited.

61. It would be possible to enter cash sales in the sales book in the same
manner as sales on account, debiting the person to whom the goods were sold and
crediting sales, and then to enter the cash received in the cash book, debiting cash
and crediting the person. This method would require the opening of personal
accounts in the ledger for every cash sale when the sales book postings were made,
and these accounts would be closed immediately by the postings from the cash
book. Since the ledger would rapidly become filled with such accounts, cash
sales are credited directly to the sales account from the cash book, thus eliminating
the personal accounts and saving time and labor. Besides, no indebtedness
between the parties to a cash sale similar to the indebtedness between the parties
to a sale on account exists except the momentary indebtedness during the time
between the delivery of the article to the purchaser and the payment by him in
return.

62. Merchandise is also frequently bought for cash. As in the case of cash
sales, the personal accounts are eliminated by charging the purchases account and
crediting cash directly through a cash book entry. The cash expended for such
purchases is usually taken from the supply of cash kept on hand for such purposes.

43257

ACCOUNTANCY AND BUSINESS MANAGEMENT

63. Expenses such as rent, heat, light, insurance, taxes, salaries and wages
of employees, office and store supplies and stationery, etc., are always incurred in
conducting a business. The bills for such expense items are usually not entered
on the books until they arc paid, at which time they are charged directly to the
expense account. Some business men pay such bills immediately upon their receipt,
but in most cases it is the practice to pay them between the first and tenth of each
month. The parties from whom expense bills are received, although they are
creditors until these bills arc paid, should be distinguished from the parties from
whom merchandise comprising the stock in trade is bought. Bills from such
parties are for supplies and services necessary in the conduct of the business and
do not cover commodities purchased for resale to customers. Personal accounts
are not opened to record the indebtedness arising out of expense transactions.
The bills serve as a record of such indebtedness until paid.

EXERCISE 6

F. J. Ralston & Co.'s cash receipts and payments for November are given on
pages 39 and 40. The correct entries for the first six transactions are shown at the
top of illustration 19. Classify the transactions mentally under the following classes :

(a) Receipt or payment in settlement of a personal account.

(b) Receipt or payment for merchandise bought or sold.

Next make the proper entries for them in a cash book. Use a sheet of journal
paper.

ILLUSTRATION 19 CASH BOOK

CASH RECEIPTS

Nov.

1
2
6

Balance
Howard Black
Sales

Bill of Oct. 23
Cash sales to date

55.40
14.25

572.80

Sales

Cash sales to date

10.20

Total Receipts

876.24

1449.04

Dec.

Balance

466.83

INTRODUCTION TO BOOKKEEPING

TRANSACTIONS EXERCISE 6

Nov. 1 Balance of cash on hand, S572.80.

1 Paid Miles & Co. in full for bill of Oct. 2, $26.70.

1 Paid the Jones Realty Co. for rent for store for November, $72.50.

2 Received cash from Howard Black for bill of October 23, $55.40.

3 Paid Sam Boggs, a huckster, $8.00 for 3 brls. of apples, which were
placed in stock.

5 Paid City Gas & Electric Co. for gas and electric light bill for
October, $5.40.

6 Cash sales to date, $14.25.

8 Paid Central Provision Co. on account, $100.00.

9 Paid Chesapeake & Potomac Telephone Co.'s bill for telephone
service, for October, $6.45.

9 Received cash from Allen & Boyce for bill of Oct. 21, $226.36.

11 Cash sales to date, $9.42.

12 Paid Office Supply Co.'s bill for office stationery and supplies, $13.26.
12 Received cash from Morton & King in full of account to date, $31 1 .78.
17 Paid 0. H. Barnes & Co. for bill of November 8, $175.60.

20 Cash sales to date, $27.40.

22 Received cash from Howard Black in full of account, $175.19.

23 Cash purchases to date, $34.80.

25 Paid Enterprise Fuel Co.'s bill for coal, $37.50.

ILLUSTRATION 19 CASH BOOK

CASH PAYMENTS

Nov.

Miles & Co.

Bill Oct. 2

26.70

Expense

Rent for November

72.50

Purchases

Cash purchase

8.00

Expense

Gas and light bill

5.40

Expense

Coal Bill

37.50

Expense

Salaries office force

372.00

Expense

Manager's salary

130.00

Total Payments

982.21

Balance

466.83

1449.04

40 ACCOUNTANCY AND BUSINESS MANAGEMENT

28 Received cash from E. Brown & Sons for bill of October 30, $46.24.

30 Paid salaries of clerks and office force, $372.00.

30 Paid manager's salary, $130.00.

30 Cash sales to date, $10.20.

64. The lower part of illustration 19 shows the manner in which the cash
book should be balanced. The balance at the beginning of the month is added to
the total receipts to get the total footing on the receipts side, just as the balance
at the close of the month is added to the total payments to get the total footing
on the payments side. After these footings are entered and the book is ruled, the
balance at the close of the month should be brought down under date of the first
day of the following month. The balance on November 1 is entered in the right-
hand column so that the left-hand column will show the total receipts for the
month. Compare with illustration 9, page 14.

SET 3
CANNED GOODS BUSINESS

The farmers and truckmen residing in the vicinity of Jamestown, New York,
have established a community canning factory in that city under the name of the
"Cooperative Canning Company."

H. C. Miller, of Jamestown, has contracted with the canning company to
assist in the marketing of the output of the factory. He will establish a trade
among the stores in Jamestown and nearby towns and among the summer resort
hotels located about Lake Chautauqua. That part of the factory's product which
Mr. Miller does not sell will be disposed of to other dealers in canned goods.

Certain stocks of goods will be set aside in the factory for Mr. Miller, for
which he will be billed at the time. As he is beginning business without capital,
he will be allowed a term of credit of 60 days on his first month's purchases, which
will give him time to collect for his sales before his bills for purchases become due.
He will deliver orders directly from the factory to his customers at his expense.
His profit will be the difference between the price to him at the factory and the
price he. secures from his customers, less his expense of doing business.

His transactions for the month of September are the following. Record them
in the proper books of original entry. Use a double sheet for the purchases, sales,
and cash books and a single sheet, numbered page 5, for the journal,

TRANSACTIONS SET 3

Sept. 1 Received bill dated Sept. 1, terms 60 days, from Cooperative
Canning Co. for the first allotment of 180 cases of canned peas,
corn, beans, and tomatoes, $624.50.

INTRODUCTION TO BOOKKEEPING 41

Sept. 2 Sold Enos Spencer, Ashville, N. Y., terms 10 days, 10 cases peas,
30 doz., @ $2.00; 5 cases corn, 15 doz., @ $1.75.

Note: Canned goods are usually packed at the canning factories in
cases containing two or three dozen cans, depending upon the size of
the cans. They are always bought and sold by the dozen and
should be billed accordingly.

3 Sold for cash one case tomatoes, $3.30.

4 Paid cash for billheads and postage stamps, $1.15.

5 Sold Chautauqua Lake Hotel, Bay View, N. Y., terms 20 days,

15 cases beans, 45 doz., @ $1.85; 20 cases tomatoes,40 doz., @ $1.55;
6 cases peas, 18 doz., @ $2.05.

8 Received cash from Enos Spencer in full for bill of Sept. 2, $86.25.

9 As Mr. Miller secured an order for canned cherries and the canning
company had none in stock, he bought 5 cases for cash, $18.00.

11 Sold Peter Duff, Bemus Point, N. Y., terms 20 days, 25 cases corn,
75 doz., @ $1.75; 20 cases tomatoes, 40 doz., @ $1.57; 12 cases
peaches, 24 doz., @ $2.05; 5 cases cherries, 10 doz., @ $2.55.

12 Paid cash for warehouse tools, $13.60.

13 Received bill dated Sept. 11, terms 60 days, from Cooperative
Canning Co. for 50 cases of canned peaches and pears purchased on
that date, $181.00.

16 Sold for cash 2 cases peas, $12.00, and one case pears, $4.90; total
$16.90.

17 Sold Chautauqua Lake Hotel, terms 30 days, 8 cases peaches,

16 doz., @ $2.62; 8 cases pears, 16 doz., @ $2.55; 10 cases corn,
30 doz., @ $1.75.

18 Peter Duff returned for credit 10 cases corn, 30 doz., sold to him on
Sept. 11. In placing this order he overlooked a reserve stock he
had on hand. Mr. Miller has given him credit for $52.50.

20 Sold Enos Spencer, terms 30 days, 15 cases peas, 45 doz., @ $2.00;

20 cases corn. 60 doz., @ $1.72; 10 cases beans, 30 doz., @ $1.85.
22 Chautauqua Lake Hotel claims an overcharge of 15 per dozen on

the 8 cases of pears sold on Sept. 17. As the price agreed upon was

$2.40, Mr. Miller has allowed a rebate on 24 dozen amounting to

$3.60.

24 Received cash from Chautauqua Lake Hotel in full for bill of
Sept. 5, $182.15.

25 Enos Spencer reported that 1 case of corn sold him on Sept. 2 was
spoiled. Investigation showed that it was a case from last year's
pack which in some manner was placed with Mr. Miller's stock.
He allowed Mr. Spencer a rebate at the selling price, $5.25.

42 ACCOUNTANCY AND BUSINESS MANAGEMENT

Sept. 25 Mr. Miller reported the case of spoiled corn to the canning company
and was allowed a rebate for the cost price, $4.20.

26 As the canning company's stock of peaches is exhausted, Mr. Miller
has purchased a supply from the Dunkirk Cannery, Dunkirk, N. Y.,
and received their bill dated Sept. 20, terms 30 days, for $38.00.

27 Sold for cash to John Ensor, Ross Mill, N. Y., 8 cases peas
and 5 cases beans, total sale $70.65. Mr. Ensor was given reduced
prices on this order because he paid cash and called for the goods
with his own truck.

29 As Mr. Miller found it difficult to sell pears and the canning company
has found a broker who will purchase their entire stock, Mr. Miller
has returned 21 cases, 42 doz., to the Cooperative Canning Co. and
has received credit for them at the cost price, $1.75, total $73.50.

29 Sold Central Hotel, Hartfield, N. Y., terms 30 days, 9 cases tomatoes,
18 doz., @ $1.55; 10 cases peaches, 20 doz., @ $2.65; 9 cases peas,
27 doz., @-$1.95.

30 Mr. Miller paid the canning company the September rent for the
space in their warehouse occupied by his stock, $12.50.

30 Peter Duff's bill of Sept. 11 less the credit of Sept. 18 is due tomorrow.

As Mr. Duff cannot pay the balance in full, Mr. Miller has accepted

a payment of $150.00 and granted Mr. Duff an extension of 15 days

on the balance.

30 Paid Cooperative Canning Co., to apply on account, $250.00.
30 Paid drayage bill of Jamestown Transfer Co. for delivering orders

to customers during September, $35.80.
30 Mr. Miller took out as his salary for September, $100.00.

After entering the above transactions, foot and rule the books with the excep-
tion of the journal. Balance the cash book in the manner shown in illustration 19.
The journal is not ruled and footed because totals are not posted from this book.

Then post from the purchases book, sales book, journal, and cash book in
the order named, using a single sheet for the ledger, numbering the pages 1 and 2,
and allowing 8 lines for each account. Post the individual items first and then the
totals. In posting to the purchases, sales, and expense accounts, write an appro-
priate explanation of each item such as "Cash purchase," "Cash sale," "Return,"
"Rebate," "Office supplies," "Tools," "Pchs. Bk. total," or "Sales Bk. total"
in the explanation column.

After posting, find the balance of each account as previously instructed. Then
take a trial balance, and present all papers to the teacher for approval. Save them
carefully for future reference when they are returned.

INTRODUCTION TO BOOKKEEPING 43

STATEMENT OF INCOME

65. Mr. Miller sold all the goods purchased during the month. The accounts
in the trial balance showing the results from which his profits are to be ascertained
are the purchases, sales, and expense accounts. His profit is determined thus :

Income from goods sold $1099.10

Cost of goods sold 783.80

Gross Trading Profit 315.30

Expenses 163.05

Net profit 152.25

STATEMENT OF INCOME AND PROFIT AND LOSS

66. Such a statement as the above, containing trial balance figures only, does
not provide all the essential details of results from operations. It is the custom,
therefore, in preparing such statements, to include a detailed analysis of the
accounts showing incomes, costs, and expenses so as to show all the units of infor-
mation, facts, and figures relating to the business transacted. This statement of
income and profit and loss plays a most important part in the decisions of the
management with regard to future operations and business policies, because it
demonstrates to what extent past policies and methods of operation have been
successful or unsuccessful.

67. The statement on page 44, showing the same final result as the one above,
was prepared from the same trial balance and from the data shown by the
purchases, sales, and expense accounts in the ledger. It supplies in approved
form the information lacking in the first statement.

ANALYSIS OF INCOME AND PROFIT AND LOSS STATEMENT

1. This statement is divided into three sections under the captions "In-
come from Sales," "Cost of Goods Sold," and "General Expenses."

2. The sales account is analyzed in the "income from sales" section. The
total sales is the credit footing of the account. The items under deduc-
tions from sales are the returned sales debited to the account on September
18, and the sum of the rebates on sales debited on September 22 and 25.
The difference between the total sales and the sum of the deductions is the
net income from sales.

3. The purchases account is analyzed in the "cost of goods sold" section.
The debit footing of the account shows the total purchases. The items under
deductions from purchases are the purchases returned credited to the account

ACCOUNTANCY AND BUSINESS MANAGEMENT

ILLUSTRATION 20 INCOME AND PROFIT AND Loss STATEMENT
Statement of Income and Profit and Loss, September 30, 19

H. C. Miller

Income from Sales:
Total sales

Deductions from sales:
Returns

Rebates and allowances
Net income from sales

Cost of Goods Sold:
Total purchases

Deductions from cost
Returns

Rebates and allowances
Net cost of goods sold
Gross Trading Profit

General Expenses:

Tools and supplies

Rent

Drayage charges

Proprietor's salary
Total expenses
Net profit for the period

52.50
8.85

4.20
73.50

1160.45

61.35

861.50

77.70

14.75

12.50

35.80

100.00

1099.10

783 . 80

315.30

163.05

152.25

on September 29, and the rebate on purchases credited on September 25.
Since all of the goods purchased have been sold, the difference between the
total purchases and the sum of the deductions is the net cost of goods sold.
The difference between the net income from sales and the net cost of
goods sold is the gross profit resulting from the buying and selling, or
trading, operations and is therefore designated as the gross trading profit.
The expense account is analyzed in the "general expenses" section. Gen-
eral expenses are the expenditures for services, materials, and supplies
required in conducting the business as a whole. Notice that the first two
items in the expense account are grouped in the statement as "tools
and supplies."

The difference between the gross trading profit and the general expenses is
the net profit resulting from the conduct of the business,

INTRODUCTION TO BOOKKEEPING

7. Observe that the net income from sales and the net cost of goods sold
are the same amounts respectively as the balances of the sales and
purchases accounts in the trial balance.

8. If the general expenses had exceeded the gross trading profit, the dif-
ference would have been the net loss. If the net cost of goods sold had
exceeded the net income from sales, the difference would have been the
gross trading loss, in which case the general expenses would have been
added to the gross trading loss to find the net loss.

9. Observe that the preparation of this statement depends upon an orderly
and proper arrangement of the items and correct addition and subtrac-
tion. The statement is really a systematically arranged solution of an
arithmetical problem containing a proper explanation of each item in the
solution.

SET 3 CONTINUED

From the trial balance and ledger for set 3 prepare a statement of income and
profit and loss, and a statement of assets and liabilities. Refer to illustrations
20 and 17 if necessary for the proper arrangement of the items. Then submit the
statements to the teacher for approval. This completes the work of set 3.

EXERCISE 7

From the following trial balance and ledger accounts, prepare the proper
statements and present them to the teacher for approval :

Trial Balance, June 30, 19

A. B. Mellon

Purchases

Browning <fe Co.

316.28

Frank Ward

176.85

Lee C. Lang Co.

26.20

Hudson Grocery Co.

119.76

R. C. Lake

122.17

Marton & King

59.60

Samuel Balke

38.40

Butler & Co.

116.22

Purchases

87693

(Sales

1182.45

Expense

168.44

Cash

152.91

1678.09

Cash Purchase

20.00

Rebate

5.25

Cash purchase

5.60

Return

41.80

Pchs. Bk. total

927.51

Rebate

29.16

Sales

Rebate

9.25

Cash sale

5.80

Rfturn
Rebate

1.60
2.35

Cash bale
Cash sale

3.20
8.46

Rebate

5.21

Sales Bk. total

1186.40

Return

3.00

Expense

<:.... ..,,,1 ll..l,t 7 s!

Drayage charges 24.75

Rent 30.00

Sundry repairs 15.85

Prop, salary 90.00

46 ACCOUNTANCY AND BUSINESS MANAGEMENT

EXERCISE 8

Refer to the comparison of classified entries and journal entries on pages 36
and 37 of the text. From this comparison it will be observed that the entry for any
transaction can be set up in journal form. For practice in determining the debit
and credit items arising out of transactions, make journal entries for all of the
transactions in set 3. In other words, work the set again using the journal as the
only book of original entry. Omit all explanations. This is a journalizing drill.

After all the entries are made, post them to a new set of ledger accounts just as
the items from the journal in the classified or regular set were posted. Allow
twelve lines for the sales and cash accounts and eight lines for the other accounts.
Then take a trial balance. It should agree with the trial balance of the classified set.

With both sets before you, prepare the answers to the following questions:

COMPARISON OF CLASSIFIED AND JOURNALIZED SETS

1. Count the individual debit and credit entries in the classified set. How
many are there?

2. How many postings to the ledger were required in this set?

3. Count the individual debit and credit entries in the journalized set.
How many are there?

4. How many postings to the ledger were required for this set?

5. Considering each individual entry and its posting to the ledger as two
operations, how many operations were required to record and post the
transactions in the classified set and how many hi the journalized set?

6. With respect to the number of such operations, how much more efficient
on a percentage basis is the classified set?

7. Do the accounts in the two ledgers show the same balances respectively?
Do they show the same items respectively?

8. Are there any differences between the personal accounts in the two
ledgers with respect to the number and amounts of the items entered
therein?

9. How do you account for the differences, if any, between the purchases, sales,
cash, and expense accounts in the two ledgers with respect to the number
and amounts of the items entered therein?

68. From the above comparison it will be observed that while the processes
of recording transactions differ, the same final results are shown by the classified
and journalized sets; also that the classified set is the more efficient method because
of the saving in time and effort in making entries and posting them.

ELEMENTARY ACCOUNTING 47

ELEMENTARY ACCOUNTING

In the section of the text devoted to Elementary Accounting, which begins
on the next page, there is provided :

(a) The text matter correlating with the material of Laboratory Unit One,
to which the student is referred as he proceeds with the work of that
.unit, after having completed the work in the "Introduction to Book-
keeping" covering the first 46 pages of this text.

(b) The text material, pages 47 to 127, required when it is desired to start the
study of the subject by the ledger account method, which when completed
is followed by the study of the Introduction to Bookkeeping, or Labo-
ratory Unit One, as the judgment of the teacher dictates and the time
available permits.

The following schedule gives a list of the accounts treated in the section of
the text devoted to Elementary Accounting and the classification required for
Unit One:

ASSET, LIABILITY, AND CAPITAL ACCOUNTS

CURRENT ASSETS: CURRENT LIABILITIES:

CASH NOTES PAYABLE

MERCHANDISE INVENTORY CREDITORS' ACCOUNTS PAYABLE

NOTES RECEIVABLE

DEBTORS' ACCOUNTS RECEIVABLE CAPITAL:
FIXED CAPITAL ASSETS : PROPRIETOR'S CAPITAL ACCOUNT

REAL ESTATE INVESTMENT PROPRIETOR'S PERSONAL ACCOUNT

FURNITURE AND FIXTURES INVESTMENT

INCOME AND PROFIT AND LOSS ACCOUNTS

COST OF GOODS SOLD: INCOME FROM SALES:

PURCHASES SALES

FREIGHT IN

WAREHOUSE EXPENSE ADDITIONS TO INCOME :
OPERATING EXPENSES: INTEREST INCOME

GENERAL EXPENSE REAL ESTATE INCOME

REAL ESTATE EXPENSE

DEDUCTIONS FROM INCOME
INTEREST EXPENSE

48 ACCOUNTANCY AND BUSINESS MANAGEMENT

ELEMENTARY ACCOUNTING

PRINCIPLES AND PRACTICE

69. A business transaction is a matter, affair, or item of business completed
or in process of completion. A financial transaction is a business transaction
which involves an amount to be recorded in the books of account.

70. Transactions result from an agreement, or contract, between two parties.
Each party under the terms of an agreement obligates himself to do certain things.
For instance, a seller obligates himself to sell certain goods at a certain price
and to ship or deliver them to the purchaser. The buyer obligates himself to
accept delivery of the goods he purchases and to pay the seller for them.

71. "A contract is an agreement (oral or written) between competent
parties upon a legal consideration to do or not to do some lawful act or thing."
Rowe's Commercial Law.

72. When both parties to a contract discharge their obligations at the
same time, they usually fulfil the terms of their agreement in one transaction.
Frequently, however, one party does not "perform his part of the agreement until
some time after the other party has done so. The first party thus becomes
indebted to the other until he does perform his part and thereby discharges his
obligation under the agreement. In such cases, two or more transactions are
required to carry out the terms of the agreement.

73. Obligations or debts are thus created and discharged by the parties
to the transactions which result from agreements between them. Records of the
creation and discharge of such obligations or debts are kept in personal accounts.

