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 20th Century Bookkeeping 
 
 and 
 
 Accounting 
 
 A TREATISE ON THE PRINCIPLES OF ACCOUNTING AND 
 
 BOOKKEEPING PRACTICE APPLIED BY MODERN 
 
 BOOKKEEPERS AND ACCOUNTANTS 
 
 FIFTEENTH EDITION 
 
 FOR USE IN ALL SCHOOLS THAT TEACH BOOKKEEPING 
 AND ACCOUNTING 
 
 •V;S v- J A- M e: s SA/i S a k ti r 
 
 ASSISTED BY 
 
 Coivi ivi ERCiAL Teachers amd Prac-tici no Accou m-taim-ts 
 
 THE DISCUSSION IN THIS TEXT AND THE TRANSACTIONS IN THE PRACTICE SETS WHICH 
 
 ACCOMPANY IT ARE THE RESULT OF SUGGESTIONS RECEIVED THROUGH PERSONAL 
 
 INTERVIEWS AND CORRESPONDENCE WITH THOUSANDS OF TEACHERS, PRACTICING 
 
 ACCOUNTANTS, AND BOOKKEEPERS, DURING TWENTY YEARS' ASSOCIATION 
 
 WITH THOSE ENGAGED IN COMMERCIAL WORK 
 
 43262 
 
 PUBLISHED BY 
 
 South-Western Publishing Co. 
 
 Cincinnati, O. 
 
 1922
 
 Copyright, 19 12 
 Copyright, 1922 
 
 SOUTH-WESTERN PUBLISHING COMPANY 
 Cincinnati, Ohio
 
 5(o 35 
 
 PREFACE 
 
 The successful business man should know that a profit will result from the 
 transactions in connection with his business before they are completed. To deter- 
 mine this he should have such information as will show the detailed operating cost, 
 the profit from trading or other operations, the net profit for each fiscal period, 
 its source, and the increase or decrease over previous periods. 
 
 A report concerning the failure or suspension of a business, accompanied by 
 the statement that the creditors will not know what percentage of their claim may 
 be collected until the experts have audited the books, indicates that the manage- 
 ment did not have all the facts available in connection with the business. Such 
 a statement is so common in the newspaper announcement of failures that it sug- 
 gests a connection between accounting and success. 
 
 If these conditions are to be improved, it is necessary to teach the correct 
 principles of accounting and the best practice in applying them. The bookkeeping 
 student of today is the bookkeeper or business man of tomorrow. If he has a 
 knowledge of the correct principles, as bookkeeper he will apply them, or, as 
 manager, he will see that they are applied by the bookkeeper. 
 
 The purpose of this text is to present the correct principles of bookkeeping 
 and accounting, — principles advocated and practiced by modern bookkeepers 
 and accountants. The information upon which it is based was obtained from 
 standard authorities on accounting and from consultations with practicing book- 
 keepers and accountants. 
 
 The text is prepared primarily for the student and not for the practicing book- 
 keeper or accountant. The presentation permits the beginner to master first the 
 simple principles of accounting as applied in a small business. When he under- 
 stands these, he can then appreciate the more complicated principles of accounting 
 necessary in recording the transactions for a business of extensive operations. 
 
 A study of the text would result in only a theoretical knowledge of the subject. 
 Practice is necessary in applying the principles. A correct knowledge of the prin- 
 ciples is essential, but efficiency in applying this knowledge is of equal importance. 
 The student who has mastered the principles of bookkeeping and accounting 
 should have also acquired accuracy, neatness and speed. For this reason the 
 practice sets require the recording of a number of transactions, — a sufHcient num- 
 ber to impress on the student's mind the importance of a correct record and to 
 give him confidence and skill in applying his knowledge of the subject. 
 
 That the student may learn to recognize a transaction from the paper that 
 represents it in business, he is required to make his record in the practice sets 
 from reproduced business papers. The transactions, moreover, are practical, 
 and identical with those that occur in business. Applying the correct principles 
 and recording practical transactions represented in the same manner as they are 
 in business, gives the student a knowledge of the subject which will make his services 
 desirable to the business man, and valuable to himself. 
 
 Not only should the student who has completed a course in bookkeeping and 
 accounting understand the principles of the subject and the best practice in ap-
 
 PREFACE 
 
 plying these principles, but he should also have some knowledge of the efficient 
 methods employed in modern business. This knowledge, given in connection with 
 the sets, includes special ruling in all books of original entry, carbon copy and loose 
 leaf records, controlling accounts, and many other time-saving methods made 
 popular by practicing bookkeepers. 
 
 Efficiency in office routine means the greatest amount of work with the best 
 results at the least cost. As applied to the work of the bookkeeper, it means the 
 ability to record the greatest number of transactions with correct results in the 
 least possible time. Throughout the text and sets, special attention is given to 
 modern methods in recording transactions. 
 
 The student who has mastered the principles in this text and completed the 
 sets that accompany it, need not hesitate to accept a position as bookkeeper in 
 any office. He can rest assured that the training received will have prepared him to 
 make a correct record in an efficient manner. If the work of his predecessor has not 
 been correctly done, he is prepared to improve the method in use. He can act 
 with the assurance that the work he does will be approved by the accountant 
 who audits his books. 
 
 The student of bookkeeping will soon be receiving an income, hence should 
 know the connection between the knowledge gained through the bookkeeping 
 course and the income tax statement required by the Government. To provide 
 this information, practice is given in the preparation of income tax statements. 
 Information in regard to the forms is given in an appendix because these forms 
 will be changed from time to time by legislation. The student who understands 
 the principles of accounting as explained in this text, and the bookkeeping practice 
 illustrated in the practice sets, will find the preparation of an income tax statement 
 a very simple problem. 
 
 THE PUBLISHERS.
 
 Part One 
 
 Chapter I 
 
 BUSINESS AND BOOKKEEPING 
 
 The Purpose of this Chapter is to introduce the student to the subject 
 of bookkeeping by showing him its purpose through an explanation of business. 
 There are many reasons why the student should understand bookkeeping. The 
 business man will pay well for information which he needs; hence the one who can 
 provide this information through a knowledge of bookkeeping will command a 
 good salary for his services. The student who is ambitious to become a business 
 man should know bookkeeping because this knowledge will enable him to interpret 
 the information obtained from his bookkeeping records and to use it as a basis for 
 future operations of the business. 
 
 § 1. Each Individual requires food, clothing, education, amusement, and 
 many other things necessary for his comfort and enjoyment. These necessities 
 and luxuries can be obtained with money, which is a medium of exchange and the 
 standard of value. An individual secures money (a) through income received as 
 wages or salary for services he has rendered to others, (b) through the use by others 
 of property which belongs to him, or (c) through the profit resulting from the oper- 
 ations of a business owned by him either in part or as a whole. 
 
 James Brown is employed as salesman for the Citizens Motor Car Co.; his income is the salary 
 received for the service rendered. J. W Smith owns the building in which the Citizens Motor Car 
 Co. is operated; his income is the rent received for the use of the building. W. O. Winkler owns 
 the Citizens Motor Car Co.; his income is the profit made by selling automobiles at a price greater 
 than the cost. 
 
 § 2. A Business. The one who sells to the individual the food, clothing, 
 education, amusement, or other things which the individual needs for his comfort 
 and enjoyment, is said to be engaged in business, and the operations in connection 
 therewith are referred to as business transactions. The operations include the 
 buying and selling of the commodities in which the business deals, at a place of 
 business and imder a name selected by the owner. There are many kinds of busi- 
 nesses, each of which supplies a specific demand; there are many businesses of 
 the same kind which undertake to supply the sam.e demand. 
 
 Robert Brown owns and operates a drug store at 405 Main St., known and advertised to the 
 public as "The Central Drug Store." Mr. Brown is a business man because he operates a business. 
 The operations of his business include the buying and selling of medicine and drugs, as well as the 
 other articles a drug store usually handles, and his business is referred to as a drug business. 
 
 § 3. Assets, Liabilities and Proprietorship. If the owner of a business 
 is to have ready for sale the merchandise or service which he expects to sell, he 
 must have cash with which to purchase this merchandise or service. The cash, 
 merchandise, and other property needed to carry on the operations of a business 
 are known as its assets. Should the owner of a business agree either in writing 
 or verbally to pay at a later date for the merchandise or service purcha.sed, he 
 has incurred an obligation or debt; this obligation is known as a liability, and 
 all the obligations of the business are known as its liabilities. The liabilities are 
 to be paid out of the assets of the business, hence the owner's interest in the busi-
 
 6 BUSINESS AND BOOKKEEPING. 
 
 ness is the excess of total assets over total liabilities; this interest is known as his 
 proprietorship. vStated in equation form, assets — liabilities = proprietorship. 
 
 John Jones, who has $3,000.00 in cash, wishes to purchase a drug store; Robert Brown, who 
 owns and operates "The Central Drug Store" is willing to sell the same for $2,500.00. January i, 
 Mr. Jones pays Mr. Brown $2,500.00 for which he secures all the assets of the store; these include 
 drugs, medicine, and other merchandise usually offered for sale by a drug store, and a soda fountain 
 with the usual equipment. He retains the $500.00 for the purpose of buying other drugs. If this 
 $500.00 is not sufficient to pay for the drugs purchased and these drugs are sold to him upon his 
 promise to pay later, he incurs a liability. During the operations of the business his interest in the 
 business is the value of all the assets belonging to the business less the liabilities. 
 
 § 4. The Name of an Asset or a Liability depends on its nature. Custom 
 has fixed the names of the assets which usually belong to a business and the liabilities 
 which are usually incurred. Money is referred to as "cash;" written promises- 
 (in negotiable form) of those who agree to pa^^ money to the business, as "notes 
 receivable," and verbal promises, as "accounts receivable;" merchandise in stock, 
 as "inventory;" fixtures used in the business, as "furniture and fixtures;" written 
 promises (in negotiable form) of the business to pay money at a future date, as 
 "notes payable;" and verbal promises, as "accounts payable." 
 
 § 5. Cost and Income. When a business is organized, the ow^ner expects 
 to purchase the merchandise or other property which he sells, also to pay rent, 
 salaries, advertising, etc. ; these are known as costs. . Th'e owner of the business 
 also expects to sell the merchandise or service which he offers for sale; the returns 
 from sales are known as income. If the income be greater than the cost, the busi- 
 ness has been operated at a profit; if the income be less than the cost, it has been 
 operated at a loss. 
 
 When Mr. Jones bought the drug business, he knew there would he certain costs in connec- 
 tion with its operations, including rent, salaries, telephone service, purchases of merchandise, supplies 
 for the soda fountain, etc. However, he was willing to assume these costs because he expected an 
 income from the sales of merchandise which he purchased and from the products of his soda foun- 
 tain. If at the end of the first year his costs amount to $4,000.00 and his sales to $5,000.00, he will 
 have made a profit of $1,000.00 through owning and operating the drug business. 
 
 § 6. The Name of Each Cost and Income depends on its nature. It is 
 quite evident that cost for rent and cost for merchandise purchased are of an en- 
 tirely different nature; also that the income from the sale of merchandise and the 
 income from the sale of service are of a different nature. Custom has fixed the 
 names of the costs and income w^hich occur in the usual operations of the business. 
 Rent and salary costs are known as "expenses;" merchandise purchased for sale, 
 as "purchases;" income from the sale of this merchandise, as "sales;" income 
 from the use of money, as "interest;" income from the sale of services such as 
 that rendered by telephone and telegraph companies, as "tolls;" and income 
 from the sale of service rendered by a street railway company, as "passenger re- 
 ceipts." 
 
 § 7. A Business Transaction is, theoretically., an exchange of equivalent 
 values; that is, the business receives an equivalent value for the material or service 
 which it sells to others, and gives an equivalent value for the material or service 
 which it purchases. Because of this exchange of values, each transaction will 
 result in a parting with values by the business with a resulting increase of liabilities 
 or income; and a corresponding receipt of value with a resulting increase of assets 
 or cost. 
 
 Mary Davis pays John Jones, the owner of The Central Drug Store, 25c for a magazine; this 
 is a transaction performed by the owner because he receives cash and parts with a magazine. James 
 Doyle pays the street-car conductor a fare of 8c; this is a transaction performed by the street-car 
 company because it receives 8c cash for service it has rendered.
 
 BUSINESS AND BOOKKEEPING. 7 
 
 §8. Bookkeeping is the systematic recording of the transactions of a busi- 
 ness, or of any changes which may affect the owner's interest in the business. This 
 record is made (i) by writing the date, explanation, and amount of each transac- 
 tion; (2) by classifying the items of the record to show values received (assets 
 arid costs), and values parted with (liabilities and income). 
 
 The term "accounting" in the title of this text is usually used with the same meaning as book- 
 keeping. However, there is a technical difference which will be explained later. No attempt is 
 made to explain everything about bookkeeping and accounting at the beginning, because it would 
 only result in confusion, and the student can better learn as he advances. 
 
 § 9. The Purpose of Bookkeeping for a Business is to provide a record 
 of all transactions performed by the business. The owner of the business needs 
 this information in order that he may know the value of the assets and liabilities 
 of the business, and the cost and income resulting from its operations. The in- 
 formation gained through the operations of the business in the past can be of value 
 to the owner in connection with the performance of future transactions only when 
 he has a complete record of the transactions performed. 
 
 § 10. The Purpose of Bookkeeping for an Individual whose income 
 results from a salary or an investment is the same as for a business — that is, to 
 assist the individual to better control his income and expenditures. If, at the end 
 of each year, the individual knows his total income for the year and his expenses 
 for the year, he will be in a far better position to control future expenditures 
 than if he depends on the information obtained from an actual count of the assets 
 he has remaining at the end of the year. The individual who has money invested 
 in property should record the cost of the property, the cost of taxes, insurance, 
 repairs, etc., and the income from rent; with this information he can determine 
 whether his investment is profitable. 
 
 The individual whose income is a salary can better control his expenditures by making ap- 
 propriations for those expenditures which he knows will occur, such as rent, food, clothing, amuse- 
 ments, contributions, etc; this will enable him to avoid spending more for any one of these 
 items than his salary will permit. This plan of making appropriations is referred to as a "budget 
 system," and the list of appropriations, as a "budget." The budget system is not only applicable 
 to the affairs of an individual, but is also applicable to the affairs of a government and a business 
 concern. City, county, state, and national governments are rapidly adopting the budget system 
 for the control of expenditures, and many business concerns make expenditures for advertising, 
 salaries, improvements, etc., through a system of budgetary control. 
 
 § 11. Summary. The student needs to know bookkeeping because a 
 knowledge of the subject will increase the value of his services, whether sold to 
 others or used in connection with his own business. Income can be earned through 
 a salary received, an investment, or the operations of a business. A business man 
 is one who undertakes to provide services or commodities for which there is a de- 
 mand. Assets are needed in connection with the operations of a business, and 
 liabilities may be incurred. The proprietorship of a business is the value of the 
 assets after the liabilities are deducted. Cost refers to expenses and purchases 
 made necessary in order that the business man may have an income through the 
 sales of merchandise or services. A business transaction is an exchange of equiva- 
 lent values; each value involves an asset, a liability, a cost, or an income. These 
 transactions are recorded in order that the owner of the business may have a record 
 of them. This record is made by writing the date of the transaction, the name 
 of the asset, liability, cost or income, and the value received and the value parted 
 with. Every transaction affects an asset or an income and a liability or a cost.
 
 I BUSINESS AND BOOKKEEPING. 
 
 QUESTIONS 
 
 1. What is the purpose of bookkeeping? 
 
 2. Is it advisable for a person who receives a salary for his services to keep a 
 
 record of the transactions which he performs in connection with his affairs? 
 
 3. Name some of the transactions which the individual would perform in con- 
 
 nection with his affairs. 
 
 4. Would you think it advisable for a person who receives a salary to appropriate 
 
 fixed amounts for living expenses, clothing, charity, and savings? State 
 reasons for answer. 
 
 5. Would it be advisable for the owner of an apartment building with six apart- 
 
 ments to keep a record of the transactions performed in connection with 
 the operation of the building? Why? 
 Name some of the transactions which the owner of the apartment building 
 would perform. 
 
 How would he ascertain whether the ownership of the apartments was a profit- 
 able investment? 
 
 Would you consider a contractor who undertakes to build houses, roads, 
 sidewalks, etc., a business man? Why? 
 
 Name some of the transactions which he would perform in connection with 
 the operations of his business. 
 
 10. Is the payment of street car fare by the individual who rides on the car a 
 
 business transaction from the standpoint of the street car company? 
 
 11. Name some of the assets which would be needed and some of the liabilities 
 
 which might be incurred in connection with the operation of a railroad. 
 
 12. Name some of the assets and liabilities in connection with the operation of a 
 
 grocery business. 
 
 13. Would you consider it advisable for those in charge of a city government to 
 
 make a record of the transactions completed in connection with its oper- 
 ations? Why? 
 
 14. Name some of the transactions which would be recorded in connection with 
 
 the operations of a city government. 
 
 15. Is an automobile truck, owned and used by the grocer for delivering groceries, 
 
 one of the assets of his business? 
 
 16. Name some of the operating costs in connection with the operations of a 
 
 steamer which carries freight and passengers. 
 
 17. Name some of the assets which would be needed and the liabilities incurred 
 
 in connection with the operations of this steamer. 
 
 18. Name some of the operating costs in connection with the publication of a 
 
 daily newspaper. 
 
 19. Name some of the assets and liabilities in connection with the operations of a 
 
 newspaper. 
 
 20. Is the farmer engaged in operating, a business? 
 
 21. Name some of the transactions which would occur in connection with the 
 
 operations of a farm. 
 
 22. Name some of the assets needed by the farmer and some of the liabilities he 
 
 might incur in connection with the operations of his farm. 
 
 23. Name some of the operating expenses which it would be necessary for the 
 
 farmer to pay in connection with the operations of his farm. 
 
 24. Name some of the transactions which a physician would perform in connection 
 
 with his practice. 
 
 25. Name three businesses of the same kind. Name three businesses of different 
 
 kinds.
 
 Chapter II 
 
 RECORDING TRANSACTIONS 
 
 The Purpose of this and the three succeeding Chapters is to explain (a) 
 the method of recording transactions in accounts with Cash, Purchases, Sales, 
 persons, Expense, and the proprietor, (b) the use of the general journal, (c) the 
 use of special journals, and (d) the Trial Balance. Exercises consisting of business 
 transactions which have been performed are provided in order that the student 
 may obtain practice in applying the principles discussed in the text. 
 
 § 12. An Account is a systematic record of all the transactions with any- 
 one asset, liability, cost or income collected under a specific title; this title is the 
 name of the asset, liability, cost or income. The ruled form for an account should 
 contain two sides (Illustration No. i), one to show the date of the transaction 
 and the value received, and the other the date of the transaction and the value 
 parted with. The balance of an account is the difference between the totals of 
 the two sides. An account is "open" when the totals of the two sides are not 
 equal, and "in balance" when the totals are equal. 
 
 Illustrations Nos. i, 2, 3 and 8 in this chapter illustrate and explain the form of an account. 
 Illustration No. 3 shows that at least two accounts are required to record each transaction. 
 
 NAME OF THE ACCOUNT 
 
 Values Received 
 
 Values Parted With 
 
 Year 
 
 
 
 
 
 ' Year 
 
 Month Day 
 
 Explanation 
 
 Page 
 
 Dollars 
 
 Cents 
 
 Month Day 
 
 Explanation 
 
 Page 
 
 Dollars] Cents 
 
 Illustration No. i, The Account. 
 
 § 13. Debit and Credit when used as bookkeeping; terms, describe the two 
 sides of an account; debit refers to the left side and credit to the right side. The 
 value received in a transaction is recorded on the debit (left) side of one account, 
 and the value parted with on the credit (right) side of another account. 
 
 § 14. The Ledger is a bound book, loose-leaf book, or cards, with rulings 
 to contain a record of transactions in account form; Illustration No. 2 shows a ruled 
 ledger page. The name of the account is written across the page, and each transac- 
 tion recorded on the opposite sides of two accounts, as in Illustration No. 3 which 
 shows a ledger with three accounts. 
 
 The number of accounts in the leds^er depends entirely on the nature of the operations of the 
 business, and the extent of these operations. The space required for recording transactions in any 
 one account depends on the number of transactions which affect the account; this space is deter- 
 mined by one who is familiar with the nature of the business and the transactions performed by it. 
 
 Illustration No. 2, One Form of Ruling for a Ledger. 
 
 9
 
 10 CASH, PURCHASES AND SALES ACCOUNTS. 
 
 CASH ACCOUNT 
 
 § 15. The Purpose of this Account is to show the amount of cash belong- 
 ing to the business as a result of the transactions in which cash is received and 
 paid. '"Cash" is a term applied to money or any commercial paper which the 
 bank will accept at its face value as money. The various forms of commercial 
 paper which are regarded as cash will be explained and illustrated later. 
 
 Debit the Cash Account: Credit the Cash Account: 
 
 11 I. For cash received. H 2. For cash paid. 
 
 ^ 3. The Balance of the Cash Account shows the amount of cash which 
 belongs to the business as a result of the' cash transactions completed; it is one of 
 the assets of the business. This cash may be in the safe, in the bank for safe- 
 keeping, or a part in each place. (See Illustration No. 3.) 
 
 There are four important points relating to each account which the student should under- 
 stand: (a) its purpose, (b) the transactions to be recorded on the debit side, (c) the transactions 
 to be recorded on the credit side, and (d) the interpretation of its balance — that is, whether it repre- 
 sents an asset, a liability, a cost, or an income. The discussion of each account in this text is 
 arranged so as to emphasize these four points. "^ 
 
 § 16. Proving Cash. Since the Cash account is a record of all cash received 
 and paid, the balance should be the same as the cash belonging to the business. 
 Cash is proved by counting the cash and comparing the amount with the balance 
 of the Cash account. If there has been an error in making change, or a transaction 
 affecting cash has not been recorded, it is obvious that the balance of the account 
 will not be the same as the cash on hand. 
 
 PURCHASES ACCOUNT 
 
 § 17. The Purpose of this Account is to show the net cost of all the mer- 
 chandise purchased for sale. Merchandise is a general term applied to goods 
 bought and sold in the trading business, such as groceries, clothing, shoes, hats, 
 hardware, drugs, musical instruments, jewelry, etc. 
 
 Debit the Purchases Account: Credit the Purchases Account: 
 
 \ I. For the cost of merchandise ^ 2. For the cost price of merchan- 
 
 purchased, and the transporta- dise returned to the seller, 
 
 tion (freight, express, and post- and allowances granted by 
 
 age), drayage, and storage him. 
 cost of this merchandise. 
 
 \ 3. The Balance of the Purchases Account shows the net cost of merchandise 
 purchased during the period for which the record is kept; it is one of the costs ot 
 the business. This balance will not, as a rule, represent the value of the merchandise 
 owned by the business because the merchandise was purchased for sale and a part 
 of it hasvprobably been sold. (See Illustration No. 3.) 
 
 SALES ACCOUNT 
 
 § 18. The Purpose of this Account is to show the net returns from the 
 sales of merchandise. It is a record of the transactions affecting the sales of those 
 articles purchased for sale, the cost of which is charged to the Purchases account. 
 
 Debit the Sales Account: Credit the Sales Account: 
 
 % I. For the selling price of merchan- If 2. For the selling price of merchan- 
 dise returned by the customer, dise sold, 
 and allowances granted to him. 
 
 ^ 3. The Balance of the Sales Account shows the net returns from the sales 
 of merchandise during the period for which the record is kept; it is one of the in- 
 comes of the business. (See Illustration No. 3.)
 
 RECORDING TRANSACTIONS IN THE LEDGER. 
 
 II 
 
 RECORDING TRANSACTIONS DIRECT IN THE LEDGER 
 
 § 19. Transactions are Recorded in the order in which they occur. The 
 record may be made direct in the ledger or in a separate book and transferred to 
 the ledger. Illustration No. 3 shows the method of recording direct in the ledger 
 the transactions outlined below and at the top of page 12. The transactions are 
 those relating to the sales and purchases of merchandise for cash performed by 
 the soda fountain department of The Central Drug Company during the week 
 beginning July 2. 
 
 July 2. Cash sales for the day per cash register, $39.40. 
 
 Recorded in Illustration No. 3 on the debit side of the Cash account and credit side of 
 the Sales account. 
 
 3. Bought syrups and extracts, $5.00; Coca-Cola, $12.75; ice cream, $19.20. 
 
 Recorded in Illustration No. 3 on the debit side of the Purchases account and credit 
 side of the Cash account. 
 Cash sales for the day per cash register, $50.30. 
 Recorded in Illustration No. 3 on the debit side of the Cash account and credit side of 
 the Sales account. 
 5. Returned one gallon of ice cream purchased on the 3d, and received $2.50, 
 the cost price, for the same. 
 Recorded in Illustration No. 3 on the debit side of the Cash account and credit side 
 of the Purchases account. 
 Bought sandwiches. $12.50; flavoring, $16.40; ice cream, $20.00. 
 Recorded in Illustration No. 3 as explained in § 17, II i and § 15, ^ 2. 
 {Concluded on page 12) 
 
 
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 Illustration No. 3, A Ledger Containing Three Accounts. 
 
 EXPLANATION. The information given in connection with each transaction and the method 
 of recording it is sufficient explanation of this illustration.
 
 12 
 
 THE TRIAL BALANCE. 
 
 {Continued from page ii.) 
 July 6. Cash sales for the day per cash register, $21.50. 
 
 Recorded in Illustration No. 3 as explained in § 15, *! i and § 18, H 2. 
 
 7. Gave James Smith $1.50 for one-half gallon of ice cream which he re- 
 turned because it was received in bad condition. 
 
 Recorded in Illustration No. 3 as explained in § 18, K i and § 15, ^ 2. 
 
 Cash sales for the day per cash register, $62,50. 
 
 Recorded in Illustration No. 3 as explained in § 15, ^ i and § 18, H 2. 
 
 § 20. A Trial Balance is a list of the open accounts in the ledger with the 
 balance or the total debits and total credits set opposite the name of each account; 
 its purpose is to test the equality of the debits and credits recorded in the ledger. 
 The Trial Balance is usually prepared on paper with two money columns ruled at 
 the right so that the debit totals or debit balances may be entered in one column, 
 and the credit totals or credit balances in the other. The test is satisfactory when 
 the total of the debit column on the Trial Balance equals the total of the credit 
 column. Illustration No. 4 shows a Trial Balance of totals, and No. 5 a Trial 
 Balance of balances prepared from the ledger in Illustration No. 3. 
 