PERSONAL ACCOUNTS

74. Personal Accounts are accounts kept with debtors and creditors. The
object in keeping personal accounts is to ascertain what our debtors owe us on
account, and what we owe creditors on account at any time. The book in which
accounts are kept is called the ledger.

75. A debtor is one who owes or is in debt. The amounts he owes are
known as debit items in the account kept with him by his creditor.

76. A creditor is one who is owed. The amounts that are owed to him are
known as credit items in the account kept with him by his debtor.

77. Only persons can be debtors and creditors and the terms debit and credit
in the sense of owing or being owed can be used only in connection with personal
accounts. All accounts with individuals, firms, or corporations showing amounts
owed to or by them are treated as personal accounts for bookkeeping purposes.

ELEMENTARY ACCOUNTING

ACCOUNTS WITH DEBTORS

78. Accounts with debtors are those kept with parties who owe us and who
will later cancel their indebtedness by paying us the amounts they owe. They will
then cease to be our debtors.

The following transactions with A. J. Cloud are correctly recorded in the
account with him which appears below:

Oct. 12 Sold him merchandise, terms 10 days, $375.80.

20 Sold him merchandise, terms 30 days, $162.75.

23 Received cash from him for bill of October 12, $375.80.

31 Sold him merchandise, terms 30 days, $441.20.

Nov. 19 Received cash from him for bill of October 20, $162,75.

ILLUSTRATION 21 DEBTOR'S ACCOUNT

'/jr ' ' rif\.f / /ia /^frfgfr-^-f'rlc.-i^-ty'^--;

Oc.

20
J/

/0<*4. */
joote </
JQC&. .</

J7J-

IOc^.
2z^

2*3
'?

^ o
o

37-S

/C,2

/C>2

7J~

4*//

2-0

ANALYSIS

1. Is this an account with a debtor or a creditor?

2. For what amounts did Mr. Cloud become indebted to us?

3. How much of this indebtedness has been paid and canceled?

4. How much remains unpaid?

5. Is Mr. Cloud a debtor or creditor for this amount?

79. It is therefore evident that in accounts with debtors there are two classes
of items debit items for the amounts for which they have become indebted to us,
and credit items which wholly or partially cancel such indebtedness. As a matter
of custom, debit items are always entered on the left-hand side and credit items
on the right-hand side of ledger accounts. Canceling, or balancing, items are
ruled out when they are entered, as shown in illustration 21.

RULES FOR DEBITING AND CREDITING ACCOUNTS WITH DEBTORS

80. Debit their accounts for all
amounts they owe us.

81. Credit their accounts for all
items which wholly or partially cancel
debit items in their accounts.

50 ACCOUNTANCY AND BUSINESS MANAGEMENT

EXERCISE 9

Prepare an account from the following transactions with Robert G. Burns,
120 N. Eutaw St., City. Rule out balancing items as they are entered.

Sept. 2 Sold him merchandise, $40.00

4 Sold him merchandise, $126.42.

9 Received cash for bill of Sept. 2, $40.00.

10 He returnepl goods for credit on bill of Sept. 4, $12.30.

12 Sold him merchandise, $56.20.

14 Received cash for balance due on bill of Sept. 4, $114.12.

15 Sold him merchandise, $125.90.

16 Billed him for undercharge on bill of Sept. 15, $3.68.
23 Sold him merchandise, $176.80.

27 Allowed him credit for defective goods on bill of Sept. 12, $7.50.

EXERCISE 10
Transactions with Bell Bros., 19 Exchange Way, Columbus, Ohio.

Oct. 1 Sold them merchandise, $126.40.

2 Billed them for freight prepaid on goods billed Oct. 1, $5.42.

7 Sold them merchandise, $198.25.

8 Allowed them credit for overcharge on bill of Oct. 1, $9.36.

12 Received cash for balance due on bill of Oct. 1, including freight

charged thereon, $122.46.

15 Sold them merchandise, $272.80.

17 They billed us for goods returned for credit on bill of Oct. 7, $17.09.

23 Sold them merchandise, $85.40.

24 Billed them for express charges prepaid on bill of Oct. 23, $4.75.
27 Received cash for bill of Oct. 15, $272.80.

30 Received bill from them for shortage on bill of Oct. 23 and allowed
credit, $3.75.

ACCOUNTS WITH CREDITORS

82. Accounts with creditors are those kept with parties whom we owe and
to whom we will later cancel our indebtedness by paying them the amount we owe.
They will then cease to be our creditors.

The following transactions with the John S. Wilson Company are correctly
recorded in the account with them which appears on the next page :

Aug. 12 Bought merchandise from them per bill of Aug. 6, terms 30 days,

$74.20.
Sept. 3 Bought merchandise from them per bill of Aug. 30, terms 30 days,

$316.12.
Sept. 5 Paid them cash for bill of August 6, $74.20.

ELEMENTARY ACCOUNTING
ILLUSTRATION 22 CREDITOR'S ACCOUNT

. Jo.

2.
3.
4.
5.

ANALYSIS

Is this an account with a debtor or a creditor?

For what amounts did we become indebted to the John S. Wilson Co.?

How much of this indebtedness has been paid and canceled?

How much remains unpaid?

Is the John S. Wilson Co. a deotor or creditor for this amount?

83. It is evident that in accounts with creditors there are two classes of
items credit items for the amounts for which we have become indebted to them,
and debit items which wholly or partially cancel such indebtedness.

RULES FOR DEBITING AND CREDITING ACCOUNTS WITH CREDITORS

85. Credit their accounts for all
amounts owed to them.

84. Debit their accounts for all
items which wholly or partially cancel
credit items in their accounts.

EXERCISE 11

Prepare an account from the following transactions with M. C. Morgan, 1242
Eighth Ave., City. Rule out cancelling items as they are entered.

Sept. 3 Bought merchandise from him, $342.50.

1 Bought merchandise from him, $72.16.

10 Paid cash for bill of Sept. 3, $342.50.

12 Received credit for goods returned on bill of Sept. 7, $12.40.

15 Bought merchandise from him, $158.55.

19 Paid cash for balance due him on bill of Sept. 7, $59.76.

21 Bought merchandise from him, $221.20.

24 Billed him for overcharge on bill of Sept. 15, $28.80.

28 Bought merchandise from him, $36.25.

30 Received credit for damaged goods on bill of Sept. 21, $11.80.

EXERCISE 12
Transactions with Rodney, Gates & Co., 12 Pine St., Philadelphia, Pa.

Oct. 2 Bought merchandise from them, $278.50.

3 Received bill for freight prepaid on bill of Oct. 2, $21.46.
7 Bought merchandise from them, $109.21.

52 ACCOUNTANCY AND BUSINESS MANAGEMENT

Oct. 8 Billed them for goods returned because they were not of grade

ordered, $35.27.
8 Paid cash for balance due them on bill of Oct. 2, $264.69.

10 Bought merchandise from them, $326.18.

11 Billed them for freight on bill of Oct. 7 which they were to prepay
according to the terms of the purchase, $5.92.

12 Bought merchandise from them, $158.20.

20 Received credit for overcharge on bill of Oct. 12, $28.80.

22 Paid them balance due on bill of Oct. 7, $103.29.

26 Bought merchandise from them, $37.50.

30 Paid balance due on bill of Oct. 12, $120.40.

86. The balance of an account is the difference between the sum of the
debits and the sum of the credits. When the balance of a personal account is
to be determined, canceled items usually may be eliminated from the calculation,
in which case the difference between the sums of the uncanceled items on the
two sides of the account is the balance of the account.

WHAT THE BALANCE OF A PERSONAL ACCOUNT SHOWS

87. The balance of a personal account is the amount owed to us or by us.
If the debit side is the larger the balance is the amount owed to us, which, if
it is not past due, is current asset. Current assets are cash and other assets which
can be quickly converted into cash. If the credit side is the larger the balance is
the amount owed by us, which is a current liability. Current liabilities are short-
time debts. In either case the balance should appear as an item in the statement
of assets and liabilities. Accounts with debtors and accounts with creditors are
often referred to as accounts receivable and accounts payable, respectively.

RULING PERSONAL ACCOUNTS

88. The proper ruling for a personal account depends upon the method
followed in the payment of bills. Bills are usually paid in one of four ways: (a)
each item or bill may be paid separately; (6) several items or bills may be paid at
one time; (c) one item or bill may be paid in two or more payments, and (d) pay-
ments may be made "on account" but not in full settlement of any particular
item or bill. The latter is the method employed in "running accounts." Any
one or more of these various methods of payment may be shown in a single
account. The following accounts illustrate the various methods of payment re-
ferred to and the proper rulings for each.

Explanation. The Park Grocery Co. account illustrates the methods of
payments described in 1J88a and ^[88b. It shows that the item debited March
6 was paid March 16, that the item debited March 12 was paid March 23, and

ELEMENTARY ACCOUNTING

ILLUSTRATION 23

>%<2^

??Z^<L/

/ 2.Z

that the item debited March 15 was paid March 39. The items of March 25
and 29 were paid April 1 in one amount. The lines were ruled underneath the
balancing items as each credit entry was made. The items of April 5 and 24
are unpaid, and their sum, shown in pencil figures, is the balance of the account.
This is an account receivable.

ILLUSTRATION 24

^^ .

7-1

7^^

/ z

Explanation. The items of August, 12, 16, and 25 are for purchases which
were paid in one amount September 5, at which time the lines were ruled under
the balancing items. The pencil footing on the credit side shows the balance of
the account on September 30. This is an account payable. It illustrates the
method of payment described in ^|88b.

Explanation. An examination of the entries in Gordon & Buchanan's account
in the order of their dates will explain the rulings shown. It is an account receivable
and illustrates the practice of many bookkeepers. It will be noticed that when
all items balance above a given point they are ruled out, as shown by those marked
"a," "b" and "c," whether they are on the same line or not. The letters also
show the method of indicating canceling items. The balance is found by taking
the difference between the two sides of the account after the canceled items are

ACCOUNTANCY AND BUSINESS MANAGEMENT

excluded, as shown in the small pencil figures in the left hand explanation column.
This account illustrates the methods of payment described in *(188b, c, and d.

Note: The small cross mark (x) may be used for indicating canceling items
instead of letters.

ILLUSTRATION 25

2-2-
2-(,
2-f

v /
/ 1,

/ /

/ O

iO
2-2-

/ Sff

/ O

89. A debtor may overpay what he owes, in which case the amount overpaid
becomes a credit balance in the debtor's account. He becomes a creditor until
the overpayment is canceled. In like manner a creditor would become a debtor
until the amount overpaid to him is returned or otherwise canceled.

90. Mixed personal accounts are accounts of persons who both buy from and
sell to each other; consequently they show both debtor and creditor items with
the corresponding canceling items. It is not good accounting practice to keep
mixed accounts. The best practice is to keep separate debtor and creditor
accounts. Indicating canceling items by letters, as explained above, will be found
exceedingly helpful in analyzing and adjusting such accounts. Illustration 26
shows a mixed personal account, and a proper segregation of the items in separate
debtor and creditor accounts,

ILLUSTRATION 26

[l^ts-n**

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220 &*S-
400 OO

tSF'J 23

2-<yo oo

200

f^oo

ELEMENTARY ACCOUNTING

ILLUSTRATION 26 Continued

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7/2

2iO

/oo

ZOO

t/OC OO

91. An investment of funds or property by the owner of a business is usually
necessary to provide working capital to finance his operations, and to secure his
creditors for the payment of debts which he may contract with them. Such
investments of capital may be increased by additional investments or they may
be decreased by withdrawals of funds at any time the owner may so desire or
circumstances permit.

92. Business is conducted to earn profits. If profits are allowed to remain in
the business, they increase the proprietor's invested capital. Losses must be met
out of the owner's capital, and hence decrease it. Profits which are withdrawn as
they are earned and ascertained do not affect invested capital one way or the other.

93. Invested capital is the excess of assets over liabilities. It represents the
owner's interest or equity in the assets of his business after all claims of creditors,
which are represented by the liabilities, have been paid.

94. Usually the owner should have two accounts a capital account showing
his interest in the business, and a personal account. In the capital account only
those items affecting the permanent investment of the owner should be recorded.
His personal account should receive entries for only such items as withdrawals of
money for salary or temporarily on account, goods taken for private use, etc.

OWNER'S CAPITAL ACCOUNT

95 This account, while widely different in its purpose, is kept much like an
ordinary personal account. It, however, is affected by the profits and losses
resulting from and incidental to the business conducted, and, therefore, is not

ACCOIM \\( Y AND BUSINESS MANAGEMENT

closed until after the final profit or loss has been ascertained. It should be kept in
the general ledger or in a private ledger.

96. The object in keeping the capital account is to show theowner's investment,
interest, or equity in the business. The title of the account is usually the owner's
name followed by the word "Capital."

The following transactions affecting F. A. Raymond's capital account are prop-
erly recorded in the account which appears below:

Mar. 1 He began business with a cash investment of $8,000.00.

Mar. 1 At the time he began business he owed on personal accounts,
$140.00.

He made an additional cash investment of $5,000.00.
He withdrew in cash $1,500.00.
He made an additional cash investment of $6,000.00.
He paid a personal note amounting to $100.00 out of the cash
invested, which he considered as a withdrawal of invested capital.

Dec. 31 His net loss for the first ten months he was in business was $453.00.

Jan. 12 He withdrew in cash $1,000.00

Jan 31 His capital account was charged for the debit balance of his per-
sonal account, representing charges for incidental personal expense
bills paid out of the funds of the business amounting to $200.00.

Jan. 31 His net profit for the month of January was $1,202.46.

May 1

Sept. 1

Nov. 1

Dec. 1

ILLUSTRATION 27

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/ 00

/ 000
20

& 00

/ 202

Note: Mr. Raymond ascertained his net capital as of January 31 because he entered into a partnership with
another merchant on February 1.

ELEMENTARY ACCOUNTING

ANALYSIS

1. How much capital did Mr. Raymond invest during the first ten months he

was in business?

2. How much did he withdraw from his invested capital during that tune

3! Did the loss on the business transacted during this period increase or
decrease his capital?

4. What was his net capital at the beginning of the second year?

5. How much did he increase or decrease it during January?

6. What items entered into the final adjustment on January 31 when his
net capital was again determined? Did these items increase or decrease his net
capital?

RULES FOR DEBITING AND CREDITING PROPRIETOR'S CAPITAL ACCOUNT

97. Debit the proprietor's capital
account for items which decrease his
invested capital.

98. Credit the proprietor's capital
account for his investments and for
items which increase his invested capital.

99. The balance of an owner's capital account, after the net profit or the
net loss and any other amounts affecting it have been closed into it, shows the
owner's net capital or net insolvency (a) wt capital when the credit side is the
larger, and (b) net insolvency when the debit side is the larger. The capital ac-
count'should be shown in a separate section of the statement of assets and liabili-
ties, which is the last section of that statement.

CLOSING THE CAPITAL ACCOUNT

100. The object in closing the proprietor's capital account is to show m
one amount the net capital or net insolvency at the close of a fiscal period,
and at the beginning of the next period. After the income and profit and loss
statement has been prepared, the account is credited by a journal entry for the
net profit or debited for the net loss shown by that statement. After this entry
is posted, if the credit side is the larger, the balance of the account is the net
capital. It is entered on the debit side to balance the account, which is then
footed and ruled, and the net capital is brought down to the credit side under
date of the next business day, as shown in illustration 27.

101. If the debit side is the larger after the net profit or net loss is posted
to the account, the balance shows the net insolvency, which should be entered on
the credit side to balance the account. The account is then footed and ruled, and
the balance brought down under date of the next business day.

58 ACCOUNTANCY AND BUSINESS MANAGEMENT

EXERCISE 13

Jan. 1 Henry B. Walters invested $2000.00.

Feb. 15 He withdrew $500.00.

July 1 He invested $1000.00.

Oct. 22 He withdrew $200.00.

Dec. 10 He purchased for his business with his private funds a store building

and lot costing $6250.00.

Dec. 31 His profit for the year, which he left in the business, was $1346.12.

EXERCISE 14

Jan. 1 Charles E. Ford invested $3200.00 in cash, merchandise worth

$900.00, notes made in his favor by his debtors $750.00, and accounts

receivable from his debtors $500.00.
Jan. 1 His liabilities to be paid upon their maturity out of the cash capital

of his business were accounts payable to his creditors, $375.00; and

notes payable, $800.00.
Apr. 1 He invested $1000.00.
May 15 He bought an automobile for his personal use which was paid for with

money he withdrew from the business, $750.00.
Nov. 20 He withdrew $500.00.
Dec. 31 His net loss for the year was $275.40.

PROPRIETOR'S PERSONAL ACCOUNT

102. The personal account of an owner is treated like any other personal
account. It is kept under the name of the owner followed by the word "Personal."
It is opened for the purpose of keeping incidental items separate from the more
permanent investment items entered in his capital account.

103. The personal account of an owner is debited for:

(a) all sums withdrawn for private use which are not to be deducted from the
investment,

(6) any personal debts paid from the funds of the business,

(d) any sums paid in subject to immediate withdrawal,

(e) any debts o! the business paid from private funds which are not to apply
on the investment,

(/) the owner's salary when it is paid to him in partial payments as needed,

(g) such part of the net profit the owner may direct.

The following bills for the personal expenses of F. A. Raymond were paid
out of the funds of his business and charged to his personal account, which is
illustrated on the next page. The balance of this account was closed into the
capital account, as shown in illustrations 27 and 28.

ELEMENTARY ACCOUNTING

Jan. 5 Paid gas bill, $7.50.

10 Paid life insurance premiums, $47.52.

16 Paid grocery bill, $31.40.

21 He withdrew cash, $75.00.

25 Paid his house rent, $35.00.

31 Paid electric light bill, $3.58.

ILLUSTRATION 28

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104. The balance shows the amount to be paid to or by the owner, or to be
closed into his capital account, as a final adjustment. When the personal account
is to be closed into the capital account, it must be done by a separate journal entry.

105. The final disposition of the balance shown by the owner's personal
account is determined entirely by the wishes of the owner. If it shows a debit balance,
he may pay into the business out of his personal funds the amount of the balance,
which will close the personal account. On the other hand, he might prefer to
debit his capital account and credit the personal account for the balance of the
latter, which likewise would close it. If his personal account shows a credit
balance, he can draw it out in cash, or close the account by debiting it for its balance
and crediting his capital account.

EXERCISE 15

Record the following items affecting the personal account of John A. Butler:
Dec. 1 Paid his house rent, $45.00.

2 He withdrew $100.00 to apply on his salary.
5 Paid provision bill, $35.20.
8 Paid auto license, $12.50.

10 He collected $22.50 from a customer and kept the money.
15 He made a temporary loan to the business of $175.00 to pay a note

maturing today.
22 He withdrew $150.00 to apply on his salary.

60 ACCOUNTANCY AND BUSINESS MANAGEMENT

Dec. 28 He paid an account of the business from his private funds, $32.75.
31 His account is to be credited for his monthly salary, $250.00.
31 His personal account is to be credited for his net profit, $928.16.
31 The balance of his personal account is to be closed into his capital
account.

NOTES AND DRAFTS
NOTES

106. A promissory note is an unconditional written promise to pay a specified
sum of money at a definite future time. It is a medium of exchange. There are
two principal original parties to a note, the maker and the payee. The maker is the
party who signs the note who makes the promise to pay. The payee is the
party in whose favor the note is made the one to whom the amount is to be paid.

ILLUSTRATION 29

107. In illustration 29 William B. Allison is the maker and Gordon Southard
& Co. is the payee. The maker of a note usually owes or is in debt to the payee
of the note, i.e., the maker is a debtor of the payee.

DRAFTS

108. A draft is a written request to pay a specified sum of money at a certain
future time. It is a medium of exchange. There are three parties to a draft, the
drawer, the drawee, and the payee. The drawer is the party who makes the request.
The drawee is the party upon whom the request is made and who, if he accepts the

ELEMENTARY ACCOUNTING

request, becomes the payer or ''acceptor" of the draft. The payee is the party in
whose favor the draft is drawn, the one to whom the amount of the draft is to be
paid when due.

ILLUSTRATION 30

109. In illustration 30 Cornell Brothers is the drawer, Winters, Van Fleet &
Company is the drawee and acceptor, and Frank B. Cunningham is the payee.
The drawee of a draft usually owes or is in debt to the drawer; i.e., the drawee is a
debtor of the drawer. The payee is usually a creditor of the drawer.

110. When the drawer makes a draft payable to a third party it is generally
spoken of as a "three party" draft, and in such case it may be assumed that the
drawer owes the payee.

111. When the drawer and the payee is the same person, the draft is usually
drawn for the purpose of collecting a debt. If the draft is drawn in favor of the
payee's bank the same purpose is indicated.

112. Drafts are of two kinds as to time of payment. Those payable "at
sight" are known as sight drafts and are usually payable on presentation. Those
payable "after sight" or "after date" are known as time drafts. After a time draft
has been accepted, it is known as an acceptance.

113. Accepting a draft is agreeing to pay it when it is due by writing the
word "Accepted" across the face, followed by the date and the name of the drawee,
who thus becomes the "acceptor," and the draft is known thereafter as an "accept-
ance," as stated in the preceding paragraph. (See illustration 30.)

114. The date of maturity is the date on which the note or draft falls due.
When the time is indicated in days, the exact number of days is meant, not counting
the date of making or of acceptance, but counting the date of maturity. When
the time is indicated in months, the same day of the maturing month is the date of
maturity. Drafts and notes are called negotiable instruments.

62 ACCOUNTANCY AND BUSINESS MANAGEMENT

115. A draft drawn "after sight" begins to mature from the date of the accept-
ance, and when drawn "after date" it begins to mature from the date the draft
was drawn without regard to the date of acceptance. A note begins to mature
from the date it is made.

116. Due on Sunday or a legal holiday. The law in nearly all states is that
when the due date falls on Sunday or a legal holiday, the paper falls due on the
next following business day. In a very few states it is due on the last preceding
business day. Days of grace are three days formerly allowed in addition to the
time specified for the payment of commercial paper. They have been abolished in
all but a few states, and will doubtless be abolished in all states within a short time.

117. Negotiable notes and drafts are those which can be transferred by one
party to another. To be negotiable, a commercial paper must contain the words
"or order" or "or bearer." When it does not contain these words it is said to be
non-negotiable, which means that it cannot be transferred by simple endorsement
and delivery. In most states special statutes provide that such papers can be
transferred by assignment, though the party to whom it is transferred gets no
better title to the paper than the original holder had.

118. Transfer. When a payee transfers a negotiable note or acceptance,
he does so by writing his name across the back, and then delivers the paper to
the endorsee. This is known as an endorsement. When a note is transferred, the
payee becomes the first endorser; when an acceptance is transferred, he becomes the
second endorser, unless the draft is drawn by him in his own favor, in which case
he is the first endorser. When commercial paper is made payable "to bearer"
it is not necessary for the holder to endorse it when transferring it to another, but
for prudential reasons it is generally requested and usually required. The differ-
ent forms of endorsement are shown on the next page. These endorsements apply
not only to notes and drafts but to checks and all forms of negotiable paper.

NOTES RECEIVABLE AND NOTES PAYABLE

119. Notes receivable are the written promises of others to pay which are
received by us. They consist of notes and accepted drafts the value of which we
are to receive when -they are due.

120. Notes payable are our own written promises to pay given (issued) to
others. They, consist of notes and accepted drafts the value of which we are to
pay when they are due.

121. Both show a condition of indebtedness, notes receivable corresponding
with accounts receivable and notes payable corresponding with accounts payable.
The principal difference between a note receivable or a note payable and an account
receivable or account payable is that the note is a written promise to pay, and the
account indicates an oral or implied promise to pay.

ELEMENTARY ACCOUNTING

ENDORSEMENTS

(!N BLANK)
J. A. Amsbaugh & Co.

(!N FULL OR SPECIAL)
Pay to the order of W. E. West.
/. A. Amsbaugh & Co.

(WITHOUT RECOURSE)*
Pay to the order of W. E. West
without recourse.

J. A. Amsbaugh & Co.

(RESTRICTED)
Pay to W. E. West only.
J. A. Amsbaugh & Co.

(FOR COLLECTION)
Pay Tenth National Bank for
collection.

J. A. Amsbaugh & Co.

(ENDORSEMENT WITH GUARANTEE)
We hereby guarantee the pay-
ment of the within note.

J. A. Amsbaugh & Co.

(FOR PART PAYMENT)
$50.00.

July 5, 19 , Received on the
within note Fifty Dollars.f

* This means that the party so endorsing is relieved from any 'further clajm
or liability as endorser.

t The writing of the name of the holder on the back of a note is a receipt in
full in the hands of the maker, therefore it should always be omitted in endorsing
for partial payments.

122. Notes and acceptances are generally received and issued in settlement
of personal accounts, thus changing oral promises into written promises, which are
in fact written contracts.

Note: If A owes B on account and afterwards A gives B his note or acceptance in
settlement, while the record of A's indebtedness in B's books is transferred from A's personal
account to the notes receivable account, A's indebtedness to B remains just the same.
In some states and under some circumstances the written promise (note or acceptance)
may be more binding upon A.

123. The principal advantage of notes and acceptances is that they are
negotiable, that is, they are transferable from one person to another, which lends to
them the characteristics of mediums of exchange and greatly increases their useful-
ness in the transaction of business.

124. Because of their negotiability, notes and acceptances are frequently
bought and sold, are discounted at bank to raise funds, are transferred "on account,"
and are sometimes given as security for loans or debts.

64 ACCOUNTANCY AND BUSINESS MANAGEMENT

NOTES RECEIVABLE ACCOUNT

125. Notes receivable account is one of the class in which items relating to
mediums of exchange are recorded. The object in keeping the account is to show:

(a) The face value of notes and acceptances received from debtors,

(b) The face value of such notes and acceptances which have been paid by
their makers, or transferred by us before maturity to others to apply on
debts owed to them, and

126. Notes and acceptances receivable are considered to be "on hand"
until actual payment of them has been received, even though some of them may
have been sent to banks or placed in attorneys' hands for collection.

127. All items must first appear on the debit side of this account before they
can appear on the credit side. As notes and acceptances of others are received they
are entered on the debit side of the notes receivable account at their face value.
As they are paid and returned to those who issued them, or are transferred to others,
they are entered as canceling items on the credit side at their face value.

128. When a debtor issues to his creditor a note or acceptance covering a
debt already recorded in their respective personal accounts, the creditor debits
notes receivable account and credits his debtor's personal account for the face
value of the paper. The debtor's record of the transaction is a debit to his creditor's
personal account and a credit to notes payable account. Regardless of these
bookkeeping entries, however, the debtor still continues to owe his debt until the
note or acceptance is paid. He has simply changed an implied or oral promise
to pay into a written promise to pay. Accordingly, the bookkeeping entries referred
to merely transfer the record of the indebtedness from the debtor's personal account
to the notes receivable account on the books of the creditor, and from the creditor's
personal account to the notes payable account on the books of the debtor.

129. The giving of a written promise to pay, whether in the form of a note
or acceptance, therefore does not pay the debt. In case a note or draft is not paid
at maturity (when it ceases to be negotiable), it is the best accounting practice to
charge it back to the debtor's personal account. In such case, the note or accept-
ance becomes merely a written evidence of indebtedness over the signature of the
debtor. The debtor continues to be responsible for his debt until the note is
redeemed or the personal account is paid. For these reasons many concerns do not
credit debtors' accounts for notes and acceptances received, but instead make a
memorandum record of them in a notes receivable book. The debit items in the
personal accounts of the debtors are not canceled until the notes or acceptances
are paid. Notes and acceptances issued, however, should invariably be credited to

ELEMENTARY ACCOUNTING

the notes payable account and charged to the personal accounts of the parties to
whom they were issued.

The following transactions are correctly recorded in the notes receivable
account shown below:

Jan. 1 Received note for $500.00.
4 Received note for $450.00.
6 Received accepted draft for $375.00.
15 Received cash for note entered on January 1.
15 Received note for $220.10.
17 Received acceptance for $360.75.
19 Received accepted draft for $900.00.
21 Received cash for draft entered on January 6.

23 Received note for $102.14.

24 Received cash for draft entered on January 4.

25 Transferred note entered on January 17 to a creditor in part pay-
ment of his account.

26 Received check for draft entered on January 19.

31 Received 200.00 in part payment of note entered on January 15.

ILLUSTRATION 31

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ANALYSIS

1. On which side of this account are entered the amounts of the notes and
accepted drafts received?

2. What do the amounts on the other side of the account show?

3. On what dates was it possible to rule out balancing items?

4. What do the footings on the debit and credit sides show?

5. What is the balance of the account and what does it show?

6. Which are the balancing items below the rulings?

7. How may the balance of the account be proved?

66 ACCOUNTANCY AND BUSINESS MANAGEMENT

RULES FOR DEBITING AND CREDITING NOTES RECEIVABLE ACCOUNT

130. Debit for the face value of
others' notes and acceptances received.

131. Credit for the face value of
such notes and acceptances when paid

or transferred.

132. The balance of the notes receivable account (if any) shows the amount
of notes and acceptances receivable on hand, which is a current asset that should
be included in the statement of assets and liabilities. The sum of the unpaid
notes and acceptances on hand must agree with the balance of the account.

133. When all items balance above a given point they may be ruled out,
as shown in illustration 31, but the notes receivable account should never be closed
except when it is necessary to forward the account to another page. In this case
the balance is entered on the credit side, the account is footed and ruled, and the
balance is forwarded to a new account on another page.

EXERCISE 16

George Warren's notes receivable transactions are the following. Enter
them in a notes receivable account.

Feb. 2 Received 30 day note for $250.00.

5 Received 60 day note for $112.50.

25 Received 10 day acceptance from customer for $96.50.

Mar. 3 Received cash in payment of note entered on Feb. 2.

4 Received two months note for $165.70.

7 Received cash in payment of acceptance entered on Feb. 25.

10 Received 30 day note for $282.19.

12 Received three months note for $742.56.
Apr. 4 Received cash for note entered on Feb. 5.

9 Transferred note entered on March 10 to a creditor in part pay-
ment of his account.

EXERCISE 17

Enter the following notes receivable transactions of Blake and Ray in a notes
receivable account.

May 2 Received 15 day accepted draft from customer for $92.68.
4 Received 90 day note for $322.18.

11 Received 60 day accepted draft from customer for $216.22.

15 Had note entered on May 4 discounted at bank.

16 Received one month note for $112.70.

17 Received cash for acceptance entered on May 2.
June 12 Received 30 day note for $175.90.

15 Had acceptance entered on May 11 discounted at bank.

16 Received cash for note entered on May 16.

ELEMENTARY ACCOUNTING

July 2 Received 60 day note for $300.00.

12 Transferred note entered on June 12 to a creditor to apply on account.
28 Received accepted draft drawn at 10 days sight for $2.11.18.

NOTES PAYABLE ACCOUNT

134. Notes payable account is one of the class in which items relating to
mediums of exchange are recorded. The object in keeping this account is to show:

(a) the face value of our notes and acceptances issued to creditors,

(6) the face value of these notes and acceptances which have been redeemed

by and returned to us, and

which is a current liability.

135. All items must first appear on the credit side of this account before
they can appear on the debit side, because our obligations to pay must be issued
before they can be paid and redeemed. As we pay them and they are returned to us
by those to whom they were issued or transferred, they are entered as canceling
items on the debit side of the account.

The following transactions are correctly recorded in the notes payable account
shown below:

Jan. 1 Gave note for $200.00.

4 Gave note for $633.45.

9 Accepted draft for $89.73.

16 Gave note for $1,137.68.

19 Paid draft entered on January 9.

21 Accepted draft for $113.39.

24 Paid note entered on January 4.

24 Issued note for $150.00.

26 Paid note issued January 1.

30 Accepted draft for $212.32.

31 Paid draft entered on January 21.

ILLUSTRATION 32

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t I. 3

ACCOUNTANCY AND BUSINESS MANAGEMENT

ANALYSIS

1. On which side of this account are entered the amounts of notes and
accepted drafts issued?

2. What do the amounts on the other side of the account show?

3. On what date was the account in balance?

4. What do the footings of the account show?

5. What is the balance of the account and what does it show?

6. Which are the balancing items below the rulings?

7. How may the balance of the account be proved?

8. At what value are notes receivable and notes payable accounts always
debited and credited?

RULES FOR DEBITING AND CREDITING NOTES PAYABLE ACCOUNT

136. Debit for the face value of
our notes and acceptances when paid.

137. Credit for the face value of
our notes and acceptances issued to
others.

138. The balance of the notes payable account (if any) shows the amount
of our notes and acceptances unpaid, which is a current liability that should be
included in the statement of assets and liabilities. The sum of the unpaid notes
and acceptances must equal the balance of the account.

139. When all items balance above a given point they may be ruled out,
as shown in illustration 32, but the notes payable account should never be closed
except when it is necessary to forward the account to another page. In this case
the balance is entered on the debit side, the account is footed and ruled, and the
balance is forwarded to the credit side of a new account on another page.

EXERCISE 18

J. C. Bond's notes payable transactions are as follows,
notes payable account.

Enter them in a

Feb. 3 Gave 30 day note for $100.00.

5 Gave 60 day note for $242.50.

24 Accepted 10 day draft drawn on him by creditor for $52.60.

Mar. 1 Paid cash in settlement of note entered on Feb. 3.

3 Gave 30 day note for $133.90.

6 Paid cash in settlement of draft entered on Feb. 24.
13 Gave two months note for $211.40.

22 Gave 30 day note for $175.00.

Apr. 2 Paid cash in settlement of note entered on Mar. 3.

6 Paid cash in settlement of note entered on Feb. 5.

ELEMENTARY ACCOUNTING 69

EXERCISE 19

Enter the following notes payable transactions of Brown and King in a notes
payable account:

May 1 Gave 3 months note for SI 85 .40.

4 Accepted 10 day draft drawn on them by creditor for $125.00.

7 Gave 30 day note for $278.21.

13 Paid cash in settlement of draft entered on May 4.

14 Gave 60 day note for $137.50.
21 Gave 30 day note for $225.00.

June 6 Paid cash in settlement of note entered on May 7.

15 Gave 2 months note for $100.00.

20 Paid cash in settlement of note entered on May 21.

25 Gave 60 day note for $372.60.

July 2 Gave 30 day note for $165.72.

13 Paid cash in settlement of note entered on May 14.

CASH ACCOUNT

140. Cash includes gold, silver, coins, bank notes, U. S. Treasury notes,
money orders, bank drafts, checks, and whatever else is received or given as money.
Cash is the most important of the mediums of exchange. The objects in keeping
the cash account are to record the receipts and payments of cash, and to ascertain
the amount of cash that should be on hand.

141. The cash on hand includes the money in the cash register, safe, or
drawer, to which must be added the balance in bank shown by the check book.
When money is kept on deposit in more than one bank, the sum of the balances
must be added to the cash in the register, safe or drawer. When a separate ledger
account is kept with the bank, "cash on hand" includes only the actual cash in
the safe or drawer. Ledger accounts with banks are seldom kept.

142. The cash account is frequently not kept in the ledger because the
cash book, in which the entries for all receipts and payments of cash are made,
is really the cash account. When the cash book is kept, no cash items are
entered in any other book.

143. Cash receipts are entered on the left-hand or debit side of the cash
book. Entries for cash receipts result in debits to cash account, and credits to the
accounts named, when the items of cash received are posted. Cash payments are
entered on the right-hand or credit side. Entries for cash payments result in
credits to cash account, and debits to the accounts named, when the items of cash paid
are posted.

The cash receipts and payments of W. B. Ward for the month of January,
listed on page 70 arc recorded in the cash book shown in illustration 33.

ACCOUNTANCY AND BUSINESS MANAGEMENT

ILLUSTRATION 33

CASH RECEIPTS

Jon.

Balance

129

W. B. Ward, Capital a/c
Walter Crane

Additional cash investment
Bill Dec. 3

1500
78

00
22

18
31

Notes Receivable
W. B. Ward, Pers. a/c
Total Receipts

Balance

F. C. Boyd's note due today
Received for debt due him

328
10

55
00

| 1916

77
U2

2046

Feb.

964

4(j

Jan.

1
1

2
3

8
11
11

15
15

Balance on hand $129.85.

Mr. Ward made an additional cash investment of $1,500.00, to be

credited to his capital account.

Paid Jameson & Fox for bill December 5, $218.78.

Paid rent for store for January, $50.00. This is an expense item to

be debited to expense account.

Paid Bowen & Co. to apply on bill December 27, $275.00.

Received from Walter Crane for bill December 3, $78.22.

Paid a doctor bill of $20.00 for Mr. Ward, to be charged to his

personal account.

Paid travelling expenses of Mr. Ward for a business trip out of the

city, which is an expense item, $11.60.

F. C. Boyd paid his note for $328.55 in favor of Mr. Ward which

is due today. As the notes receivable account was debited when

the note was received, credit it when the note is paid.

Paid note for $228.50 in favor of Biggs & Co., which is due today.

As the notes payable account was credited when the note was

issued, it is debited when the note is paid.

Mr. Ward collected a personal debt due him of $10.00, and turned

the money over to the business. It is to be credited to his personal

account.

Paid Bowen & Co. in full for bill December 27, $269.60.

Paid gas and light bill, $8.68. This is an expense item.

ANALYSIS
1. What was the cash balance on January 1?

ELEMENTARY ACCOUNTING

ILLUSTRATION 33

CASH PAYMENTS

Jan.

Jameson & Fox

Bill Dec. 5

218

Expense

Rent of store for Jan.

Bowen & Co.

a/c bill Dec. 27

275

W. B. Ward, Pers/ a/c

Personal doctor's bill

Expense

Traveling expenses

Notes Payable

Note Biggs & Co. due today

228

Bowen & Co.

In full bill Dec. 27

269

Expense

Gas and light bill

Total payments

1082

Balance

964

2046

2. What were the total receipts for the month?

3. Now much cash would have been on hand January 31 if none had been
paid out?

4. What were the total payments for the month?

5. What were the total debits and credits to cash for the month?

6. To which side of the ledger accounts named are cash receipts posted?
Cash payments?

The following account shows how the total receipts and total payments are
posted from the cash book to the cash account in the ledger:

CASH

Jan.

Balance
Total receipts

129
1916

Jan.

Total payments

1082

RULES FOR DEBITING AND CREDITING CASH ACCOUNT

144. Debit
receipts.

cash account for

145.

ments.

Credit cash account for pay-

146. The balance of the cash account should always be a debit balance,
and should equal the amount of cash on hand. It is a current asset that should be
included in the statement of assets and liabilities. The credit side of the ac-
count can never properly be the larger since it is impossible to pay out more
cash than is received. "Overchecking" on the bank may result in the credit
side being the larger, but this is a violation of banking rules, and the cash book
should never be closed showing an overdraft.

72 ACCOUNTANCY AND BUSINESS MANAGEMENT

147. To close. Find the balance and entor it on the credit side. Then foot
and rule the book, and bring down the balance on the opposite side under the date
of the next business day, as shown in illustration 33.

EXERCISE 20

Record the following receipts and payments .of J. H. Bond in a cash book.
Then balance the cash book in the manner shown in illustration 33.
Jan. 2 Balance on hand, $211.36.

2 Mr. Bond made an additional cash investment of $2000.00 to be
credited to his capital account.

3 Paid R. J. Maclean & Co. for bill December 28, $179.20.

4 Paid H. B. Wilson & Co. for bill December 29, $139.85.

5 Paid personal coal bill for Mr. Bond, which is to be charged to his
personal account, $36.00.

6 Paid rent for store for January, $47.50.

8 Received from Charles Clyde for bill January 2, $78.52.
11 Paid Archer & Crane, on account bill January 6, $150.00.
15 Received from J. C. Lane for bill January 6, $22.13.

17 Paid bill for office supplies, $18.25.

18 A. H. Morton paid his note for $135.42 in favor of Mr. Bond, which
is' due today.

20 Paid Mr. Bond $75.00 to apply on his January salary, which is to be

charged to his personal account.

20 Received from Allen & Blake, on account bill January 4, $100.00.
22 Paid note for $275.80 in favor of H. B. Wilson & Co., which is due

today.
24 Mr. Bond sold some second-hand furniture belonging to him for

$20.00 and turned the money over to the business, to be credited

to his personal account.
24 Paid Archer & Crane in full for bill January 6, $95.60.

26 Paid note for $125.00 in favor of J. K. Gill, which is due today.

27 Cole & Co. paid their note for $187.50 in favor of Mr. Bond, which
is due today.

30 Received from Allen & Blake in full for bill January 4, $72.16.

31 Paid clerk's wages for the month, $60.00.

MERCHANDISE ACCOUNTS

148. Merchandise is the general name given to commodities that are bought
for the purpose of selling them at a profit.

ELEMENTARY ACCOUNTING 73

149. As the principal profit of a mercantile or trading business is derived
from the buying and selling of merchandise, those accounts in which are recorded
the various items entering into the cost of the goods purchased, the cost of goods
sold, and the income from saks are of first importance, because they provide the
data from which the gross trading profit is determined.

150. The three principal operations in a trading business are purchasing
merchandise, setting merchandise, which are more or less continuous operations,
and taking the inventory at the time of closing the books, which operation occurs
at the close of each fiscal period.

Note: A fiscal period is any yearly period, and may be the calendar year or any other
period of twelve months. For purposes of instruction in this text a fiscal period is usually
assumed to be one month.

151. Three principal trading accounts are kept to record the results of the
three trading operations referred to in the preceding paragraph, namely the pur-
chases, sales, and inventory accounts. Current purchases and sales are recorded in-
the first two accounts, and they are therefore running or continuing accounts. The
inventory account receives entries only when the books are closed at the end of a
fiscal period and when they are opened at the beginning of the next period. The
items included in these accounts relate only to the commodities dealt in.

PURCHASES ACCOUNT

152. The object in keeping the purchases account is twofold:

(a) To ascertain the invoice cost of merchandise for a fiscal period, and

(b) To ascertain the invoice cost of goods sold for a fiscal period.

153. The invoice cost of goods purchased is debited to the purchases account.
Invoice cost is the price at which goods are billed when purchased. All items which
decrease or reduce the invoice cost of purchases are credited to the purchases account.
Such items are designated as "deductions from cost," and consist of purchases
returned for credit, rebates and allowances on purchases for defective or damaged
goods and overcharges, and similar items.

154. In order to have the purchases account show the invoice cost of goods
sold for a fiscal period, it must include the inventory at the beginning and the
inventory at the close of the current period. The inventory at the beginning of the
period consists of goods which were purchased but not sold in the preceding fiscal
period or periods. Since these goods are on hand and available for sale at the
beginning of the current period, at that time their invoice cost is debited to the
purchases account. The inventory at the ckse of the current poriod consists of
the unsold goods on hand. Their invoice cost is therefore credited to the purchases
account at the close of the period because it is not a part of the cost of the goods sold
or disposed of during the current period.