 C,^^7-zJ^?"SZX^;5'OZ^5'<-Z^<:-!9' C <^ 
 
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 Illustration No. 4, A Trial Balance of Totals. 
 
 EXPLANATION. This Trial Balance is prepared from the ledger in Illustration No. 3. 
 The page in the ledger and the name of each account are written at the left, and the total debits 
 and total credits are written in the two money columns at the right. If the Trial Balance is footed 
 before it is ruled, the totals are entered in small pencil figures in the same manner as the totals in 
 Illustration No 3. By comparing Illustration No. 4 with Illustration No. 3, the student will observe 
 that it is necessary to add the accounts in the ledger and write the totals in small pencil figures before 
 preparing the Trial Balance. 
 
 (-^-e^^^^i-^t^y-^z^ (S'Oi; 
 
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 Illustration No. 5, A Trial Balance of Balances. 
 
 EXPLANATION. It is customary, when taking a Trial Balance of balances, to write the 
 balance in the explanation column on the larger side of the account in the ledger. These balances 
 are not shown in Illustration No. 3 because they are not necessary in taking a Trial Balance of totals.
 
 RECORDING TRANSACTIONS IN THE LEDGER. 13 
 
 Exercise No. 1, Recording Transactions Direct in the Ledger. 
 
 Record on ledger paper* (paper with the same ruHng as lUustration No. 2) 
 the following transactions performed during the month of January by J. W. 
 McCormick, a dealer in musical instruments. Write the names of the three 
 accounts before recording the transactions; allow twelve lines for Cash, eight 
 lines for Purchases and twelve lines for Sales. The space given for each account 
 includes suificient lines for recording the transactions and one line for the name 
 of the account. If one sheet of ledger paper is used for the three accounts, separate 
 them by double red lines as in Illustration No. 3. 
 
 In practice, transactions are recorded separately from the ledger and transferred to it, but 
 for the purpose of instruction the first few exercises are recorded direct in the ledger. 
 
 Jan. I. Sold for cash one piano, $450.00. 
 
 Record on the debit side of the Cash account and on the credit side of the Sales account 
 in the same manner as the transaction for July 2 is recorded in Illustration No. 3. 
 
 2. Bought for cash one hundred Victrola records, $110.00. 
 
 Record on the debit side of the Purchases account and on the credit side of the Cash 
 account in the same manner as the first transaction for July 3 is recorded in Illus- 
 tration No. 3. 
 5. Sold for cash one Victrola, $225.00; records, $10.50. 
 
 Record in one amount on the debit side of the Cash account and on the credit side of 
 the Sales account in the same manner as the second transaction for July 3 is recorded 
 in Illustration No. 3. 
 7. Sold for cash one piano, $350.00. 
 
 10. Sold for cash one player-piano, $500.00; rolls, $22.50. 
 12. Bought for cash three Victrolas, $320.00; paid freight on the same, $52.50. 
 14. Sold for cash one Victrola, $200.00; records, $42.50. 
 
 17. Gave J. O. Smith $1.50 for a damaged record which he purchased on the 
 
 14th and returned. 
 
 Debit §18, ^i; credit §15, ^\ 2. 
 
 18. Sold for cash one Victrola, $50.00; records, $6,50. 
 
 20. Bought for cash one piano, $225.00; paid freight and drayage on the 
 
 same, $42.65 
 23. Sent the damaged record returned to us on the 17th to the distributing 
 
 agent of the records and received 90c for the same. 
 
 Debit § 15, ^ i; credit § 17, ^ 2. 
 
 27. Sold for cash one Victrola, $75.00; records, $10 50. 
 
 Bought for cash one piano, $300.00; paid freight on the same, $48.65. 
 
 30. Received $3.50 from the railroad company to pay for overcharge on 
 
 freight paid on the 20th. 
 Debit § 15, 5[ i; credit § 17, ^2. 
 
 31. Sold for cash one piano, $350.00. 
 
 When these transactions have been recorded in the three accounts, add the 
 debit side and the credit side of each account, enter the totals in small pencil figures 
 as in Illustration No. 3, and prove the equality of the debits and credits by a Trial 
 Balance of totals as in Illustration No. 4. • 
 
 Exercise No. 2, Recording Transactions Direct in the Ledger. 
 
 Record on ledger paper* the following transactions performed during the week 
 beginning May 28 by Charles Smith, a butcher. Allow space for the accounts as 
 follows: Cash, ten lines; Purchases, eight lines; Sales, nine lines. 
 May 28. Cash sales for the day per cash register, $42.85. 
 
 {Concluded on page 14) 
 
 *NOTE. The exercises in the text are not to be recorded in the books of account provided 
 for the practice set. Unless special blanks, marked "For Exercises in the Text," are provided, the 
 student should use loose sheets of ruled paper. Present exercises for approval as directed on the 
 direction card or as directed bv the instructor.
 
 14 BOOKS OF ORIGINAL ENTRY 
 
 Exercise No. 2 — {Continued from page ij.) 
 May 29. Bought meat for cash, $22.50. 
 
 Cash sales for the day per cash register, $35.60. 
 
 30. Paid the express company $20.00, $18.75 of which was for a cash 
 
 purchase of lard and $1.25 for express charges on the same. 
 Cash sales for the day per cash register, $45.25. 
 
 31. Gave Mrs. R. K. Polk $1.10 cash for a steak which she returned because 
 
 it was not satisfactory. 
 June I. Bought meat for cash, $57.50. 
 
 Cash sales for the day per cash register, $49.90. 
 2. Received $3.50 from the Central Provision Co. for lard which we returned 
 as per agreement. 
 Bought meat for cash, $36.40. 
 Cash sales for the day per cash register, $72.19. 
 When these transactions have been recorded in the three accounts, add the 
 debit side and the credit side of each account, enter the totals in small pencil figures, 
 and prove the equality of the debits and credits by a Trial Balance of totals as in 
 Illustration No. 4. 
 
 Exercise No. 3, Recording Transactions Direct in the Ledger. 
 
 Record on ledger paper the following transactions performed during the week 
 beginning September 15 by Shepherd Young, who conducts the Central Cafeteria. 
 Allow space for the accounts as follows: Cash, eleven lines; Purchases, nine lines; 
 Sales, ten lines. 
 
 Sept. 15. Paid cash for meat, $25.50; bread, $4.75. 
 Received for cash sales, $37.55. 
 
 16. Paid cash for vegetables, $12.80. 
 Received for cash sales, $32.65. 
 
 17. Paid cash for canned goods, $13.75; meat, $15.00; bread, $5.50. 
 Received for cash sales, $29.90. 
 
 18. Received cash, $2.50, for canned goods returned by us as per agreement. 
 Received for cash sales, $31.55. 
 
 19. Paid cash for meat, $9.75; bread, $3.40. 
 Received for cash sales, $27.90. 
 
 20. Paid cash for vegetables, $13.50; bread, $5.60; butter, $7.55. 
 Received for cash sales, $44.59. 
 
 Complete in the same manner as instructed at the conclusion of Exercises 
 Nos. I and 2. 
 
 § 21. A Book of Original Entry is one ruled to contain a record of business 
 transactions arranged chronologically, that is, in the order of their occurrence. 
 The information given in connection with the record of each transaction in a book 
 of original entry should be arranged so that the value received and the value parted 
 with may be transferred to the accounts in the ledger. The method of recording 
 transactions in book of original entr>^ is illustrated and explained in this and suc- 
 ceeding chapters. 
 
 The purpose of a book of original entry is to provide a basis for the information recorded in 
 the ledger. When transactions are recorded direct in the ledger it is difficult to detect errors because 
 there is no complete record of each transaction in one place. Should the bookkeeper fail to record 
 a debit or a credit he might have difficulty in locating the error. 
 
 § 22. The Journal is a book of original entry. The ruling is shown in Illus- 
 tration No. 6 and the method of recording transactions on this ruling, in Illustra- 
 tion No. 7. A comparison of these two illustrations shows that space is provided 
 for the name of the account debited and the amount (value received), the name
 
 THE JOURNAL. 
 
 15 
 
 Illustration No. 6, Ruling for a Page in the Journal. 
 
 EXPLANATION. The purpose of the ruling in this journal can be understood better by 
 comparing it with that in Illustration No. 7, which contains the same form of ruling with trans- 
 actions recorded. The student will observe that debits and credits are indicated by the position 
 of the writing and figures. 
 
 of the account credited and the amount (value parted with), and the explanation 
 of the transaction; this explanation should be so worded that one who is familiar 
 with accounting may know that the values received and the values parted wuh 
 have been correctly expressed in the record. 
 
 ^ I. Journalizing is the analysis of transactions to determine which accounts 
 shall be debited and which credited; and the recording of the names of the accounts 
 debited and credited with the amounts in a book of original entry. 
 
 § 23. Posting from the Journal is transferring the amounts from the 
 journal to the accounts in the ledger. Each amount in the first money column is 
 posted to the debit side of the account written on the same line with it, and each 
 amount in the second money column is posted to the credit side of the account 
 written on the same line with it. The posting is indicated by writing the letter 
 "J" and the page of the journal in the folio column in the ledger, and the page of 
 the account in the ledger in the folio column in the journal. The amounts recorded 
 in the journal are posted to the ledger in the same order as they appear in the 
 journal; the purpose of posting is to provide in the ledger, through accounts, a 
 complete history of all the transactions with each asset, liability, cost and income. 
 
 The transactions recorded in Illustration No. 7, when posted to the ledger accounts, will 
 appear as in Illustration No. 8, and a Trial Balance from these ledger accounts will appear as in 
 Illustration No. 4 or No. 5. 
 
 RECORDING TRANSACTIONS IN THE JOURNAL 
 
 § 24. Transactions Are Recorded in the Journal in the order in which 
 they occur. A complete record of a transaction in the journal shows the date 
 of the transaction, the name of the account debited and the amount, the name of
 
 i6 
 
 RECORDING TRANSACTIONS IN THE JOURNAL. 
 
 the account credited and the amount, and the explanation. This explanation is 
 for the information of the bookkeeper or any person who may have occasion to 
 examine the record. The record should show a distinction between debits and 
 credits to facilitate posting. 
 
 The following transactions affecting the purchases and sales of merchandise 
 for cash, performed by the soda fountain department of the Central Drug Co. during 
 
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 Illustration No. 7, A Journal Page with Transactions Recorded on It. 
 
 EXPLANATION. The transactions shown recorded here are outlined on pages 17 and 18. 
 The ledger accounts resulting from posting are shown in Illustration No. 8.
 
 POSTING FROM THE JOURNAL. 
 
 17 
 
 the week beginning July 2, are shown recorded in the journal in Illustration 
 No. 7 and posted to the ledger in Illustration No. 8. These transactions are the 
 same as those beginning on page 11. 
 
 July 2. Cash sales for the day per cash register, $39.40. 
 
 Recorded in the first entry in Illustration No. 7. The i)osition of the writing and figures 
 shows that Cash is debited and Sales credited. 
 
 3. Bought syrups and extracts, $5.00; Coca-Cola, $12.75; ice cream, $19.20. 
 
 Recorded in the second entry in Illustration No. 7. The position of the writing and 
 figures shows that Purchases is debited and Cash credited. 
 
 Cash sales for the day per cash register, $50.30. 
 
 Recorded in the third entry in Illustration No. 7. The position of the writing and figures 
 shows that Cash is debited and Sales credited. 
 
 5. Returned one gallon of ice cream purchased on the 3d, and received $2.50, 
 the cost price, for the same. 
 Recorded in the fourth entry in Illustration No. 7. § 15, 1[ i is debited and § 17, If 2 
 
 credited. 
 
 {Concluded on page 18.) 
 
 Illustration No. 8, A Ledger with Three Accounts Resulting from Posting. 
 
 EXPLANATION. The accounts in this ledger are the result of posting the transactions 
 recorded in the journal, Illustration No. 7. A comparison of the two illustrations shows that each 
 amount entered in the first column of the journal is posted to the debit side of the account written 
 on the same line with it, and each amount entered in the second column of the journal is posted to 
 the credit side of the account written on the same line with it. The posting is indicated by writing 
 the journal page (i) in the ledger, and the ledger page (i) in the journal.
 
 i8 RECORDING TRANSACTIONS IN THE JOURNAL. 
 
 {Continued from page ly.) 
 
 July 5. Bought sandwiches, $12.50; flavoring, $16.40; ice cream, $20.00. 
 
 Recorded in the fifth entry in illustration No. 7. § 17, H i is debited and § 15, ^2 
 credited. 
 
 6. Cash sales for the day per cash register, $21.50. 
 
 Recorded in the sixth entry in Illustration No. 7. § 15, *i i is debited and § 18, *\ 2 
 credited. 
 
 7. Gave James Smith $1.50 for one-half gallon of ice cream which he re- 
 
 turned because it was received in bad condition. 
 
 Recorded in the seventh entry in Illustration No. 7. § 18, T i is debited and § 15, ^ 2 
 credited. 
 Cash sales for the day per cash register, $62.50. 
 
 Recorded in the eighth entry in Illustration No. 7. § 15, ^ i Is debited and § iS, ^ 2 
 credited. 
 
 Exercise No. 4, Recording Transactions in the Journal and Posting. 
 
 Record on journal paper* (paper with the same ruling as Illustration No. 6) 
 the following transactions performed during the month of March by Robert Smith, 
 a dealer in used automobiles: 
 
 March i. Sold A. L. Lott a used Chandler for $840.00 cash. 
 
 3. Bought a used Ford from W. H. Roland for $250.00 cash. 
 8. Sold W. W. Jones a used 1920 Franklin for $925.00 cash. 
 15. Bought a used Packard from Robert MacFarland for $980.00 cash. 
 19. Sold Davis Bros, the used Packard purchased on the 15th, for $1,200.00 
 
 cash. 
 25. Bought a used Hudson from David Browning at Danville for $950.00 
 
 cash; paid Charlie Smith $25.00 for delivering this car. 
 31. Sold B. M. Morris the used Hudson purchased on the 25th, for 
 $1,250.00 cash. 
 
 When the above transactions have been recorded in the journal as instructed, 
 open accounts on a sheet of ledger paper with Cash (8), Purchases (7), and Sales 
 (8), allowing for each account the number of lines indicated by the number given 
 in parenthesis after the name of the account; post the transactions, and prove the 
 posting by a Trial Balance of balances. 
 
 Exercise No. 5, Recording Transactions in the Journal and Posting. 
 
 Record on journal paper* the following cash transactions performed by the 
 H. F. Ritter Electric Co. during the month of August: 
 
 Aug. I. Sold M. N. Stewart a No. 9 electric washer, $135.50. 
 2. Sold A. L. Graham three Solvay electric fans, $99.75. 
 5. Bought three electric lamps from the General Electric Co., $85.70. 
 9. Received $275.00 from the Dowell Construction Co. in payment for 
 
 one No. 10 electric washer. 
 12. Bought two electric washers from the General Electric Co., $325.00. 
 16. Sold Mrs. J. M. Taylor one electric iron, $13.50. 
 18. Sold Mrs. A. L. Day one electric lamp, $42.50. 
 
 21. Gave H. L. Jones $5.50 for an electric iron which he purchased for cash 
 and returned per agreement. 
 
 {Concluded on page IQ.) 
 *See note at bottom of page 13.
 
 QUESTIONS ON RECORDING TRANSACTIONS. 19 
 
 {Continued from page 18.) 
 Aug. 25. Sold Dr. C. C. Doyle one No. 5 electric pad, $22.50; one No. 6 Violet 
 Ray machine, $35.00. 
 26. Sold E. E. Erblang one No. 10 electric flashlight, $2.50 ; one extra battery 
 
 for the same, 50c. 
 28. Received $12.50 from the General Electric Co. for a lamp which we 
 purchased from them on the 5th, but returned because it was not the 
 kind ordered. 
 31. Gave E. E. Erblang $3.00 for the flashlight and battery sold him 
 on the 26th and returned per agreement. 
 When the above transactions have been recorded in the journal as instructed, 
 open accounts on a sheet of ledger paper with Cash (12), Purchases (6), and Sales 
 (11), allowing for each account the number of lines indicated; post the transac- 
 tions, and prove the posting by a Trial Balance of totals. 
 
 Exercise No. 6, Recording Transactions in the Journal and Posting. 
 
 Record on journal paper the following transactions performed during the 
 month of March by Martin R. Daley, a retail furniture dealer: 
 March i. Sold for cash one bedroom suite, $175.00; one dining room suite, 
 $196.50. 
 5. Paid cash for furniture purchased, $209.60. 
 10. Paid $18.75 cash, freight on furniture purchased. 
 12. Received cash for six rugs sold, $205.75. 
 
 Paid cash for furniture purchased, $172.60. 
 15. Gave a customer cash, $5.50, for a chair returned as per agreement. 
 18. Paid cash for furniture purchased, $82.50. 
 21. Received $14.75 cash for three small rugs returned by us to the seller 
 
 as per agreement. 
 25. Sold for cash one refrigerator, $55.00; one gas range, $47.50; one 
 
 kitchen cabinet, $65.00. 
 30. Paid the American Railway Express Co. cash, $2.50, for express 
 charges on furniture purchased. 
 
 When the above transactions have been recorded in the journal as instructed, 
 open accounts on a sheet of ledger paper with Cash (10), Purchases (9), and Sales 
 (7), allowing for each account the number of lines indicated; post the transactions 
 and prove the posting by a Trial Balance of balances. 
 
 QUESTIONS 
 
 1. What is the purpose of an account? 
 
 2. In what order are the transactions recorded? 
 
 3. State the two methods of recording transactions. 
 
 4. How is a cash sale recorded (a) in the journal and (b) direct in the ledger? 
 
 5. Which is preferable, a bound book or a loose-leaf book? 
 
 6. If a merchant wishes to know the total sales of merchandise for any given 
 
 number of months, from which book of account would he obtain the 
 information? from what account? 
 
 7. If a drug store has five departments, would it be necessary to maintain a Cash 
 
 account for each department? Give reasons for your answer. 
 
 8. Would it be necessary to keep a separate record of the sales made by each of 
 
 the five departments mentioned in Question No. 7?
 
 20 QUESTIONS ON RECORDING TRANSACTIONS. 
 
 9. If you were keeping books for a local merchant and, when you proved cash at 
 the close of January 10, you found that you had $2.00 more cash than the 
 amount shown by the Cash account, what entry would you make for the 
 $2.00? 
 
 10. Why will the Sales account always show a cre^iit balance? 
 
 11. Why will the Purchases account always show a debit balance? 
 
 12. Why will the Cash account always show a debit balance? 
 
 13. Why does the Trial Balance prove that the total debits equal the total credits 
 
 in the ledger? 
 
 14. If $10.00 cash is received for a sale of merchandise and the amount is erro- 
 
 neously entered on the credit side of the Purchases account instead of the 
 Sales account, how would it affect the Trial Balance? 
 
 15. How would the error mentioned in Question 14 affect the balance of the Pur- 
 
 chases account? the Sales account? 
 
 16. If the debits and credits on the Trial Balance are not equal, how does the book- 
 
 keeper who has recorded the transactions separate from the ledger ascertain 
 the error? 
 
 17. Why is it advisable to give an explanation of each entry in the journal? 
 
 18. If $10.10 cash is received for merchandise sold and recorded in the journal as 
 
 Cash, Dr., $10.00, and Sales, Cr., $10.10, what effect will this have on the 
 Trial Balance if the entry is posted as recorded? 
 
 19. What does a telephone company sell? 
 
 20. Would these sales be recorded in a Sales account? 
 
 21. Would the bookkeeper for a city government have a Sales account in his 
 
 ledger? 
 
 22. Would the farmer who keeps a record of the transactions he performs have a 
 
 Sales account in his ledger? 
 
 23. If a merchant discontinues business and sells all the merchandise which he 
 
 owns, what will the balance of the Sales account show? 
 
 24. Under the conditions mentioned in Question No. 23, what would the balance 
 
 of the Purchases account show? 
 
 25. If a grocer buys an automobile truck to be used in delivering merchandise, 
 
 would the value of this truck be debited to the Purchases account? Give 
 reasons for your answer.
 
 Chapter III 
 
 RECORDING TRANSACTIONS— Continued 
 
 § 25. Purchases and Sales of Merchandise on Account. When the 
 owner of a business purchases merchandise with the agreement that it is to be 
 paid for at a later date, he incurs an obHgation or a liabiHty. The transaction 
 will be recorded in the same manner as if he had paid cash except the name of the 
 person or business from whom the merchandise is pui chased will be credited in 
 place of cash; when the obligation is paid as per agreement, the account with the 
 person or business will be debited and Cash credited. The value received in the 
 first transaction is the merchandise purchased, and the value parted with, the 
 promise to pay the liability incurred. The value received in the second transaction 
 is the cancellation of the obligation, and the value parted with, the cash. 
 
 When the owner of a business sells his merchandise with the agreement that 
 it is to be paid for at a later date, he extends credit to the one who purchases the 
 merchandise. A transaction of this nature will be recorded in the same manner 
 as when cash is received, except that the name of the person who purchases the 
 merchandise will be debited instead of Cash; when the owner of the business re- 
 ceives cash from the one to whom he has extended credit, he debits Cash and credits 
 the account with the person. The value received in the first transaction is the 
 promise of the person to whom the merchandise is sold, and the value parted with, 
 the merchandise; the value received in the second transaction is cash, and the 
 value parted with, the cancellation of the obligation of the one to whom the mer- 
 chandise was sold. 
 
 Purchases and sales of merchandise where cash is not involved are referred to as "on account," 
 possibly because the account with the person takes the place of cash until the amount is paid. The 
 owner of the business regards those who extend credit to him as his creditors, and those to whom 
 he extends credit as his customers; the term "customer" also applies to those from whom cash is 
 received at the time the sale is made. 
 
 ACCOUNTS WITH PERSONS 
 
 § 26. Accounts with Persons are those required when credit is extended 
 to the business through the purchase of merchandise, or when the business extends 
 credit to its customers through the sale of merchandise. Accounts with persons 
 are divided into two classes: one (accounts with customers) shows the result of 
 transactions with the persons to whom the business sells merchandise or other 
 assets on account, usually referred to as "accounts receivable"; and the other 
 (accounts with creditors) shows the result of transactions with those from whom 
 merchandise is purchased on account, usually referred to as "accounts payable." 
 
 ACCOUNTS RECEIVABLE 
 
 § 27. The Purpose of an Account with a Customer is to show the balance 
 due from the customer as a result of the transactions in which the business sells 
 merchandise to him on account. When a customer pays cash for merchandise, 
 it is not necessary to record the transactions in an account with him; but when 
 he buys and does not pay cash, it is necessary to record the date and amount of 
 the sale in an account with him so that the owner inay know the amount 'the cus- 
 
 21
 
 22 ACCOUNTS RECEIVABLE AND PAYABLE. 
 
 tomer owes him when settlement is desired. A separate account is kept with each 
 customer because the owner of the business should know the amount due from 
 each customer to whom he sells on account as well as the total amount due from 
 all customers. The address of each customer should be given in connection with 
 the title of his account; this includes street, number, city, and state. 
 
 Debit the Account of Each Customer: Credit the Account of Each Customer: 
 
 ^ I. For the selling price of merchan- ^ 2. For the cash or other assets re- 
 
 dise sold to him on account, ceived from him to apply on ac- 
 
 and for prepaid transporta- count, and for the amount of 
 
 tion charges if the terms of . any allowance or deduction 
 
 sale do not include delivery. granted to him. Partial pay- 
 
 ments are indicated as ex- 
 plained in ^ 5. 
 
 ^ 3. The Balance of an Account Receivable shows the amount the customer 
 owes the business. It is one of the assets of the business. The debit side will be 
 the larger unless the customer should pay for more than he has purchased. When 
 the two sides are equal, his account is said to be in balance; this indicates that he 
 has paid for all the merchandise sold him on account. 
 
 ^ 4. Ruling an Account Receivable. When the account with a customer is 
 in balance, it should be ruled with a single red line on each side, across the money 
 columns only, as in the account with Walter Rogers in Illustration No. 9; the 
 lines should be drawn on the same blue line on each side when possible. If there 
 are a number of debits or credits, the two sides should be footed with small pencil 
 figures to prove that they are equal before ruling as in the account with People's 
 Hotel on page 71. The use of red ink for ruling is not arbitrary but it is customary 
 for bookkeepers to use it, hence its use in the illustrations. 
 
 ^ 5. Partial Payments. A debtor has the right, by law, to indicate on what 
 item his payment shall be applied. Thus if he owes several amounts and wishes 
 the payment to be applied to any one particular amount, and indicates this, the 
 credit must be applied on that amount. In cases of this kind the bookkeeper 
 should indicate the amount on which the credit is applied by placing a letter at 
 the left of the amount of the item on the debit side, and placing the same letter to 
 the left of the amount of each payment on the credit side. It is best to begin with 
 "a" and continue with as many letters as may be required for payments on different 
 debits. The letters are not necessary when an item is paid in full by one payment, 
 and the account is ruled. If the payments are indicated by letter as explained, 
 the bookkeeper can ascertain the amount due for any one sale without referring 
 to a book of original entry. The use of the letters as explained here is illustrated 
 in the personal accounts on pages 70, 71 and 72. 
 
 Those to whom the business sells merchandise on account are referred to as "trade customers" 
 and those from whom it buys merchandise on account as "trade creditors." Property other than 
 merchandise may be bought or sold on account; such sales and purchases are recorded in personal 
 accounts in the same manner as sales and purchases of merchandise. 
 
 ACCOUNTS PAYABLE 
 
 § 28. The Purpose of an Account with a Creditor is to show the balance 
 due from the creditor as a result of the transactions in which the business buys 
 merchandise from him on account. When merchandise is purchased for cash, no 
 account- with the one from whom it is purchased is necessary because the transac- 
 tion is completed; but when the business buys on account, it is necessary to keep 
 a record of such transactions in order that the owner mav know the amount he
 
 RECORDING TRANSACTIONS IN THE LEDGER. 23 
 
 owes at the time settlement is made. A separate account is kept with each 
 creditor because the owner of the business should know the amount he owes 
 each creditor as well as the total amount due all creditors. 
 