155. When the purchases account is debited for the beginning inventory

ACCOUNTANCY AND BUSINESS MANAGEMENT

and goods purchased, the debit footing is the total invoice cost of merchandise for
the period. The total invoice cost minus the sum of the deductions from invoice
cost credited to the account is the net invoice cost of merchandise. When the
account is credited for both deductions from invoice cost and the closing inventory,
the balance is the net invoice cost of goods sold for the period.

The following transactions are properly recorded in the purchases account
which appears below:

Nov. 1 Inventory at beginning of period, $6842.19.

10 Returned for credit goods which were ordered by mistake, $33.66.

Bought merchandise for cash, $22.95.

Received a rebate on goods purchased which were damaged because

of defective packing, $9.45.

Received rebate for overcharge on goods purchased, $13.72.

Purchased goods for cash, $15.00.

Returned defective goods for credit, $11.16.

Total purchases on account per purchases book total, $7002.91.

Inventory of unsold goods on hand, $8716.42.

26
27
30
30

ILLUSTRATION 34

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ANALYSIS

1. If no merchandise had been purchased during the month, what would
have been the invoice cost of the goods available for sale from November 1?

2. What was the invoice cost of the goods purchased during November?

3. What was the total invoice cost of merchandise for the period?

4. What was ths invoice cost of the goods returned, the amount of rebates
and allowances, and the total deductions from cost for the period?

5. What was the net invoice cost of merchandise for the period?

6. What was the invoice cost of the goods remaining unsold on November 30?

7. What was the net invoice cost of goods sold for the period?

8. What is the balance of the account and what does it represent?

ELEMENTARY ACCOUNTING 75

RULES FOR DEBITING AND CREDITING PURCHASES ACCOUNT

156. Debit for the invoice cost of
merchandise on hand at the beginning
of and purchased during a fiscal period.

157. Credit for deductions from in-
voice cost, and for the invoice cost of
goods unsold at the close of the period.

To CLOSE PURCHASES ACCOUNT

158. After the income and profit and loss statement has been prepared, the
purchases account is closed by a journal entry crediting it for the amount of its
balance shown in the trial balance. When this entry is posted, the account will
be in balance and can be footed and ruled as shown in illustration 34.

EXERCISE 21

C. H. Crook's transactions for. January affecting the purchases account
were as follows. Record them in an account.

Jan. 1 Inventory of merchandise on hand at beginning of business, $1892.73.

7 Bought merchandise for cash, $175.00.

11 Received credit memorandum for purchases returned, $13.45.

18 Bought merchandise for cash $112.42.

22 Received credit memorandum for defective goods purchased, $42.80.

25 Mr. Crook took for his private use merchandise which cost $11.85.

31 Total purchases of merchandise during month per total of purchases

book, $3695.48.

31 Inventory of merchandise unsold at end of month, $1522.76.

EXERCISE 22

Walter E. Lee's transactions affecting the purchases account for January, Feb-
ruary, and March, in monthly totals, are as follows:

Jan. 1 Inventory at beginning of period, $12,472.16.

31 Total of purchases returned during January, $117.28.

31 Total of purchases book for January, $3,278.46.

Feb. 28 Total of rebates and allowances received during February, $96.19.

28 Total cash purchases during February, $276.80.

28 Total of purchases returned during February, $161.20.

28 Total of purchases book for February, $7,248.22.'

Mar. 31 Total of rebates and allowances received during March. $39.25.

31 Total of purchases returned during March, $185.40.

31 Mr. Lee donated to charity at cost goods amounting to $75.40.

31 Total purchases for March per purchases book, $5,98(3.21 .

31 Inventory of merchandise unsold at end of period, $13,788.28.

76 ACCOUNTANCY AND BUSINESS MANAGEMENT

ADDITIONS TO INVOICE COST OF GOODS SOLD

159. The balance of the purchases account shows the net invoice cost of
goods sold, as explained in If 155 and illustrated in the above exercises. There
are a number of other costs and expenses incurred in purchasing and handling
merchandise which increase its cost; consequently, they must be added to the net
invoice cost of goods sold in finding the total cost of goods sold. These additional
costs and expenses include incoming freight, express, and drayage charges; boxing,
packing, and shipping materials; warehouse wages, supplies, and expenses; salaries
and expenses incurred in buying goods, etc. Such items are designated as "addi-
tions to cost," and it is the best practice to keep separate accounts for them. As this
practice is observed in this text, such accounts will be introduced later as required.

SALES ACCOUNT

160. The object in keeping the sales account is to ascertain the net income
from sales for a fiscal period. The account is credited for the selling price of all
goods sold, which is the income from sales. It is debited for all items which
decrease or reduce the income from sales. Such items are designated as "deduc-
tions from sales," and consist of goods returned for credit, rebates and allowances
on sales for defective or damaged goods and overcharges, and similar items.

161. The credit footing of the sales account is the total sales, or gross sales.
The debit footing is the total deductions from sales. The total sales minus the
total deductions is the net income from sales, which is the balance shown by the
account.

The following transactions are correctly recorded in the sales account which
appears on page 77.

Jan. 19 A customer was allowed a rebate of $7.56 for an overcharge on

goods previously sold to him.

21 Allowed a customer a credit of $12.40 for damaged goods.
25 A customer reported a shortage in a shipment and was allowed

a credit for $15.18.

31 A customer returned goods for credit amounting to $64.13.
31 The total sales for the month as shown by the total of the sales book
were $7,124.38.

ANALYSIS

1. What were the total sales for the period?

2. What was the amount of the goods returned for credit and the total of
the rebates and allowances on sales?

3. What were the total deductions from sales?

4. What were the net sales for the period?

5. What is the balance of the account, and what does it represent?

ELEMENTARY ACCOUNTING

ILLUSTRATION 35

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RULES FOR DEBITING 'AND CREDITING SALES ACCOUNT

162. Debit for all deductions
from the selling price of goods sold.

163. Credit for the selling price
of all goods sold.

To CLOSE SALES ACCOUNT

164. After the income and profit and loss statement has been prepared
the sales account is closed by a journal entry debiting it for the amount of its
balance as shown in the trial balance. When this entry is posted, the account
will be in balance and can be footed and ruled as shown in illustration 35.

EXERCISE 23

C. G. Kirwan's transactions affecting the sales account for January were
as follows. Record them in an account.

Jan. 3 Sold merchandise for cash, $27.60.

10 Allowed customer credit for goods returned, $13.72.

14 Sold merchandise for cash, $115.00.

17 Allowed customer credit for overcharge on goods sold him, $3.76.

22 Allowed customer credit for damaged goods, $21.75.

25 Sold merchandise for cash, $12.70.

31 Total sales for month per sales book total, $4,278.89.

EXERCISE 24

Hynson <fe Westcott's transactions affecting the sales account for the months
of January, February, and March, in monthly totals, are as follows:

Jan. 31 Total cash sales during January, $211.83.

31 Total sales per sales book for January, $7,898.85.

31 Total rebates and allowances on sales during January, $368.40.

Feb. 28 Total sales returned during February, $122.19.

78 ACVOl M AN'CY AND BUSINESS MANAGEMENT

Feb. 28 Total cash sales during February, $326.72.

28 Total rebates and allowances on sales during February, $37.22.

28 Total sales per sales book for February, $8,688.78.

Mar. 31 Total sales returned during March, $422.16.

31 Total cash sales for March $521.73.

31 Total rebates and allowances on sales during March, $78.21.

31 Total sales per sales book for March, $9,972.43.

OTHER DEDUCTIONS FROM SALES

165. There are other items in addition to those named in paragraph 160
which reduce the income from sales, but such items are not entered in the sales
account. It is the best practice to keep separate accounts for them, and such
accounts will be introduced later as they are required.

CASH SALES

166. Cash sales are those sales in which cash is received immediately for the
goods sold. They are "spot cash" sales over the counter. When goods are
paid for immediately there is no reason for opening an account with the customer.
When cash registers or cash drawers are used, the amount received for cash sales
during the day is entered as one item in the cash receipts book and credited to
sales account. This disposition of cash sales is made in most lines of business.
When goods are not paid for immediately an account is opened with the customer.

INVENTORY ACCOUNT

167. A merchandise inventory is a list of merchandise or stock in trade
on hand at any time. It is necessary to take an inventory of the merchandise
on hand at the end of each fiscal period in order to ascertain the correct profit or
loss on the goods sold, because the inventory of unsold goods must be deducted
from the total invoice cost of merchandise to ascertain the net invoice cost of
goods sold for the period. Read ^f's 153, 154, and 155.

168. The object in keeping the inventory account is to record in the ledger
the value of the merchandise on hand at the end of any fiscal period. The
inventory is a current asset which should be included in the statement of assets and
liabilities. The account on the next page shows the proper entries for inventories
taken on October 31, November 30, and December 31.

Explanation: The inventory of $6842.19 was debited to the inventory account
on October 31, when the books were closed for that month. Reference to illus-
tration 34 on page 74 will show that when the books were opened again for the next
period on November 1, this inventory was debited to the purchases account. At
the same time it was credited to the inventory account as shown above. As the

ELEMENTARY ACCOUNTING

inventory account was then in balance, the balancing items were ruled out. On
November 30, when the books were closed again, the inventory of $8716.42 on hand
at that date was debited to the inventory account and credited to the purchases
account, as shown in the two illustrations. When the books were opened again
on December 1 for the next period the purchases account was debited (this entry
is not shown in illustration 34 because it only includes November items) and was
credited to the inventory account, which again brought that account into balance.

ILLUSTRATION 36

ANALYSIS

What account was credited when the inventory account was debited on

December 31 for $7516.45?

When the books are opened again on January 1 what account will be

debited and what account credited for this amount?

Why is the inventory account debited and purchases account credited

for the inventory on hand at the close of a fiscal period?

Why is the purchases account debited and the inventory account credited

for the inventory on hand at the beginning of a period?

RULES FOR DEBITING AND CREDITING INVENTORY ACCOUNTS

169. Debit for the inventory on
hand at the end of any fiscal period.

170. Credit for the same inven-
tory at the beginning of the next fiscal
period.

EXERCISE 25

Jan. 1, 1922. R. L. Johnson's inventory of merchandise debited to the
inventory account on his books at the beginning of the year was $3,278.42.
Dec. 31, 1922. His inventory at the end of the year was $4,391.12.
Open the Inventory Account, debiting it with the inventory of Jan. 1.

1.
2.

What entries are required to transfer this inventory from the inven-
tory account to the purchases account at the beginning of business

80 ACCOUNTANCY AND BUSINESS MANAGEMENT

on Jan. 1? Make the entries in the two accounts and rule out
any balancing items.

3. Make the entries required to transfer the inventory of Dec. 31
from the purchases to the inventory account.

EXERCISE 26

Dec. 31, 1923. Mr. Johnson's inventory at the end of the year 1923 was
$5,678.40.

1. Follow instructions given in paragraphs 2 and 3 in the above exercise.

FREIGHT, EXPRESS, AND DRAYAGE CHARGES

171. Freight and express charges are the amounts paid for the transportation
of good^ by public carrier. Drayage and cartage charges represent the cost of
hauling goods from freight stations to the warehouse or to other freight stations,
and from the warehouse to freight stations or other points of delivery. As under-
stood by accountants the term "freight" includes all freight, express, cartage,
postage, and other charges assessed for the transportation of goods.

172. The terms on which goods are bought and sold generally indicate
which of the parties is to pay transportation charges. Goods shipped "f. o. b."
(free on board) means that the seller delivers the goods on board the cars, boat or
ship, after which they are transported at the expense of the buyer. "Charges
prepaid" generally means that the seller of goods shipped f . o. b. pays the freight
or express charges at the point of shipment for the buyer, and that the buyer
becomes indebted to the seller for the amount. Goods shipped "f. o. b. delivery
point" means that the seller is to pay the carrying charges; if they are paid by the
buyer the seller becomes indebted to him for the amount. However, in any case
it is a matter of agreement between the parties when the sale is made as to who is to
bear the expense of the transportation charges.

173. There are two kinds of freight from an accounting standpoint. Incom-
ing freight (or "freight in") consists of all transportation charges on goods pur-
chased. Outgoing freight (or "freight out") consists of all such charges on goods
sold.

FREIGHT IN ACCOUNT

174. Freight In account is one of the accounts included in the group desig-
nated as "additions to cost." Read ^[159. The account is debited for the cost
of freight, express, and drayage charges paid on goods purchased. It is credited
for the amount of any of these charges rebated and returned because of over-
charges resulting from mistakes in rating, etc. Its balance shows the net increase
in cost for incoming freight to be added to the net invoice cost of goods sold in
finding the total cost of goods sold for a fiscal period. Inward freight is a trading
expense.

ELEMENTARY ACCOUNTING

ILLUSTRATION 37

FREIGHT IN

Jan.

Freight

Jan.

Rebate on dra. 1/5

Express

Rebate on frt. 1/9

Freight

To close

Drayage bill

Express

Drayage bill

ANALYSIS

1. What should the charges have been for the freight entered on January 9?

2. What should have been the amount of the drayage bill entered on January
15?

3. What were the total freight, express, and drayage charges for the month?

4. What were the total rebates on these charges?

5. What is the balance of the account, and what does it show?

RULES FOR DEBITING AND CREDITING FREIGHT IN ACCOUNT

175. Debit for incoming freight,
express, drayage, and postage charges, j

176. Credit for rebates or allowances
on such charges.

177. To close. After the income and profit and loss statement has been
prepared, this account is closed by a journal entry, crediting it for the amount of
its balance shown in the trial balance. The account is then footed and ruled as
shown in illustration 37.

EXERCISE 27

L. C. Rusmisel's transactions affecting the freight inward account are the
following. Record them in an account.

June 2 Paid freight bill on goods purchased, $42.65.

8 Paid express charges on incoming goods, $7.63.

15 Paid freight on goods purchased, $35.72.

21 Received rebate for overcharge on freight paid on June 2, $11.22.

28 Paid expressage on incoming goods, $3.16 .

30 Paid bill of City Transfer Co, for hauling incoming goods from
freight stations to store, $8.50.

AcViH M'A.NCV AM) WslNKSS MANAGEMENT

WAREHOUSE EXPENSE ACCOUNT

178. Warehouse expenses consist of the expenditures for labor employed
and supplies used in handling merchandise in the warehouse or store. They thus
consist of the expenses of receiving, unpacking, placing in stock, and preparing
merchandise for sale or shipment, such as the cost of labor and boxing, packing,
and shipping materials and supplies.

179. The warehouse expense account is one of the accounts in the group
designated as "additions to cost." It is debited for the cost of warehouse expenses.
It is credited for rebates resulting from overcharges and such other items as reduce
the cost of such expenses. The balance of the account shows the net increase in
cost for warehouse expenses to be added to the net invoice cost of goods sold in
rinding the total cost of goods sold for a fiscal period. Warehouse expenses are
trading expenses.

ILLUSTRATION 38

WAREHOUSE EXPENSE

Jan.

Boxes

Jan.

Rebate on boxes

Paper and twine

Cartons sold

Cartons

To close

261

Wages

Nails, strapping, etc.

Wages

268

ANALYSIS

1 What should have been the amount of the bill for boxes entered on Jan-
uary 5?

2. What was the expense for warehouse labor for the month?

3. What was the expense for materials and supplies?

4. What were the total charges to warehouse expense?

5. How much were these charges reduced by rebates and other credits?

6. What is the balance of the account, and what does it show?

RULES FOR DEBITING AND CREDITING WAREHOUSE EXPENSE ACCOUNT

180. Debit for the cost of ware-
house labor and supplies.

181 . Credit for deductions from the
cost of items charged to the account.

182. To close. After the income and profit and loss statement has been
prepared, this account is closed by a journal entry crediting it for the amount of
its balance shown in the trial balance. The account is then footed and ruled as
shown in illustration 38.

ELEMENTARY ACCOUNTING 83

EXERCISE 28

Record the following transactions affecting R. L. Strong's warehouse expense
account:

Aug. 3 Paid bill for nails, twine, and wrapping paper, $17.65.
8 Paid bill for packing cases and boxes, $79.60.
11 Paid bill for box strapping and small tools, $9.20.
15 Paid wages of warehouseman and shipping clerk, $110.00.
17 Sold six cases to accommodate neighboring merchant for cash,

$4.50.

22 Paid bill for excelsior and barrels, $6.50.

27 Received rebate for overcharge on boxes paid for on August 8, $4.40.
31 Paid wages due today, $110.00.

GROSS TRADING PROFIT

183. In a mercantile or trading business, the gross trading profit is the excess
of net income from sales over the total cost of goods sold. It represents the profit
resulting from the buying and selling operations. It is ascertained by deducting
from the net income from sales the total cost of goods sold. If the total cost of
goods sold should exceed the net income from sales, the difference is the gross
trading loss.

The following tabulation, prepared for illustrative purposes from the ac-
counts shown in illustrations 34, 35, 37, and 38, gives the gross trading profit
resulting from the buying and selling operations recorded in those accounts:
Net income from sales 7025.11

Net invoice cost of goods sold 5098.64
Additions to cost:

Freight in 82.96

Warehouse expense 261.55

Total cost of goods sold 5443.15

Gross Trading Profit 1581.96

ANALYSIS

1. The net income from sales is the debit footing, credit footing, or
balance of what account?

2. The net invoice cost of goods sold is the debit footing, credit footing, or
balance of what account?

3. By what amount was the net invoice cost of goods sold increased by-
additions to cost?

4. If there had been no deductions from sales, what would have been the
net income from sales?

84 ACCOUNTANCY AND BUSINESS MANAGEMENT

5. If there had been no deductions from the invoice cost of merchandise,
what would have been the net invoice cost of goods sold and the total
cost of goods sold?

6. If the inventory of November 30 had been $7716.42, what would have
been the gross trading profit?

EXERCISE 29

Prepare tabulations showing the gross trading profit or gross trading loss
from the two following groups of accounts:

A B

Sales 9728.60 Sales 15893.21

Purchases 7263.22 Purchases 14938.20

Freight In 236.78 Freight In 573.98

Warehouse Expense 498.16 Warehouse Expense 1216.93

EXPENSES

184. In general, expenses are the expenditures for services and supplies
required in conducting the activities and operations of a business, but for
which no permanent value is secured. They consist of the expenditures of
funds which necessarily must be made in carrying on the operations from which
the income and profits of a business are derived. These expenditures do not
represent permanent investments of funds, but on the contrary, they represent
the cost of services and of materials and supplies that are used or consumed.
Expenses include the cost of such items as rent, fuel, light, taxes, insurance, postage,
office supplies and stationery, telephone and telegraph charges, freight, express,
and drayage charges, warehouse expenses, interest on borrowed money, salaries of
the proprietor or manager, office help, and clerks, etc.

185. When it is possible to determine accurately the expenses of any particu-
lar department or operation of a business, they are classified or segregated in a
separate account or accounts so they can be charged against the department or
operation in connection with which they were incurred. For instance, the freight
in and warehouse expense accounts include the cost of two classes of expense
items incurred directly in connection with the merchandising operations, and
hence are included in the cost of such operations.

186. Expenses which cannot properly be charged entirely to any particular
department or operation, but which are applicable to and incurred by the business
as a whole, are referred to in the smaller businesses as general or operating ex-
penses, and are recorded in one account under the title of "Expense/' or "General
Expense." These expenses include such items as rent, fuel, light, taxes, insurance,
etc. If desired, the expense account may be analyzed at any time to determine
the cost of each separate item of expense.

ELEMENTARY ACCOUNTING
EXPENSE ACCOUNT

187. The expense account is debited for the cost of all general expenses. It
is credited for any deductions in the cost of items charged to it. The balance of the
account shows the net cost of the general expenses, which must be deducted from
the gross trading profit in finding the net profit for a fiscal period. In case there
is a gross trading loss, the expenses must be added in determining the net loss.

ILLUSTRATION 39

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ANALYSIS

1. What were the total general expenses for January?

2. If the $25.00 credited to the account on January 31 was received for
space rented to another merchant, what was the net expense for rent for
the month?

3. What is the balance of the account, and what doete it represent.?

RULES FOR DEBITING AND CREDITING EXPENSE ACCOUNT

188. Debit for the cost of all gen-
eral expenses.

189. Credit for deductions from the
cost of items charged to the account.

190. To close. After the income and profit and loss statement has been
prepared, this account is closed by a journal entry crediting it for the amount of
its balance shown in the trial balance. The account is then footed and ruled as
shown in illustration 39.

EXERCISE 30

H. A. Bacon's expenses for October were as follows. Prepare an account for
them.

Oct. 1 Paid rent of store for the month. $65.00.

10 Bought 5 tons coal for heating, $37.50.

13 Bought postage stamps, $5.00.

18 Paid electric light bill, $2.48.

86 ACCOUNTANCY AND BUSINESS MANAGEMENT

24 Bought letterheads, envelopes, and office supplies, $22.40.
28 Paid telephone bill, $5.30.
31 Paid clerk's salary, $60.00.

EXERCISE 31

The Central Drug Company's expenses for February were the following:

Feb. 1 Paid rent for store and warehouse, $135.00.

2 Paid gas and electric light bill, $11.86.

10 Paid bill for building new shelves and sundry repairs, $45.00.

12 Paid printing bill for advertising matter, $75.60.

15 Paid clerks' salaries and wages, $265.00.

18 Paid bill for automobile oils and gasoline, $26.52.

20 Paid telephone bill, $7.85.

22 Received cash for overpayment on bill paid on Feb. 18, $2.00.

27 Paid traveling expenses of salesman , $35.80.

28 Paid clerks' salaries and wages, $265.00.

INTEREST AND DISCOUNT

191. Interest and discount are charges paid for the use of money. When the
charge is paid after the money has been used, it is called interest; when the charge
is paid before the money is received, it is called discount. Discount is interest paid
in advance. This is the only real difference in the terms and consequently for
bookkeeping purposes the term "interest" applies to both interest and discount.

Illustration. If A borrows $100 from B for one year at 6% interest, at the
expiration of that time (after he has had the use of the money) he will return
to B $100 plus $6, or $106. The $100 is in payment of the loan. The $6 is in
payment for the use of $100 for one year. If the $6 is deducted from the $100
when the loan is made, the interest is then called discount, because it is paid in
advance, or before the borrower has had the use of the money.

192. Interest is received and paid in connection with many kinds of business
transactions, the more common of which are:

(a) Interest paid by banks to depositors for funds on deposit with them.

(b) Interest paid by their customers to banks for funds borrowed.

(c) Interest received and paid on notes receivable and notes payable rep-
resenting debts arising out of current routine transactions between busi-
ness concerns.

(d) Interest received and paid on past-due open book accounts.

(e) Interest received and paid on mortgages, bonded indebtedness, and such
long-time obligations, which are fixed liabilities.

193. Most debts upon which interest is to be received or paid are evidenced
by notes receivable or notes payable, which stipulate the rate at which the interest
is to be calculated. Such notes are called interest-bearing notes. In most states

ELEMENTARY ACCOUNTING 87

the legal rate of interest is 6%, but in some states the legal rate is as high as 12%.
The charging of interest in excess of the legal state rate is unlawful.

194. Interest is calculated on an interest-bearing note from the date of the
note to the date upon which it is paid. Discount is calculated for the exact num-
ber of days from the date of discount to the due date. An interest-bearing note is
discounted for the amount of the note, which is the face of the note plus the interest.
The amount of the note less the discount equals the proceeds, which is the value of
the note on the date it is discounted. Interest on an open book account is cal-
culated from the date on which the account is due to the date on which it is paid.

INTEREST INCOME ACCOUNT

195. Interest received is income earned for the use of money loaned. From
the standpoint of the business man wko extends credit to his customers, it repre-
sents an earning of capital because the capital he has invested in his business is
sufficient to enable him to continue to carry the accounts of debtors when they
fail to pay their debts within the usual term of credit. Under these circumstances
a creditor indirectly lends money to his debtors by giving them the use of a part
of his capital. Interest received is therefore frequently referred to as a capital
income, to distinguish it from operating income.

196. Interest received is recorded in the interest income account, which is
credited for all such interest and debited for any rebates to others resultirig from
overpayments of interest charges. The balance of the account is the net income
from interest received. The account is included in the group designated as "addi-
tions to income," and its balance is added to the gross trading profit in finding the
gross income for a fiscal period.

INTEREST EXPENSE ACCOUNT

197. Interest paid is an expense incurred for the use of money which it is
necessary to borrow because the capital invested is not sufficient to meet all debts
and obligations when they mature. It represents an expense which would not
be incurred if the capital invested were sufficient to finance promptly all the opera-
tions of a business. Interest paid is therefore frequently referred to as a capital
expense, to distinguish it from operating expenses.

198. Interest paid is recorded in the interest expense account, which is
debited for such interest and credited for any rebates received from others resulting
from overpayments of interest charges. The balance of the account is the net
expense for interest paid. The account is included in the group designated as
"deductions from income," and its balance is deducted from the gross income in
finding the net profit for a fiscal period.

The following transactions are correctly classified and recorded in the interest
expense and interest income accounts which appear below.

ACCOUNTANCY AND BUSINESS MANAGEMENT

Mar. 2 Paid interest on note due today at bank, $9.17.

5 Received interest from a customer on note due today but renewed

at his request, $4.48.

7 The bank discounted a note for $300.00, deducting discount amount-
ing to $3.00.
12 Paid an interest bearing note due today, the interest amounting

to $5.72.

17 Received interest on a past due account amounting to $6.60.
17 Allowed customer credit on the above interest for error in calculating,

ftO Oft

<fl>o.oU.

25 Paid interest on a note due today, $7.80.

31 Received credit from bank for interest accrued on daily bank balance
for quarter ending March 31, $17.16.

ILLUSTRATION 40

INTEREST INCOME

Mar.

To close

IK)

ILLUSTRATION 41

INTEREST EXPENSE

Mar.

To close

(><)

(H)

ANALYSIS

1. What was the total income from interest received for the month?

2. Were there any deductions from this income, and if so, what was the net
income from interest received?

3. What is the balance of the interest income account, and what does it
show?

ELEMENTARY ACCOUNTING 89

4. What was the expense for interest paid during the month?

5. Were there any deductions from interest expense?

6. What is the balance of the interest expense account, and what does .it
show?

RULES FOR DEBITING AND CREDITING INTEREST INCOME ACCOUNT

199. Debit for items which reduce
the income from interest received.

200. Credit for all income from
interest received.

RULES FOR DEBITING AND CREDITING INTEREST EXPENSE ACCOUNT

201. Debit for the expense in-
curred for interest paid.

202. Credit for any items which
reduce the expense incurred for interest

paid.

203. To close. After the income and profit and loss statement has been
prepared, the interest income account is closed by a journal entry debiting it for
the amount of its balance shown in the trial balance. The interest expense account
is closed by a journal entry crediting it for the amount of its balance. The accounts
may then be footed and ruled as shown in illustrations 40 and 41.

EXERCISE 32

C. J. Boone's transactions for July affecting the interest expense and income
accounts are as follows. Record them in the proper accounts.

July 2 Paid interest on note due at bank, $7.45.

5 Received interest on note due today, $5.20.

8 The bank discounted a note, deducting discount amounting to $3.68.

11 Received interest from customer on a note due today but renewed
at his request, $8.38.

12 Paid interest bearing note due today, the interest amounting to $9.22.
15 Paid interest on an overdue account amounting to $7.48.

15 Received interest from customer on overdue account, $9.62.
15 Allowed customer credit on above interest for error in calculating
it, $1.68.

17 The bank discounted a note, deducting discount amounting to $6.42.

18 Received rebate on interest paid on July 12, the interest being due
for 30 days instead of 60 days, $4.61.

21 Received interest on note due today, $7.43.

31 Received credit from bank for interest accrued on bank balance
$16.21.

CAPITAL INVESTMENT ACCOUNTS

204. In almost every business some part of the invested capital is reinvested
in tho property and equipment of various kinds required in conducting it, such as

90 ACCOUNTANCY AND BUSINESS MAX A! i KMKNT

real estate, furniture and fixtures, machinery and tools, delivery equipment, etc.
Property of this kind is to be distinguished from the merchandise purchased and
from the materials and supplies consumed in operating the business. The property
required in conducting a business is used continuously over a period of years and
consequently the sums required to purchase it are more or less permanent invest-
ments of capital. Such investments constitute that part of the invested capital
which is not immediately available for the payment of current debts and expenses.
For these reasons such investments are referred to as capital investments, and
the accounts in which they are recorded are called capital investment accounts.
The properties themselves are referred to as capital assets, or fixed capital assets.

205. A capital investment account should be debited for the cost of ths
capital asset acquired. It is credited only for the cost of the whole or any part of
the asset that is sold or otherwise disposed of, the purpose being to have the balance
of the account represent at all times the cost of the property on hand. Any profit or
loss resulting from the sale of a capital asset is recorded in a separate account
opened for that purpose.

EXPENSE AND INCOME ACCOUNTS RELATING TO CAPITAL ASSETS

206. Expenses are incurred and incomes are sometimes earned in connection
with the ownership and use of capital assets. The various expenses incurred in
their maintenance may be recorded in separate expense accounts, instead of charg-
ing them to the general expense account, when it is desired to know the cost of
maintaining each particular property. Likewise, some properties classed as
capital assets produce incidental incomes which are not a part of the principal
income resulting from the regular operations of the business, and hence are recorded
in separate accounts. Such incomes are secured by renting vacant space in build-
ings, leasing idle machinery, hiring the use of equipment to others, etc.

207. The question arises frequently as to whether expenditures made in
connection with capital assets should be charged to the investment account or to
the expense account. The following rules are usually observed by accountants:

(a) All expenditures on a capital asset, whether for first cost or for improve-
ments, up to the time the property is ready for use or becomes productive
should be charged to the investment account.

(b) All sums expended on a capital asset which increase its efficiency as an
income-producing factor or its market value as an investment should be
charged to the investment account.

(c) All sums expended to maintain a capital asset at its normal efficiency
as an income producing factor or at its original cost or investment value
should be charged to the expense account.

ELEMENTARY ACCOUNTING 91

REAL ESTATE ACCOUNT

208. Real estate is a general name that is applied to real property, which
consists of land and the houses, buildings, and permanent improvements erected
thereon. An investment account with all of the real property owned may be
kept under the title of "Real Estate," or "Real Estate Investment," but it is
better practice when more than one property is owned to open an account with
each piece of property under an appropriate heading, such as, "House and lot,
96 North Street," and "Elm Township Farm."

209. The real estate account is a typical capital investment account repre-
senting a permanent investment in a capital asset. The object* in keeping it is
to show the original cost of an investment in real property, which includes:

(a) The first cost of the property purchased, including the land, buildings,
and other improvements thereon, and the cost of surveying, examination
of title, recording fees, etc.

(b) The cost of all permanent improvements which result in increasing the
earning or rental value of the property, such as repairs and alterations,
grading, sidewalks, etc.

(c) The cost of taxes, interest on mortgages, or other similar items incurred
prior to the time the property becomes productive or is ready for use.

210. The cost of these items constitutes the investment in the property.
The account is credited for the original cost of the whole or any part of the prop-
erty sold or otherwise disposed of. The balance of the account at all times is the
original cost of the property on hand, which is a fixed capital asset that should
appear in the statement of assets and liabilities.

The following transactions are recorded in the account which appears on the
next page:

Jan. 1 Purchased an 80 ft. lot improved by a 40 x 60 ft. building known as

9 West Main Street for a purchase price of $11,500, the cost of the

lot being $6,000 and of the building $5,500.

5 Paid contractor's bill of $450.00 for permanent improvements and
alterations on the store building.

6 Paid for examining the title and recording the deed for the property,
$63.75.

12 Paid for repairing the sidewalk and putting in new front steps, $86.25.

The property was ready for use on January 15.
25 Sold the vacant half of the lot for cash, $3,000.

ANALYSIS

1. What was the purchase price of the property when it was taken over?

2. How much was spent -for improvements and other outlays until the time
the property was ready for use?

92 ACCOUNTANCY AND BUSINESS MANAGEMENT

ILLUSTRATION 42

(two

J000

VS0

&eiasns^'

7/00

(,3

yroo

Zt,

/ 2/00

/ 2 /Of)

J/ OO

3. What was the original cost price of the entire investment?

4. Why was the account credited for $3,000?

5. What is the balance of the account, and what does it represent?

FURNITURE AND FIXTURES ACCOUNT

211. Furniture and fixtures is a general name applied to the furniture,
fixtures, machines, and appliances required to equip business offices and stores
for the efficient transaction of business. The cost of such furniture and equip-
ment is recorded in the furniture and fixtures account, which is another typical
capital investment account. It is debited for the cost of all furniture and equip-
ment. It is credited for the cost price of anything sold which has previously been
charged to the account. The balance of the account is at all times the cost of the
furniture and equipment on hand, which is a fixed capital asset that should appear
in the statement of assets and liabilities.

ILLUSTRATION 43

/jr

'7
7-*

Jfl

ffO

ELEMENTARY ACCOUNTING

ANALYSIS

1. What was the total cost of the furniture and fixtures charged to the above
account?

2. What reasons can be suggested for the credit to the account dated Jan-
uary 31 for $5.00?

3. At what price was the copy press credited to the account?

4. What is the balance of the account, and what does it represent?

RULES FOR DEBITING AND CREDITING CAPITAL INVESTMENT ACCOUNTS

212. Debit for the cost of capital
assets, including all expenditures (if
any) until the time they become pro-
ductive or ready for use.

213. Credit for the cost price of
the whole or any part of a capital asset
sold or otherwise disposed of.

CLOSING CAPITAL INVESTMENT ACCOUNTS

214. A capital investment account is never closed except:

(a) When the capital asset is sold or otherwise disposed of, and

(b) When the account contains so many items that it is desirable to
re-state them in one total amount, which is done by entering the
balance of the account on the lesser side, footing and ruling it, and
bringing the balance down on the opposite side as shown in
illustrations 42 and 43.

EXERCISE 33

J. K. Marston began business as a retail grocer on May 1. His transactions
involving the purchase of capital assets are given below. Record them in the
proper accounts.

May 1 Purchased a store and lot at 122 Pine Street, the price of the store

building being $4,250.00 and of the lot $2,500.00.
1 Paid for examining the title, recording the deed, and real estate

agent's commission for negotiating the purchase, $172.50.
3 Purchased furniture and equipment required to equip the office

and store, the bill amounting to $478.60. Mr. Marston desires to

have but one account kept for both the office and store furniture

and fixtures.
9 Paid carpenters' bill for building shelves and counters, $100.00.

These shelves and counters are not permanent improvements to

the building.

94 ACCOUNTANCY AND BUSINESS MANAGEMENT

11 Paid plumber's bill for repairs and replacements required to put
the plumbing in first class condition, $16.20.

15 Mr. Marston opened his store for business on this date, all altera-
tions and repairs having been completed.

18 He returned for credit a single typewriter desk included with the
other furniture and fixtures purchased on May 3, the cost of which
was $21.50, and purchased in place of it a combination typewriter
and flat-top desk for $37.50 and paid the difference.

22 Paid for an electric coffee grinding machine, $75.00.

29 Sold a hand-operated coffee grinding machine for $15.00, the cost
of which was $20.00.

REAL ESTATE EXPENSE

215. The real estate expense account is kept to show the expenses incurred
in maintaining real property. It is an expense account typical of the kind kept
in connection with the investment account for a capital asset. As explained in
paragraph 206, the expenses of maintaining capital assets may properly be recorded
in the general expense account, but when it is desired to separate the expenses
incurred in maintaining a particular property from other expenses, they should
be recorded in a special expense account.

216. The real estate expense account is debited for all expenses incurred in
maintaining the real estate owned. It is credited for any rebates or deductions
resulting from overcharges on the items debited to the account. The balance of
the account is the net expense of maintaining the real property owned for a fiscal
period. The expenses on real estate used in a business are part of its general or
operating expenses. The expenses on real estate owned by but not used in -a
business are included in the group of accounts designated as "deductions from
income," because in that case they are not operating expenses of the business.

The following transactions are properly recorded in the account which appears
at the top of page 95.

Jan. 15 Paid tinner's bill for repairing roof and rain spouts, $6.50.
25 Paid plumber's bill for repairing frozen pipe, $2.56.
31 Paid city tax bill for installing extra water hydrant, $3.50.
31 Paid annual premium on fire insurance policy covering the store
building, $8.50.

ANALYSIS

1. What were the total real estate expenses paid during the month?

2. What is the balance of the account, and what does it represent?

217. To close. After the income and profit and loss statement has been
prepared, the real estate expense account is closed by a journal entry crediting
it for the amount of its balance shown in the trial balance. The account may then
fee footed and ruled as shown in illustration 44.

ELEMENTARY ACCOUNTING

ILLUSTRATION 44

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^^z^

Jhi^<sU*s^>'

,-?/

tf h_

-3 /

REAL ESTATE INCOME ACCOUNT

218. The real estate income account is kept to show the income received
from real property. It is an income account typical of the kind kept in connec-
tion with the investment and expense accounts for a capital asset. Since the in-
come from real property is not a part of the principal income derived from the
regular income-producing operations of a business, is recorded in a special account
as explained in paragraph 206.

219. The real estate income account is credited for all incomes received from
real property, owned or rented. It is debited for any reductions from such income.
The balance of the account is the net income from real estate for a fiscal period
which is included in the group of accounts designated as "additions to income."

The following transactions are properly recorded in the account which appears
below:

Received cash for rent of second floor of the store building, $22.50.

Received cash for storing temporarily the surplus stock of another

merchant, $10.00.

Refunded $2.50 to the tenant on the second floor in consideration

of his signing a year's lease for the space at a monthly rental of

$20.00.

Jan. 2
20

ILLUSTRATION 45

REAL ESTATE INCOME

Jan.

25
31

To close

2
30

50
00

Jan.

22
10
32

50
00
50

f6 ACCOUNTANCY AND BUSINESS MANAGEMENT

ANALYSIS

1. What was the total income from real estate received during the month?

2. . What was the net income?

3. What is the balance of the account, and what does it represent?

220. To close. After the income and profit and loss statement has been
prepared, the real estate income account is closed by a journal entry debiting it
for the amount of its balance shown in the trial balance. The account may
then be footed and ruled as. shown in illustration 45.

EXERCISE 34

Classify and record the following transactions in the general expense, real
estate expense, and real estate income accounts:

May 2 Paid bill for office supplies and stationery, $8.65.

3 Received rent for offices on the second floor of the store building,

$20.00.

8 Paid city and state taxes on the assessed value of the building and
lot for the current year, $211.83.

10 Paid gas and electric light bill, $9.43.

12 Paid carpenter's bill for repairs on floors, steps, weather stripping,
etc., $18.00.

15 Rented a vacant office on the second floor and received rent for one-
half month, $6.25.

15 Paid salaries and wages of office help and clerks, $170.00.

21 Paid the premium on a fire insurance policy covering the building,
$12.40.

24 Paid advertising bill for the announcement of a special sale, $36.00.

28 Paid bill for painting the front of the building, $20.00.

31 Paid salaries and wages of office help and clerks, $170.00.

31 Paid proprietor's salary, $175.00.

RECORDING TRANSACTIONS AND POSTING TO THE LEDGER

221. Instruction and practice in recording transactions in books of original
entry, and in posting the entries in such books to ledger accounts, are provided in
the "Introduction to Bookkeeping" at the beginning of this text, and in the Elemen-
tary Set which accompanies it. As explained therein, a book of original entry is
any book which receives the first entry of a transaction. Posting is the process of
transferring the debit and credit items from books of original entry to the ledger.
The ledger is the book of final entry.

ELEMENTARY ACCOUNTING

222. In the development of ledger accounts from page 48 to page 9G inclusive,
debit and credit items were entered directly in the accounts. Original entries and
posting were dispensed with in order to simplify the presentation of the principles
involved in keeping these accounts. The accounts treated are shown as they
appear after the debit and credit items are posted to them from books of original
entry. The process of recording transactions and posting to ledger accounts is
explained and illustrated in connection with the model set in the Introduction to
Bookkeeping beginning on page 12.

TRIAL BALANCE

223. After all entries are posted to the ledger, the next step in bookkeeping
procedure is to take a trial balance. A trial balance is a list of open accounts in the
ledger, with the balance of each account set opposite its name, showing that the
sum of the debit balances is equal to the sum of the credit balances. Trial balances
are usually taken on the last day of each month, and must always be taken before
the statements which show the results of the business transacted for a fiscal period
are prepared.

The following trial balance includes all the accounts heretofore considered
in this text. It will serve as a basis for instruction in the preparation of statements.
ILLUSTRATION 46

TRIAL BALANCE, DECEMBER 31, 19 . JOHN SPANGLER v

Cash

1187

Merchandise Inventory

2736

Notes Receivable

578

Accounts Receivable

2975

Real Estate Investment

7250

Furniture and Fixtures Investment

428

Notes Payable

3006

Accounts Payable

1635

John Spangler, Capital .

10000

John Spangler, Personal

122

Purchases

6278

Freight In

Warehouse Expense

275

Sales

7719

General Expense

388

Real Estate Expense

Real Estate Income

Interest Expense

Interest Income

22411

!.->

22411

98 ACCOUNTANCY AND BUSINESS MANAGEMENT

Explanation: The accounts receivable item in the trial balance includes the
balances of all personal accounts showing debit balances. The accounts payable
item includes the balances of all personal accounts showing credit balances. Ac-
counts receivable and accounts payable are grouped in this way to shorten the
trial balance. A detailed exhibit that includes the items which make up the
balance of an account in a trial balance or statement is called a supporting schedule.
The following schedules support the accounts receivable and accounts payable
items referred to:

Schedule A Accounts Receivable Schedule B Accounts Payable

M. J. Forgan 782 91 Platt & Co. 313 18

Bronson Bros. 598 26 James L. Vernon 209 70

R. C. Nelson & Co. 322 50 Matthews & Kling 778 96

Dodd Mercantile Co. 978 20 Bell & Bell 333 90

Wilson & Marcott 293 56 Total accounts payable 1635 80

Total accounts receivable 2975 43

224. A trial balance does not necessarily prove that the accounts in the
ledger are correct it demonstrates merely that the sum of the debits is equal to
the sum of the credits. Any one or more of the following errors might exist in a
ledger and a trial balance could still be taken from it:

(a) A debit or a credit item posted to the wrong account; as for example, the
posting of a debit of $10.00 to general expense instead of to real estate
expense.

(b) The posting of a debit item to the credit side of the ledger and the
posting of the corresponding credit item to the debit side; as for example,
debiting a debtor's personal account and crediting notes receivable for a
note received from him.

(c) An error in addition or subtraction in footing accounts and finding their
balances, which is equalized by a similar error for the same amount
on the opposite side of the ledger.