 Debit the Account of Each Creditor: Credit the Account of Each Creditor: 
 ^ I. For cash or other assets of the ^ 2. For the cost of merchandise 
 business given him to apply purchased from him on ae- 
 on account, and for any al- count, and for prepaid trans- 
 lowance or deduction granted portation charges if the terms 
 to the business by him. Partial of purchase do not include 
 payments are indicated as delivery, 
 explained in § 27, T[ 5. 
 
 ^ 3. The Balance of an Account Payable shows the amount the business 
 owes the creditor. The credit side will be the larger unless the business should pay 
 a creditor more than it owes him. The balance due a creditor is one of the verbal 
 obligations of the business, hence a liability. 
 
 ^ 4. Riding an Account Payable. The account with a creditor is ruled in 
 the same manner as an account with a customer, as described in § 27, ^ 4. 
 
 ^ 5. Partial Payments should be indicated by letter as explained in § 2"], 
 ^ 5. This enables the bookkeeper to ascertain the balance due on any one purchase 
 without referring to a book of original entry. 
 
 RECORDING TRANSACTIONS DIRECT IN THE LEDGER 
 
 § 29. Transactions with customers and creditors on account may be 
 recorded direct in the ledger in the same manner as cash transactions. When 
 credit is extended to a customer of the business, his promise to pay the amount of 
 the sale is recorded on the debit side of his account as the value received, and the 
 value of the merchandise sold, on the credit side of the Sales account in the same 
 manner as a cash sale. When credit is extended to the business, the cost of the 
 merchandise purchased is recorded on the debit side of the Purchases account in 
 the same manner as a cash purchase, and the same amount is recorded on the credit 
 side of the creditor's account because the promise of the owner of the business to 
 pay for the merchandise bought is regarded as the value parted with. The account 
 with a customer remains on the ledger as an asset, and that with a creditor as a 
 liability, until settlement is made, either with cash or some other asset. 
 
 The following transactions affecting the purchases and sales of merchandise 
 for cash and on account, performed by J. H. Henderson, a retail furniture dealer, 
 during the month of November, are shown recorded direct in accounts with Cash, 
 customers, creditors. Purchases, and Sales in Illustration No. 9 and a Trial Balance 
 of totals made from the accounts, in Illustration No. 10. 
 
 Nov. I. Purchased furniture from the Consolidated Furniture Co., Grand 
 Rapids, on sixty days' time, $215.75. 
 2. Sold C. H. Powers, Arlington, on account, one bedroom suite, $125.00. 
 6. Sold Walter Rogers, City, on account, one hatrack, $22.50. 
 12. Received cash for furniture sold today, $625.50. 
 14. Paid the Consolidated Furniture Co. $100.00 on account. 
 20. Received $22.50 from Walter Rogers in payment for the hatrack sold 
 him on the 6th. 
 
 25. Received $25.00 from C. H. Powers to apply on account. 
 
 26. Sold C. H. Powers on account three leather rockers at $25.50 each. 
 29. C. H. Powers returned one rocker and was allowed credit for $25.50.
 
 24 
 
 RECORDING TRANSACTIONS IN THE LEDGER 
 
 Illustration No. 9, A Ledger with Six Accounts. 
 
 EXPLANATION. This illustration is in the same form as Illustration No. 3, with the 
 exception of three additional accounts, two with customers and one with a creditor. A comparison 
 of the transactions wdth the record will show that the value received in each is recorded on the debit 
 side, and the value parted with on the credit side. The "60 days" in the explanation column of 
 the account with the Consolidated Furniture Co. refers to the time when payment is to be made. 
 Since the purchase is on November i, payment will be expected on December 31. When no specific 
 time of settlement is mentioned, the purchase or sale is sometimes referred to as "on account," 
 and settlement is usually required on the first of the month following the purchase or sale.
 
 RECORDING TRANSACTIONS IN THE LEDGER. 
 
 25 
 
 
 C 73- 
 
 /L.^-a 
 
 .2=./' 
 
 
 />/ ^ -Z 
 
 
 7^ 
 
 r ^^ \ .-r a 
 
 / 3- / 
 
 Illustration No. 10, A Trial Balance of Totals. 
 
 EXPLANATION. This Trial Balance, which is prepared from the ledger in Illustration No. 
 9, is the same form as Illustration No. 4 with the addition of two personal accounts. By com- 
 paring this illustration with Illustration No. 9, it will be observed that the account with Walter 
 Rogers does not appear on the Trial Balance. The reason for this is that the amounts recorded 
 on the debit and credit sides are equal. This explains the statement in § 20 that only the open 
 accounts in the ledger appear on the Trial Balance. 
 
 Exercise No. 7, Recording Transactions Direct in the Ledger. 
 
 Record on ledger paper* the following transactions performed during the month 
 of October by J. J. Hammond, a retail shoe dealer. Allow space for the accounts as 
 follows: Cash, ten lines; Purchases, ten lines; Sales, ten lines; J. C. Mason, 
 Walter Love, J. C. Miller, Robert Whitacre, W. O. Crosswhite, Davis Bros., and 
 Smith Shoe Co., each four lines. Give each customer and creditor a local address. 
 
 Oct. 2. Bought shoes from W. O. Crosswhite on account, $187.65. 
 
 3. Sold J. C. Mason on account one pair of shoes, $11.50. 
 
 5. Bought shoes from Davis Bros, on account $281.36. 
 
 7. Received for cash sales of shoes, $127.50. 
 
 9. Paid W. O. Crosswhite $100.00 on account. 
 
 10. Sold Walter Love on account six pairs of shoes, $56.50. 
 
 1 1 . Bought shoes from the Smith Shoe Company on sixty days' time, $211 .85. 
 
 12. Received for cash sales of shoes, $97.50. 
 
 13. Paid W. O. Crosswhite $87.65 in full of account. 
 
 14. Sold J. C. Miller on account two pairs of shoes, $25.25. 
 
 16. Received for cash sales of shoes, $106.95. 
 
 17. Allowed Walter Love credit for one pair of shoes returned, $17.50. 
 
 18. Bought shoes from W. O. Crosswhite on account, $321.85. 
 
 19. Paid $82.50 for shoes purchased and delivered today. 
 
 20. Paid Mrs. W. C. Davis $6.00 for a pair of shoes returned for which she 
 
 had paid cash when sold to her. 
 23. Received $39.00 from Walter Love in full of account. 
 
 25. Paid the Smith Shoe Company $25.00 on account. 
 
 26. Received for cash sales of shoes, $88.90. 
 
 27. Paid the Santa Fe Railroad $65.50 for freight on shoes purchased. 
 
 28. Sold Robert Whitacre one pair of shoes on account, $15.00. 
 
 30. Bought shoes from the Smith Shoe Company on sixty days' time, $175.75 • 
 
 31, Davis Bros, allowed us credit for $62.50 for shoes returned to them. 
 
 When these transactions have been recorded in the accounts, prove the equality 
 of the debits and credits by a Trial Balance of totals. 
 
 *See note at the bottom of page 13.
 
 26 RECORDING TRANSACTIONS IN THE JOURNAL. 
 
 Exercise No. 8, Recording Transactions Direct in the Ledger. 
 
 Record on ledger paper the following transactions performed by F. B. Bellis, 
 a retail candy merchant, during the week beginning July 5. Allow space for the 
 accounts as follows: Cash, ten lines; Purchases, ten lines; Sales, ten lines; 
 Candy Kitchen, seven lines; Robert Farland, five lines; Norway Candy Co., six 
 lines; R. H. Hunter, five lines. Give each person a local street address. 
 July 5. Purchased from the Candy Kitchen, City, on account, $65.84. 
 Cash sales for the day, $62.48. 
 
 6. Paid cash for nuts purchased, $9.50. 
 Cash sales for the day, $55.80. 
 
 7. Sold Robert Farland, City, on- account, six boxes of candy at* $2.75. 
 Purchased from the Norway Candy Co., City, on account, $32.75. 
 Cash sales for the day, $41.90. 
 
 8. Paid the Candy Kitchen $50.00 on account. 
 
 Paid a customer $1.00 for a box of candy which he had purchased for 
 
 cash and returned per agreement. 
 Cash sales for the day, $41.80. 
 
 9. Received $10.00 from Robert Farland on account. 
 
 Sold R. H. Hunter, City, on account, twelve boxes of candy at* $2.25. 
 Purchased from the Candy Kitchen, City, on account, $61.50. 
 Cash sales for the day, $52.80. 
 10. Paid cash for chewing gum, $5.00. 
 
 Paid the Candy Kitchen $25.00 on account. 
 
 Purchased from the Norway Candy Co., City, on account, $26.95. 
 
 Returned to the Candy Kitchen six boxes of candy purchased on the 9th 
 
 and received credit for the same at $1.75 per box, the cost price. 
 Cash sales for the day, $101.19. 
 When these transactions have been recorded in the accounts, prove the equality 
 of the debits and credits by a Trial Balance of balances. 
 
 RECORDING TRANSACTIONS IN THE JOURNAL 
 
 § 30. Transactions with customers and with creditors may be recorded in 
 the journal in the same manner as cash transactions. When credit is extended to 
 a customer, his name is written in the journal as the account debited, and the 
 Sales account credited; when credit is extended to the business, the Purchases 
 account is debited, and the name of the creditor is written as the account credited. 
 The owner should have a record of the articles sold on account; this information 
 may be obtained by retaining a copy of the list given the customer, or writing the 
 names of the articles in connection with the explanation in the journal. It is not 
 necessary to itemize the articles purchased in the explanation of the transaction 
 in the journal because the creditor provides a list of these articles. 
 
 The following transactions affecting the purchases and sales of merchandise 
 for cash and on account, performed by J. H. Henderson, a retail furniture dealer, 
 during. the month of November, are shown recorded in the journal in Illustration 
 No. II and posted to the ledger in Illustration No. 12. These transactions are 
 the same as those on page 23. 
 
 Nov. I. Purchased furniture from the Consolidated Furniture Co., Grand 
 Rapids, on sixty days' time, $215.75. 
 
 2. Sold C. H. Powers, Arlington, on account, one bedroom suite, $125.00. 
 
 6. Sold Walter Rogers, City, on account, one hatrack, $22.50. 
 
 {Concluded on page 28.) 
 *NOTE. The word "at," appearing before the price, indicates that this price is per unit; 
 if this word does not appear, the price given appHes to the quantity mentioned. "Six boxes candy 
 at $2.75" means that the amount of the sale is $16.50. "Six boxes candy, $2.75," means that the 
 amount of the sale is $2.75.
 
 RECORDING TRANSACTIONS IN THE JOURNAL. 
 
 
 3.?^^^ 
 
 ' ^\ /I ,.rr:^:<;-*z>S''-S>-z'r?^KLX...iC-:-i-cX^ iT-f-zy <^^C^^-^^£^*z, ^ 
 
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 C^ <5'-^Kl^ £?>&<Vr 
 
 
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 Illustration No. ii, A Journal Page with Transactions Recorded on It. 
 EXPLANATION The numbers in the foHo column indicate the page of the ledeer to which 
 
 i'ournaT bnt'.f ?hf;- ^\T ""'"''"''' ^'^ "°^ ^^''''^ ^^en the transactions are recorded in he 
 journal, but at the time the amounts are posted to the ledger accounts.
 
 28 
 
 RECORDING TRANSACTIONS IN THE JOURNAL. 
 
 Nov. 
 
 12. 
 14. 
 20. 
 
 25- 
 
 26. 
 29. 
 
 {Continued from page 26.) 
 Received cash for furniture sold today, $625.50. 
 Paid the ConsoHdated Furniture Co. $100.00 on account. 
 Received $22.50 from Walter Rogers in payment for the hatrack sold 
 
 him on the 6th. 
 Received $25.00 from C. H. Powers to apply on account. 
 Sold C. H. Powers on account three leather rockers at $25.50 each. 
 C. H. Powers returned one rocker and was allowed credit for $25.50. 
 
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 Illustration No. 12, A Ledger with Six Accounts Resulting from Posting. 
 
 EXPLANATION. The transactions in this ledger were not recorded direct in it, but were 
 recorded in the journal shown in Illustration No. 11 and posted, as indicated by the figures in 
 the folio column of each account. Compare with Illustration No. Q and note the additional infor- 
 mation. A Trial Balance of totals taken from this ledger would be the same as Illustration No. 10
 
 RECORDING TRANSACTIONS IN THE JOURNAL. 
 
 29 
 
 Exercise No. 9, Recording Transactions in the Journal and Posting. 
 
 Record on journal paper the following transactions performed by the Central 
 Paper Co. during the month of February. Give each customer and creditor a 
 local address. 
 
 Feb. I. Purchased paper from the Whiting Paper Co. on account, $350.00. 
 
 2. Sold paper to the Federal Press on account, $126.50. 
 
 3. Received $352.10 for paper sold today. 
 
 5. Purchased envelopes from the U. S. Envelope Co. on account, $207.60. 
 
 6. Received $126.50 from the Federal Press in full of account. 
 
 7. Sold paper to C. J. Krehbiel & Co. on account, $200.25. 
 9. Paid the Whiting Paper Co. $150.00 on account. 
 
 12. Purchased paper from the Whitaker Paper Co. on account, $409.37. 
 
 14. Paid $106.16 for freight and drayage bills to date. 
 
 16. Sold paper to C. W. Ogden on account, $98.66. 
 
 19. Received credit from the U. S. Envelope Co. for $36.50, value of en- 
 
 velopes returned by us per agreement. 
 
 20. Received for cash sales of paper today, $191.96. 
 
 21. Received $200.25 from C. J. Krehbiel & Co. in full of account. 
 
 23. Sold paper and envelopes to the Federal Press on account, $161.52. 
 
 24. Allowed C. W. Ogden credit for paper returned, $12.50. 
 
 26. Paid the Herrlinger Paper Co. $76.60 for paper delivered today. 
 2y. Sold paper and envelopes to C. J. Krehbiel & Co. on account, $112.60. 
 28. Paid the U. S. Envelope Co. balance due on account, $171.10. 
 Received $40.00 from C. W. Ogden on account. 
 
 When the above transactions have been recorded in the journal as instructed, 
 open accounts on a sheet of ledger paper with Cash (9), Purchases (9), Sales (11), 
 Federal Press (5), C. J. Krehbiel & Co. (5), C. W. Ogden (5), Whiting Paper Co. 
 (5), U. S. Envelope Co. (5), Whitaker Paper Co. (5), allowing for each account the 
 number of lines indicated; post the transactions, and prove the posting by a Trial 
 Balance of totals. 
 
 Exercise No. 10, Recording Transactions in the Journal and Posting. 
 
 Record on journal paper the following transactions performed during the 
 month of May by J. O. Cutshaw, an automobile tire dealer: 
 
 May 
 
 / 
 10 
 12 
 13 
 
 14 
 16 
 20 
 
 Purchased from the Goodyear Tire Co., City, on account, $355.00. 
 Received cash for four Goodyear 33 x 4 cord tires, $215.60. 
 Purchased from the Goodrich Tire Co., City, on account, $525.50. 
 Sold the Central Grocery Co., City, on account, two Ford tires, $32.65. 
 Received cash for one 35 x 5 Silvertown cord tire, $67.50. 
 Paid the Goodyear Tire Co. $200.00 on account. 
 
 Sold I. W. Walker, City, on account, four Miller cord tires at $52.45. 
 Gave I. W. Walker credit for one of the tires sold him on the 12th and 
 
 returned by him today per agreement. 
 Received for cash sales of tires, $278.50. 
 
 Received $32.65 from the Central Grocery Co. in full of account. 
 Sold W. L. Watson, City, on account, two 33 x 4 Fisk cord tires at 
 
 $48.00; these tires are not carried in stock and were purchased from 
 
 the Fisk Tire Co., City, on account, at $36.00. 
 Record the sale and purchase as separate transactions. 
 
 (Concluded on page jo.)
 
 30 QUESTIONS ON RECORDING TRANSACTIONS. 
 
 {Exercise No. lo — Continued from page 2Q.) 
 
 May 25. Sold David Jordan, City, on account, two 32 x 4 Silvertown cord tires 
 at $41.60 each. 
 
 26. Paid the Goodrich Tire Co. $200.00 on account. 
 
 27. Received $50.00 from W. L. Watson to apply on account. 
 
 28. Paid the Fisk Tire Co. $72.00 in full of account. 
 
 Returned to the Goodrich Tire Co. two 32 x 4 fabric tires and received 
 credit for $34.60. 
 31. Received for cash sales of tires, $315.50. 
 
 Purchased from the Goodyear Tire Co., City, on account, $452.40. 
 
 When the above transactions have been recorded in the journal as instructed, 
 open accounts on a sheet of ledger paper with Cash (10), Purchases (8), Sales (12), 
 Goodyear Tire Co. (5), Goodrich Tire Co. (4), Fisk Tire Co. (4), Central Grocery 
 Co. (4), I. W. Walker {/\), W. L. Watson (4), David Jordan (4), allowing for each 
 account the number of lines indicated; post the transactions, and prove the posting 
 bv a Trial Balance of balances. 
 
 QUESTIONS 
 
 1. If a merchant buys merchandise on March 2, 1922, with the privilege of 
 
 paying for the same within sixty days, on what date will he be required to 
 pay the amount? 
 
 2. Why is it not necessary to keep an account with the person to whom the 
 
 business sells for cash? 
 
 3. Is an amount due from a customer one of the assets of the business? 
 
 4. Would you consider the asset of the business described as "Accounts Receiv- 
 
 able" as valuable as the asset described as "Cash"? Give reasons. 
 
 5. Distinguish between the meaning of the terms "creditor" and "customer." 
 
 6. Why is it necessary for the bookkeeper to indicate payments made to apply 
 on merchandise purchased or sold on a designated date? 
 
 Would it be possible for an account with a customer to show a credit balance? 
 
 Explain. 
 Would it be possible for an account with a creditor to show a debit balance? 
 
 Explain. 
 Why is it advisable to rule an account receivable or an account payable when 
 
 the two sides are equal ? 
 
 10. Open an account with Robert Jones, a customer of the business, and record 
 
 the following transactions in it: 
 
 Jan. 10. Sold merchandise on account, $425.00.- 
 
 15. Received $100.00 to apply on account. 
 
 20. Sold merchandise on account, $72.50. 
 
 31. Received $200.00 to apply on sale of the loth. 
 Feb. 10. Received $72.50 in full for sale of Jan. 20. 
 
 11. Why is it not necessary to show on the Trial Balance an account which is in 
 
 balance? 
 
 12. What efifect would it have on the Trial Balance if an account which shows a 
 
 debit balance of $10.00 was omitted because it was ruled by mistake? 
 
 13. What accounts are affected when the business receives cash from a customer 
 
 in part payment of his account? 
 
 14. What accounts are affected when cash is paid to a creditor to apply on an 
 
 account owed him?
 
 QUESTIONS ON RECORDING TRANSACTIONS. 31 
 
 15. If a sale made to a customer on account should not be recorded, would this 
 
 affect the equality of the debits and credits on the Trial Balance? 
 
 16. Can you suggest a plan which would avoid the possibility of failing to record 
 
 transactions in which merchandise is sold on account.'' 
 
 17. If a sale is made to a customer for cash and the transaction is not recorded, 
 
 how would the bookkeeper detect the error? 
 
 18. If cash is received from a customer in payment of his account, and the trans- 
 
 action is not recorded, how would the bookkeeper detect the error? 
 
 19. If merchandise is purchased from a creditor on account and the transaction 
 
 is not recorded, how would the bookkeeper detect the error? 
 
 20. If cash is paid for merchandise purchased and the transaction is not recorded, 
 
 how would the bookkeeper detect the error? 
 
 21. If a sale is made to one customer and by mistake debited to another customer, 
 
 will this affect the equality of the debits and credits on the Trial Balance? 
 
 22. How would the bookkeeper detect the error mentioned in the preceding 
 
 question? 
 
 23. If a customer's account, which is not in balance, is ruled by mistake, how 
 
 would the bookkeeper discover the error? 
 
 24. Why is it advisable to indicate the address of a customer on his account in 
 
 the ledger? 
 
 25. If the two sides of the Trial Balance are not equal, how would the bookkeeper 
 
 ascertain the error?
 
 Chapter IV 
 
 RECORDING TRANSACTIONS— Continued 
 
 § 31. Expense. Each business has a building or place in which to carry on 
 its operations; this building or place of business is provided with heat and light; 
 modern business requires the use of the telephone, telegraph, and other means of 
 rapid communication; clerks are employed to assist with the purchasing and selling 
 of the merchandise or service which the business sells; bookkeepers and stenog- 
 raphers are required in connection with the office operations; the owner receives a 
 compensation for his services in connection with the operations of the business; 
 these and many other services must be purchased and paid for by the business. 
 Such services are usually referred to as the "operating cost" of the business, also 
 as the "expenses" of the business. 
 
 The term "expenses" also includes any material purchased by the business which will be con- 
 sumed by its use; this class of material includes books of account for use in the office, stationery, 
 wrapping paper, twine, nails for packing cases, etc. The cost of material regarded as expense is 
 usually shown in an account separate from the amounts paid for services; this will be discussed 
 later in more detail. 
 
 A record of the payments for operating cost (expenses) is made in one or more 
 expense accounts, depending on the nature of the expenses and the extent of the 
 business operations. When cash is given in payment for services or property which 
 is regarded as an expense item, the account which is to show a record of this operating 
 cost is debited and the Cash account credited ; should an asset other than cash be 
 given in payment, the account which shows the value of the asset parted with is 
 credited instead of the Cash account. 
 
 EXPENSE ACCOUNT 
 
 § 32. The Purpose of this Account is to show the cost of operating the 
 business, that is, its expenses. If all operating cost is debited to one account, the 
 total cost of the business operations will be shown in this account. The debit and 
 credit given below refer to only one Expense account. 
 
 Debit the Expense Account: Credit the Expense Account: 
 
 ^ I. For amounts paid for operating ^ 2. For any adjustments* which re- 
 
 cost as outlined in § 31. duce the operating cost as 
 
 shown by the debit side of 
 this account. 
 
 \ 3. The Balance of this Account shows the operating cost of the business 
 for the period covered by the debits and credits to the account. The total 
 expense is a deduction from the profit made by the operations of the business. 
 
 § 33. Capital. It is usually necessary for the owner of the business to invest 
 cash or other property at the beginning of the business, because, if the business is 
 
 *NOTE. The term "adjustment" used in connection with the credits to the Expense account 
 refers to those transactions which reduce the cost of operating the business. If the cost of stamps 
 is debited to the Expense account, and a part of these stamps is sold. Cash or the asset received 
 is debited, and Expense credited because the amount received reduces the expense cost. 
 
 32
 
 CAPITAL ACCOUNT. 33 
 
 to supply a demand, it must have on hand those things which its customers will 
 wish to purchase. The cash or other property which the owner assigns to the oper- 
 ations of the business at its beginning or at any time subsequent thereto is regarded 
 as an investment in the business and referred to as the "invested capital of the busi- 
 ness." If the operations of the business are successful — that is, if the costs are less 
 than the income — the interest of the owner (proprietorship) will be increased by 
 this profit; if the result of operating the business is a loss, the interest of the 
 owner (proprietorship) will be decreased by this loss. Once each year it is neces- 
 sary for the owner of the business to ascertain the profit or loss resulting from the 
 operations of the business during the year because of the governmental tax on 
 income. If the bu'siness has been operated at a profit, the owner's capital is in- 
 creased the amount of this profit; if the business has been operated at a loss, the 
 owner's capital is decreased the amount of the los^;. 
 
 The owner may, if he desires, withdraw part of his capital; the withdrawal of 
 a part of his capital will decrease his proprietorship in the business. Should the 
 owner take cash, merchandise or other assets from the business as a remuneration 
 for his services in connection with the operations of the business, the value of these 
 withdrawals is debited to Expense in the same manner as amounts paid for the 
 salaries of clerks and other employees. If desired, the owner may be debited for 
 the value of the property which he takes from the business and credited with the 
 salary he is to receive as compensation; the title of this account would be the name 
 of the owner with the word "personal" written after it. The owner's personal 
 account is debited with withdrawals and credited with the salary; the balance, if a 
 debit, will show the amount he has withdrawn in excess of his salary, and if a 
 credit, the amount of salary yet to be withdrawn. Under no circumstances should 
 withdrawals for services be debited to the Capital account. 
 
 CAPITAL ACCOUNT 
 
 § 34. The Purpose of this Account is to show the result of transactions 
 which the business has with the owner of the business as they relate to investments 
 and withdrawals. 
 
 Debit the Capital Account: Credit the Capital Account: 
 
 ^ I. For debts of the owner assumed ^4. For cash or other assets in- 
 
 at the beginning of the busi- vested at the beginning of the 
 
 ness. business. 
 
 II 2. For amounts withdrawn from *\ 5. For subsequent investments. 
 
 the capital invested. H 6. For the net profit at the end of 
 
 *\ 3 For the net loss at the end of the the business year. 
 
 business year. 
 
 ^ 7. The Balance of this Account, show^s the owner's interest in the busi- 
 ness, that is, his proprietorship or net investment. 
 
 RECORDING TRANSACTIONS DIRECT IN THE LEDGER 
 
 § 35. The Complete Operations of a business include transactions which 
 relate to the investment at the beginning of the business, the purchases and sales 
 of merchandise, and the payment of operating expenses. All of these transactions 
 may be recorded direct in the ledger as explained in §§ 19 and 29. 
 
 The following transactions relative to the complete operations of a business 
 (including investment, operating cost, and purchases and sales of merchandise for 
 
 ^ (Concluded on page J5.)
 
 34 
 
 RECORDING TRANSACTIONS IN THE LEDGER. 
 
 C-<«-</^C' 
 
 
 
 7-^ ,o~ 
 
 / ^ > \ I 
 
 
 ^ /^.^^^..^^^^^ 
 
 y > / -!^^ 
 
 (^:i^^ T^XXj' 
 
 (y-u 
 
 y-^ 
 
 s / 7 <^ ^ 
 
 .2^. ,£. ^^/^^c^c.c^^^J'ZzJz^, 
 
 
 — 'f*' — r 
 
 
 
 <;^'S^^tirc^^-z:-fl»^-<x-<^l-.^-c/ 
 
 7 
 
 J ^ 7 ^ 
 
 ^/ 
 
 Illustration No. 13, A Ledger with Eight Accounts. 
 