Note: Other errors detected at the time the trial balance is taken will be referred to later.

225. The errors mentioned above are detected by a process called "check-
ing," which consists of comparing all postings with the entries in the books of
original entry to determine whether each entry has been correctly posted. All
figures should be checked as the footings and balance of each account are calculated.

226. Accounts may be grouped in two principal classes: (a) asset, liability,
and capital accounts, and (b) income and profit and loss accounts. The statement

ELEMENTARY ACCOUNTING 99

of assets and liabilities is prepared from the asset, liability, and capital accounts.
The statement of income and profit and loss is prepared from the income and profit
and loss accounts. Accounts showing assets, costs, expenses, and losses have
debit balances. Accounts showing liabilities, invested capital, incomes, and
profits have credit balances. Classify mentally the accounts in the trial balance
shown in illustration 46 under the two principal groups named above. Then
reclassify them according to whether they represent assets, liabilities, capital,
costs, expenses, losses, incomes, or profits.

INCOME AND PROFIT AND LOSS STATEMENT

227. The income and profit and loss statement is prepared at the close of each
fiscal period to exhibit in detail the results of the income-producing operations of a
business, which are expressed finally in terms of net profit or net loss. The net
profit may be quickly found by adding the balances of the income and profit and
loss accounts showing credit balances, and deducting from the total the sum of the
balances of such accounts showing debit balances, as shown by the following tabula-
tion prepared from the above trial balance.

Sales 7719.16

Real Estate Income 35 . 00

Interest Income 14 . 33

Total credit balances 7768.49

Purchases 6278.37 .

Freight In 91.72

Warehouse Expense 275.84

General Expense 388.70

Real Estate Expense 75.16

Interest Expense 21 . 72

Total debit balances 7131 . 51

Net Profit 636.98

228. An income and profit and loss statement, however, should be arranged
to exhibit in their proper relations all the essential facts and figures shown by the
accounts, so as to provide the detailed and properly classified information that is
necessary in managing a business intelligently. The statement on page 101, show-
ing the same final result as the above tabulation, was prepared from the same
accounts in the trial balance, but includes an analysis of the purchases and sales
accounts, which appear in the ledger as follows:

100

ILLUSTRATION 47

ACCOUNTANCY AND BUSINESS MANAGEMENT

PURCHASES

Dec.

Inventory

2276

Dec.

Rebate

Cash purchase

Return

L'O

Pch. Bk. total

6724

Rebate

6278.37

9093

Inventory

2736

2815

SALES

Dec.

Return

Dec.

Cash sale

Rebate

Cash sale

Return

Sales Bk. total

7779

The preparation of statements is facilitated when explanations such as the
above are included in posting to accounts which must be analyzed in a statement.

CONSTRUCTION AND INTERPRETATION OP
INCOME AND PROFIT AND Loss STATEMENT

229. This statement is arranged in "report" form. It is divided into five
sections under the captions "Income from Sales," "Cost of Goods Sold," "Operat-
ing Expenses," "Additions to Income," and "Deductions from Income."

1. The sales account is analyzed in the "income from sales" section for the
purpose of exhibiting certain units of information that are not shown in a state-
ment prepared from trial balance figures only, such as the tabulation on page 99
and the statement on page 83. The gross sales is the credit footing of the account.
This item is frequently designated as total sales. The items under deductions from
sales are the returned sales and rebates and allowances on sales debited to the account.
The difference between the total sales and the sum of the deductions is the net
income from sales, or balance of the sales account.

2. The purchases account is anaryzed in the "cost of goods sold" section.
The Inventory of December 1 is the invoice cost of the goods which were on hand
at the beginning of the fiscal period and which was consequently debited to the
account at that time. To this inventory is added the invoice cost of goods pur-
chased during the period to find the total invoice cost of merchandise for the period.
From this amount is deducted the invoice cost of the goods on hand at the close
of the period, represented by the credit to the purchases account for the inventory
of December 31, to find the total invoice cost of goods sold for the period. It is evident
that the invoice cost of goods sold must be the inventory at the beginning of a
period, plus the purchases during the period, minus the inventory at the close
of the period.

ILEMEXTARY ACCOUNTING

ILLUSTRATION 48

IXCOME AND PROFIT AND Loss STATEMENT, DECEMBER 31, 19

101

JOHN SPANGLER

Income from Sales:

Gross sales

7830

Deductions from sales:

Returns 68.72

Rebates and allowances 42.30

111

Net income from sales

7719

Cost of Goods Sold:

Inventory Dec. 1, 19 .

2276

Purchases during month

6816

Total invoice cost of merchandise

9093

Inventory Dec. 31, 19

2736

Total invoice cost of goods sold

6356

Deductions from cost:

Returns 32.20

Rebates and allowances 46.00

Net invoice cost of goods sold

6278

Additions to cost :

Freight in

Warehouse expense

275

Total cost of goods sold

6645

Gross Trading Income

1073

Operating Expenses:

General expense

388

Real estate expense

463

Net Income from operations

609

Additions to Income:

Real estate income

Interest income

Total income from operations and all other sources

658

Deductions from Income:

Interest expense

Net Profit for the month

636

102 ACCOUNTANCY AND BUSINESS MANAGEMEXT

After the invoice cost of goods sold has been determined, any deductions from
such cost for returned purchases and rebates and allowances on purchases must be
subtracted to find the net invoice cost of goods sold, which is the balance of the
purchases account. To this amount must be added any additions to cost for
trading expenses, such as freight in and warehouse expense, to find the total cost of goods
sold. Such expenses are called trading expenses because they decrease the gross
trading profit, since they must be included in the cost of goods sold.

The difference between the net income from sales and the total cost of goods
sold is the gross trading profit. This profit is frequently referred to as the gross
trading income, and is so designated in this statement. It is the income derived
directly from the buying and selling operations before any other incomes have been
added or before any non-trading expenses have been deducted.

3. "Operating expenses" are the general expenses applicable to and incurred
by a business as a whole and which therefore cannot properly be charged against
any particular department or operation. They may be designated as non-trading
expenses to distinguish them from trading expenses, which are included in the cost
of goods sold in finding the gross trading income, as stated in ^[2 above. In other
words, trading expenses must be included in the cost of goods sold, but operating
expenses must be excluded from such cost and must be set up, in calculating the
net profit, as one of the deductions from gross trading income after it has been
ascertained. Operating expenses must of necessity be incurred in order to earn
income and profits. Some of them, such as rent, insurance, and taxes, are fixed
charges; that is, they are incurred and must be paid regardless of whether a concern
is making money or not. If earnings are not sufficient to meet them, they must
be paid out of capital. Other operating expenses, such as light, fuel, salaries and
wages, public service charges, materials and supplies, etc., can be reduced or
eliminated in case of low earnings, lack of business, or temporary suspension of
operations.

The operating expenses included in this statement are the expenses recorded
in the general expense and real estate expense accounts. The real estate expenses
are included in operating expenses because the real estate is owned by and used
in the business. If this real estate, while owned by the business as an investment,
were not used in conducting it, the real estate expenses would not be considered as
operating expenses, but in such case would be included in "deductions from
income" as a non-operating expense. The difference between the gross trading
income and total operating expenses is the net income from operations.

4. "Additions to income" include the incidental and miscellaneous incomes
which are not earned by the regular income-producing operations of a business.
They are therefore non-operating incomes. The income from real estate is an
incidental earning resulting from renting a portion of the space in the building in

ELEMENTARY ACCOUNTING

103

which the business is conducted. As the investment in the building is a capital
asset, the income received from the investment in the form of rentals is a capital
income. The income from interest is likewise an incidental income which results
from having sufficient capital invested to loan money directly or indirectly to
debtors temporarily. The sum of the net income from operations and the addi-
tions to income is the total income from operations and all other sources.

5. "Deductions from income" include incidental expenses which cannot
properly be charged against the regular income-producing operations of a business
as operating expenses in finding the net income from operations. They are there-
fore non-operating expenses. The interest expense included under this heading
represents an expense that would not have been incurred had sufficient capital
been invested to pay all debts and obligations when they matured. It represents
the cost of borrowing money directly or indirectly with which to finance the
business. For these reasons it is classified as a capital expense. The difference
between the total income from operations and all other sources and the sum of the
deductions from income is the net income for the fiscal period. The net income is
generally referred to as the net profit, and is so designated in this statement.

STATEMENT OF ASSETS, LIABILITIES, AND CAPITAL

230. The assets and liabilities of a business and its financial condition on a
given date are set forth in the statement of assets, liabilities, and capital. The
difference between the total assets and total liabilities is the net assets when the
assets are the larger, or net liabilities when the liabilities are the larger. The net
assets represent the proprietor's interest or equity in his business, and constitute
his net capital. The net liabilities are the excess of creditors' claims over the
assets available to meet them, and constitute the proprietor's net insolvency.

Cash 1187.52

Merchandise Inventory 2736.84

Notes Receivable 578.60

Accounts Receivable 2975.43

Real Estate Investment 7250.00

Furniture & Fixtures Investment 428.75

Total Assets 15157.14

Notes Payable 3006.86

Accounts Payable 1635.80

Total Liabilities 4642.66

Nt Aneto 10514.48

104

ACCOUNTANCY AND BUSINESS MANAGEMENT

231. The net assets may be quickly ascertained by adding the balances of
the asset accounts, and deducting from the total the sum of the balances of the
liability accounts, as shown by the tabulation on page 103, which was prepared
from the trial balance on page 97.

232. In a properly prepared statement of assets, liabilities, and capital,
however, the assets and liabilities are exhibited in classified order in their proper
relations so as to provide all the units of information required to interpret the
statement correctly. The following statement, showing the same final result as
the tabulation referred to, was prepared from the same accounts:

ILLUSTRATION 49

STATEMENT OF ASSETS, LIABILITIES, AND CAPITAL, DECEMBER 31-19 .

JOHN SPANGLER

Assets

Current Assets:
Cash 1187.52
Merchandise inventory 2736.84
Notes receivable 578.60
Accounts receivable 2975.43

7478
7678

39
75

15157

4642

Total current assets

Fixed Capital Assets:
Real estate investment 7250.00
Furniture and fixtures investment 428.75

Total fixed capital assets
Total Assets

Liabilities

Current Liabilities:
Notes payable
Accounts payable

Total liabilities

Net Assets

Capital

John Spangler, Capital % 10000.00
Add Net Profit for December per I. & P. & L.
Statement 636.98

3006
1635

86
80

98
50

10636
122

10514
10514

Deduct John Spangler, Personal %
John Spangler's Net Capital December 31, 19 .

ELEMENTARY ACCOUNTING 105

CONSTRUCTION AND INTERPRETATION OF
STATEMENT OF ASSETS, LIABILITIES, AND CAPITAL

233. This statement is divided into three sections under the captions
"Assets," "Liabilities," and "Capital." It is arranged in "report" form, which
requires the assets, liabilities, and capital to be listed in the order named. In
S3tting up this statement, the assets are usually classified or grouped as current
assets and fixed capital assets. Liabilities should be arranged in the same relative
groups; namely, current liabilities and fixed liabilities. There are, however, no
fixed liabilities to be considered in this instance. Assets are also called resources;
hsnce this statement is frequently referred to as the statement of resources and
liabilities. It is sometimes called the statement of financial condition.

1. Current assets consist of cash and such other assets as can be quickly con-
verted into cash or its equivalent if necessary to meet maturing debts. They
are frequently referred to as quick, liquid, or floating assets, because they are
quickly convertible into cash or its equivalent and because they fluctuate con-
tinuously in amount as a result of the daily transactions of a business.

Current assets should be listed in the order of their availability to meet maturing
obligations or convertibility in securing working cash capital. As the cash on hand
is always immediately available to pay debts, it is given first place in the statement.
Th3 merchandise inventory is given second place because the stock in trade is
continuously being converted into cash as goods are sold, and for the further reason
that loans for a considerable part of the present market value of the goods on
hand can usually be negotiated at bank when the stock in trade is offered as
security. Notes receivable are listed next because they are short-time contracts
to pay at a specified date, and because they can usually be readily discounted at
bank if the notes are made and endorsed by responsible parties. Debtors' ac-
counts receivable are listed next because they are usually short-time debts based
upon implied promises to pay at the expiration of the term of credit, and can
ordinarily be collected sooner if a sufficient inducement in the way of a cash discount
is offered for prepayment. They can also be offered to banks as security for loans
for a part of their book value if they are "good" accounts. They may also be
sold at a discount to concerns which make a business of buying accounts receivable
from business men who are in need of funds. These concerns collect the accounts
they buy at their book value at maturity, and their profit is the difference between
the book value and the discounted value at which they were purchased. These
concerns, however, charge back any part of an account which cannot be collected
to the party from whom it was purchased. Accounts receivable that are past due
and which therefore may not be collected should not be listed as current assets
with such other accounts receivable as are not yet due, but should be included in
the statement as "Doubtful Accounts Receivable" under the caption "Other
Assets."

106 ACCOUNTANCY AND BUSINESS MANAGEMENT

Fixed capital assets are the permanent investments in the various kinds of
property and equipment required in conducting a business. They are to be
distinguished from investments in stock in trade and such other assets that are
purchased to be sold at a profit. As a rule they are the kind of assets in which
some part of the capital of a concern must first be invested before the income-
producing operations can be started or maintained. They do not fluctuate in
amount as a result of daily routine transactions and cannot be as readily converted
into cash as current assets. However, because of their status as permanent
investments in tangible real or personal property, most of them can be pledged as
security for long-time loans when funds are borrowed to finance current obliga-
tions, new operations, or permanent improvements and betterments. Fixed
capital assets are usually listed in the order of their importance and permanence
as investments, the largest being listed first.

2. Liabilities should be grouped in the same relative order as assets. When
current assets are stated first among the assets, current liabilities should be listed
first among the liabilities. Current liabilities are the obligations and debts which
will mature and be payable in the near future, and thus as a rule represent the
first claims upon assets. Careful management requires that care be taken at all
times to have sufficient current assets available to pay current liabilities as they
mature, in order to keep the credit of a concern unimpaired.

Current liabilities should be listed in the order in which they will have to be
liquidated. Notes payable are listed first because they are usually short-time
written promises or contracts to pay on definitely specified dates. Accounts payable
are listed next because they are usually short-time debts based upon implied
promises to pay at the expiration of the term of credit. As previously stated,
there are no fixed liabilities in this statement. The long-tune loans referred to
above in connection with fixed capital assets, such as mortgages on real estate
and bonded indebtedness, are examples of fixed liabilities.

3. The capital of a business at a given date is its owner's net assets invested
therein. The net assets are the total assets minus the total liabilities. The net
assets are equal to the proprietor's capital investment at the beginning of a given
period plus the profit or minus the loss for the period, and plus or minus the balance
(if any) of the proprietor's personal account, which is usually closed into the
capital account at the close of the period.

Mr. Spangler's income and profit and loss statement shows that he has made
a profit of $636.98. His wealth has been increased by the amount of this profit.
Any part of the net profit may be withdrawn, or it may be allowed to remain in
the business as an addition to invested capital. If Mr. Spangler had allowed his
entire profit to remain in his business, his invested capital would have been increased
by the amount of the profit. If he had withdrawn all of the profit, his invested

ELEMENTARY ACCOUNTING

107

capital would have remained unchanged, because in that case the profit would
no longer have been included in the assets of his business.

Mr. Spangler's books show that during the month thsre were paid out in
settlement of his personal debts sums amounting to $122.50, which were charged
to his personal account. Such items are to be regarded as withdrawals of profit
made prior to the date on which the net profit is ascertained. The difference
between $636.98 and $122.50, or $514.48, is the amount of the profit yet to be
disposed of in the final adjustment of his accounts for this period. Mr. Spangler
desires to have it credited to his capital account as an addition to invested capital.
This disposition and adjustment of his profit is provided for in the capital section
of the statement of assets and liabilities.

The proprietorship interest in a business, as set forth in the statement of
assets and liabilities, may therefore be stated in the form of an equation as follows:

Assets Liabilities = Capital

In the ledger, however, assets are debits and liabilities are credits, because the
only way to distinguish between them in keeping books by double entry is to
record them on opposite sides of their respective ledger accounts. No provision
is made in double entry bookkeeping for the usual method of subtracting one item
from another as required in the above equation. The only way to secure a sub-
traction in the ledger is to record the item to be subtracted on the opposite side of
either the same or another account. For example, the credit items in debtors'
accounts are subtractions from debit items. Likewise, the debit items in creditors'
accounts are subtractions from credit items. Hence, transposing the negative
quantity in the above equation gives a new equation which states the proprietor-
ship interest in ledger form, thus:

, Assets = Liabilities + Capital

Substituting the total assets, total liabilities, and net capital, as shown in the
statement of assets and liabilities, for the members of the above equation, we
have the following:

Total Assets

15157.14

Total Liabilities
Capital

4642.60
10514.48

15157.14

Since in double entry bookkeeping an equality of debits and credits is to be
maintained, and further, since assets are debits and liabilities are credits, it follows
that capital must be treated as a credit for bookkeeping purposes. It is erroneous,
however, to reason that since capital is a credit it is in any sense a liability of ite

108

ACCOUNTANCY AND BUSINESS MANAGEMENT

owner or of the business in which he invested it, or that the business owes the
proprietor the amount of the capital invested. Since an owner owns his business
h'.* cannot be owed for something which already belongs to him. The credit balance
of liis capital account merely shows the excess of his assets over his liabilities, and
represents his interest or equity in his assets. His liabilities represent the claims
held by his creditors against his assets. If he has no liabilities he is the sole owner
of his assets, and the balance of his capital account will be equal to the sum of
his assets. It stands as a credit in the ledger as an offsetting or balancing item
against the assets appearing on the debit side.

The accounting practica of treating asssts as debits, and liabilities and
capital as credits, is the equivalent of crediting a proprietor in his capital account
for his assets and debiting him for his liabilities, thus :

Assets

Total assets

15157.14

Liabilities

I Total liabilities
John Spangler, Capital

4642.66

Total liabilities

4642.66

Total assets

15157.14

The capital account as now set up above shows the same balance as it would if
the proprietor were credited with his net assets, or the difference between his total
assets and total liabilities, thus:

John Spangler, Capital

Net assets 10514.48

A trial balance of the above ledger accounts thereforehows:

Assets

Liabilities

John Spangler, Capital

15157

464266
10514 48

15157 14

RECONCILIATION OF INCOME AND PROFIT AND Loss STATEMENT WITH
STATEMENT OF ASSETS, LIABILITIES, AND CAPITAL

234. The net profit or net loss for a fiscal period can be determined by taking
the difference between the net capital at the beginning and the net capital at the
close of the period. If the net capital at the close of the period is the larger, the

ELEMENTARY ACCOUNTING 10ft

difference is the net profit. If it is less than the net capital at the beginning of the
period, the difference is the net loss. Stated in another way, since the net capital
of a business is its net assets, the amount of the increase in net assets during the
period is the net profit, or the amount of the decrease is the net loss. The follow-
ing tabulation shows how the final results in the income and profit and loss
statement and statement of assets and liabilities are reconciled in proving the
correctness of the net profit:

Net capital at close of period 10514.48

Net capital at beginning of period 10000.00

Profit credited to capital account of proprietor 514.48

Profit withdrawn during period and charged to pro-
prietor's personal account. 122.50
Net profit shown by income and profit and loss statement. 636 . 98

CLOSING THE BOOKS

235. It is the best practice to post daily all current entries in the books of
original entry and to post the totals of the books at the end of the month, after
which they may be ruled and closed for the month. In order to make a periodical
test of the equality of debits and credits in the ledger, it is customary to take a
trial balance at the end of each month. By doing so, errors in original entries or in
posting may be detected and corrected promptly.

236. As a rule it is ^customary to prepare statements "and ascertain the net
profit or loss and the financial condition of a business annually at the end of each
fiscal period, although in some instances they are prepared semi-annually, quarterly,
or even monthly. The ledger should be closed at the end of each fiscal period,
after the annual statements have been prepared, for the following purposes:

(a) To indicate the end of an accounting or fiscal period.

(b) To close the current income and profit and loss accounts and thus
eliminate them as open accounts in the ledger so as to prepare them to
receive entries for the next fiscal period.

(c) To record the final distribution of the net profit or net loss in the proper
ledger accounts in accordance with the directions of the proprietor, and

(d) To close the proprietor's capital account for the current period and to
reopen it for the amount of the capital invested at the beginning of the
next fiscal period.

237. It is the function of the income and profit and loss accounts to supply
the classified data from which to ascertain the net profit or the net loss for each
fiscal period. The various elements of cost, expense, loss, income, and profit
shown by these accounts are summarized in the income and profit and loss state-

110 ACCOUNTANCY AND BUSINESS MANAGEMENT

mcnt and are therein reduced to the single result of net profit or net loss. The
income and profit and loss accounts should therefore be closed, or "written off the
books," after the statement referred to has been prepared. These accounts are
frequently referred to as fiscal accounts because they are opened at the beginning
and closed at the end of each fiscal period.

238. On the other hand, asset and liability accounts are not closed because
their function is to show at all times, regardless of fiscal periods, the amounts of
the various assets and liabilities. They are continuing accounts, showing the
assets and liabilities not only at the close of one accounting period, but also at the
beginning of the next period and during that and succeeding periods, until the
assets are finally disposed of or the liabilities are paid.