 EXPLANATION. This ledger contains a record of the transactions outlined in § 35, recorded 
 direct in the ledger. It is the same as Illustrations No. 3 and No. 9 with the addition o( accounts 
 with the owner and Expense. Whether only a part or all of the transactions in connection with the 
 operations of a business are recorded, each transaction afTects two accounts, one showing the value 
 received recorded on the debit side and the other the value parted with recorded on the credit side. 
 The same amount in each transaction is recorded on the debit side of one account and on the credit 
 side of another account.
 
 RECORDING TRANSACTIONS IN THE LEDGER. 
 
 35 
 
 cash and on account), performed by M. E. Studebaker during the month of October, 
 are shown recorded direct in accounts with Cash, customers, creditors, Capital, 
 Sales, Purchases, and Expense in Illustration No. 13. A Trial Balance of balances 
 made from these accounts is shown in Illustration No. 14. 
 
 Oct. 
 
 I 
 
 7 
 10 
 
 18 
 
 24 
 
 28 
 
 31 
 
 M. E. Studebaker invested $1,000.00 in the office supplies business. 
 
 Purchased from A. R. King, Clinton, on account, merchandise, $317 65. 
 
 Received $75.50 for cash sales of merchandise. 
 
 Sold E. B. Moore, 305 Elm St., City, on account, one desk, $75.00. 
 
 Paid A. R. King $200.00 on account. 
 
 Sold J. W. Macon, 222 Main St., City, on account, three files, $127.50. 
 
 Paid rent of store, $50.00. 
 
 
 
 Illustration No. 14, A Trial Balance of Balances Made from the Ledger Accounts 
 
 in Illustration No. 13. 
 
 Exercise No. 11, Recording Transactions Direct in the Ledger. 
 
 Record on ledger paper the following transactions performed during the first 
 half of May by R. H. Gillespie, a retail clothing dealer. Allow space for the accounts 
 as follows: Cash, eight lines; Purchases, nine lines; Sales, eight lines; Exi^ense, 
 six lines; R. H. Gillespie, Capital, five lines; A. C. Dugan, A. R. Isaacs. Charles 
 Heaney, Davis Bros., Globe Clothing Co., and Pope Clothing Co., each four 
 lines. Give each customer and creditor a local address. 
 
 May I. R. H. Gillespie invested $2,500.00 in the retail clothing business. 
 
 2. Bought of Davis Bros., on account, merchandise, $318.67. 
 Bought of Brand Bros., for cash, merchandise, $362.55. 
 
 3. Bought of the Globe Clothing Co., on account, merchandise, $196.50. 
 Sold A. C. Dugan, on account, one suit of clothes, $65.00. 
 
 4. Bought of Brand Bros., for cash, merchandise, $318.62. 
 
 5. Sold for c<!sh one suit of clothes, $65.00; one spring overcoat, $50.00. 
 
 6. Sold A. R. Isaacs, on account, one suit $60.00; five shirts at $2.50. 
 9. Paid the Globe Clothing Co. $196.50 in full of account. 
 
 Sold Charles Heaney, on account, one suit, $50.00; one vest, $10.00, 
 
 {Concluded on page j6.)
 
 36 RECORDING TRANSACTIONS IN THE LEDGER. 
 
 {Exercise No. ii — Continued from page 35.) 
 
 May 10. Bought of the Pope Clothing Co., on account, merchandise, $269.96. 
 Sold A. C. Dugan, on account, one spring overcoat, $85.00; six ties at 
 $1.25 each. 
 
 11. Received $60.00 from Charles Heaney in full of account. 
 
 12. Bought of Brand Bros., for cash, merchandise, $327.16. 
 
 13. Paid $12.00 for telephone service. 
 
 14. Received $25.00 from A. R. Isaacs in part payment of the merchandise 
 
 sold him on the 6th. 
 
 15. Bought of Davis Bros., on account, merchandise, $105.81. 
 Paid rent, $80.00; salaries of cterks, $75.00. 
 
 When these transactions have been recorded in the accounts, prove the equality 
 of the debits and credits by a Trial Balance of balances. 
 
 Exercise No. 12, Recording Transactions Direct in the Ledger. 
 
 Record on ledger paper the following transactions performed during the month 
 of May by W. L. Kirby, a retail paint merchant. Allow space for the accounts 
 as follows: Cash, eight lines; Purchases, nine lines; Sales, ten lines; Expense, 
 four lines; W. L. Kirby, Capital, Jones Bros., Cowan Bros., W. L. Luttrell, and 
 W. H. Rowland, each four lines; C. A. Norman, five lines; National Paint Co., 
 and Marcus Franklin, each four lines. 
 
 May I. W. L. Kirby invested $2,500.oo^in the retail paint business. 
 
 Bought of Jones Bros., Uniontown, on account, merchandise, $221.35. 
 Paid one month's rent in advance, $75.00. 
 2. Bought of Cowan Bros., City, ten days, merchandise, $86.49. 
 
 Sold W. L. Luttrell, City, on account, merchandise per Sale No. i, 
 $42.50. The sale number indicates that a copy of the list of items 
 sold has been retained. 
 
 4. Paid the National Paint Co., New York, cash for merchandise delivered 
 
 today, $798.57. 
 
 5. Sold W. H. Howland, Middletown, on account, per Sale No. 2, $75.80. 
 Received for cash sales of merchandise, $110.00. 
 
 7. Paid Cowan Bros. $86.49 in full of account. 
 
 Sold C. A. Norman, City, on account, merchandise per Sale No. 3, 
 
 $87.50. 
 9. Bought of National Paint Co., New York, twenty days, merchan- 
 dise, $171.58. - 
 10. Sold W. L. Luttrell, City, on account, merchandise per Sale No. 4, 
 
 $78.75- 
 
 • II. Received $50.00 from C. A. Norman to apply on account. 
 
 12. Bought of Cowan Bros., City, on account, merchandise, $93.25. 
 
 14. Received $75.80 from W. H. Howland in full of account. 
 
 16. Bought of Marcus Franklin, Ardmore, five days, merchandise, $218.32. 
 
 17. Bought of Jones Bros., Uniontown, on account, merchandise, $172.50. 
 
 18. Paid Marcus Franklin $218.32 in full of account. 
 
 Sold W. H. Howland, Middletown, on account, merchandise per Sale 
 No. 5, $88.50. 
 
 19. Sold C. A. Norman, City, on account, merchandise per Sale No. 6, 
 
 $32.45- 
 21. Received $30.00 from W. L. Luttrell to apply on account. 
 
 {Concluded on page 37.)
 
 RECORDING TRANSACTIONS IN THE JOURNAL. 37 
 
 {Exercise No. 12 — Continued from page j6.) 
 
 May 21. Sold C. O. Baily, for cash, 20 gallons I. X. L. paint at $4.75, $95.00. 
 24. Paid Jones Bros. $100.00 to apply on account. 
 
 C. A. Norman returned one gallon paint purchased from us on the 19th 
 and was granted credit for $3.00. He paid cash, $29.45, for the bal- 
 ance due on this sale. 
 Enter as two separate transactions. 
 26. Gave a customer $2.00 in payment for paint purchased from us for cash 
 
 and returned per agreement. 
 29. Paid the National Paint Co. $171.58 in full of account. 
 
 C. O. Bailey returned 2 gallons I. X. L. paint purchased on the 21st 
 
 and accepted in exchange for it 4 gallons varnish. 
 No entry is required. Why? 
 31. Received credit from Jones Bros, for $12.00, value of 3 gallons paint 
 
 purchased on the 17th and returned by us per agreement. 
 When these transactions have been recorded in the accounts, prove the equality 
 of the debits and credits by a Trial Balance of balances. 
 
 RECORDING TRANSACTIONS IN THE JOURNAL 
 
 § 36. Transactions with the owner and with operating expenses may be 
 recorded in the journal in the same manner as transactions in which merchandise 
 is purchased or sold for cash or on account. When the owner invests cash or other 
 assets in the business, the transaction is recorded in the journal by writing the date, 
 tlie name of the account debited and amount, the name of the account credited 
 and amount, and the explanation, in the same form as other transactions; each 
 asset invested is debited to the account which is to show its value, and the owner's 
 Capital account credited. When the owner withdraws a part of his capital, the 
 transaction is recorded in the journal in the same form as the entry for investment; 
 in this case, however, the owner's Capital account is debited with the amount of 
 the withdrawal, and the account which shows the value of the asset withdrawn 
 is credited. When operating costs are paid, the transaction is recorded in the 
 journal by writing the date, the name of the operating account affected (usually 
 Expense) and the amount of the payment, the name and amount of the asset parted 
 with, and the explanation. 
 
 Before recording transactions in the journal, the student should journalize each one mentally; 
 that is, he should determine from the nature of the transaction the account to be debited and the 
 account to be credited. Since the information the owner desires is obtained from the accounts, it 
 is essential that the proper accounts be debited and credited in each transaction. Thus if M. E. 
 Studebaker, the proprietor of the business, withdraws from the business $1,000.00 during the year, 
 as salary, and the bookkeeper debits M. E. Studebaker Capital instead of Expense, the report which 
 Mr. Studebaker receives from his bookkeeper at the end of the year would show $1,000.00 less 
 expenses than have really been paid. 
 
 The following transactions relative to the complete operations of a business 
 (including investment, operating cost, and the purchases and sales of merchandise 
 for cash and on account), performed by M. E. Studebaker during the month of 
 October, are shown recorded in the journal in Illustration No. 15 and posted to 
 the ledger in Illustration No. 16. These transactions are the same as those at 
 the top of page 35. 
 
 Oct. I. M. E. Studebaker invested $1,000.00 in the office supplies business. 
 
 7. Purchased from A. R. King, Clinton, on account, merchandise, $317.65. 
 10. Received $75.50 for cash sales of merchandise. 
 
 (Concluded on page j 8.)
 
 38 
 
 RECORDING TRANSACTIONS. 
 
 cy^cJt^^c'-t^-^.^-T^ 
 
 /. /^2- 
 
 f 
 
 
 2-, 
 
 iZ-'f>e^-'>T^ 
 
 ^ / 
 
 
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 3 / 
 
 / 
 
 /- 
 
 7' 
 
 ■^a a 
 
 / 7- 
 
 7 
 
 cf~d 
 
 <^yj 
 
 lTV 
 
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 7 
 
 7^ 
 
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 Illustration No. 15, A Journal Page with Transactions Recorded on It. 
 
 EXPLANATION The transactions recorded in this illustration are given at the bottom of 
 pages 37 and 38. The method of recording is the. same as in Illustrations Nos. 7 and xi. The 
 transactions are the same as those recorded direct in the ledger in Illustration No. 13. 
 
 {Continued from page 37.) 
 
 Oct. 18. Sold E. B. Moore, 305 Elm St., City, on account, one desk, $75.00. 
 
 24. Paid A. R. King $200.00 on account. 
 
 28. Sold J. W. Macon, 222 Main St., City, on account, three files, $127.50. 
 
 31. Paid rent of store, $50.00.
 
 
 O-^^. >-r 
 
 Oi^. J/ 
 
 RECORDING TRANSACTIONS. 
 
 39 
 
 /ft 
 
 a Jf 
 
 
 ^ 
 
 / c07, 
 
 
 9-^ -^7 
 
 7^ 7^ 7(^c^^. 
 
 \t' 
 
 ^a 
 
 
 
 
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 - 
 
 f 
 
 - 
 
 i ' 1 
 
 1 
 
 
 
 
 . 
 
 
 Illustration No. i6, A Ledger with Eight Accounts Resulting from Posting. 
 
 EXPLANATION. This ledger shows the posting of the transactions recorded in the journal, 
 Illustration No. 15. A comparison of Illustration No. 13 with this illustration will show that the 
 facts are the same, except the folio columns are used in the illustration above.
 
 40 EXERCISES IN RECORDING TRANSACTIONS. 
 
 Exercise No. 13, Recording Transactions in the Journal and Posting. 
 
 Record on journal paper the following transactions performed during the 
 month of January by E. B. Taylor, a retail grocer: 
 
 Jan. I. E. B. Taylor invested $1,000.00 in the retail grocery business. 
 
 2. Bought of E. C. Cline, Chicago, on account, merchandise, $77.30. 
 
 3. Bought of Langley Bros., City, thirty days, merchandise, $134.95. 
 
 4. Paid $20.00, city and state license for one year. 
 
 6. Sold A. R. Manley, 106 Elm St., City, on account, 40 lbs. Arbuckle 
 coffee at 20c; i bbl. White -Lily flour, $6.25. 
 When the sale includes more than one item, the explanation in the journal should be as 
 follows : 
 
 Sold on account: 
 40 lbs. Arbuckle Coffee at 20C, S'8.00. 
 I bbl. White Lily Flour 6.25. 
 
 10. Paid J. F. Sherwood $192.00 for merchandise purchased today. 
 
 12. Received $30.50 for sundry cash sales. 
 
 13. Paid E. C. Cline $77.30 in full of account. 
 
 16. Sold Gibson Hotel, 12 E. 4th St., City, ten days, 6 bbls. Roller King 
 
 flour at $5.10; 3 bbls. White Lily flour at $6.25; 40 lbs. Arbuckle 
 coffee at 20c. 
 
 17. Sold T. L. Staples, Clinton, sixty days, 4 bbls. Roller King flour at $5.10; 
 
 4 cans, 200 lbs., lard at 15c. 
 20. Received $10.00 from A. R. Manley to apply on account. 
 23. Bought of Logan & Moseley, Centerville, twenty days, merchandise, 
 
 $228.60. 
 
 26. Sold A. R. Manley, 106 Elm St., City, on account, 5 bbls. White Lily 
 
 flour at $6.25; 115 lbs. Arbuckle coffee at 20c. 
 
 27. Received $30.50 from the Gibson Hotel to apply on account. 
 30. Received $41.85 for sundry cash sales. 
 
 When the above transactions have been recorded in the journal as instructed 
 open accounts in the ledger with Cash (9), Purchases (8), Sales (10), Expense (5), 
 E. B. Taylor, Capital (5), E. C. Cline (4), Langley Bros. (4), A. R. Manley (4), 
 Gibson Hotel (4), T. L. Staples (4), Logan & Moseley (4), allowing for each account 
 the number of lines indicated; post the transactions, and prove the posting by a 
 Trial Balance of totals. 
 
 Exercise No. 14, Recording Transactions in the Journal and Posting. 
 
 Record on journal paper the following transactions performed during the 
 month of July by E. H. W^eatherby, a retail grocer; 
 
 July I. E. H. Weatherby invested $1,500.00 in the retail grocery business. 
 
 2. Bought from Woodward Bros., Morgantown, on account, merchandise, 
 
 $127.60. 
 
 3. Bought from Winters & Gay, Batesville, on thirty days' time, mer- 
 
 chandise, $204.05. 
 Paid $20.00 cash for city and state license. 
 
 5. Sold J. A. Taylor, 22 Poplar St., on account, 25 lbs. roasted coffee at 
 
 33c; 50 lbs. granulated sugar at 7c; 60 lbs. bacon at 23c. 
 Bought from Chafin & Jones, City, for cash, merchandise, $242.00. 
 
 6. Received $22.50 for sundry cash sales to date. 
 Paid Woodward Bros. $127.60 in full of account. 
 
 {Concluded on page 41.)
 
 EXERCISES IN RECORDING TRANSACTIONS. 
 
 41 
 
 (Exercise No. 14 — Continued from page 40.) 
 
 Sold the Colonial Hotel, Washington Ave., on account, 5 bbls. Blue 
 Ribbon flour at $Q.io; 3 bbls. White Rose flour at $9.75; 90 lbs. 
 granulated sugar at 7c. 
 
 Received $15.00 from J. A. Taylor to apply on account. 
 
 Bought from Winters & Gay, Batesville, on thirty days' time, merchan- 
 dise, $209.58. 
 
 Received $40.00 from the Colonial Hotel in part payment for merchan- 
 dise sold on the 8th. 
 
 Paid Winters & Gay $100.00 to apply on purchase of the 3d. 
 Sold M. J. Sanders, 227 Beech St., on account, 5 bbls., White Rose flour 
 at $9.75; 10 hams, 191 lbs., at 26c. 
 
 Bought from Woodward Bros., Morgantown, on account, merchandise, 
 $216:37. 
 
 Sold the Colonial Hotel, Washington Ave., on account, 7 doz. cans 
 peaches at $1.75 per doz.; 2,000 lbs. bran at $16.25 per 1,000 lbs. 
 
 Bought from the Perfection Creamer^^ Rosedale, on twenty days' time, 
 merchandise, $34.45. 
 
 Received $30.00 from M. J, Sanders to apply on account. 
 
 Bought from Chafin & Jones, City, for cash, merchandise, $116.60. 
 
 Sold W. W. Johnston, 122 1 Elm St., on account, 2,000 lbs. bran at $16.25 
 per 1,000 lbs.; 200 lbs. lard at 22c; 3 doz. cans peaches at $1.60 per 
 doz. cans. 
 
 Paid Winters & Gay $104.05, balance due on purchase of the 3d. 
 Received $52.50 for sundry cash sales to date. 
 
 Sold W. W. Johnston, 1221 Elm St., on account, 100 lbs. granulated 
 sugar at 7c; 10 bbls. White Rose flour at $9.75. 
 
 Bought from the Perfection Creamery, Rosedale, on twenty days' time, 
 merchandise, $167.55. 
 
 Received $50.00 from the Colonial Hotel in full for balance due on 
 
 sale of the 8th, and on account of sale of the i6th. 
 Paid Winters & Gay $200.00 on account of purchase of the loth. 
 
 Received $10.55 from J. A. Taylor in payment for balance due on mer- 
 chandise sold him on the 5th. 
 
 Sold L. S. Lynn, 915 Jefferson Ave., on account, 5 bbls. White Rose flour 
 at $9.75; 10 lbs. creamery butter at 42c. 
 
 Received $40.00 from L. S. Lynn to apply on account. 
 
 Paid Woodward Bros. $200.00 on account of purchase of the 15th. 
 
 Paid bookkeeper's salary, $60.00; rent, $50.00; telephone service, $10.00.
 
 42 QUESTIONS ON RECORDING TRANSACTIONS. 
 
 QUESTIONS 
 
 1. Name some of the necessary expenses of a grocery business. 
 
 2. Can you suggest a plan which would permit the grocer to know the cost of 
 
 delivering merchandise? 
 
 3. What accounts are afTected when cash is paid for telephone service? 
 
 4. What effect would it have on the operating cost of the business if the salary 
 
 paid the owner for his services in connection with the business were debited 
 to his Capital account? 
 
 5. Name the account debited and the account credited when merchandise is 
 
 invested at the beginning of business. 
 
 6. What accounts are affected when cash and merchandise are invested at the 
 
 beginning of business? 
 
 7. What must the owner of a business take into consideration when he fixes the 
 
 selling price of the merchandise which the business offers for sale? 
 
 8. Name some of the expenses in connection with the operation of a railroad. 
 
 9. If a farmer shows all of his operating cost in one account, name some of the 
 
 expenses which would be debited to this account. 
 
 10. If a merchant pays $25 00 for drayage on merchandise he has purchased, 
 
 would this be debited to the Expense or the Purchases account? Give 
 reasons for your answer. 
 
 11. What accounts are affected when the owner withdraws a part of his capital? 
 
 12. Name the account debited and the account credited when the owner invests 
 
 cash in the business at a time other than the beginning of the business. 
 
 13. If a telephone company pays $2,000.00 for wire used in connection with the 
 
 service rendered its customers, will this be debited to the Expense account? 
 
 14. If a railroad company pays $8,000.00 for a new engine, will this be debited to 
 
 the Expense account? 
 
 15. What accounts are affected when stamps, debited to Expense when purchased, 
 
 are used for parcel post on a package containing merchandise sold a cus- 
 tomer on account, with the agreement that he is to pay the postage? 
 
 16. Name the account debited and the account credited if the sale mentioned in 
 
 the preceding question had been made for cash and the customer had given 
 the business cash for the merchandise and stamps. 
 
 17. If Robert A. Clark, the owner of a business, is to receive a salary of $200.00 
 
 a month for his services rendered to the business and this is withdrawn at 
 diflerent times, what would be the name of the account kept with the trans- 
 actions affecting this salary? 
 
 18. What accounts would be affected when the entry was made at the end of the 
 
 month for the $200.00 salary (s33, page 33)? 
 
 19. Name the account debited and the account credited if Mr. Clark accepted 
 
 merchandise from stock at cost price in payment for a part of his salary. 
 
 20. What accounts would be afiected if Mr. Clark accepted merchandise from 
 
 stock at the selling price in payment for a part of his salary? 
 
 21. What entry would be required if one customer was debited with merchandise 
 
 purchased by another customer? 
 
 22. Name some of the transactions which might occur in connection with the 
 
 complete operations of a hardware business. 
 
 23. Name some of the transactions which might occur in connection with the 
 
 complete operations of a plumbing business. 
 
 24. Under what circumstances would you advise the keeping of more than one 
 
 account with the expenses of a business? 
 
 25. Name some of the transactions which might be performed in connection with 
 
 the operations of a dairy.
 
 Chapter V 
 
 RECORDING TRANSACTIONS— Concluded 
 
 § 37. Special Journals. While all transactions may be recorded in the 
 journal as explained in § 22, yet it is not customary to do this because efticiency in 
 bookkeeping means the greatest amount of work with the best results at the least 
 cost. When a number of transactions affect the same account, much time can be 
 saved by recording them in special journals. Fifty purchases during one month 
 recorded in the journal would require writing "Purchases" fifty times and posting 
 fifty separate amounts to the Purchases account. In addition to the extra time 
 required in recording the transactions and posting, fifty lines would be needed in 
 the ledger for the Purchases account. If these transactions were recorded in a 
 journal and no other transactions were recorded in this journal, it would not be 
 necessary to write "Purchases" in each transaction and the total could be posted 
 to the Purchases account in one amount at the end of the month, thus saving 
 practically half the time in the recording and posting of these transactions. In 
 addition to the time saved in posting, forty-nine lines will be saved in the ledger 
 as a result of posting the total purchases in one amount. 
 
 In a mercantile business the transactions which are of the most frequent 
 occurrence are those in connection with the purchase and sale of merchandise and 
 the receipt and payment of cash. If these transactions are recorded in special 
 journals, the work in the accounting department will be much more efficient, and, 
 where the volume of business is large and more than one bookkeeper is needed, the 
 several bookkeepers can use the different journals without interfering with the 
 work of each other. 
 
 The title of any special journal is usually the name of the account affected by posting the 
 total at the end of the month. Thus, the journal in which purchases are recorded is usually referred 
 to as the purchases journal because the Purchases account will be debited with the total, and the 
 journal in which sales are recorded is referred to as the sales journal because the Sales account will 
 be credited with the total. 
 
 § 38. The Purchases Journal is a book of original entry in which all pur- 
 chases of merchandise are recorded and no other transactions are recorded in it. 
 The complete record of a transaction in which merchandise is purchased includes 
 the date of entry, the name and address of the person or firm from whom the mer- 
 chandise is purchased, the terms, the number of the purchase and the amount of 
 the purchase. The ruling in the purchases journal should be so arranged that all 
 this information can be recorded on one line. When arranged in this manner, each 
 person or firm from whom merchandise is purchased can be credited in his account 
 in the ledger, and the Purchases account debited for the total at the end of the 
 month. Illustration No. 17 shows one form of the purchases journal. 
 
 If cash purchases are recorded in the cash book (§ 43), it is not necessary to record them in 
 the purchases journal. This is explained further in connection with the discussion of the cash book. 
 
 The following purchases of merchandise made by E. B. Taylor, a retail grocer, 
 during the month of January, are shown recorded in the purchases journal in 
 Illustration No. 17: 
 
 Jan. 2. Bought of E. C. Cline, Chicago, on account, merchandise, $77.30. 
 
 3. Bought of Langley Bros., City, on thirty days' time, merchandise, 
 
 $i34-95- 
 23. Bought of Logan & Moseley, Centerville, on twenty days' time, mer- 
 chandise, $228.60. 
 
 43
 
 44 RECORDING TRANSACTIONS IN THE PURCHASES JOURNAL 
 
 JJ^Z^'7'l..i,.t^ist.^y*'^, /j^J?^- 
 
 Date 
 
 L.F. 
 
 Account Credited 
 
 Address 
 
 Terms 
 
 Pur. 
 No. 
 
 Amount 
 
 ^0 
 
 3 / 
 
 ^^^^^4.^ 
 
 (_,-/^^<''OT^C-e?'i^ 
 
 
 
 
 »S'\ 
 
 ^^oVs 
 
 Illustration No. 17, Purchases Journal. 
 
 EXPLANATION. Each transaction is recorded on one horizontal line. The information 
 in the "Pur. No." column refers to the list of merchandise (invoice) sent by the seller to the pur-^- 
 chaser; this list is filed for future reference. The entire record in this illustration is equivalent 
 to one journal entry in which the Purchases account is debited and three personal accounts credited. 
 
 § 39. Posting from the Purchases Journal. The accounts affected by 
 each transaction recorded in the purchases journal are Purchases (debit) and the 
 account of the person or firm (credit); for this reason, each amount entered in the 
 
 {Concluded on page 43.) 
 
 — : ^j3,_ (3^f^j^ ^ 
 
 Osz^^n^^ { ^i:p ,::^C!>y^ ^A /vi'vi^. 
 
 Illustration No. 18, Ledger Resulting from Posting Illustration No. 17. 
 
 EXPLANATION. A Trial Balance from this ledger will show that the debit amount is 
 equal to the credit amounts even though the record in the accounts does not represent all of the 
 transactions that the business would perform. One purpose of this illustration is to show that the 
 ledger is in balance when all the transactions from any one journal have been posted.
 
 RECORDING TRANSACTIONS IN THE PURCHASES JOURNAL. 45 
 
 money column is posted to the credit of the account written on the same line with 
 it, and the Purchases account is debited at the end of the month with the total. 
 The posting is the same as in the journal, except that the amounts debited to 
 Purchases are grouped and posted at one time; the posting to the accounts with 
 creditors should be daily, and the posting of the total to the Purchases account, 
 monthly. The date, the letter "P" and the page of the purchases journal are 
 entered in the ledger; the letter "P" indicates the title of the book of original 
 entry. If a specific time of payment is stated, this should be written in the explana- 
 tion column of the ledger as explained in Illustration No. i. The page of the 
 ledger is written in the folio column of the purchases journal to indicate where 
 the entry has been posted. 
 
 The posting of the transactions recorded in the purchases journal, Illustration 
 No. 17, is shown in Illustration No. 18. 
 
 Exercise No. 15, Recording Transactions in the Purchases Journal. 
 
 Record in the purchases journal (paper ruled similar to Illustration No. 17) 
 the following transactions relative to the purchase of merchandise during the month 
 of February by W. O. Gardner, who is engaged in the hardware business: 
 
 Feb I. B. A. Ames, Toledo, 30 days, Purchase No. i, $350.00. 
 
 5. H. M. Lowe, Nashville, Feb. 3, 30 days. Purchase No. 2, $325.00. 
 
 In this purchase the merchandise was shipped Feb. 3 and received Feb. 5; the amount is 
 due 30 days from Feb. 3. 
 
 9. H. T, Harris, Rochester, 20 days. Purchase No. 3, $486.00. 
 
 12. J. T. Goodrich, City, Feb. 10, 90 days. Purchase No. 4, $825.00. 
 
 18. J. P. Benson, Cleveland, Feb. 17, 60 days. Purchase No. 5, $64.00. 
 
 23. C. O. Parsons, City, 30 days, Purchase No. 6, $128.00. 
 
 28. H. L. Simpson, Dayton, Feb. 26, 30 days. Purchase No. 7, $242.00. 
 
 When the above transactions have been recorded in the purchases journal as 
 instructed, and the purchases journal ruled as in Illustration No. 17, open accounts 
 on a sheet of ledger paper with Purchases and each of the seven creditors, allowing 
 four lines for each account. When the posting has been completed, prove the 
 equality of the debits and credits by a Trial Balance. 
 
 Exercise No. 16, Recording Transactions in the Purchases Journal. 
 
 Record in the purchases journal the following transactions relative to the 
 purchase of merchandise during the month of January by H. H. Goodman, a retail 
 grocer : 
 
 Jan. 2. Brown & Co., Elmwood, on account, Purchase No. i, $77.30. 
 
 3. Knox Bros., City, on account. Purchase No. 2, $134.95. 
 
 10. Hazen & Lockhart, Danville, on account. Purchase No. 3, $228.60. 
 15. Brown & Co., Elmwood, on account. Purchase No. 4, $226.00. 
 
 17. Lake View Creamery, Lake View, Jan. 14, 20 days, Purchase No. 5, 
 
 $28.00. 
 23. J. Allen Smith & Co., Rockford, 10 days, Purchase No. 6, $197.10. 
 27. Donaldson Bros., City, Jan. 24, account. Purchase No. 7, $172.75. 
 
 When the above transactions have been recorded in the purchases journal as 
 instructed, and the purchases journal ruled, open accounts on a sheet of ledger 
 paper with Purchases and each of the six creditors, allowing five lines for Brown 
 & Co. and four lines for each of the other accounts. When the posting has been 
 completed, prove the equality of the debits and credits by a Trial Balance. 
 
 After the instructor has approved this exercise, retain the purchases journal 
 only for use in connection with Exercise No. 22.
 
 46 RECORDING TRANSACTIONS IN THE SALES JOURNAL. 
 
 Exercise No. 17, Recording Transactions in the Purchases JournaL 
 
 Record in the purchases journal the following transactions relative to the 
 purchase of merchandise during the month of March by C. U. Steele, a retail shoe 
 dealer: 
 March 2. Bay State Shoe Co., Boston, Feb. 28, 10 days, Purchase No. i, $496.81. 
 
 3. Haynes, Henson & Co., Newark, N. J., Mar. 2, 10 days. Purchase No. 
 
 2, $387-65- 
 
 4. M. B. Lang, City, Mar. 3, 30 days. Purchase No. 3, $1,691.42. 
 
 6. Cline Shoe Co., Pittsburgh, Mar. 4, 30 days. Purchase No. 4, $168.42.' 
 18. . Bay State Shoe Co., Boston, Mar. 15, 30 days. Purchase No. 5, $987.35. 
 
 25. Haynes, Henson & Co., Newark, N. J., Mar, 20, 30 days. Purchase 
 
 No. 6, $462.85. 
 
 26. Cline Shoe Co., Pittsburgh, Mar. 20, 30 days, Purchase No. 7, $785.00. 
 31. A. O. Haines, Albany, Mar. 21, 60 days, Purchase No. 8, $432.50; 
 
 M. B. Lang, City, Mar. 22, 30 days. Purchase No. 9, $356.00. 
 
 When the above transactions have been recorded in the purchases journal as 
 instructed, and the purchases journal ruled, open an account with Purchases at 
 the top of page i of a double sheet of ledger paper, and an account with each of 
 the five creditors on page 2 of the same sheet, allowing equal space for each personal 
 account; prove the equality of the debits and credits by a Trial Balance. 
 
 If double ledger paper ruled with from thirty to forty horizontal lines on each page can not 
 be obtained, use any ledger paper available and allow five lines for each account. 
 
 After the instructor has approved this exercise, retain the ledger sheet only 
 for use in Exercises Nos. 20 and 23. 
 
 § 40. The Sales Journal is a book of original entry in which all sales of 
 merchandise on account are recorded and no other transactions are recorded in it. 
 The complete record of a transaction in which merchandise is sold on account 
 includes the date of the sale, the name and address of the person or firm to whom 
 the merchandise is sold, the terms, a list of the items sold, and the amount of the 
 sale. It is necessary for the seller to retain a record of the items sold a customer 
 on account because this information will be needed in case adjustments are required. 
 If a customer returns merchandise which he claims was purchased froin the seller 
 and the seller has no record of the items sold to this customer, he might be imposed 
 on by allowing credit for merchandise which was not purchased from him. 
 
 Illustration No. 19 shows a form of sales journal containing a list of the items 
 sold, and Illustration No. 20 the same sales recorded in a sales journal with the 
 list of items indicated by the sale number. The method shown in Illustration No. 
 20 is more efficient because it requires less time to record a number than a list of 
 articles sold. The other form is shown because it is used by some business concerns. 
 
 If cash sales are recorded in the cash book (§ 43), it is not necessary to record them in the 
 sales journal. This is explained further in connection with the discussion of the cash book. 
 
 The following sales made by E. B. Taylor, a retail grocer, during the month 
 of January, are shown recorded in the sales journals in Illustrations Nos. 19 and 20. 
 
 Jan. 6. Sold A. R. Manley, 106 Elm St., City, on account, 40 lbs. Arbuckle coffee 
 at 20c; I bbl. White Lily flour, $6.25. 
 
 16. Sold Gibson Hotel, 12 E. 4th St., City, on ten days' time, 6 bbls. Roller 
 
 King flour at $5.10; 3 bbls. White Lily flour at $6.25; 40 lbs. Ar- 
 buckle coffee at 20c. 
 
 17. Sold T. L. Staples, Clinton, on sixty days' time, 4 bbls. Roller King flour 
 
 at $5.10; 4 cans, 200 lbs., lard at 15c. 
 26. Sold A. R. Manley, 106 Elm St., City, on account, 5 bbls. White Lily 
 flour at $6.25; 115 lbs. Arbuckle coffee at 20c.
 
 RECORDING TRANSACTIONS IN THE SALES JOURNAL. 
 
 47 
 
 jL4z.-?^,-<t.€--tfZ-<7<-2V ^, / 'f >■ 
 
 / 6> 
 
 ^^ 
 
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 7-a 
 
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 ^y"^ 
 
 
 x^ 
 
 2..S- 
 
 Illustration No. 19, Sales Journal Containing a List of Items Sold. 
 EXPLANATION. The transactions recorded in this sales journal are equivalent to a journal 
 entry in which four accounts are debited, each for the amount written on the same line with it, and 
 the Sales account credited for the total. Each entry shows the date, the name and address of the 
 customer, the total amount of the sale, and a list of the items sold. 
 
 ; ''7^ 
 
 Account Debited 
 
 Sato 
 Bo. 
 
 3 / 
 
 '<^ ^^^^Aa^^C^'!^ 
 
 
 
 
 /A(>J 
 
 -^7 
 
 yJ'^T'J' 
 
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 >s 
 
 Illustration No. 20, Sales Journal Without a List of Items Sold. 
 EXPLANATION. The above facts are the same as those in Illustration No. 19, except the 
 articles are not itemized. Information concerning these is obtained from a copy of the sale (sales 
 ticket).
 
 48 
 
 RECORDING TRANSACTIONS IN THE SALES JOURNAL. 
 
 § 41. Posting from the Sales Journal. The accounts affected by each 
 transaction recorded in the sales journal are the customer (debit) and Sales (credit) ; 
 for this reason each amount written on the line with the name of the customer 
 is posted to the debit of his account, and the Sales account is credited with the 
 total at the end of the month. The posting of the amounts to accounts with cus- 
 tomers is daily, and the total to the Sales account, monthly. The date, the letter 
 "S" and the page of the sales journal are entered in the ledger; the letter "S" in- 
 dicates the title of the book of original entry- If a specific time of payment is 
 stated, this should be written in the explanation column of the ledger as explained 
 in Illustration No. i. The page of the ledger is written in the folio column of the 
 sales journal to indicate where the entry has been posted. 
 
 The posting of the transactions recorded in the sales journal. Illustration No. 
 19 or No. 20, is shown in Illustration No. 21. 
 
 
 C ^Sl^^r^^J/r.Clcty. 
 
 x€.\^^yJA:(2^. 
 
 UtZyTTy. /C ^<y ^^Z'GC'Ud^ ^ . 
 
 Illustration No. 21, Ledger Resulting from Posting Illustration No. 19 or No. 20. 
 
 EXPLANATION. The same explanation applies here as that given in connection with the 
 ledger resulting from posting the transactions from the purchases journal, Illustration No. 18. 
 
 Exercise No. 18, Recording Transactions in the Sales Journal. 
 
 Record in the sales journal (paper ruled similar to Illustration No, 20) the 
 following transactions relative to the sale of merchandise on account during the 
 month of February by W. J. Wheeler, a retail merchant: 
 Feb. 3. E. M. Miller, 507 Gay St., Sale No. i, $25.50. 
 
 8. William A. Wallace, Evanston, Sale No. 2, $14.50. 
 {Concluded on page 4g.)
 
 RECORDING TRANSACTIONS IN THE SALES JOURNAL. 49 
 
 {Exercise No. 18 — Continued from page 48.) 
 Feb. 12. B. T. Hart & Co., Maryville, Sale No. 3, $32.50. 
 14. D. T. Sinton, Uniontown, Sale No. 4, $41.65. 
 
 18. G. L. Frye, 29 Main St., Sale No. 5, $12.75. 
 
 20. The Long Construction Co., Uniontown, 30 days, Sale No. 6, $142.50. 
 
 23. Henry Mason, 64 Union St., Sale No. 7, $21.55. 
 
 27. D. P. Lewis, 310 Chestnut St., Sale No. 8, $9.75. 
 
 28. Maynard Pritchett, Brookville, 30 days, Sale No. 9, $65.25. 
 
 When the above transactions have been recorded in the sales journal as in- 
 structed, and the sales journal ruled as in Illustration No. 20, open accounts on a 
 sheet of ledger paper with Sales and each of the nine customers, allowing four 
 lines for each. When the posting has been completed, take a Trial Balance. 
 
 Exercise No. 19, Recording Transactions in the Sales JoumaL 
 
 Record in the sales journal (journal paper ruled similar to Illustration No. 19) 
 the following transactions relative to the sale of merchandise during the month of 
 January by H. H. Goodman, a retail grocer: 
 
 Jan. 4. A. R. Jennings, 105 Main St., 20 lbs. roasted coffee at 33c; 100 lbs. 
 
 granulated sugar at 7c; 50 lbs. bacon at 23c. 
 8. Central Hotel, 22 Walnut St., 5 bbls. Blue Ribbon flour at $9.25; 4 hams, 
 
 100 lbs., at 26c; 100 lbs. granulated sugar at 7c. 
 II. A. R. Jennings, 105 Main St., i doz. cans tomatoes, $2.00; 4 cans, 216 
 
 lbs., lard at 26c. 
 13. M. A. Johnson, Kingston, 5 bbls. White Rose flour at $9.75; 6 hams, 141 
 
 lbs., at 26c. 
 16. Imperial Hotel, 200 Locust St., 5 bbls. Blue Ribbon flour at $9.25; 100 
 
 lbs. granulated sugar at 7c. 
 
 19. A. C. Williams, 1221 Elm St., 12 doz. cans peaches at $1.80 per doz.; 
 
 2,000 lbs. bran at $16.25 per 1,000 lbs. 
 22. R. G. Mathews, 25 E. Fourth St., 10 bu. meal at $1.10; 5 bu. beans at 
 $3.20; 3 doz. cans peaches at $1.80 per doz. 
 
 25. Imperial Hotel, 200 Locust St., 5 bbls. White Rose flour at $9.75; 25 
 
 lbs. creamery butter at 41c. 
 
 26. J. C. Wilson, 270 Central Ave., 2,000 lbs. bran at $16.25 per 1,000 lbs.; 
 
 5 cans, 248 lbs., lard at 26c. 
 
 27. C. L. Loyd, 1604 Vine St., 100 lbs. brown sugar at 63/2c; 100 lbs. gran- 
 
 ulated sugar at 7c; 5 bbls. White Rose flour at $9.75. 
 
 When the above transactions have been recorded in the sales journal as in- 
 structed, and the sales journal ruled as in Illustration No. 19, open accounts on a 
 sheet of ledger paper with Sales and each of the eight customers, allowing five 
 lines each for A. R. Jennings and Imperial Hotel and four lines for each of the 
 other accounts. When the posting has been completed, take a Trial Balance. 
 
 After the instructor has approved this exercise, retain the sales journal only 
 for use in connection with Exercise No. 22. 
 
 Exercise No. 20, Recording Transactions in the Sales Journal. 
 
 Record in the sales journal (journal paper ruled similar to Illustration No. 19) 
 the following transactions relative to the sale of merchandise during the month of 
 March by C. U. Steele, a retail shoe dealer: 
 
 March i. R. L. Watson, 207 Mason St., i pr. Queen City shoes, $10.50. 
 4. C. A. Sheppard, Canton, 3 prs. Ladies' shoes at $4.00. 
 9. J. C. Wilson & Co., Hamilton, 8 prs. Men's Calf shoes at $2.50; 14 
 prs. Men's Jefferson shoes at $3.75. 
 * {Concluded on page 50.)
 
 50 
 
 RECORDING TRANSACTIONS IN THE CASH BOOK. 
 
 {Exercise No. 20 — Continued jrom page 49.) 
 
 March 12. A. R. King, Boston, i pr. Ladies' Bal. at $4.50. 
 
 15. W. E. Peters, Clinton, i pr. Men's Vici Autocrat shoes, $14.00. 
 
 18. W. K. Love, 207 Main St., i pr. Men's Vici Kid shoes, $11.50. 
 
 21. A. R. King, Boston, 2 prs. Women's Box Calf at $4.00. 
 
 26. C. A. Sheppard, Canton, i pr. Men's Cong. Calf, $9.00. 
 
 30, R. L. Watson, 207 Mason St., 6 prs. Children's Satin Calf at 
 
 52.75- 
 
 When the above transactions have been recorded in the sales journal as in- 
 structed, and the sales journal ruled as in Illustration No. 19. open an account 
 with Sales eight lines from the top of page i of the double sheet of ledger paper used 
 in Exercise No. 17; open an account wi-th each of the six customers on page 3 of 
 this same ledger sheet, allowing equal space for each personal account; take a 
 Trial Balance. When approved, retain the ledger sheet for use in Exercise No. 23. 
 
 § 42. The Cash Record. There are two classes of cash transactions: those 
 in which cash is received, and those in which cash is paid. These transactions may 
 be recorded in two separate journals, the receipts in a cash receipts journal and the 
 payments in a cash payments journal, or they may be recorded in a cash book 
 which is a combination of the two journals. When one bookkeeper records all the 
 transactions with cash received and paid, it is better to use the cash book; when 
 the recording of cash transactions requires more than one bookkeeper, it is better 
 to use separate cash receipts and cash payments journals. 
 
 ^E^^tL^e-^-^^i^^ 
 
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 V 
 
 
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 Illustration No. 22, Receipts Side of Cash Book. 
 
 3 0\S0 
 
 ^ / 
 
 lA 
 
 / / / z 
 
 / / / % 
 
 f2 3 
 
 'S 
 
 FS 
 
 5-S 
 
 EXPLANATION. The transactions recorded on the receipts side of the cash book in the 
 illustration are equivalent to a journal entry in which the Cash account is debited for the total, 
 and each of the four accounts credited for the amount written on the same line with it. The ruling 
 separates the cash receipts for two different months; the balance at the beginning of the month 
 is carried down below the ruling because it will be needed in subsequent proving of cash. 
 
 § 43. The Cash Book is a book of original entry in which all receipts and 
 payments of cash are recorded and no other transactions are recorded in it. Receipts 
 and payments are usually recorded on separate pages opposite each other, receipts 
 on the left and payments on the right. The complete record of a transaction in 
 which cash is received or paid consists of the date, the name of the account affected, 
 explanation, and the amount received or paid. The ruling in the cash book should 
 be so arranged that all this information can be recorded on one line. When ar-
 
 RECORDING TRANSACTIONS IN THE CASH BOOK. 
 
 51 
 
 ranged in this manner, each account affected by a cash receipt can be credited 
 for the amount and the Cash account debited for the total at the end of the month; 
 each account affected by a cash payment can be debited for the amount and the 
 Cash account credited for the total at the end of the month. One form of the 
 cash book is shown in Illustrations Nos. 22 and 23; other forms will be illustrated 
 and explained later. 
 
 When a cash sale is recorded in the cash book only, the Sales account is credited; if recorded 
 in the sales journal and cash book, the customer whose account is debited by the sales journal entry 
 is credited in the cash hook entry When a cash purchase is recorded in the cash bo(jk only, the 
 Purchases account is debited; if recorded in the purchases journal and cash book, the creditor whose 
 account is credited by the purchases journal entry is debited in the cash book entry. 
 
 The following receipts and payments of cash made during the month of Jan- 
 uary by E. B. Ta>'lor, a retail grocer, are shown recorded in the cash book in Illus- 
 trations Nos. 22 and 23: 
 
 Jan. 
 
 I. E. B. Taylor invested $1,000.00 in the retail grocery business. 
 
 4. Paid $20.00, city and state license for one year. 
 
 10. Paid J. F. Sherwood $192.00 for a cash purchase of merchandise. 
 
 12. Received $30.50 for sundry cash sales. 
 
 13. Paid E. C. Cline $77.30 in full of account. 
 
 20. Received $10.00 from A. R. Manley to apply on account. 
 
 27. Received $30 50 from the Gibson Hotel to apply on account. 
 
 30. Received $41.85 for sundry cash sales. 
 
 V 
 
 / 
 
 /^ 
 
 /. 
 
 /J 
 
 / 
 
 3/ 
 
 / 
 
 3r 
 
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 ^^1 
 
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 -^:?44 
 
 2.ff 
 
 f 2-3 
 
 y / y z 
 
 s a? 
 
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 Illustration No. 23, Payments Side of Cash Book. 
 
 EXPLANATION. The transactions recorded on this side of the cash book are equivalent 
 to a journal entry in which three accounts are debited, each for the amount written on the same 
 line with it, and the Cash account credited for the total. The balance is entered in red ink because 
 it is customary to use red ink when an amount is entered in a book of account or a ledger account in 
 order to make the two sides equal. The ruling separates the cash payments for two different months. 
 
 § 44. Proving Cash. The difference between the two sides of the cash 
 book should at all times equal the amount of cash belonging to the business; the 
 proof is effected by counting the cash and comparing it with the balance shown 
 by the cash book. Cash should be pro\x'd before posting. After the cabh is proved 
 at the end of the month, the cash book is ruled; Illustrations Nos. 22 and 23 show 
 the method of footing and ruling the cash book at the end of the month.
 
 52 
 
 RECORDING TRANSACTIONS IN THE CASH BOOK. 
 
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 Illustration No. 24, Ledger Resulting from Posting Illustrations Nos. 22 and 23. 
 
 EXPLANATION. This illustration is given to show that the ledger is in balance when all 
 the transactions recorded in the cash book have been posted, and not to show the true meaning of 
 the accounts. Accounts resulting from the posting of transactions recorded in the cash book only 
 will not show their true meaning because of the connection between the record in the cash book 
 and that in the purchases and sales journals. If desired, the posting from the receipts side, the pay- 
 ments side, and both sides of the cash book may each be proved by a separate Trial Balance.
 
 RECORDING TRANSACTIONS IN THE CASH BOOK. 53 
 
 § 45. Posting from the Cash Book. The accounts affected by each 
 transaction recorded on the receipts side of the cash book are Cash debited and 
 some account credited; for this reason each amount written on the line with the 
 name of the account is posted to the credit of the account, and Cash is debited 
 with the total at the end of the month. The accounts affected by each transaction 
 recorded on the payments side of the cash book are some account debited and 
 Cash credited; for this reason each amount written on the line with the name of 
 the account is posted to the debit of the account, and Cash is credited with the 
 total at the end of the month. The posting to the accounts debited and credited 
 is daily, and to the Cash account monthly. The date, the letter "C" and the page 
 of the cash book are entered in the ledger; the letter "C" indicates the title of 
 the book of original entry. The page of the ledger is written in the folio column 
 of the cash book to indicate where the entry has been posted. 
 
 The posting of the transactions recorded in the cash book, Illustrations Nos. 
 22 and 23, is shown in Illustration No. 24. 
 
 Some bookkeepers advise a Cash account in the ledger, while others accept the record in the 
 cash book as the Cash account. The Cash account in the ledger will show the total receipts and 
 total payments of cash for a period longer than a month, while the record in the cash book shows 
 the total receipts and total payments for each month only. If it is desired to know the cash receipts 
 and cash payments for the first six months of a given year, this information can be obtained from 
 the total debits and total credits to the Cash account in the ledger; if the cash book is the only 
 record of cash, it will be necessary to add the totals for each of the six months in order to ascertain 
 the desired information. 
 
 Exercise No. 21, Recording Transactions in the Cash Book. 
 
 Record in the cash book (the two inside pages of a double sheet of journal 
 paper* ruled similar to Illustrations Nos. 22 and 23), receipts on the left and pay- 
 ments on the right, the following cash transactions performed during the month of 
 February : 
 
 Feb. I. Student invested $1,276.80 in the retail grocery business. 
 
 2. Received $150.00 from E. H. White to apply on account. 
 
 3. Paid office rent for the month of February, $40.00. 
 
 4. Received $80.00 for cash sales. 
 
 Paid H. R. Swanson $60.00 to apply on account. 
 6. Received $120.00 for cash sales. 
 
 8. Paid A. B. Hill $90.50 to apply on account.. 
 
 9. Received $90.00 from J. K. Lachman in payment for merchandise sold 
 
 him on the 4th. 
 
 10. Paid drayage on merchandise purchased, $22.50. 
 
 11. Paid J. G. Pipkin $124.00 to apply on account. 
 14. Received $69.75 ^or cash sales. 
 
 16. Received $170.00 from P. B. S. Peters in payment for merchandise sold 
 
 him on the loth. 
 18. Paid $45.00 for office supplies. 
 20. Paid J. T. Ludlow $146.00 to apply on account. 
 
 22. Purchased merchandise for cash from H. P. King, $128.00. 
 
 23. Received $47.85 for cash sales. 
 
 24. Received $210.00 from H. M. Lovert to apply on account. 
 
 25. Paid salesman's expenses, $76.00. 
 Received $52.50 for cash sales. 
 
 {Concluded on page 54.) 
 
 *If double journal paper with from thirty to forty lines on each page is not available, 
 cash receipts should be recorded on one sheet of paper and payments on another, as the proper 
 ruling of the cash book cannot be shown when receipts are entered on one side and payments on 
 the other side of the same sheet.
 
 54 RECORDING TRANSACTIONS IN THE CASH BOOK. 
 
 {Exercise No. 21 — Continued from page jj.) 
 
 Feb. 27, Paid $32.80 for freight on merchandise purchased. 
 Paid clerk hire, $40.00. 
 
 28. Paid for advertising, $22.50. 
 
 Cash balance, $1,439.60. 
 
 When the above transactions have been recorded in the cash book as instructed, 
 prove cash and rule the cash book as in Illustrations Nos. 22 and 23. Open ac- 
 counts on a sheet of ledger paper with Student, Capital (5), Cash (5), Purchases (6), 
 Sales (8), Expense (8), E. H. White (4), J. K. Lachman (4), P. B. S. Peters (4), H. M. 
 Lovert (4), H. R. Swanson (4), A. B. HilJ (4), J. G. Pipkin (4), J. T. Ludlow_(4), 
 allowing for each account the number of lines indicated. Post the transactions, 
 and prove the equality of the debits and credits by a Trial Balance of balances. 
 
 Exercise No. 22, Recording Transactions in the Cash Book. 
 
 Record in the cash book, receipts on the left and payments on the right, the 
 following cash transactions performed during the month of January by H. H. 
 Goodm n, a retail grocer: 
 
 Jan. I. H. H. Goodman invested $2,000.00 in the retail grocery business. 
 
 4. Paid $20.00 for city license. 
 
 5. Paid City Milling Co. $192.00 for a cash purchase. 
 
 6. Received $30.00 for sundry cash sales. 
 Paid Brown & Co. $77.30 in full of account. 
 
 9. Received $10.00 from A. R. Jennings to apply on account. 
 
 12. Received $30.00 from Central Hotel to apply on account, 
 
 13, Received $40.00 for sundry cash sales. 
 
 Paid Knox Bros. $100.00 to apply on account. 
 18. Received $35.00 from M. A. Johnson to apply on account. 
 20. Paid Knox Bros. S34.95 in full of account. 
 
 Received $50.00 for sundry cash sales. 
 24. Received $15.00 from Central Hotel to apply on account. 
 
 Paid Hazen & Lockhart $125.00 to apply on account. 
 
 26. Received $15.10 from A. R. Jennings to apply on account. 
 
 27. Received $42.50 for sundry cash sales. 
 
 29. Received $50.00 from C. L. Loyd to apply on account. 
 
 30. Paid Brown & Co. $150.00 to apply on account. 
 
 31. Paid bookkeeper's salary, $35.00; rent, $25.00. 
 
 Cash balance, $1,558.35. 
 