CLOSING AND ADJUSTING ENTRIES

239. The closing of the ledger is accomplished by means of certain closing and
adjusting entries made in the journal, which, when posted, will balance and thus
close out all accounts in the ledger except the asset, liability, and capital accounts.
These entries summarize in one account all the income and profit and loss
accounts in substantially the same manner in which they are summarized in the
income and profit and loss statement. This account is called the Profit and Loss
Summary. It is set up by transfer entries which close the balances of the various
income and profit and loss accounts into it, with the result that its balance is the
net profit or net loss sSown on the statement. The balance of the profit and loss
summary is closed into the proprietor's capital account. The balance of his
personal account is then closed into his capital account inmost instances. Read
^[105. The closing and adjusting entries referred to are prepared from the trial
balance and statements.

240. The debits and credits in an account must be equal before it can be
closed. If an account shows a debit balance, it must be credited for the amount of
its balance to close it; and likewise, if it shows a credit balance it must be debited
for the amount of its balance. The income and profit and loss accounts can thus
be closed by journal entries which transfer their balances to the profit and loss
summary account. The entries in the journal on page 111 set up the profit
and loss summary account in Mr. Spangler's ledger, and close the income and
profit and loss accounts included in his trial balance on page 97.

241. Illustration 51 shows the income and profit and loss accounts and the
profit and loss summary account in Mr. Spangler's ledger after the transfer and
closing entries referred to have been posted. Notice that all of the income and profit
and loss accounts are footed and ruled to show that they are closed, and that the
profit and loss summary has a credit balance equal to the amount of the net profit
shown by the income and profit and loss statement. These entries have therefore

ELEMENTARY ACCOUNTING

111

ILLUSTRATION 50

JOURNAL, DECEMBER 31, 19

Sales

Profit & Loss Summary

To close sales account and transfer income
from sales to the P. & L. Summary

31
Real Estate Income

Profit & Loss Summary

To close real estate income account and trans-
fer its balance to P. & L. Summary

31
Interest Income

Profit & Loss Summary

To close interest income account and transfer
its balance to P. & L. Summary

Profit & Loss Summary
Purchases

To close purchases account and transfer cost
of goods sold to P. & L. Summary

Profit & Loss Summary
Freight In

To close freight in account and transfer its
balance to P. & L. Summary

Profit & Loss Summary-
Warehouse Expense

To close warehouse expense account and trans-
fer its balance to P. & L. Summary

Profit & Loss Summary
General Expense

To close general expense account and close its
balance into P. & L. Summary

Profit & Loss Summary
Real Estate Expense

To close real estate expense account and close
its balance into P. & L. Summary

Profit & Loss Summary
Interest Expense

To close interest expense account and transfer
its balance to P. & L. Summary

7719 16

3500

1433

6278 ?7

27584

7719 16

:>:> oo

1433

6278 37

1)1

3SS

27584

38870

7516

112

ACCOUNTANCY AND BUSINESS MANAGEMENT

resulted finally in recording the net profit on the books as a credit to the profit and
loss summary.

242. The profit and loss summary contains exactly the same data as the
tabulation showing the net profit which appears on page 99. In the tabulation
the sum of the costs, expenses, and losses is deducted from the sum of the incomes
and profits, while in the summary account the costs, expenses, and losses are
debits, and the incomes and profits are credits. In other words, the profit and
loss summary is an abbreviated or condensed income and profit and loss statement
in ledger form.
ILLUSTRATION 51

PURCHASES

Dec.

Inventory

2276

Dec.

Rebate

Cash purchase

Return

Pch. Bk. total

6724

Rebate

<S4

Inventory

2736

S-l

To close

6278

9093

FREIGHT IN

Dec.

Freight

Dec.

Frt. rebate

Express

To close

Freight

Drayage

WAREHOUSE EXPENSE

Dec.

12
31

Supplies
Wages

' 95
180

84
00

Dec.

To close

275

SALES

Dec.

Return

Dec.

Cash sale

Rebate

Cash sale

Return

Sales Bk. total

7779

To close

7719

7830

ELEMENTARY ACCOUNTING
GENERAL EXPENSE

113

Dec.

4
15
31

Coal
Office supplies
Salaries

]

66
42
280

388

25
45

Dec.

To close

388

REAL ESTATE EXPENSE

Dec.

12
20

Taxes
Repairs

52
22

42
74

Dec.

To close

REAL ESTATE INCOME

Dec.

To close

00
00

Dec.

10
31

Rent
Rent

10
25

00
00

INTEREST

EXPENSE

Dec.

12
24

Interest
Discount

12
60

Dec.

To close

INTEREST

INCOME

Dec.

To close
PR

Dec.

19
29

Interest
Interest

3
11

21
12

OFIT AND LOSS SUMMARY

Dec.

31
31
31
31
31
31

Purchases
Freight In
Ware. Expense
Gen. Expense
R. E. Expense
Int. Expense

6278
91
275
388
75
21

7131

72
84
70
16
72

Dec.

31
31
31

Sales
R. E. Income
Int. Income

636.93

7719
35
14

7768

16
00

114

ACCOUNTANCY AND BUSINESS MANAGEMENT

243. The profit and loss summary now stands open in the ledger with a
credit balance 1 equal to the amount of the net profit. The next step in the process
of closing the ledger is to transfer this balance, which is the net profit, to the capital
account of the proprietor. The following journal entry will therefore close the
profit and loss summary into Mr. Spangler's capital account:
ILLUSTRATION 52

Profit & Loss Summary 636 98

John Spangler, Capital 636 98

To close P. & L. Summary and credit pro-
prietor's capital account for net profit shown
on I. & P. & L. Statement, Dec. 31, 19 .

When the above entry is posted, the summary account, after being footed and
ruled, and the capital account will appear as follows:

ILLUSTRATION 53

PROFIT AND Loss SUMMARY

Dec.

Purchases

6278

Dec.

Sales

7719

Freight In

R. E. Income

Ware. Expense

275

Int. Income

Gen. Expense

388

R. E. Expense

Int. Expense

J. Spangler, Cap.

636

7768

JOHN SPANGLER, CAPITAL

Dec.

Investment
Net profit

loooo'oo

636J98

244. After the net profit is carried to the credit of the capital account, the
next step in the closing process is to make such final adjustment of the owner's
personal account as he may direct. The personal account may be closed into
the capital account, it may be allowed to stand as an open account for future adjust-
ment, it may be credited with such part of the net profit as is required to close it,
or with such part of the net profit as the proprietor may elect to withdraw. In
any case, that part of the net profit not withdrawn or applied against the debit
balance of the owner's personal account remains as a credit in his capital account
as an addition to invested capital. In case the owner has a credit balance in his

ELEMENTARY ACCOUNTING

115

personal account, it may be closed by transferring the balance to his capital
account as an additional investment, by withdrawing the amount of the balance
in cash or some other asset, or by charging it, in the case of a net loss, with that
part of the loss required to close it.

245. In Mr. Spangler's case, he has decided to credit his personal account
with such part of the net profit as is required to close it, and to allow the remainder
of the net profit to remain in his business as an addition to invested capital. This
adjustment is made by the following journal entry:
ILLUSTRATION 54

John Spangler, Capital 12250

John Spangler, Personal 12250

To close balance of personal account and credit
capital account with that part of net profit
invested.

After the above entry is posted, the personal account, after being footed and ruled,
and the capital account will appear as follows:
ILLUSTRATION 55

JOHN SPANGLER, PERSONAL

Dec.

1
4

House rent
Coal

75
47

00
50

Dec.

Capital a/c

122

JOHN SPANGLER, CAPITAL

Dec.

Personal a/c

122

Dec.

Investment
Invested profit

lOOOOJOO
636)98

246. The process of closing the ledger is completed when the final distribution
of the net profit or net loss is recorded in the ledger and the accounts are footed
and ruled. It is customary, however, to "balance" the proprietor's capital
account in order to restate his present invested capital, or net capital, in one
amount. This is done by entering the credit balance on the debit side, footing
and ruling the account, and bringing the balance down on the credit side under
date of the next business day, as illustrated on the next page. Read 214b.

116

ACCOUNTANCY AND BUSINESS MANAGEMENT

ILLUSTRATION 56

JOHN SPANGLER, CAPITAL

Dec.

31
,31

Personal a/c
Net Capital

122
10514

10636

Dec.

Investment
Net profit

Net Capital

lOOOOJOO
63698

10636

Jan.

10514

247. Observe that a journal entry is not required in balancing an account in
the manner described in ^[246. An account is balanced by a cross entry within the
account itself a credit above the ruling and a debit below, or vice versa. It is
stated in ^[238 that asset and liability accounts are not closed. They may be
balanced, however, at the close of each fiscal period, in the manner described above,
if it is preferred to do so. As a rule it is customary not to balance them until it is
necessary to forward them to new pages in the ledger. Illustrations 42 and 43 on
page 92 show howsuch accounts may be balanced.

COMPOUND JOURNAL ENTRY TO CLOSE

248. The process of closing the ledger may be considerably simplified and
shortened if the profit and loss summary account is not opened. If the debits and
credits to the profit and loss summary included in illustrations 51 and 53 are
omitted and the remaining debits and credits in these entries are combined in
one entry, a compound journal entry will result which will include:

(a) all the debits and credits required to close the income and profit and
loss accounts, and

(b) a credit to the proprietor's capital account for the amount of the net
profit, thus:

ILLUSTRATION 57

JOURNAL, DECEMBER 31, 19 .

Sales

To close

7719

Real Estate Income

Interest Income

Purchases

6278

Freight In

Warehouse Expense

275

General Expense

388

Real Estate Expense

Interest Expense

John Spangler, Capital

Net profit for December

636

ELEMENTARY ACCOUNTING

117

249. In order to complete the closing of the ledger, a second entry adjusting
the proprietor's personal account is required. This entry is shown in illustration
54. The method to be followed in closing the ledger is largely a matter of individual
preference. Those who close by the first method illustrated prefer it because
they wish to group all the elements of profit and loss in one account in the ledger.
This method is to be preferred principally because it supplies a record in the
ledger of all the amounts entering into annual net profits or losses from year to year
that can be checked up easily when books are audited for income tax purposes.
Those who use the compound journal entry claim that the profit and loss summary
account in the ledger is useless because the income and profit and loss statement
contains the same information in greater detail, and consequently the compound
entry is to be preferred because of its brevity.

EXERCISE 35

From the following trial balance and other data, prepare an income and profit
and loss statement, a statement of assets, liabilities, and capital, and the closing
and adjusting entries required to close the ledger. Set up the profit and loss
summary account. The proprietor's capital account is to be credited with the
net profit, and his personal account is to be closed into his capital account.

TRIAL BALANCE, DECEMBER 31, 19 . J. M. WARREN

Cash

2460

Inventory

3647

Notes Receivable

2214

Accounts Receivable

3114

Real Estate Investment

5215

Furniture & Fixtures Investment

322

Notes Payable

4629

Accounts Payable

3514

J. M. Warren, Capital

8246

J. M. Warren, Personal

Purchases

10725

Freight In

578

Warehouse Expense

1621

Sales

15746

General Expense

2225

Real Estate Expense

328

Real Estate Income

447

Interest Expense

129

Interest Income

32603

118

ACCOUNTANCY AND BUSINESS MANAGEMENT

ADDITIONAL DATA REQUIRED FOR INCOME AND PROFIT AND Loss STATEMENT

Inventory January 1, $2378.82; returned purchases, $113.26; rebates and
allowances on purchases, $212.63; total purchases, $12319.30.

Gross Sales, $16246.53; returned sales, $328.42; sales rebates and allowances,
$171.90.

EXERCISE 36

Prepare statements and a compound journal entry to close from the following
trial balance and other data. The net profit or loss is to be recorded in the pro-
prietor's personal account, the balance of which is not to be closed into the capital
account because the proprietor intends to withraw whatever sum stands to his
credit in his personal account after final results are determined.

TRIAL BALANCE, DECEMBER 31, 19 . F. B. CLARKE

F. B. Clarke, Capital

10296

Green Spring Farm Investment

2092

Notes Payable

2793

Store and Lot Investment

6245

Notes Receivable

2312

Accounts Payable

2191

Inventory

3225

Accounts Receivable

2515

Mortgage Payable

3000

Purchases

12593

Farm Expense

750

Store Expense

225

Freight In

628

Interest Income

Sales

16672

Farm Income

875

Store Income

540

Furniture and Fixtures Investment

529

General Expense

2526

Interest Expense

125

Cash

1454

Warehouse Expense

1428

F. B. Clarke, Personal

250

36652

ADDITIONAL DATA REQUIRED FOR INCOME AND PROFIT AND Loss STATEMENT

Inventory January 1, $1972.80; total purchases, $14134.77; returned pur-
chases, $173.14; purchase r.ebates and allowances, $90.22; goods donated
to- charity at invoice cost, $25.60.

ELEMENTARY ACCOUNTING 119

Gross sales, $16894.36; returned sales, $125.19; sales rebates and allowances,
$96.22.

RECAPITULATION OF PRINCIPLES

A review of the subject matter of Part One, which should be made the basis of a series of very thorough class
drills and recitations.

1. Bookkeeping is the art of classifying and recording business transactions
and facts systematically.

2. Accountancy is the science which treats of the methods of classifying
business transactions and accounts so that the facts they exhibit shall be shown in
their proper relations, expressed in terms that will most fully provide the informa-
tion necessaiy to successful business and financial administration.

3. The two principal objects of accounting are: (a) to determine at stated
intervals the financial condition of an enterprise, and (b) to determine at stated
intervals the net profit or loss resulting from conducting the enterprise.

4. Accounts are grouped in two principal classes: (a) asset, liability, and
capital accounts, and (b) income and profit and loss accounts.

5. It is the function of the statement of assets and liabilities to exhibit in
complete detail the financial condition of an enterprise as reflected by the relative
condition and amounts of its various assets and liabilities, and invested capital.

6. The function of the income and profit and loss statement is to exhibit in
their proper relations and in complete detail the sources and amounts of all costs,
returns, expenses, incomes, losses, and profits which enter into the determination
of the net profit or net loss for a fiscal period.

7. The invested capital of an enterprise is its net assets, which consist of the
difference between its total assets and its total liabilities.

8. In an accounting sense, assets include all real and tangible personal
property, the rights to such property, and claims against debtors.

9. Current assets consist of cash and such other quick, liquid, or floating
assets as in the usual course of business can readily be converted into cash or its
equivalent if necessary to meet maturing debts.

10. Fixed capital assets are the more permanent investments in the various
kinds of real and tangible personal property and equipment required in conducting
a business and in maintaining its operations.

11. In an accounting sense, liabilities include all claims of creditors and
debts and obligations owed to others.

12. Current liabilities are the obligations and debts which in the usual course
of business mature and become due and payable in the near future.

13. Fixed liabilities are long-term debts and obligations in the form of
mortgages and bonded indebtedness.

120 ACCOUNTANCY AND BUSINESS MANAGEMENT

14. Income and profit and loss accounts are subdivided and grouped as
trading accounts, income and expense accounts, and profit and loss accounts.

15. A trading account is one in which are recorded items which increase or
decrease the cost of goods sold, or which increase or decrease the income from sales.

16. An income account is one in which are recorded the receipts, returns,
proceeds, or income from a particular operation, activity, or transaction.

17. An expense account is one in which is recorded a certain class of expendi-
tures for the services and supplies required in conducting the operations of a busi-
ness that are necessarily incurred in order to earn incomes and profits, but from
which no definite permanent value is derived.

18. A profit account is one in which is recorded an unusual, incidental, non-
operating, or miscellaneous increase in assets which does not result from the regular
income-producing operations of a business.

19. A loss account is one in which is recorded an unusual, incidental, or
miscellaneous decrease in assets arising out of a non-operating source and which
results in a pure waste, destruction, or forfeiture of capital and wealth.

20. Trading accounts are divided into two groups those affecting the income
from sales, and those affecting the cost of goods sold.

21. The total, or gross, sales is the gross income from sales, from which all
deductions from sales must be subtracted to find the net income from sales.

22. Deductions from sales include all amounts which reduce the returns, pro-
ceeds, or income from sales.

23. The invoice cost of goods sold is the invoice cost of the goods on hand
at the beginning of a period, plus the invoice cost of purchases during the period,
minus the invoice cost of goods on hand at the end of the period.

24. All deductions from cost must be subtracted from and all additions to
cost must be added to the invoice cost of goods sold in finding the total cost of goods
sold.

25. Deductions from cost include all amounts which reduce the invoice
price of goods purchased.

26. Additions to cost are the trading expenses which increase the cost of
goods sold.

27. Trading expenses are those which increase the cost of goods sold because
they are incurred directly in connection with the buying and selling, or trading,
operations.

28. Operating expenses are the general expenses applicable to and incurred
by a business as a whole and which therefore cannot properly be charged against
any particular department or operation.

29. Additions to income are the non-operating, incidental, and miscellaneous
incomes and profits which are not earned by the regular income-producing operations
of a business.

ELEMENTARY ACCOUNTING 121

30. Deductions from income are the non-operating, incidental, and mis-
cellaneous expenses and losses which are not necessarily incurred in connection
with the regular income-producing operations of a business.

31. Gross trading income is the profit remaining after the total cost of goods
sold has been deducted from the net income from sales.

32. The net income from operations is the gross trading income minus
operating expenses.

33. The total income from operations and all other sources is the net income
from operations plus additions to income.

34. The net profit is the total income from operations and all other sources
minus the deductions from income.

35. Profits increase one's wealth losses decrease it.

36. Profits retained in a business increase its invested capital losses must
be met out of invested capital and hence decrease it.

37. Profits are accounted for finally in increased assets or in decreased
liabilities.

38. Losses are accounted for finally in decreased assets or increased
liabilities.

39. The function of books of original entry is to provide a convenient and
efficient method of classifying and recording the transactions of a business as
they occur from day to day, and to serve as posting mediums by means of which
the debit and credit items resulting from transactions can be readily transferred
to ledger accounts.

40. When books are kept by double entry, an equality of debits and credits
in the ledger is maintained by posting all entries in the books of original entry to
the ledger accounts in such manner as to always offset debit items with credit
items, or vice versa.

41. Entries in books of original entry do not assume the status of debits and
credits until they are posted to and appear in ledger accounts.

42. The purpose of recording the various classes of transactions in separate
books of original entry is to reduce posting to the minimum, since the totals of such
books can be posted as offsetting debits or credits to the individual items posted
from them.

43. The journal is the book in which are recorded the transactions which
cannot be classified in other books of original entry.

44. Any entry in a book in which transactions are classified is the equivalent
of a journal entry insofar as the final result in the ledger is concerned.

45. No item should appear in the ledger that is not posted from some book
of original entry, except cross entries which balance accounts.

46. The purpose of ledger accounts is to group the financial records of all
transactions under their proper classifications.

122 ACCOUNTANCY AND BUSINESS MANAGEMENT

47. Accounts must be classified so that the balance of each account will
show one definite financial result and unit of accounting information.

48. The only way to secure a subtraction in the ledger is to record the item to
be subtracted on the opposite side of either the same or another account.

49. With respect to the manner in which the rules of debit and credit apply
to them, accounts may be classified as personal and impersonal.

50. Personal accounts include all accounts receivable with individuals, firms,
and corporations showing what they owe to us, and all accounts payable with individ-
uals, firms, and corporations showing what we owe to them.

51. Impersonal accounts include all other asset, liability, capital, income,
profit, and loss accounts.

52. Assets, costs, investments, receipts, expenses, and losses are always
debits. Liabilities, capital, expenditures, incomes, and profits are always credits.

53. All expenditures on a capital asset, whether for first cost or for improve-
ments, prior to the time it is ready for use or becomes productive, or which increase
its efficiency as an income-producing factor or its market value as an investment,
should be charged to the asset investment account. All other expenditures on
a capital asset are capital expenses.

54. Capital is treated as a credit for bookkeeping purposes in order to main-
tain an equality between the debits for assets and the credits for liabilities.

55. A trial balance merely shows that in the ledger the total debits are equal
to the total credits, but it does not prove the correctness of the ledger accounts,
or of the balances which compose it.

56. A supporting schedule or exhibit is a supplementary statement setting
forth in detail the items which make up an item or account included in a trial
balance or statement.

57. The net profit or net loss can be determined by taking the difference
between the capital at the beginning and the capital at the close of an accounting
period; that is, the net profit or loss is the measure of the increase or decrease in
net assets during a period.

58. The purposes of closing a ledger are to record the final distribution 01 the
net profit or net loss in the proper ledger accounts, and to eliminate the income
and profit and loss accounts as open accounts in the ledger.

59. The profit and loss summary account is a recapitulation in the ledger
of the balances of all the income and profit and loss accounts which were included
in finding the net profit or net loss.

60. The function of the post-closing trial balance is to test the equality of
debits and credits in the ledger after it has been closed.

ELEMENTARY ACCOUNTING 123

REVIEW EXERCISES

Exercises 37 to 44 inclusive, which follow, provide a test of the student's
knowledge of the principles underlying the classification of accounts which have
been presented up to this point. A double sheet of journal paper and a double
sheet of ledger paper will be required. Allow twenty-two lines for the cash ac-
count, eight lines for the purchases account, and six lines each for all other accounts
one line for the heading and five lines for the entries.

R. E. Wood began business as a hardware merchant on November 1. He did
not keep a regular set of books. All of his records of the business he transacted
to December 31 are in the form of memorandums he made from time to time,
bills he received for purchases of merchandise and bills for expense items, memo-
randum charges to customers for merchandise sold, and his check book stubs
showing the records of all cash deposits and payments. On December 31 it is
necessary for him to ascertain what his profit or loss has been for the two months
he has been in business so he can prepare his income tax return. He also wishes
to determine the financial condition of his business on this date because he intends
to open a set of books at the beginning of business for the new year.

The student has just been employed as his bookkeeper. It is first necessary
to set up accounts which will properly record his transactions for November and
December, from which to prepare an income and profit and loss statement and a
statement of assets and liabilities as of December 31. As it will be somewhat
difficult to record his transactions in chronological order, all entries are to be
journalized and entered under date of December 31, and then to be posted to the
ledger.

EXERCISE 37

Mr. Wood reports that when he began business on November 1 he invested
$10,000.00 in cash, a stock of merchandise he had purchased at auction on October
20 which cost him $2,750.00, office and store furniture, fixtures, and equipment
which were also purchased at the same auction sale for a price of $700.00, and a
new automobile truck which cost $1,500.00, that was delivered to him on October 29.
On that date he issued a check for $1,200.00 to apply on the purchase price. This
payment, however, was not made out of the funds he invested in his business,
but from other money he had in his possession at that time. On November 1 he
issued a 60 day note for $300.00, dated November 1, with interest at 6%
payable at maturity, for the balance of the purchase price of this delivery equip-
ment, the note to be paid from the funds of his business when it matured.

Prepare a journal entry to record the assets invested. Then prepare another
entry to record any claims against these assets. Next, open the ledger accounts
required and post the entries.

124 ACCOUNTANCY AND BUSINESS MANAGEMENT

Mr. Wood closed a deal on October 20 for the purchase of a business property
located at the corner of Main and Oak Streets. It is known as 32 Main Street.
The property consists of a lot having a frontage of 40 feet on Main Street and a
depth of 100 feet on Oak Street, improved by a two-story brick store and warehouse,
building 40 feet, wide and 70 feet deep. The purchase price of the building was
$7,000.00 and the lot cost $4,000.00.

Mr. Wood did not take title to the property until November 1, on which
date he issued a check for $5,000.00 on the checking account of his business to apply
on the purchase price, and executed a mortgage, dated November 1, in the amount
of $6,000.00, bearing interest at the rate of 6% per annum, for the balance. The
former owner of the property had already paid the taxes for the current year,
which amounted to $261.18. Mr. Wood accordingly issued his check to him for
$43.53, which amount was one-sixth of the year's taxes applicable to the months
of November and December. He also issued a check for $142.52 to pay the bill
for examining the title, recording the deed, arranging for the mortgage, and other
expenses incurred on the property prior to the time he began to use it for business
purposes.

EXERCISE 39

Among the furniture and fixtures which Mr. Wood purchased at auction was
a second-hand typewriter for which he paid $28.00. He traded this machine in on
November 3 on the purchase of a new machine, the price of which was $87.50. He
was allowed $20.00 for the old machine and issued his check to the typewriter
company for the difference", $67.50.

Note: Losses similar to the loss between the cost price of the old typewriter
and the price received when it was disposed of are unusual or non-operating losses
in the sense that they result from transactions outside of those from which the
regular or operating income of the business is derived. They are referred to as
-incidental or miscellaneous losses. Consequently, they should be accounted for in a
separate account under the title of "Miscellaneous Losses." The losses charged
to this account should be listed separately in the income and profit and loss state-
ment with the other "deductions from income." Likewise, unusual or non-
operating profits such as the profit on the sale of real estate reported in the next
transaction are not operating profits. They are incidental or miscellaneous profits,
and should be accounted for in a separate account under the title of "Miscellaneous
Profits." They should be listed separately in the statement with the other
"additions to income."

On November 15 he sold the rear part of his lot for $1,500.00, accepting at the
time the transaction was consummated a cjjeck for $500.00 and .two notes for $500.00

ELEMENTARY ACCOUNTING 125

each. Both notes were dated November 15, one payable in 30 days and the other
in 60 days with interest at 6% payable at maturity. The cost of that part
of the lot disposed of was $1,200.00. The purchaser intends to erect a building in
which to conduct a drug store.

On October 21 Mr. Wood employed a contractor to build a partition on the
second floor so as to make a room for a photographer's studio. He leased the
space, the tenant taking possession on November 1. The cost of this partition and
of other alterations and repairs about the building required to put it in first-class
condition was $280.00, for which Mr. Wood issued his check to the contractor on
November 5.

EXERCISE 40

An analysis of Mr. Wood's merchandising transactions for the two months
he has been in business discloses the following facts and figures:

The bills for merchandise purchased amount to $2,147.16. All of this mer-
chandise was bought on open account. For one reason or another he returned for
credit merchandise included in these purchases amounting to $72.23, and received
rebates and allowances amounting to $13.52. He also took from his stock of mer-
chandise tools and other articles for use in the store and warehouse which cost $32.90.

Note: Open an accounts receivable account and an accounts payable account
in which to record all debits and credits to trade debtors and trade creditors
respectively.

Mr. Wood billed all goods sold to customers on open account in duplicate,
and retained the duplicate copies as his records of the transactions. As his custom-
ers paid him he marked the carbon copies "Paid." His sales,' as shown by these
carbon copies, total $2,714.88. His customers returned goods amounting to
$15.80, for which he allowed credit, and he rebated various sums to his customers
on sales amounting to $22.37.

His inventory of unsold merchandise on hand on 'December 31 taken at
invoice cost amounts to $3,267.28.

EXERCISE 41

Since he began business on November 1, Mr. Wood has deposited all cash
received. He classified his deposits when entering them on the stub of his check
book so as to show the amounts received in settlement of accounts receivable, the
proceeds from cash sales, the income from rentals, etc. An analysis of these
deposits shows that he received in settlement of customers' accounts the sum
of $1,842.55. Included in this amount was an item of $1.36 for interest on a
past due account. The deposits of receipts from cash sales amounted to $312.18.

In drawing a check in payment of one of his bills for merchandise purchased,

126 ACCOUNTANCY AND BUSINESS MANAGEMENT

he transposed the figures on the bill from $123.50 to $132.50. His creditor re-
funded the overpayment by a check for $9.00, which was deposited. He also
m:ule two deposits of $35.00 each for the checks received in payment of the rent of
the studio for November and December. He received a check for $5.44 from the
railroad company for an overpayment on a freight bill on goods purchased due to
a mistake in the rate assessed on the shipment, which was also deposited.

On December 15 he received a check for $502.50 in payment of the first note
he accepted from the purchaser of the rear part of his lot. This check included
the interest on the note for 30 days. This check was deposited also.

EXERCISE 42

An analysis of Mr. Wood's cash payments, exclusive of those previously re-
ported, as prepared from the stubs in his check book discloses the following data:

During November and December his payments in settlement of sums owed to
his creditors amounted to $928.47. On December 30 he issued a check for $303.00
in payment of the note he gave on November 1 for the balance of the purchase
price of his truck. The check included the interest on the note for 60 days. Dur-
ing the period he paid freight bills on goods purchased amounting to $97.84. He
issued two checks in favor of himself for $125.00 each for his salary for November
and December.

On November 3 he issued a check for $75.00 in payment of a bill for repairing,
painting, and varnishing the furniture and fixtures he purchased at auction. These
permanent improvements were necessary to put the equipment in good condition.
The work was completed prior to the time he began to transact business. His
bills for boxing, packing, and shipping materials and store and warehouse supplies
paid during the two months amount to $52.60. On November 8 he issued a
check for $43.25 in payment of a bill for repairing the plumbing and installing new
plumbing and fixtures in the building. These were permanent improvements re-
quired to put the plumbing in first-class condition.

Mr. Wood employs a warehouseman and truck driver whose time is fully
occupied in handling incoming and outgoing stock in the warehouse. His wages
for the two months were $180.00. He also employs a sales clerk to wait upon
customers in the store and to assist him in the general conduct of the business.
His salary was $162.00 for the period. On December 20 a carpenter's bill for $5.80
for minor repairs to different parts of the building was paid by check. In filling
an order the clerk dropped a hammer and broke a plate glass top in a show case.
It cost $11.50 to replace it, which was paid by check. On November 2 he insured
the building against fire, the face value of the policy being $7,000.00. He issued
a check for $32.90 in payment of the premium on the policy. He paid bills amount-
ing to $123.84 for office supplies and stationery, electric light, coal, license fees
for the truck, gasoline, oils, and similar expenses.

ELEMENTARY ACCOUNTING 127

On December 31 he made a payment of $1,000.00 on the mortgage covering
his real estate to retire a part of the principal. He included in his check the accrued
interest from November 1 to December 31 on the full amount of the mortgage, his
check amounting to $1,036.00. The balance of cash shown by the check book is
$4405.92.

EXERCISE 43

In addition to the above he had the following transactions during the period.
On November 22 he accepted a draft drawn on him by a creditor at 60 days after
sight dated November 20 for $224.58, the amount of a bill of merchandise pur-
chased. He intends to pay this draft at maturity.

One of his customers who owed him $103.95 for a bill which matured on
December 15 could not pay the bill at that time, and Mr. Wood accepted his
30 day note dated December 15 with interest at 6% for the amount of the bill.

EXERCISE 44

After all the transactions in Exercises 37 to 43, inclusive, have been entered
and posted, take a trial balance and then prepare an income and profit and- loss
statement. Then close the income and profit and loss accounts into the profit
and loss summary account.

Mr. Wood states that he wants the profit he made on the sale of the lot plus
such other part of his profit from other sources credited to his capital account as
to make an investment of an even $15,000.00 with which to start business at the
beginning of the new year. The remainder of his profit is to be credited to his
personal account subject to withdrawal whenever he may wish to draw it. Make
the entries to record this distribution of profits and post them to the ledger.

Prepare a statement of assets, liabilities, and capital as of December 31,
showing in the capital section the distribution of profit which has been ordered.

Next prepare a trial balance from the ledger as it stands after the income and
profit and loss accounts have been closed. Such a trial balance is called a post-
closing trial balance. It includes only the asset, liability, and capital accounts.
Its purpose is to make certain that the ledger is in balance after it has been closed
for a fiscal period and before any entries for the next fiscal period have been posted.

On January 1 Mr. Wood drew a check in his favor for that part of his profit
that was credited to his personal account. Make the journal entry to adjust.

Mr. Wood has purchased a complete set of books in which to keep the accounts
of his business for the ensuing year: Set up the journal entry that would be re-
quired to open his new books and ledger at tHb beginning of business on January 1.
Then make the adjusting entry for the inventory of merchandise of December 31.

Note to Teacher: Accruals are not to be taken into consideration in working
exercises 37 to 44 inclusive.

INDEX TO PART ONE

Acceptance 61

Accounts:

Capital 55

Capital Investment 89, 90

Cash 25, 37, 69-72

Creditors' 50, 51

Debtors' 49

Expense 37, 85

Expense & Income, relating to Capital

Assets 90, 94, 95, 96

Fiscal 110

Impersonal 24

Inventory 78

Interest Expense 87

Interest Income 87

Investment, Capital 89, 90

Merchandise , 72

Notes Payable 67-69

Notes Receivable 64-66

Ownership 55

Owner's Personal 58, 114-117

Payable 18, 48, 50

Personal 18, 22, 48, 52

Balance of -. 22

Debiting and Crediting of 20, 21

Mixed 24, 37

Ruling of 22, 52-54

Property Investment 89

Proprietor's Capital 55, 114, 115, 116

Net Profit Transferred to 114

Personal Account Balance trans-
ferred to 115, 117

Proprietor's Personal 58, 114-117

Balance Closed into Capital Account

114, 115, 117

Profit & Loss Summary 110, 112, 114

Purchases 73, 76

Analyzed 100

Real Estate Expense 94

Real Estate Income 95-96

Real Estate Investment 91

Receivable 18, 48, 49

Sales 24, 37, 76

Analyzed 100

Warehouse Expense 82

Additions to

Cost 76, 80, 82

Invoice Cost of Goods Sold 76

Income 87, 95, 102

Analysis of

Cash Payments. 11

Cash Receipts 9

Model Set . 14-16

Posting 19

Purchases Book '.'.'.'.'. . 3 4

Sales Book .'!.'.'.' . 7' 8

Assets

Capital Assets 90, 103

Current Assets 52, 105

Fixed Capital Assets 90, 105, 106

Floating Assets 105

Liquid Assets 105

Net Assets 31, 103, 104, 105

yuick Assets 105

Assets and Liabilities

Statement of 31, 103, 109

Construction and Interpretation of 105-109

Bill, or Invoice 2 5

Due dates of ' s| 9

Books, Closing the 169 117

Book of Final Entry, Defined 18

Book of Original Entry, Defined 18, 96

Business Transaction, Defined 48

Capital 31, 32, 106

Invested Capital 55

Net Capital 31, 103

Capital Account 55

Proprietor's Capital Account. .114, 115, 116

Net Profit transferred to 114

Personal Account Balance trans-
ferred to 115, 117

Capital Assets 90, 91, 92, 103

Expense & Income Accounts, relating

to 90

Fixed Capital Assets 105, 106

Capital Expense 87, 103

Capital Income 87, 103

Capital Investment 31

Capital Investment Accounts 89

Closing of 93

Canceling Items 21, 22

Cash, denned 69

Cash Account 25, 37, 69-72

Cash Book, Payments 10, 71

Analysis of , n

Cash Book, Receipts. 8, 14, 15, 38, 39, 70, 71

Analysis of 9, 10

Cash Sales 7g

Charges, Fixed 10

Classification of Transactions 12, 33, 96

Classified Original Entries 12, 36

Closing and Adjusting Entries 110-117

Closing the Books 109-117

129

130

INDEX TO PART ONE

Closing the Ledger 110-117

By Compound Journal Entry .... 116, 117
Comparison of Classified and Journal

Entries 36, 46

Construction and Interpretation of
Statement of Assets, Liabilities and

Capital 105-109

Construction and Interpretation of
Income and Profit and Loss State-
ment 100-103

Contract, defined 48

Cost of Goods Sold 30

Net Cost of Goods Sold 43

Total Cost of Goods Sold 102

Cost of Purchases, deductions from 73

Creditor, defined. 48

Accounts with Creditors 50

Current Assets 52, 105

Current Liabilities 52, 105

Debit and Credit 20

Debits and Credits, Equality of 26-28

Debtor, defined 48

Accounts with Debtors 49

Debts 48

Deductions from Cost of Purchases 73

Deductions from Income 87, 94, 103

Deductions from Sales. 76-78, 100

Discount and Interest 86

Drafts, definition of 60

Acceptance of 61

Acceptor of 61

Date of Maturity of 61

Drawee of 60

Drawer of 60

Endorsement of 62

Sight Drafts 61

Time Drafts 61

Transfer of 62

Drayage Charges 80

Endorsement 62, 63

Endorser 62

First Endorser 62

Second Endorser 62

Entries, Closing and Adjusting 110-117

Errors in taking Trial Balance. 98

Expense Account 37, 85

Expense and Income Accounts relating

A to Capital Assets 90, 94, 95, 96

Expense Charges 80

Expenses 38, 44, 84

Capital Expenses 103

General Expenses 44

Non-operating Expenses 103

Non- trading Expenses 102

Operating Expenses 102

Trading Expenses 102

Final Entry, Book of 96

Financial Condition 105

Financial Transaction, defined 48

Fiscal Accounts 110

Fixed Capital Assets .... 90, 91, 92, 105, 106

Fixed Charges 102

Fixed Liabilities 105

Floating Assets 105

F.o.b. Delivery Point 80

F.o.b. Shipping Point -. . . 80

Freight, Expense and Drayage Charges 80

Freight In Account 80

Freight Out Account 80

Function of Income and Profit and Loss
Accounts 109

General Expenses 44, 84

Goods Sold

Invoice Cost of 73, 100

Net Cost of 44

Net Invoice Cost of 74, 102

Total Invoice Cost of 74, 100

Total Cost of 76, 83, 102

Gross Profits 32

Gross Sales 100

Gross Trading Income 102

Gross Trading Loss 30, 45

Gross Trading Profit 30, 44, 83, 102

Grouped Accounts 98

Impersonal Accounts 24

Debiting and Crediting of 25

Income

Additions to 103

Capital Income 103

Deductions from 103

From Sales 30, 76, 100

Gross Trading 102

Net Income 103

Non-operating Incomes 102, 103

Statement of 30, 43

Total from operations and all other
sources 103

Income and Profit and Loss Accounts,
Function of 109, 110

Income and Profit and Loss Statement

30, 4*3, 99-103

Analysis of 43

Construction and Interpretation of

100-103
Illustrations of 20, 101

INDEX TO PART ONE

131

Reconciliation of with Statement of

Assets, Liabilities, & Capital 108-110
Incoming Freight, Express and Dray-
age Charges 80

Interest and Discount 86

Interest Bearing Note 87

Interest Expense Account 87

Interest Income Account 87

Interest Paid 86, 87

Interest Received 86, 87

Insolvency, Net 103

Inventory

At Beginning of Fiscal Period 100

At Close of Fiscal Period 100

Inventory Account s . . . 78

Invested Capital 55

Invoice Cost of Goods Purchased 73

Invoice Cost of Goods Sold 73, 110

Net Invoice Cost of 74, 102

Total Invoice Cost of 74, 100, 102

Journal 33

Analysis of 34, 35

Entries in 34

Posting from 35

Journalizing, defined 36

Non-operating Expenses 103

Non-operating Incomes 102, 103

Notes

Amount of 87

Date of Maturity of 61

Endorsement of 62

Face of 87

Illustration of 60

Maker of 60

Payee of 60

Proceeds of 87

Negotiable Instruments 61

Transfer of 62

Notes and Drafts. 60-63

Notes Payable Account 67-69

Notes Receivable Account 64-67

Notes Receivable and Notes Payable. . 62, 63

Obligations 48

Operating Expenses 102

Operations, Net Income from 102

Original Entry, Book of 18, %

Ownership Accounts 55

Owner's Personal Account 58

Outgoing Freight, Expense and Drayage
Charges 80

Ledger, Book of Final Entry 96

Ledger, Closing the 110-117

By Compound Journal Entry 116-117

Ledger defined 18

Liabilities 29, 55, 106

Current 105, 106

Fixed 105

Net 103

Liquid Assets 105

Maturity, Date of 61

Medium of Exchange, defined 60

Merchandise Accounts 72

Merchandise Inventory defined 68

Model Set 12-15

Net Assets 103, 104, 106

Net Capital 103

Net Cost of Goods Sold 44

Net Income 103

From Sales 100

From Operations 102

Net Insolvency 103

Net Invoice Cost of Goods Sold 74, 102

Net Invoice Cost of Merchandise 74

Net Liabilities 103

Net Loss 45

Personal Accounts 18, 20, 22, 48, 52

Balance of 22

Debiting and Crediting of 20, 21

Mixed 24, 37

Ruling of 22, 52-54

Posting 18, 96

Analysis of 19

From Cash Book 20

From Purchases Book 18

From Sales Book 18

Procedure in 22

Principles, Recapitulation of 119-123

Profit

Gross 32

Gross Trading 102

Net 34, 44, 103

Profit and Loss Statement 43

Illustration of 44

Profit and Loss Accounts, Function of. . 109

Profit and Loss Summary Account

110, 112, 114

Property Investment Accounts 89

Property Investments
Expense and Income Accounts relating
to 90

Proprietor's Capital Account 55, 114, 115, 116

Net Profit transferred to 114

Personal Account Balance trans-
ferred to 114, 117

132

INDEX TO PART ONE

Proprietor's Personal Account 58

Balance Closed into Capital Account

114, 115, 117

Proprietorship 107, 108

Pun-liases 54

Deductions from 43

Rebates and Allowances on 44, 102

Recording 1

Returned 43

Total or Gross 43

Purchases Account 73, 76

Analyzed 100

Purchases Book 2

Analysis of 3, 4

Quick Assets. 105

Real Estate Expense Account 94

Real Estate Income Account 95, 96

Real Estate Investment Account 91

Rebates and Allowances

On Purchases 44, 102

On Sales 43, 100

Recapitulation of Principles 119-122

Reconciliation of Statements 108-110

Recording Cash Payments 10

Recording Cash Receipts 8

Recording Purchases 1

Recording Sales 5

Resources 105

Resources and Liabilities, Statement of 105

Returned Sales 100

Review Questions. / 12, 32

Sales 4

Deductions from 43, 100

Income from '. 30, 43, 76

Net Income from 43, 73, 100

Rebates and Allowances on 43, 100

Returned 43, 100

Total or Gross 43, 76, 100

Sales Account 24, 37, 76

Analyzed 100

Sales Book 5

Analysis of 7, 8

Schedule, Supporting. . '. 98

Sight Draft 61

Statement .of Assets and Liabilities 31

Illustration of 31

Statement of Assets, Liabilities, and

Capital 103-109

Illustration of 104

Construction and Interpretation of

105-107

Reconciliation of 108-110

Statement of Financial Condition 105

Statement of Income and Profit & Loss

30, 43, 99-103

Analysis of 43

Illustration of 30, 44, 101

Reconciliation of 108-110

Statement of Resources & Liabilities 105

Supporting Schedule 98

Three Party Draft 61

Time Draft 61

Total Cost of Goods Sold 76, 83, 102

Total Invoice Cost of Goods Sold. ... 74, 100
Total Invoice Cost of Merchandise. . 73, 100
Total Income from Operations and all

other sources 103

Total or Gross Sales 100

Trading Expenses. 80, 82, 102

Transaction, defined 48

Trial Balance 29, 97, 98

Accounts In, Grouped 98, 99

Defined 27, 97

Errors in 98

When Taken 97

Warehouse Expense Account 82

Warehouse Expenses 82

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