 When the above transactions have been recorded in the cash book as instructed, 
 prove cash and rule the cash book; then proceed as follows: 
 
 1. Open accounts on ledger paper with H. H. Goodm n. Capital (4), Cash 
 (4), Purchases (4), Sales (6), Expense (4), A. R. Jennings (4), Central Hotel (4), 
 M. A. Johnson (4), C. L. Loyd (4), Brown & Co. (4), Knox Bros. (4), Hazen & 
 Lockhart (4), allowing for each account the space indicated; post the transactions, 
 and prove the equality of the debits and credits by a Trial Balance of balances, 
 
 2. After the instructor has approved the work required in the first para- 
 graph, post to a sheet of ledger paper the transactions in the purchases journal for 
 Exercise No. 16 and the sales journal for Exercise No. 19, which you were instruct- 
 ed to retain, and the cash book in this exercise. Arrange the accounts as follows: 
 Cash (6), customers (each 4 lines), creditors (each 4 lines), H. H. Goodm n. Capital 
 (5), Sales (7), Purchases (4), Expense (4), allowing for each the number of lines 
 indicated; take a Trial Balance of balances from this ledger, 
 
 {Concluded on page 55-)
 
 THE GENERAL JOURNAL. 55 
 
 {Exercise No. 22 — Continued j row, page 54.) 
 The purpose of the second division of this exercise is to show that the ledger is 
 
 in balance when all the transactions from all the special journals have been posted, 
 
 the same as it is when all the transactions from each special journal have been 
 
 posted. 
 
 Present the purchases journal, sales journal, cash book, ledger resulting from 
 
 posting the transactions from the three books, and Trial Balances to the instructor 
 
 for approval. 
 
 Exercise No. 23, Recording Transactions in the Cash Book. 
 
 Record in the cash book the following cash transactions performed during the 
 month of March by C. U. Steele, a retail shoe dealer: 
 March i. C. U. Steele invested $2,500.00 in the retail shoe business. 
 
 2. Bought from M. B. Arnstine, for cash, stock of shoes, $1,691.42. 
 • 3. Paid telephone service in advance for three months, $20.00. 
 Received $69.85 for cash sales. 
 
 5. Paid clerk's salary, $25.00. 
 
 6. Received $10.50 from R. L. Watson in full of account. 
 
 8. Paid Bay State Shoe Co. $496.81 in full of account. 
 
 9. Received $275.40 for cash sales. 
 
 12. Paid clerk's salary, $25.00. 
 
 13. Paid $75.00, premium on insurance policy. 
 
 15. Paid Haynes, Henson & Co. $387.65 in full of account. 
 
 16. Received $12.00 from C. A. Sheppard in full of account. 
 
 18. Paid $8.25 for stamps and stationery. 
 
 19. Paid clerk's salary, $25.00. 
 
 22. Received $72.50 from J. C. Wilson & Co. in full of account. 
 24. Received $11.50 from W. K. Love in full of account. 
 26. Received $581.92 for cash sales. 
 
 Paid clerk's salary, $25.00. 
 29. Received $4.50 from A. R. King for merchandise sold him on the 12th. 
 31, Paid rent, $50.00. 
 
 Paid ClineShoe Co. $168.42 for merchandise purchased on the 6th. 
 Received $361.92 for cash sales. 
 Cash balance, $902.54. 
 When the above transactions have been recorded in the cash book as instructed, 
 prove cash and rule the cash book. Open an account on page i of the double sheet 
 of ledger paper used in Exercises Nos. 17 and 20 with C. U. Steele, Capital, eleven 
 lines below the heading of the Sales account, an account with Expense seven lines 
 below the heading of the account with C. U. S eelc, Capital, and an account with 
 Cash fourteen lines below the heading of the Expense account. Post the entries 
 in the cash book to the accounts on pages i, 2 and 3 of the ledger sheet, and take a 
 Trial Balance of balances. 
 
 Retain the ledger and Trial Balance for use in Exercise No. 37. 
 
 § 46. The General Journal is a book of original entry in which all transac- 
 tions are recorded except those recorded in special journals. The general journal 
 is the same as the journal explained in § 22, and the ruling is the same as the various 
 illustrations of the journal given in preceding chapters. When purchases are recorded 
 in the purchases journal, sales in the sales journal, and cash receipts and payments 
 in the cash book, all other transactions are recorded in the general journal. These 
 transactions may be classified into four groups: (i) opening entries; (2) current 
 entries; (3) correcting entries; (4) adjusting and closing entries. 
 
 ^ I. Opening Entries are those necessary to record assets other than cash 
 invested by the owner at the beginning of the business. If the business is owned
 
 56 RECORDING TRANSACTIONS IN THE GENERAL JOURNAL. 
 
 by one person and his investment is cash, the opening entry will be made in the 
 cash book. If assets other than cash are invested, the accounts which are to show 
 the value of the assets will be debited, and the owner's Capital account credited 
 for the total of the assets in the opening entry in the journal. If the owner wishes 
 to have the business assume liabilities, two entries are necessary to open the books, 
 one to record the assets, and the other to record the liabilities; the owner's Capital 
 account is debited for the total liabilities, and the accounts which are to show the 
 liabilities, credited. 
 
 ILLUSTRATION. January i, S. J. Shook began the retail shoe business. He invested 
 cash $500.00, merchandise $425.65, and an January i 102 
 
 account due him from W. H. Barton for -^ ' ^ 
 
 $221.75. He owes the Ritter Shoe Co. $150.00 
 and the Haynes Shoe Co. $75.85. The cash 
 invested will be recorded in the cash book 
 as in the first entry in Illustration No. 22; 
 the other assets and the liabilities will be record- 
 ed in the general journal as in the illustration 
 
 425\65\\ 
 
 22l\75\ 
 
 647 40 
 
 150 
 
 75 S5 
 
 Purchases 
 
 ! W. H. Barton 
 I S. J. Shook, Capital 
 j S. J. Shook, Capital 
 Ritter Shoe Co. 
 
 at the'ridit.' ^ "" " " ' Haynes Shoe Co. 
 
 If desired, the entry for the cash invested may be made in connection with the entry in the 
 general journal for the other assets When this plan is followed, cash and each asset is debited and 
 the proprietor credited in the same form as in the illustration. The proprietor is also credited for the 
 cash in the cash book in the same manner as though the entry for the cash had not been made in 
 the general journal. A check mark is placed in the L. F. column at the left of Cash in the general 
 journal and at the left of the proprietor's name in the cash book to avoid double posting. 
 
 ^ 2. Current Entries are those necessary to record transactions in the reg- 
 ular operations of the business. When the nature of these transactions is such 
 that they cannot be recorded in one of the special journals, it is necessary to record 
 them in the general journal. Current entries include those for transactions in 
 which merchandise is returned to a creditor, a customer returns merchandise, 
 assets other than cash are accepted from customers in payment of their obligations, 
 and assets other than cash are given to a creditor in payment of an obligation 
 owed him. 
 
 ILLUSTRATION. May 12, George A. Douglas purchased from the Potter Shoe Co. two 
 pairs shoes at $8.50. with the privilege of returning one pair within five days. This transaction 
 was recorded in the sales journal, his account 
 
 being debited with $17.00. May 15 he returned May is, 192 
 
 one pair and received credit for $8.50 as per ^ =^ 7. , 'y =F= 
 
 agreement. The entry required in the gen- | Sales 8 $0 
 
 eral journal is shown in the illustration at 1 I George A. Douglas 8^0 
 
 the right. j 
 
 Tl 3. Correcting Entries are those made necessary because of errors in record- 
 ing transactions. These errors may occur in the calculations necessary to ascertain 
 the amount of a sale, a purchase, merchandise returned by a customer, merchan- 
 dise returned to a creditor, or they may be the result of incorrect posting. 
 
 ILLUSTRATION. April 16, C. A. Moore purchased from Dawes Bros., retail tire dealers 
 two 32 X 33^ Fisk cord tires at $37.75 each. The transaction was recorded in the sales journal 
 by the bookkeeper for Dawes Bros., but through an error, the amount was entered as $85.50 instead 
 of $75.50. May I, Dawes Bros, received $75.50 from Mr. Moore in full payment for the two tires. 
 When the bookkeeper for Dawes Bros, posted 
 
 the amount to Mr. Moore's account, there was May i 
 
 a balance of $10.00, due to the error which 
 
 Mr. Moore had reported. The only means of \ Sales 
 
 correcting this error was through an entry in \ C. A. Moore 
 
 the general journal similar to that in the IIlus- | 
 
 tration at the right. 1 : 
 
 % 4. Adjusting and Closing Entries are those required at the end of a business 
 year. These are explained and illustrated in Chapter VIII. 
 
 ^ 5. Posting from the General Journal. Each amount entered in the debit 
 column is posted to the debit side of the account written on the same line with it. 
 Each amount entered in the credit column is posted to the credit side of the account 
 written on the same line with it. The process is the same as that given in § 23.
 
 EXERCISE IN RECORDING TRANSACTIONS. 57 
 
 Exercise No. 24, Purchases Journal, Sales Journal, General Journal, and 
 
 Cash Book. 
 
 Record in the purchases, sales (Illustration No. 19), and general journals and 
 the cash book, the following transactions performed during the month of February 
 by Donald D. Sells, a retail hardware merchant: 
 
 Feb. I. Donald D. Sells invested $3,000.00 in the hardware business. 
 
 2. Bought from Moore & Moore, City, on account, merchandise, $187.65. 
 Enter in the purchases journal as Purchase No. i and number succeeding entries in this 
 
 journal in regular order. 
 
 3. Sold J. C. Mason, City, on account, four kegs nails at $4.50 each. 
 
 4. Paid Davis Bros., City, $281.36 for a cash purchase of merchandise. 
 
 Enter on the payments side of the cash book as a debit to the Purchases account. 
 
 5. Paid $25.00 telephone rent for three months in advance. 
 
 6. Bought from the Pickering Hardware Co., Danville, on fifteen days' 
 
 time, merchandise, $321.97. 
 Paid Moore & Moore $100.00 on account. 
 
 8. Received $116.50 for cash sales. 
 
 9. Sold Walter Love, Riverside, on account, one saw, $5.00; one corn 
 
 sheller, $37.25. 
 
 10. Bought from Johnson Bros., Dayton, on fifteen days' time, merchandise 
 
 $261.85. 
 Received $18.00 from J. C. Mason in full of account. 
 
 11. Paid Moore & Moore $87.65 in full of account. 
 
 12. Sold J. C. Miller, City, on account, 100 lbs. lead at 8c; 4 doz, picks at 
 
 $14.50 per doz. 
 
 13. Received $106.95 for cash sales. 
 
 Gave Walter Love credit for $5,00, value of the saw sold him on the 9th 
 and returned by him per agreement. 
 
 15. Received $20.00 from Walter Love to apply on account. 
 
 16. Paid clerk's salary, $30.00. 
 
 17. Bought from Donaldson Bros., Mooresville, on account, merchandise, 
 
 $321.85. 
 
 18. Sold Central Construction Co., Arlington, on account, 3 doz. shovels 
 
 at $9.00 per doz. ; 5 doz. picks at $14.00 per doz. ; 6 scrapers at $38.50 
 each. 
 
 19. Paid Pickering Hardware Co. $321.97 in full of account. 
 
 20. Received $15.60 cash from Davis Bros, for three kegs of nails purchased 
 
 from them on the 4th and returned by us per agreement. 
 Paid Johnson Bros. $150.00 on account. 
 22. Received $125.25 for cash sales. 
 
 24. Donaldson Bros, have allowed us credit for $32.60, cutlery purchased 
 
 from them on the 17th and returned by us per agreement. 
 Sold Walter Love, Riverside, on account, i Studebaker wagon, $125.00. 
 Paid Johnson Bros. $100.00 to apply on account. 
 
 25. Purchased from the Pickering Hardware Co., Danville, on fifteen days' 
 
 time, merchandise, $127.50. 
 
 26. Received $17.25 from Walter Love in full for the corn sheller sold him 
 
 on the 9th. 
 
 27. Received $121.85 for cash sales. 
 
 28. Paid rent, $50.00; clerk's salary, $30.00. 
 
 When the above transactions have been recorded in the four books of original 
 entry, prove cash (balance, $2,365.42) and rule the cash book as in Illustrations Nos. 
 22 and 23. Open accounts on a sheet of ledger paper with Cash (8), J. C. Mason 
 (5), Walter Love (7), J. C. Miller (5), Central Construction Co, (5), Moore &
 
 58 EXERCISE IN RECORDING TRANSACTIONS. 
 
 Moore (6), Pickering Hardware Co. (6), Johnson Bros. (6), Donaldson Bros. (5), 
 Donald D. Sells, Capital (8), Sales (10), Purchases (10), Expense (8), allowing for 
 each account the number of lines indicated; post from the books of original entry, 
 and take a Trial Balance of totals. 
 
 Retain the ledger and Trial Balance for use in Exercise No. 38. 
 
 Exercise No. 25, Purchases Journal, Sales Journal, General Journal and 
 
 Cash Book. 
 
 Record in the purchases, sales (Illustration No. 20), and general journals and 
 the cash book, the following transactions performed during the month of October 
 by H. A. Popp, a retail coal dealer: 
 
 Oct. I. H. A. Popp invested $1,000.00 in the retail coal business. 
 
 3. Bought from the Central Coal Co., Jerseyville, on ten days' time, $250.00. 
 
 Enter in the purchases journal as Purchase No. i and number succeeding entries in this 
 jnurnal in regular order. 
 
 Sold J. C. Miller, City, on account, coal per Sale No. i, $52.50. 
 
 4. Bought from Davis Coal Co., Covington, on account, $175.50. 
 
 5. Paid $10.00 for one month's telephone service 
 
 6. Bought from Jellico Coal Co., Jellico, on fifteen days' time, $362.75. 
 
 8. Paid the Central Coal Co. $100.00 on account. 
 Received $62.80 for cash sales of coal. 
 
 9. Sold M. B. Wallace, City, on account, coal per Sale No. 2, $30.50. 
 
 10. Paid the Murray Drayage Co. $104.90, freight and drayage bills on coal 
 
 purchased and delivered. 
 Received $151.05 for cash sales of coal. 
 
 11. Sold the Central Hotel, City, on account, coal per Sale No. 3, $242.50. 
 
 12. Paid the Central Coal Co. $150.00 in full of account. 
 
 13. Sold J. C. Miller, City, on account, coal per Sale No. 4, $16.50. 
 
 15. Paid clerk's salary for the first half of the month, $40.00. 
 Received $122.00 for cash sales of coal. 
 
 16. Received $20.00 from M. B. Wallace on account. 
 
 18. Paid the Donaldson Coal Co. $400.00 for coal delivered today. 
 20. Paid the Jellico Coal Co. $150.00 on account. 
 
 The Jellico Coal Co. has allowed us credit for $10.00 overcharge on coal 
 purchased on the 6th. 
 
 22. Received $10.50 from M. B. Wallace in full of account. 
 
 23. Sold the Central Hotel, City, on account, coal per Sale No. 5, $27.50. 
 
 24. Bought from the Davis Coal Co., Covington, on account, $209.38. 
 
 25. Received $135.65 for cash sales of coal. 
 
 26. Allowed the Central Hotel credit for $2.50, error in weight of coal sold 
 
 them on the 23d. 
 Sold M. B. Wallace, City, on account, coal per Sale No. 6, $10.00. 
 
 27. Received $200.00 from the Central Hotel to apply on account. 
 
 29. Sold J. C. Miller, City, on account, coal per Sale No. 7, $40.00. 
 
 30. Received $192.80 for cash sales of coal. 
 
 31. Paid rent, $65.00; clerk's salary for the latter half of the month, $40. 00. 
 When the above transactions have been recorded in the four books of original 
 
 entry, prove cash (balance, $834.90) and rule the cash book. Open accounts on a 
 sheet of ledger paper with Cash (8), J. C. Miller (7), M. B. Wallace (7), Central 
 Hotel (6), Central Coal Co. (6). Davis Coal Co. (6), Jellico Coal Co. (6), H. A. Popp, 
 Capita] (8), Sales (12), Purchases (10), Expense (8), allowing for each account the 
 number of lines indicated; post from the books of original entry, and take a Trial 
 Balance of balances. 
 
 Retain the ledger and Trial Balance for use in Exercise No. 39.
 
 QUESTIONS ON RECORDING TRANSACTIONS. 59 
 
 Summary of Chapters II, III, IV and V. Transactions may be recorded 
 direct in the ledger, in one journal and posted to the ledger, or in special journals 
 and posted to the ledger; the final results are the same in etch case. The Trial 
 Balance, if in balance, proves that the total of the debit amounts recorded in the 
 ledger equals the total of the credit amounts recorded in the ledger; also that the 
 addition of those accounts which have more than one amount recorded on the 
 debit or credit side is correct. The Trial Balance may be made by using the total 
 debits and total credits of each account, or the balance of each account; the fmal 
 results are the same with either method. 
 
 Each account is debited and credited through the recording of business 
 transactions. All money received is recorded on the debit side of the Cash account, 
 and all money paid on the credit side. The value of merchandise purchased is 
 recorded on the debit side of the Purchases account, and the value of merchandise 
 returned to a creditor on the credit side of this account. The value of merchandise 
 sold is recorded on the credit side of the Sales account and the value of merchandise 
 which customers return is recorded on the debit side of this account When a cus- 
 tomer bux'S merchandise and does not pay for it at the time it is purchased, his ac- 
 count is debited for the amount; when he pays this obligation to the business, his 
 account is credited. When a business buys merchandise and does not pay for it 
 at the time of purchase, the account with the creditor is credited: when the busi- 
 ness pays this obligation, the account with the creditor is debited. When a cus- 
 tomer has paid all he owes, his account will be in balance: when the business has 
 paid .1 creditor all it owes him, his account will be in balance. The expenses of 
 the bu=^iness are recorded on the debit side of the Expense account. The owner 
 of the business is credited in his Capital account with the investment, and debited 
 with any amount which he withdraws from the investment. 
 
 The purpose of special journals is to save time in recording transactions and 
 posting to the accounts in the ledger. When a number of transactions affect the 
 same account, the amounts debited or credited to this account may be posted in 
 one amount if all these transactions are in one journal. The purchases journal 
 contains a record of all transactions in which merchandise is purchased on account; 
 the sales journal contains a record of all transactions in which merchandise is sold on 
 account; the cash book contains a record of all transactions in which cash is re- 
 ceived and paid. 
 
 QUESTIONS 
 
 1. Describe in detail the labor saved in recording one hundred sales of merchan- 
 
 dise on account in the sales journal instead of the journal. 
 
 2. Describe in detail the labor saved in recording fifty purchasss of merchandise 
 
 on account in the purchases journal instead of the journal. 
 
 3. Can you suggest some method of obtaining a copy of a sale made to a customer 
 
 on account without writing twice the description of the articles sold.'* 
 
 4. Describe in detail the labor saved in recording one hundred sales in the sales 
 
 journal, Illustration No. 20, instead of the sales journal. Illustration No. 19, 
 provided you have suggested a means of retaining a copy of the items sold 
 without writing them twice. 
 
 5. When is it advisable to record the transactions in a cash receipts journal and 
 
 a cash payments journal? 
 
 6. Is it necessary to enter receipts on the left and payments on the right pages 
 
 of a cash book?
 
 6o QUESTIONS ON RECORDING TRANSACTIONS. 
 
 7. Describe in detail the method of proving cash. 
 
 8. Would you consider it advisable to prove cash before posting? Give reason 
 
 for your answer. 
 
 9. Describe in detail the method of recording a purchase of merchandise for 
 
 cash in the cash book and the purchases journal. 
 
 10. Describe in detail the method of entering a cash purchase in the cash book 
 
 onl}^ 
 
 11. What account is debited and credited when the total cash receipts and cash 
 
 payments are posted at the end of the month? 
 
 12. Name the account debited when the total of the purchases journal is posted 
 
 at the end of the month. What accounts show the credits? 
 
 13. What account is affected when the total of the sales journal is posted at the 
 
 end of the month? How? 
 
 14. Why is it necessary to post the total of the purchases journal and the total ot 
 
 the sales journal at the end of the month? 
 
 15. If the difference between the two sides of the cash book is greater than the 
 
 cash on hand, what does this indicate? 
 
 16. If the difference between the two sides of the cash book is less than the cash 
 
 on hand, what does this indicate? 
 
 17. If you were keeping books for a retail drug store and the difference betw^een 
 
 the two sides of the cash book was $10.00 more than the cash on hand, 
 what entry would you make for this $10.00? 
 
 18. Have you seen a cash register in operation? If so, can you explain its con- 
 
 nection with the entries in the cash book? 
 
 19. What does the total of the debit side of the cash book show? 
 
 20. What does the total of the credit side of the cash book show? 
 
 21. What does the total of the debit side of the Cash account in the ledger show? 
 
 22. W'hat does the total of the credit side of the Cash account in the ledger show? 
 
 23. Will the balance of cash on hand, as shown by the cash book on December 31, 
 
 1 92 1, show the same amount as the balance of the Cash account in the 
 ledger which shows a record of cash transactions from January i, 1921 to 
 December 31, 192 1? 
 
 24. What additional information, which is not shown in the cash book, does the 
 
 owner of a business obtain from the totals of the two sides of the Cash 
 account in the ledger? 
 
 25. Name some of the transactions which the bookkeeper for a retail jewelry 
 
 business might enter in the general journal.
 
 Chapter VI 
 
 A MODEL SET 
 
 The Purpose of this Model Set is to illustrate the recording of transactions 
 for a period of two months and to serve as a basis for completing the two practice 
 sets which are separate from the text. The references in connection with each trans- 
 action correlate the principles discussed in the preceding chapters with the recording 
 of the transactions. Illustrations Nos. 25-38 show the method of recording the 
 transactions for September and October, ruling the books of account, posting, 
 forwarding accounts, and the Trial Balance at the close of each month. The stu- 
 dent is not required to record the transactions for September and October, but 
 he should check them with the entries in the illustrations before he begins the 
 first practice set, or as he proceeds with it. 
 
 MEMORANDA OF TRANSACTIONS FOR MODEL SET 
 
 September 
 
 I. W. A. Gordon invested $1,000.00 cash and $500.00 merchandise in the re- 
 tail grocery business. (Recorded as in the first entry in Illustration No. 29 
 and the first entry in Illustration No. 28; §§ 43 and 46. Two accounts are 
 debited, §§15 and 17, and one account credited, § 34.) 
 
 T 
 
 Date 
 
 Account Credited 
 
 > 
 
 3 
 
 n 
 
 3o 
 
 / 3 
 
 0-0 
 
 
 
 Cyi^^^tS-77' 
 
 'f 
 
 '^^i^-^&y^lcZe^Ci^C--^/'iS<zyp'7T.'ey7^ 
 
 
 
 c5^^<S'<^-ZZ-<:'Z-^!>-^:*Z-^ 
 
 
 C-^CyC^ 
 
 C^CPC.^C'^T^^ 
 
 / O 
 / O 
 
 30 
 /•^ 
 
 Jo 
 30 
 
 /o 
 
 // 
 
 /3 
 /^ 
 /J- 
 
 77 
 
 /3 C 
 
 U-J O 
 
 30 
 
 30 
 
 / 
 
 
 / g- f 2. 
 
 3^ / 
 
 / zj 
 /// 
 3 o y 
 
 /a 
 
 Z4^ 
 
 3 -v d 
 
 / 3 Vo 
 
 7^ 
 
 37 
 
 7^ 
 
 Illustration No. 25, Purchases Journal for Model Set 
 
 61
 
 62 
 
 A MODEL SET. 
 
 2. Bought from Brown Bros., City, on account, merchandise per Purchase No, 
 
 i> $79 30- (Recorded as in the first entry, Illustration No. 25; § 38.) 
 
 3. Bought from King & King, City, on account, merchandise, per Purchase No. 
 
 2, $136.95. (References same as for above transaction.) 
 
 4. Paid $25.00 cash for city and state license. (Debit § 32; credit § 15.) 
 
 5. Sold A Y. Jordan, 115 Main St., City, on account, merchandise per Sale No. 
 
 I, $16.25. (Recorded as in the first entry, Illustration No. 26; § 40.) 
 Bought from Brown Bros., City, for cash, merchandise per Purchase No. 3, 
 $194.00. (Recorded as in the third entry in Illustration No. 25 and in the 
 second entry in Illustration No' 30.) 
 
 6. Received $32.00 for sundry cash sales to date. (Debit § 15; credit § 18.) 
 Paid Brown Bros. $79 30 in full for merchandise purchased on the 2d. (Re- 
 corded as in the third entry. Illustration No. 30; § 28.) 
 
 8. Sold People's Hotel, 165 Willis St., City, on account, merchandise per Sale 
 No. 2, $59.35. (Debit § 27; credit § 18. Illustration No. 26.) 
 
 7 /f 
 
 Account Debited 
 
 r / 
 
 /_ 
 
 /^! / 
 
 /f\ / 
 
 ■J^T- _ > 
 
 ■>s / 
 
 
 
 
 
 V 
 
 >- 
 
 6 
 
 >- 
 
 f 
 
 / 
 
 /o 
 
 / 
 
 /3 
 
 ?- 
 
 /J- 
 
 / 
 
 n 
 
 »- 
 
 
 
 
 0-. (3. ^S^.^/<^^ 
 
 C-^^d'Ci'nJi^^iM^Cuu 
 
 '/j-//PZ<x.(^7T^ii^L^^ 
 
 
 /C 
 
 / C >S' 
 
 
 3S- 
 
 
 
 3a 
 
 OS- 
 
 ^T'.OS' 
 
 
 J- -r 
 
 
 AA. 
 
 / 3% S-S- 
 
 3r 
 
 ^Sy^r 
 
 ^ ^ / ■] / •>- 
 
 s-a 
 
 Illustration No. 26, Page i of the Sales Journal for Model Set.
 
 A MODEL SET. 
 
 63 
 
 O-r^Z:^^ 
 
 /f 
 
 7- f 
 
 -3-? 
 >? 
 
 Account Debited 
 
 /^^^?'-t^-z^,yt»'fz^S^C'--?--'-^t/-e^^^7'^ 
 
 
 J7SZ 6^«i<<=«»i^<^^«*^'S>^ 
 
 3 /yS^^Q'i'y^t.^^^'CC'Z^- C<,^y- 
 
 Amount 
 
 ^.-^ 
 
 
 ;._/s 
 
 L 
 
 / > 
 
 7 ■?\r ' 
 
 I 
 
 Illustration No. 27, Page 2 of the Sales Journal for Model Set. 
 
 9. Received $10.00 from A. Y. Jordan to apply on merchandise sold him on the 
 5th. (Debit § 15; credit § 27. Illustration No. 29.) 
 
 10. Bought from Brown Bros., City, on account, merchandise per Purchase No. 
 
 4, $230.00. (Debit § 17; credit § 28. Illustration No. 25.) 
 
 11. Sold A. Y. Jordan, 115 Main St.. City, on account, merchandise per Sale 
 
 No. 3, $56.25. (Debit § 27; credit § 18. Illustration No. 26.) 
 
 12. Received $30.50 from People's Hotel to apply on account. 
 
 13. Received $40.00 for sundry cash sales to date. (Debit § 15; credit § iS.) 
 Paid King & King $100.00 to apply on account. (Debit § 28; credit § 15.) 
 Sold W. O. Burns, Kingston, on account, merchandise per Sale No. 4, $54.40. 
 
 (Debit § 27; credit § 18. Illustration No. 26.) 
 
 15. Bought from Brown Bros., City, on account, merchandise per Purchase No. 
 
 5, $248.00. (Debit § 17; credit § 28. Illustration No. 25.) 
 
 Proved cash (balance, $714.20) and posted. (§44; § 39; §41; § 45! § 46, 
 ^ 5. Illustrations Nos. 33, 34, 35 and 36.) 
 
 16. Sold People's Hotel, 165 Willis St., City, on account, merchandise per Sale 
 
 No. 5, $51.40. (Illustration No. 26.) 
 
 17. Bought from Lake View Creamery, 'Dayton, on 20 days' time, merchandise 
 
 per Purchase No. 6, $30.00. (Illustration No. 25.) 
 
 18. Received $35.00 from W. O. Burns to apply on merchandise sold him on the 
 
 13th. (Illustration No. 29.) 
 
 19. Sold James O. Wills, 416 Broad St., City, on account, merchandise per Sale 
 
 No. 6, $44.30. (Illustration No. 26.) 
 Allowed People's Hotel credit for $9.10, one barrel flour, purchased on the 
 i6th, returned because it had been damaged by coming in contact with 
 kerosene. (§ 18, ^ i; § 27, 1| 2; § 46, If 2. Illustration No. 28.) 
 
 20. Paid King & King $36.95 in full of account. (Illustration No. 30.) 
 Received $65.00 for sundry cash sales to date. (Illustration No. 29.) 
 
 22. Sold James C. Wells, 765 E, 9th St., City, on account, merchandise per Sale 
 No. 7, $26.05. (Illustration No. 26.) 
 
 {Continued on page 6^.)
 
 6-1 
 
 A MODEL SET. 
 
 / /f 
 
 .<*V^<e<7*-2J-*4-!«-'9-Z-^^<£-<^^A-' (S^^^-Z-^-^^C-rJ^-^JOiSf gg-^^^-Z^^^C-e^ 
 
 
 
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 Illustration No. 28, Page i of the General Journal for Model Set.
 
 A MODEL SET. 65 
 
 23. Bought from Brown Bros., City, on 10 days' time, merchandise per Purchase 
 
 No. 7, $199.10. (Illustration No. 25.) 
 Received credit from Brown Bros, for $12.60, three cases of canned peaches 
 at $4.20, purchased on the loth, returned per agreement. (§ 28, If i ; § 17, 
 
 ^2; §46,112. Illustration No. 28.) 
 
 24. Received $15.00 from People's Hotel to apply on account. 
 
 25. Sold People's Hotel, 165 Willis St., City, on account, merchandise per Sale 
 
 No. 8, $82.05. (Illustration No. 26.) 
 
 26. Received $6.25 from A. Y. Jordan in full for merchandise sold him on the 
 
 5th. (Illustration No. 29.) 
 Sold James C. Wells, 765 E. 9th St., City, on account, merchandise per Sale 
 No. 9, $44.25. (Illustration No. 26.) 
 
 2"]. Sold People's Hotel, 165 Willis St., City, on account, merchandise per Sale 
 No. 10, $80.25. (Illustration No. 26) 
 
 Received $44.50 for sundry cash sales to date. (Illustration No. 29.) 
 
 29. Bought from King & King, City, on 10 days' time, merchandise per Purchase 
 
 No. 8, $174.75. (Illustration No. 25.) 
 Received $65.00 from People's Hotel to apply on account. 
 
 30. Paid Brown Bros. $150.00 to apply on merchandise purchased on the 15th. 
 
 (Illustration No. 30.) 
 Sold James O. Wills, 416 Broad St., City, on account, merchandise per Sale 
 
 No. II, $37.56. (Illustration No. 26.) 
 Paid bookkeeper's salary for September, $75.00; rent for September, $65.00. 
 
 (§ 32, H i; § 15. H 2. Illustration No. 30.) 
 Proved cash (balance, $618.00), and ruled the cash book. Posted* from the 
 
 purchases, sales and general journals, and the cash book. Footed and 
 
 ruled the purchases journal and sales journal; posted the total purchases, 
 
 sales, cash receipts and cash payments. Took a Trial Balance of balances; 
 
 checked the Trial Balance because it did not balance due to an error in 
 
 posting. (Illustration No. 37.) 
 
 The check marks on the double line at the left of each amount in the books of original entry 
 indicate that the September Trial Balance did not balance and it was necessary for the bookkeeper 
 to check the posting to ascertain the error. These check marks should be made on the double line to 
 avoid confusion with the figures. It is not always possible to show the exact position of these check 
 marks in the illustrations due to the variation in printing. 
 
 October 
 
 1. W. A. Gordon withdrew $200.00 cash from his capital. 
 
 Bought from Dick, McMillan & Co., Springfield, on 15 days' time, merchan- 
 dise per Purchase No. 9, $381.78. 
 
 2. Received $50.00 from James C. Wells to apply on account. He called atten- 
 
 tion to our error in debiting him with the sale of September 30; made a 
 correcting entry to adjust this. 
 
 Paid the Central Transfer Co. $2.25 cash for freight and drayage on merchan- 
 dise purchased on September 17. 
 
 3. Received $100.00 from People's Hotel to apply on account. 
 
 *The accounts resulting from this posting are illustrated on pages 70-73. The arrangement 
 of the accounts in these illustrations is in the same order as the information will be needed in the 
 preparation of the reports to be provided the owner. The reports to be prepared from these accounts 
 are explained in Chapter VII.
 
 66 
 
 A MODEL SET. 
 
 3. Paid Brown Bros. $199.10 in full for merchandise purchased on Sept. 23. 
 
 4. Sold J. C. Taylor, 3752 Crescent Ave., City, on account, merchandise per 
 
 Sale No. 12, $132.55- 
 Received $87.65 for sundry cash sales to date. 
 
 6. Paid Mrs. W. B. Scott $2.50 for two brooms which she bought and paid for 
 
 on the 4th and returned to us per agreement. 
 Sold People's Hotel, 165 Willis St., City, on account, merchandise per Sale 
 No. 13, $142.50. 
 
 7. Received $50.00 from James O. Wills to apply on account. 
 
 Paid Lake View Creamery $30.00 in full for merchandise purchased Sept. 17 
 
 8. Sold A. Y. Jordan, 115 Main St., City, on account, merchandise per Sale 
 
 No. 14, $38.50. 
 
 9. Paid King & King $174.75 in full of account. 
 
 Paid Brown Bros. $200.00 to apply on merchandise purchased September 10. 
 
 10. Sold A. Y. Jordan, 115 Main St., City, on account, merchandise per Sale 
 No. 15, $42.50. 
 
 V — e^Cj^i-*!^ 
 
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 Illustration No. 29, Page 2, Receipts Side of Cash Book for Model Set.
 
 A MODEL SET. 
 
 67 
 
 II. Received $19.40 from W. O. Burns in full for merchandise sold him Sept. 13. 
 Received $109.80 for sundry cash sales to date. 
 
 13. Paid $18.50 for repairs in the office. 
 
 Sold People's Hotel, 165 Willis St., City, on account, merchandise per Sale 
 No. 16, $92.90. 
 
 15. Bought from Lake View Creamery, Dayton, on 20 days' time, merchandise 
 
 per Purchase No. 10. $48.00. 
 Received $50.00 from People's Hotel to apply on account. 
 Sold W. O. Burns, Kingston, on account, merchandise per Sale No. 17, $45.75. 
 Proved cash (balance, $257.75) and posted. 
 
 16. Bought from Brown Bros., City, on 30 days' time, merchandise per Purchase 
 
 No. II, $216.50. 
 Paid Dick, McMillan & Co. $381.78 in full of account. 
 
 17. Sold J. C. Tavlor, 3752 Crescent Ave., City, on account, merchandise per 
 
 Sale No. 18, '$86.42. 
 Paid $5.00 for stamps. 
 
 18. Paid Brown Bros. $98.00, balance due on merchandise purchased Sept. 15. 
 Received $129.50 for sundry cash sales to date. 
 
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 Illustration No. 30, Page 3, Payments Side of Cash Book for Model Set.
 
 68 
 
 A MODEL SET. 
 
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 Illustration No. 31, Page 4, Receipts Side of Cash Book for Model Set. 
 
 20. Bought from King & King, City, on 30 days' time, merchandise per Purchase 
 
 No. 12, $127.65. 
 Discovered an error of $10.00 in the calculations for the purchase from Brown 
 Bros, on September 23, and received instructions from them to debit their 
 account with this amount. 
 
 21. Sold J. C, Taylor, 3752 Crescent Ave., City, on account, merchandise per 
 
 Sale No. 19, $55.40. 
 
 Sold a customer stamps for cash, 50c. 
 
 22. Received $3.45 from- People's Hotel in full for all merchandise sold them in 
 
 September, less all credits to date. 
 Sold James O. Wills, 416 Broad St., City, on account, merchandise per Sale 
 No. 20, $51.40. 
 
 23. Received $25.00 from W. O. Burns to apply on account. 
 
 Sold People's Hotel, 165 Willis St., City, on account, merchandise per Sale 
 No. 21, $162.25. 
 
 24. Gave A. Y. Jordan credit for $3.75, two hams sold him on the loth and re- 
 
 turned per agreement. 
 Bought from Dick, McMillan & Co., Springfield, on 15 days' time, merchan- 
 dise per Purchase No. 13, $117.90. 
 
 25. Sold People's Hotel, 165 Willis St., City, on account, merchandise per Sale 
 
 No. 22, $116.65. 
 Received $20.30 from James C. Wells in full of account. 
 
 27. Received $136.45 for sundry cash sales to date. 
 
 Bought from Dawson Bros. & Co., Lebanon, on 30 days' time, merchandise 
 per Purchase No. 14, $307.55.
 
 A MODEL SET. 
 
 69 
 
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 27. 
 
 28. 
 
 29. 
 
 30. 
 
 31 
 
 3/ 
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 S/ -^ 
 
 
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 Illustration No. 32, Page 5, Payments Side of Cash Book for Model Set. 
 
 Sold W. O. Burns, Kingston, on account, merchandise per Sale No. 23, $12.50. 
 Shipped package to him by parcel post and debited his account with 6oc, 
 the required amount of postage. 
 
 Sold James O. Wills, 416 Broad St., City, on account, merchandise per Sale 
 
 No. 24, $38.65. 
 Bought from King & King, City, on 30 days' time, merchandise per Purchase 
 
 No. 15, $141.37- 
 
 Received $50.00 from People's Hotel to apply on account. 
 Sold Robert E. Cowan, 3175 Burnet Ave., City, on account, merchandise 
 per Sale No. 25, $61.83. 
 
 Received $56.25 from A. Y. Jordan for balance due on merchandise sold him 
 September 11. 
 
 Received $150.00 from J. C. Taylor to apply on account. 
 
 Received $87.19 for sundry cash sales to date. 
 
 Paid bookkeeper's, salary for October, $75.00; rent for October, $65.00. 
 
 Proved cash (balance, $291.61) and ruled the cash book. 
 
 Took stock of the merchandise in the store so that the bookkeeper might prepare 
 the necessary reports showing the assets, liabilities, income, costs and net 
 income for the two months during which the business has been operated. 
 The usual monthly Trial Balance was taken including the information 
 necessary in the preparation of reports. Balanced the Cash account. 
 
 The foregoing instructions include posting all entries, ruling the purchases and sales journal, 
 and the posting of the total purchases, sales, cash receipts and cash payments. The results of the 
 instructions are shown in Illustrations Nos. 25-36 and 38. The Cash account after it is balanced 
 is shown at the top of page 70; it is customary to balance the Cash account at the end of the busi- 
 ness year. The work of preparing the reports of the operations of the business showing the facts 
 which Mr. Gordon desires are explained in Chapter VII.
 
 70 
 
 A MODEL SET. 
 
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 A MODEL SET. 
 
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 Illustration No. 34, Page 2 of the Ledger for Model Set.
 
 72 
 
 A MODEL SET. 
 
 ^|::C-^q^^ 
 
 Illustration No. 35, Page 3 of the Ledger for Model Set.
 
 A MODEL SET. 
 
 73 
 
 J2^4^-<^2<^ 
 
 Illustration No. 36, Page 4 of the Ledger for Model Set.
 
 74 A MODEL SET. 
 
 
 
 Illustration No. 37, Trial Balance of Balances for First Month of Model Set. 
 
 / 
 
 
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 Illustration No. 38, Trial Balance for Second Month of Model Set. 
 The purpose of showing both sides of the Purchases and Sales accounts, the merchandise in- 
 ventory at the beginning of the fiscal period and purchases during the period is explained in Chapter VI I .
 
 A MODEL SET 75 
 
 Exercise No. 26, Recording Transactions, Posting and Trial Balance. 
 
 Record the transactions given below in the purchases, sales and general jour- 
 nals, and the cash book. All purchases and sales except those for c sh are "on 
 account" and are entered in the purchases or sales journal; number the entries in 
 each of these journals in regular order, beginning with one. 
 
 April I. J. N. Fulton invests $1,500.00 in the radio supply business. 
 
 2. Bought from Standard Radio Co., Chicago, supplies, $681.70. 
 
 3. Paid rent for month, $45.00, and telephone service, $15.00. 
 
 4. Sold Davis Bros., City, 100 ft. No. 14 aerial wire, 45c; i Willard radio 
 
 storage battery, $12.00. 
 
 5. Paid $365.87 for cash purchase of radio supplies. 
 
 9. Bought from the Radio Service Co., Dayton, supplies, $962.48. 
 
 12. Paid $37.50 insurance on stock. (Debit Expense.) 
 
 15. Received for cash sales to date, $350.60. 
 
 17. Paid $25.00 for stamps and stationery. 
 
 18. Paid Standard Radio Co. $38.70, on account. 
 
 Received credit from Radio Service Co. for supplies returned, $20.15. 
 
 19. Sold Caleb Fall, City, i Thordarson amplifying transformer, $4.00; 
 
 I Remler detector panel, $8.00. 
 
 20. Sold Jacob Dolittle, City, 200 ft. 7-strand aerial wire, $1.50; i doz. 
 
 aerial insulators, $3.00; 2 test buzzers, $1.30; 2 Willard storage 
 batteries, $24.00; 2 doz. switch points, 60c. 
 
 23. Sold Joe Smith, for cash, 200 ft. No. 14 aerial wire, 90c. 
 
 24. Gave Joe Smith 45c for 100 ft. aerial wire which he returned. 
 
 26. Received $15.00 from Jacob Dolittle, to apply on account. 
 
 27. Sold A. J. Bowen, Columbus, i mounted crystal detector, $1.95. Debit 
 
 his account with 75c, postage required on this shipment. 
 30. Sold A. F. Shaw, City, i complete radio outfit, $125.00, to be installed 
 
 under our inspection, installation cost to be paid by him. 
 Received for cash sales to date, $414.85. 
 Paid clerk's salary, $80.00. 
 
 Prove cash (balance, $1,673.83), rule the cash book and purchases and sales 
 journals, and post all entries including the totals. Arrange the accounts in the ledger 
 as in the Model Set, allowing five lines for each personal account and eight lines for 
 each of the other accounts. Take a Trial Balance of balances. 
 
 May I. Sold Davis Bros., City, 6 "B" Batteries, 22^/^ volt, $11.70; i loud 
 speaker, $15.00; i filament rheostat, $1.25, 
 
 2. Bought from Standard Radio Co., Chicago, supplies, $343.60. 
 Received for cash sales to date, $157.81. 
 
 Gave the Radio Service Co. $600.00 to apply on account. 
 
 3. Sold Caleb Fall, City, i New Howard rheostat, $1.10; 6 porcelain 
 
 V. T. sockets, $2.70. 
 Received check from A. J. Bowen in full of account. 
 Received a bill from the Kelly Electric Co. for $24.50, installation 
 
 cost of the radio outfit sold A. F. Shaw on April 30. 
 
 Debit A. F. Shaw and credit Kelly Electric Co. in the general journal. 
 
 4. Paid Lawton Express Co. $26.17, freight and drayage on purchases. 
 Gave Caleb Fall credit for 45c because one of the porcelain V. T. sockets 
 
 sold him on the third was defective. 
 Sold the entire stock of merchandise for $2,000.00 cash. 
 
 Prove cash (balance $3,208.17), rule the cash book and purchases and sales jour- 
 nals, and post all entries including the totals. Take a Trial Balance, using both sides 
 of the Sales and Purchases accounts and the balances of the other accounts. 
 
 Retain the ledger and Trial Balance for use in Exercise No. 40.
 
 76 QUESTIONS ON THE MODEL SET. 
 
 QUESTIONS ON THE MODEL SET 
 
 These questions refer to Illustrations Nos. 25-38. 
 
 1. What do the check marks (v) at the left of the amounts in the books of 
 
 original entry, ledger, and Trial Balance for the month of September, 
 indicate? 
 
 2. Why are there no check marks at the left of the amounts for the month of 
 
 October? 
 
 3. Why did the Trial Balance September 30 balance when there was an error 
 
 in one of the accounts as indicated by the adjusting entry in the general 
 journal October 2 ? 
 
 Explain the transactions recorded in the account of A. Y. Jordan without 
 referring to a book of original entry. 
 
 Why is the Expense account credited in the general journal entry of Oc- 
 tober 27? 
 
 Does the general journal entry of October 2 change the value of the assets 
 or liabilities of the business? 
 
 Why is the People's Hotel account not ruled on the same blue line on each 
 
 side on October 22? 
 Explain the transactions in the account of Brown Bros, without referring 
 
 to a book of original entry. 
 
 When is payment due for the merchandise purchased from Brown Bros. 
 
 October 16? 
 Why are both sides of the account with Brown Bros, carried forward and 
 
 the balance of the account with the People's Hotel carried forward? 
 What indicates that the People's Hotel account is that of a customer and 
 
 Brown Bros, that of a creditor? 
 What is the balance due on the merchandise sold A. Y. Jordan October 10? 
 Why not forward the totals of both columns of the general journal in the 
 
 same manner as the totals of the purchases journal and sales journal? 
 Why is the total of each side of the cash book forwarded and not the balance? 
 When is it necessary to forward the totals of a book of original entry? 
 What information is shown in the Cash account which is not shown in the 
 
 cash book? 
 Why is the double ruling in the cash book on the same blue line on each side? 
 Why is it necessary to write in the cash book the date of the purchase or sale 
 
 when cash is paid or received to apply on that particular purchase or sale? 
 Why is the cash balance carried down below the double ruling on the debit 
 
 side of the cash book and entered in the second column? 
 W^hat information of value does the owner of the business obtain from the 
 
 entries on the debit side of the Sales account? 
 Why is the Purchases account credited in the general journal entry of Sep- 
 tember 23? 
 Why is the Sales account debited in the general journal entry of October 24? 
 If Sales had been credited for the first transaction of October 23, (a) what 
 
 accounts would have been affected and (b) how afifected? 
 If the owner wished to know the value of merchandise in stock, from what 
 
 accounts could he ascertain this information? 
 Why is W. O. Burns debited in the general journal entry of October 27?
 
 Chapter VII 
 
 BALANCE SHEET AND STATEMENT OF PROFIT AND LOSS 
 
 The Purpose of this Chapter is to explain the Balance Sheet and Statement 
 of Profit and Loss — two reports prepared by the bookkeeper for the information 
 of the owner. The illustrations are applicable to the business of W. A. Gordon in 
 the Model Set, Chapter VL The income tax return for an individual is explained 
 and illustrated in Appendix C. 
 
 § 47. Fiscal Period. The owner of a business will want to know from time 
 to time the results of his operations because he has invested cash or other assets in 
 the business with the purpose of making a profit. Since the Federal Government 
 requires a report of the results of the operations of the business for one year in 
 order to ascertain the amount of income tax the business is to pay, the owner 
 usually ascertains the results of operating the business yearly. However, if the 
 nature of the business is such that the profit should be ascertained more often, 
 the owner can obtain this information at such times as he desires, but this does 
 not release him from the yearly report required by the Federal Government. The 
 period of operation for which the profit is ascertained is referred to as the fiscal 
 period, which, as explained, may be for one year or such part of a year as the owner 
 may designate. 
 
 § 48. Method of Ascertaining the Profit or Loss. The profit or loss 
 resulting from the operations of a business is (i) the difference between the pro- 
 prietorship at the beginning and the proprietorship at the end of a fiscal period, 
 and (2) the difference between the income and the cost for the period. If the 
 value received and the value parted with in each transaction are recorded, the 
 profit or loss will be' the same with each of the two methods. When ascertaining 
 the profit or loss by subtracting the proprietorship at the beginning and end of 
 the period, it is necessary to take into consideration withdrawals from capital 
 and additional investments during the period. 
 
 The proprietorship of W. O. Crosswhite, a retail grocer, January I, is $8,000.00, and on Dec- 
 ember .•^i of the same year, $11,50000. If he has not withdrawn part of his invested capital or 
 invested additional capital during the year, his net profit is $3,500.00; if he had withdrawn $500.00 
 from his capital during the year, his net profit would have been $4,000.00, and if he had invested 
 an additional $500.00 during the year, his net profit would have been $3,000.00. If, during the- 
 same year, the income resulting from the operations of the grocery business conducted by Mr. 
 Crosswhite is $6,500.00 and the cost, $3,000.00, his net profit is $3,500.00. It is necessary for Mr. 
 Crosswhite to know the amount of the income and cost as well as the net profit, because he must 
 submit this information on his income tax return as explained in Appendix C. 
 
 § 49. A Merchandise Inventory is the value of all merchandise in stock 
 at the close of a fiscal period as shown by a written list of this merchandise. The 
 information on this list includes the quantity and description of each kind of 
 merchandise and its value at cost or present market price whichever is the lower. 
 
 It is necessary to ascertain the value of the merchandise owned by the business 
 through an inventory at the close of the fiscal period because it is one of the assets 
 and its value is not shown in either the Purchases or the Sales account. The Pur- 
 
 77
 
 78 
 
 MERCHANDISE INVENTORY. 
 
 chases account shows the cost of the merchandise bought, and the Sales account 
 the returns from sales, but the value of the merchandise in stock is not shown as 
 a result of this record because the selling price is greater than the cost price. 
 
 A unit record of the merchandise purchased and sold may be kept in certain lines of business, 
 such as musical instruments, shoes, clothing, and furniture; but in other lines, such as hardware, 
 groceries, and dry goods, it is not practicable to keep a record of each unit purchased and sold. It 
 is necessary to ascertain the value of merchandise in stock by an inventory at the close of the fiscal 
 period whether or not a record of the units purchased and sold is kept, because of thefts, errors in 
 filling orders, and many other causes which result in the number of units shown by the record not 
 corresponding with the number of units on hand. 
 
 An inventory of the following merchandise owned by W. A. Gordon and in 
 stock by actual count at the close of the fiscal period ending October 31, would 
 appear in inventory form as in Illustratfon No. 39: 
 
 Granulated sugar, 1,216 lbs., cost $4.50 per 100 lbs.; 1,183 lbs. brown sugar, 
 cost $4.10 per 100 lbs.; 256 lbs. roasted coffee, cost 22c per lb.; 1,802 lbs. bacon, 
 cost 15c per lb.; 8 hams, 183 lbs., cost 17c per lb.; 5 cans, 261 lbs., lard, cost i6c 
 per lb.; 24 doz. cans tomatoes, cost $1.10 per doz.; 20 doz. cans pineapples, cost 
 $2.00 per doz.; 18 doz. cans peaches, cost $1.95 per doz.; 20 doz. cans corn, cost 
 $1.50 per doz.; 268 lbs. creamery butter, cost 33c per lb.; 60 bbls. Blue Ribbon 
 flour, cost $5.10 per bbl.; 34 bbls. White Rose flour, cost $5.25 perbbl.; 25 bbls. 
 Fancy flour, cost $6.00 per bbl.; 25 bu. beans, cost $1.60 per bu.; 20 bxs. Werk's 
 soap, cost $4.00 per box. 
 
 // fJ 
 
 r 
 
 >0 
 
 
 3^ 
 
 //a 
 
 T'.OO 
 
 
 6.0 
 
 7^ 
 
 3 O 
 J / / / 
 
 ■¥ o\ 
 J o 
 
 3 a 1^ 
 / yi- 
 
 . MO 
 
 ^ V 
 
 j~ff 
 
 ^ ^77 
 
 /<?" 
 
 Illustration No. 39, Inventory of Groceries, Model Set. 
 
 EXPLANATION. The quantities indicated by the figures at the left were obtained by weigh- 
 ing or counting the articles in stock. The price was ascertained from the invoices. This price in- 
 cludes not only the invoice cost but also the freight cost. The figures at the right were ascertained 
 by multiplying the quantity by the price.
 
 BALANCE SHEET. 79 
 
 Exercise No. 27, Merchandise Inventory. 
 
 Prepare on journal paper an inventory for the following merchandise owned 
 by the Fred B. Jenkins Hardware Co. and in stock December 31 : 
 
 Nails, 10 kegs 8-d., cost $4.50 per keg; 15 kegs lo-d. nails, cost $4.25 per keg; 
 12 doz. No. 9 hammers, cost $9.00 per doz. ; 7 doz. No. 4 Simmons saws, cost $10.00 
 per doz., present market price, $900 per doz.; 5 doz. No. 3 hatchets, cost $8.00 
 per doz., present market price $7.00 per doz.; 50 gal. Lucas paint, cost $1.75 per 
 gal., present market price, $1.60 per gal.; 25 gal. varnish, cost $2.00 per gal.; 159 
 lbs. white lead, cost 42c per lb.; 5 No. 3 gas stoves, cost $7.50 each. 
 
 Exercise No. 28, Merchandise Inventory. 
 
 Prepare on journal paper an inventory for the following merchandise owned 
 by U. R. Underhill Stationery Co., and in stock June 30: 
 
 Typewriter desks, 8, cost $65.00 each; 5 used typewriters, cost $62.50 each; 
 7 chairs, cost $4.50 each; 3 bookkeeper's desks, cost $27,50 each; 14 loose-leaf 
 ledgers, cost $16.50 each; 27 sections No. 9 filing cases, cost $5.60 each; 5 filing 
 cases, cost $6.50 each; 500 reams typewriting paper, cost 35c per ream, present 
 market price, 38c per ream; 65 reams legal paper, cost 90c per ream, present 
 market price, 97c per ream; 150 doz. pen points, cost 32c per doz.. 
 
 THE BALANCE SHEET 
 § 50. The Balance Sheet is a written report of the assets, liabilities, 
 and proprietorship of a business prepared at the close of a fiscal period. The 
 information is obtained from the asset and liability accounts in the ledger (Trial 
 Balance) and the merchandise inventory at the close of the fiscal period. The 
 assets are usually listed as follows: cash, notes receivable (written promises to 
 pay money to the business), accounts with customers, and merchandise inventory. 
 The liabilities are usually listed as follows: notes payable (written promises signed 
 by the business), and accounts with creditors. The accounts should be arranged 
 in the ledger in the order in which they appear on the Balance Sheet. 
 
 The Balance Sheet may be prepared in "account" form (Illustration No. 40) or "report" 
 form (Illustration No. 41). Either form is correct, but accountants usually prefer the account 
 form because it shows assets opposite liabilities; this information is of value to the owner of the 
 business in determining his financial condition because the liabilities must be paid out of the assets. 
 
 The assets and liabilities of W. A. Gordon as shown by the accounts in his 
 ledger on pages 70, 71 and 72, October 31, are as follows: 
 Assets : 
 
 Cash $291 .61 
 
 Accounts Receivable: 
 
 A. Y. Jordan 77-25 
 
 W.O.Burns 33.85 • 
 
 James O. Wills 121 .91 
 
 J. C. Taylor 124.37 
 
 Robt. E. Cowan 61 . 83 
 
 People's Hotel 464 . 30 
 
 Liabilities: 
 
 Accounts Payable: 
 
 King & King 269.02 
 
 Lake View Creamery 48.00 
 
 Dick, McMillan & Co 117.90 
 
 Dawson Bros. & Co 307 . 55 
 
 Brown Bros 223 . 90 
 
 Merchandise Inventory, October 31 (Illustration No. 39), $1,477.15. 
 A Balance Sheet prepared in account form from this information will appear 
 as in Illustration No. 40, and in report form, as in Illustration No. 41.
 
 8o 
 
 BALANCE SHEET. 
 
 
 Illustration No. 40, Balance Sheet for Model Set, "Account" Form. 
 
 EXPLANATION. This illustration shows the Balance Sheet for W. A. Gordon, prepared 
 in "account" form from the accounts in the ledger on pages 70, 71 and 72 (Trial Balance, page 74) 
 and the inventory of merchandise, page 78. The same information is shown in "report" form in 
 the illustration below. 
 
 
 
 / >-/ If/ 
 
 1 
 
 2; & 'J- '^ 
 
 :>-<:^:i}p\y 
 
 / / 7 f ^ 
 
 ^ I 
 
 9 <. <.'<!? 
 
 
 Illustration No. 41, Balance Sheet for Model Set, "Report" Form.
 
 BALANCE SHEET. 8i 
 
 Exercise No. 29, Balance Sheet. 
 
 Prepare a Balance Sheet in account form for J. J. Hagan, who is engaged in 
 the office supplies business, from the following assets and liabilities as shown by 
 the accounts in his ledger at the close of the fiscal period, December 31: 
 
 Assets : 
 
 Cash $357-50 
 
 Accounts Receivable: 
 
 L. A. Stallman 150.00 
 
 W. R. Jones 63 . 50 
 
 Sinton Hotel 132 . 65 
 
 W. H. Wilson 14-50 
 
 Robert W. Hill 35 - 00 
 
 J. J. Anderson 36. 18 
 
 H. R. Kraus 130.00 
 
 Liabilities : 
 
 Accounts Payable: 
 
 A. Martin Stationery Co $180.00 
 
 Hall Bros 127.50 
 
 Laurence & Scott 205 . 07 
 
 O. L. Robertson 192 . 90 
 
 Central Mfg. Co 182.55 
 
 Globe-Wernicke Co 100.00 
 
 Merchandise Inventory, December 31, $865.40. 
 
 Exercise No. 30, Balance Sheet. 
 
 Prepare a Balance Sheet in account form for C. M. Becket, a hardware mer- 
 chant, from the following assets and liabilities as shown by the accounts in his 
 ledger at the close of the fiscal period, June 30: 
 
 Assets : 
 
 Cash ." $850 . 00 
 
 Accounts Receivable: 
 
 C. R. Carter 50 . 00 
 
 J. A. Smith 38.50 
 
 John B. Dawes 76. 19 
 
 A. J. Baird & Son 39-90 
 
 Johnson Construction Co 125.50 
 
 B. H. Franklin 207 . 90 
 
 C. C. Ernst 260.00 
 
 Liabilities: 
 
 Accounts Payable: 
 
 Evans Bros. Hdwe. Co $160.00 
 
 D. D. Bowen 350 . 00 
 
 Smith Bros 107 . 60 
 
 A. L. Games & Co 1 35 • 00 
 
 Pickering Hardware Co 150.00 
 
 Merchandise Inventory, June 30, $442.85.
 
 44 
 
 75 
 
 52 
 
 40 
 
 452 
 
 oo 
 
 9 
 
 65 
 
 55 
 
 15 
 
 82 STATEMENT OF PROFIT AND LOSS. 
 
 Exercise No. 31, Balance Sheet. 
 
 Prepare a Balance Sheet in report form for C. H. Sheller, an automobile dealer, 
 from the following assets and liabilities as shown by the accounts in his ledger at 
 the close of the fiscal period, July 31: 
 
 Assets : 
 
 Cash $6,741 .85 
 
 Accounts Receivable: 
 
 J. W. Hayes 
 
 J.J.Davis 
 
 Robert Humphries - 
 
 A. L. Arnot 
 
 T. M. Bowen 
 
 Liabilities: 
 
 Accounts Payable : 
 
 Packard Automobile Co $1,500.00 
 
 Warner-Lenz Co 152 . 50 
 
 Goodyear Rubber Co 250.00 
 
 Citizens Motor Car Co 350.00 
 
 Merchandise Inventory, July 31, $6,181.75. 
 
 STATEMENT OF PROFIT AND LOSS 
 
 § 51. The Statement of Profit and Loss is a written report of the income, 
 costs, and net profit or loss resulting from the operations of a business during a 
 fiscal period, prepared at the close of the period. This information is obtained 
 from the income and cost accounts in the ledger (Trial Balance) and the inven- 
 tory of merchandise at the close of the period. The report should show (i) the net 
 sales, (2) the cost of the merchandise sold, (3) the profit made by selling mer- 
 chandise, (4) the operating cost of the business, and (5) the net profit or loss. 
 The accounts should be arranged in the ledger in the order in which they appear 
 on the Statement of Profit and Loss so that this report can be prepared from the 
 Trial Balance without rearranging the accounts thereon. 
 
 The Statement of Profit and Loss may be prepared in account form or in report form (Illus- 
 tration No. 42), the same as the Balance Sheet. Accountants usually prefer the report form because 
 the deductions in connection with ascertaining the profit on sales and the operating cost of the busi- 
 ness can be shown more distinctly in this form. 
 
 The income, costs, and beginning inventory of W. A. Gordon, as shown by 
 the accounts in his ledger October 31, page 73, are as follows: 
 
 Income: 
 
 Sales of merchandise $2,364.00 
 
 Less merchandise returned by customers 15-35 
 
 Costs : 
 
 Inventory, September i (beginning) 500.00 
 
 Purchases of merchandise during the period. 2,635. 10 
 
 Less merchandise returned to creditors 22.60 
 
 Expense (operating cost) for the period 327.40 
 
 The merchandise inventory at the close of the fiscal period, October 31 
 (Illustration No. 39), is $1,477.15. 
 
 A Statement of Profit and Loss prepared in report form from this information 
 will appear as in Illustration No. 42.
 
 STATEMENT OF PROFIT AND LOSS. 
 
 83 
 
 
 
 ^^ 
 
 C-€'~df^ 
 
 
 CyK^i^'T'-g^^^^^y^f^L^ C-^J-Ti?^* 
 
 
 3 / / X 
 / "^7 7 
 
 / 3 a o 
 
 3 r s- 
 
 / ^ S-J' 
 
 ^_o_ 
 
 
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 y / 3 
 
 / ^ g' s- 
 
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 3j£_ 
 
 3 J- 
 
 £-£- 
 
 f 
 
 ^L±- 
 
 Illustration No. 42, Statement of Profit and Loss for Model Set, "Report" Form. 
 
 EXPLANATION. This illustration shows the Statement of Profit and Loss (income and cost) 
 for W. A. Gordon, prepared in "report" form from the income and cost accounts in the ledger on 
 page 73 (Trial Balance, page 74) and the inventory of merchandise, page 78. The same information 
 may be shown in "account" form in the same manner as in the Balance Sheet, Illustration No. 40. 
 Sales Cr. minus Sales Dr. equals net returns from sales; Purchases Dr. minus Purchases Cr. equals 
 net purchases; net purchases minus inventory at the close of the fiscal period equals cost of mer- 
 chandise sold; net returns from sales minus cost of merchandise sold equals profit made by selling 
 merchandise; profit made by selling merchandise minus Expense Dr. equals net profit. The "Proof" 
 shown on this statement is explained in § 52. 
 
 Exercise No. 32, Statement of Profit and Loss. 
 
 Prepare a Statement of Profit and Loss for L. M. Hazen, a retail grocer, from 
 the following information obtained from the accounts in his ledger at the close of 
 the fiscal period, December 31: 
 
 Income: 
 
 Sales of merchandise $685.29 
 
 Less merchandise returned by customers 37-10 
 
 Costs: 
 
 Inventory, July i (beginning) 801 .25 
 
 Purchases of merchandise during the period 489.50 
 
 Less merchandise returned to creditors 24.35 
 
 Expense (operating cost) for the period 78.50 
 
 The inventory of rnerchandise, December 31, is $862.45.
 
 84 RELATION BETWEEN THE TWO REPORTS 
 
 Exercise No. 33, Statement of Profit and Loss. 
 
 Prepare a Statement of Profit and Loss for A. Reagan, a retail jeweler, from the 
 following information obtained from the accounts in his ledger at the close of the 
 fiscal period, March 31: 
 
 Income: 
 
 Sales of merchandise $1,016.68 
 
 Less merchandise returned by customers 20. 10 
 
 Costs : 
 
 Inventory, January i (beginning) 1,216.31 
 
 Purchases of merchandise during the period 458.90 
 
 Less merchandise returned to creditors 21. 11 
 
 Expense (operating cost) for the period 154.70 
 
 The inventory of merchandise, March 31, is $1,127.36. 
 
 Exercise No. 34, Statement of Profit and Loss. 
 
 Prepare a Statement of Profit and Loss for C. H. Sheller, an automobile dealer, 
 from the following information obtained from the accounts in his ledger at the close 
 of the fiscal period, July 31 : 
 
 Income: 
 
 Sales of merchandise $4,907.54 
 
 Less merchandise returned by customers loi .32 
 
 Costs: 
 
 Inventory, January i (beginning) 5,000.00 
 
 Purchases of merchandise during the period 4,506.96 
 
 Less merchandise returned to creditors 210. 11 
 
 Expense (operating cost) for the period 406 . 07 
 
 The inventory of merchandise, July 31, is $6,181.75. 
 
 § 52. Relation Between the Two Reports. The Balance Sheet and 
 Statement of Profit and Loss have been discussed independent of each other be- 
 cause the purpose of the discussion was to explain the nature of each report. How- 
 ever, there is a relation between these two reports because the information is 
 obtained from the accounts which show the results of recording business trans- 
 actions completed by a business during a fiscal period. 
 
 If all the accounts on pages 70, 71, 72 and 73 are checked with those accounts 
 used in preparing the Balance Sheet (Illustration No. 40) and the Statement 
 of Profit and Loss (Illustration No. 42), it will be observed that the only account 
 not appearing on either of the two reports is that with W. A. Gordon, Capital; 
 also that the Balance Sheet shows the capital of W. A. Gordon as a different amount 
 from that shown by his Capital account in the ledger. The reason his Capital 
 account as it appears at the close of the fiscal period is not shown on either report 
 is that his proprietorship has increased through the operations of the business; in 
 this case the increase is $385.90, the difference between the net investment and 
 the proprietorship at the close of the period, also the difference between the income 
 and cost. 
 
 Because of this relation between the two reports, the bookkeeper can prove 
 the correctness of each report before submitting it to the owner of the business. 
 A proof of the reports in Illustrations Nos. 40 and 42 is given below the Statement 
 of Profit and Loss, Illustration No. 42. If desired, this same proof may be shown 
 in connection with the Balance Sheet. 
 
 It is customary to show assets, liabilities, and proprietorship on the Balance Sheet, and income, 
 costs, and the net profit on the Statement of Profit and Loss; hence the proof of the two reports 
 may be made separate from the reports or in connection with one of them.
 
 QUESTIONS 85 
 
 Exercise No. 35, Balance Sheet and Statement of Profit and Loss. 
 
 Prepare a Balance Sheet in report form and a Statement of Profit and Loss 
 from the following Trial Balance and inventory of merchandise, May 31: 
 
 Cash $2,192.35 
 
 Novelty Gift Shop 764 . 50 
 
 Wharton & Co 810.30 
 
 Timmich Art Co $ 743 . 90 
 
 Sadler Printing Co 956.30 
 
 American Paper Mills 374.05 
 
 Counts Bros 78 • 98 
 
 T. B. Stone, Capital 2,000.00 
 
 Sales 10.10 2,399. 17 
 
 Purchases (Inventory, May i, $1,012.75) 2,621.45 26.30 
 
 Expense 180 . 00 
 
 $6,578.70 $6,578.70 
 
 Merchandise Inventory, May 31, $826.80. 
 
 Exercise No. 36, Balance Sheet and Statement of Profit and Loss. 
 
 Prepare a Balance Sheet in report form and a Statement of Profit and Loss 
 
 from the following Trial Balance and inventory of merchandise, June 30: 
 
 Cash $2,330.51 
 
 Rogers Seed Market 535 . 65 
 
 Terry Grocery Co 1,156.20 
 
 Farmers Exchange 269.49 
 
 Evergreen Flower Shop 282 .90 
 
 A. R. Trimble 661 . 76 
 
 Brookville Nurseries $2,364.09 
 
 Empire Seed Co 1,327.84 
 
 L. D. R. Rowland, Capital 2,500.00 
 
 Sales 32.01 2,595.20 
 
 Purchases (Inventory, June i, $906.75) 3,296.95 61 . 13 
 
 Expense 282.79 
 
 $8,848.26 $8,8^8.26 
 
 Merchandise Inventory, June 30, $740.22. 
 
 QUESTIONS 
 
 1. If Robert Brown pays $5,000.00 cash for a grocery business on January i, 
 
 1920, and sells it for $6,500.00 cash on December 31, 192 1, does this indicate 
 that the net profit resulting from the operations of the business is 
 $1,500.00? 
 
 2. On June 30, 1921, George A. Clark, who owns and operates a gasoline service 
 
 station, wishes to borrow $2,000.00 from the bank and is requested to make 
 a report to the bank of the financial condition of his business. Would the 
 bank require a Balance Sheet or a Statement of Profit and Loss? What 
 information would it require? 
 
 3. What is A. L. Day's profit or loss for the year 1922 if his proprietorship at 
 
 the beginning of the year is $3,000.00; investments during the year, 
 $1,000.00; withdrawals during the year, $500.00; and his proprietorship 
 at the end of the year is $5,000.00?
 
 86 QUESTIONS 
 
 4. October 31, 1921, the profit and loss accounts of J. B. Sullivan as shown by 
 
 the Trial Balance taken on that date are as follows: General Expense, 
 $857.50; Selling Expense, $1,252.80; Delivery Expense, $609.75; Sales, Dr., 
 $165.60, Cr., $3,875.92; Purchases, Dr., $1,888.95, Cr., $32.50. The mer- 
 chandise inventory is $561.12. Has his business been operated at a profit 
 or a loss? State the amount of the profit or loss. 
 
 5. L. J. Strong has been offered the grocery business at 762 Main St. He wishes 
 
 to know that the merchandise inventory submitted to him by the present 
 owner is correct and asks you to verify it. How would you proceed in making 
 the verification? Why is it necessary to know the value of the merchandise 
 in stock before ascertaining the profit or loss for a fiscal period? 
 
 6. If you were the bookkeeper for a business engaged in the sale of Victrolas and 
 
 Victrola records, could you devise a plan whereby a record could be kept 
 of each article purchased and sold? 
 
 7. If such a plan were effected, would the number of units of each kind on hand, 
 
 as shown by the record, be equal to the number of units in stock, as shown 
 by actual count, at the close of the fiscal period? 
 
 8. Name some conditions that might cause a discrepancy between the record 
 
 and the actual stock on hand. 
 
 9. If merchandise which cost $800.00 is inventoried at $600.00, the present 
 
 market price, what effect will this have on the net profit for the period? 
 
 10. If merchandise is inventoried at present market value when this is less than 
 
 the cost value, why is it not inventoried at present market value when this 
 is greater than the cost? 
 
 11. Can you name a condition under which it would be advisable to use the 
 
 present market value even though this should be greater than the cost? 
 
 12. What information does the owner of a business obtain from the Balance Sheet 
 
 that he can not obtain from the accounts in the ledger? 
 
 13. What information does the owner of a business obtain from the Statement of 
 
 Profit and Loss which he can not obtain from the accounts in the ledger? 
 
 14. Why is "Cash" listed first on the Balance Sheet? 
 
 15. How does the owner of a business expect to pay its liabilities? 
 
 16. Name two forms in which the Balance Sheet may be prepared. 
 
 17. Which is considered the better of the two forms? State reasons for answer. 
 
 18. If the Sales account shows a debit of $1,500.00 and a credit of $6,000.00, 
 
 what does this indicate? 
 
 19. If the net returns from sales are $4,565.50 and the expense of operating the 
 
 business is $4,375.00, what does this indicate? 
 
 20. If the total assets are $7,682.50 and the total liabilities $6,552.90, what does 
 
 this indicate? 
 
 21. If the total assets are $10,500.00 and the total liabilities $1,500.00, what does 
 
 this indicate? 
 
 22. Would it be practicable for a department store to make a Balance Sheet and 
 
 Statement of Profit and Loss at the close of each month? Why? 
 
 23. Why is it necessary for each business concern in the United States to have a 
 
 Balance Sheet and a Statement of Profit and Loss prepared at least once each 
 year? 
 
 24. What information can the owner obtain from his Balance Sheet which will be of 
 
 assistance to him in securing credit from other business concerns? 
 
 25. Why is it that the difference between the total assets and total liabilities equals 
 
 the net investment plus the net profit?
 
 Chapter VIII 
 
 CLOSING THE LEDGER 
 
 The Purpose of this Chapter is to explain and illustrate the process' of 
 closing the ledger at the end of a fiscal period. It is customary to close the ledger 
 at the end of a fiscal period in order that the profit or loss resulting from the oper- 
 ations of the business during the period may be credited or debited to the owner's 
 account, and in order that the income and cost accounts may be in balance at 
 the beginning of the next period. The illustrations are applicable to the business 
 of W. A. Gordon in the Model Set, Chapter VI. 
 
 § 53. Closing the Ledger is an accounting term applied to the process of 
 transferring the net profit or net loss to the owner's Capital account at the close 
 of a fiscal period. This process requires the closing of all income and cost accounts 
 which appear on the Statement of Profit and Loss. As explained in § 34, the 
 owner's interest in the business consists of the assets invested at the beginning 
 of the business, subsequent investments, and the net profit resulting from the 
 operations of the business, less withdrawals from the investment, and the net loss, 
 if the business has been operated at a loss. The debits and credits to the owner's 
 Capital account will show the investments and withdrawals, but will not show 
 the profit or loss resulting from the operations of the business until the ledger has 
 been closed. For this reason, it is customary for the bookkeeper or accountant to 
 close all accounts shown on the Statement of Profit and Loss at the close of a fiscal 
 period and to debit or credit the owner's Capital account with the loss or profit 
 reported to the owner on the Statement of Profit and Loss. 
 
 § 54. Accounts Required in Closing the Ledger. Two accounts in 
 addition to those discussed in the preceding chapters are required in closing the 
 ledger: one to show the value of the merchandise inventory and the other to show 
 the operating cost, special losses, gross profit on sales, special profits, and net profit; 
 the former account is usually given the title "Inventory" or "Merchandise Inven- 
 tory," and the latter, "Profit and Loss." Other accounts may be required; these 
 will be explained and illustrated as they are needed in connection with the dis- 
 cussion of the adjusting and closing entries. 
 
 INVENTORY ACCOUNT 
 
 § 55. The Purpose of this Account is to show the value of the merchan- 
 dise on hand at the close of the fiscal period as indicated by the merchandise in- 
 ventory. It is necessary to show the value of the inventory in an account in the 
 ledger because it is shown as one of the assets on the Balance Sheet. 
 
 Debit the Inventory Account: Credit the Inventory Account: 
 
 ^ I. At the close of each fiscal ^ 2. At the beginning or close of 
 
 period, with the value of the each fiscal period, with the 
 
 merchandise inventory at the value of the merchandise in- 
 
 close of the period. ventory at the close of the 
 
 preceding fiscal period as in- 
 dicated by the entry on the 
 debit side. 
 H 3. The Balance of this Account shows the value of the merchandise in- 
 ventory at the close of the fiscal period. 
 
 87
 
 88 CLOSING THE LEDGER. 
 
 PROFIT AND LOSS ACCOUNT 
 
 § 56. The Purpose of this Account is to show the operating cost, special 
 losses, principal income, and special profits for the fiscal period as shown by the 
 Statement of Profit and Loss. No transactions are recorded in this account, the 
 debits and credits being formed by transferring to it the balances of the profit 
 and loss accounts shown on the Statement of Profit and Loss. If desired, the 
 balances of these accounts could be closed direct into the owner's Capital account, 
 but it is considered the better practice to have one account in the ledger which 
 summarizes the facts shown on the Statement of Profit and Loss. This account 
 is opened only at the close of the fiscal period, and when the balances of all the 
 profit and loss accounts have been transferred to it and its balance transferred 
 to the owner's Capital account, it is ruled and remains in balance until the close 
 of the next fiscal period. 
 
 Direct profits or losses that occur during the fiscal period should not be credited or debited to 
 the Profit and Loss account, but to a special account, the name of which should indicate the nature 
 of the profit or loss, as "Profit on Sales of Real Estate," "Loss on Stolen Typewriter," "Loss on 
 Delivery Truck," etc. 
 
 Debit the Profit and Loss Account: Credit the Profit and Loss Account: 
 
 % I. At the close of each fiscal period, ^ 3. At the close of each fiscal period, 
 
 with the balance of the Ex- with the gross profit on sales. 
 
 pense account or accounts. T[ 4. At the close of each fiscal period, 
 
 ^2. At the close of each fiscal period, with the balance of each ac- 
 
 with the balance of each ac- count which shows a profit. 
 
 count which shows a loss. 
 
 ^ 5. The Balance of the Profit and Loss Account shows the net profit or net 
 loss for the fiscal period, which is the same as the "Net Profit" or "Net Loss" shown 
 on the Statement of Profit and Loss. This balance is debited or credited to 
 the owner's Capital account. 
 
 The student may wonder why the account is not named "Loss and Profit," or "Loss and Gain," 
 because the losses are recorded on the debit side and the gains or profits on the credit side. The 
 title "Profit and Loss" is not arbitrary, and "Loss and Gain" may be used if desired. However, 
 the title "Profit and Loss" is preferred by accountants because the account is a summary of those 
 accounts used in connection with the preparation of the Statement of Profit and Loss. 
 
 CLOSING ENTRIES 
 
 § 57. Entries to Close the Ledger. Five or more entries are necessary to 
 close the ledger as follows: (i) to record the merchandise inventory at the close 
 of the fiscal period; (2) to close the Purchases account; (3) to close the Sales 
 account; (4) to close the Expense account; (5) to close the Profit and Loss account. 
 A separate entry is required to close each account which shows an income or a cost, 
 hence the number of entries will depend on the number of accounts to be closed. 
 The information for these entries is obtained from the Statement of Profit and 
 Lo.ss, hence this statement is used as a guide in closing the ledger. 
 
 The first entry may be regarded as an adjusting entry required to show in the ledger the 
 value of an asset used in the preparation of the Balance Sheet, or as one of the entries necessary in 
 the process of closing the ledger. (§ 46, Hlf 4 and 5.) 
 
 § 58. Methods of Closing the Ledger. The five or more closing entries 
 are of the same nature as entries for transactions which occur in the regular oper- 
 ations of the business in that each entry requires an account debited and an ac- 
 count credited, the values being the same. These entries may be made direct in 
 the ledger accounts or in the general journal and posted to the ledger in the same 
 manner as transactions. When entries are made in the general journal and posted
 
 METHODS OF CLOSING THE LEDGER. 89 
 
 to the ledger, the process is known as the "journal entry method" of closing the 
 ledger; when the adjusting entries are made direct in the ledger, the process of 
 closing is referred to as the "direct method" of closing the ledger. Both methods 
 of closing the ledger will be discussed and illustrated to emphasize the fact that 
 the final results are the same no matter which method is used. 
 
 The student might conclude from the foregoing discussion that the direct method of closing 
 is used when the transactions are recorded direct in the ledger, and the journal entry method of 
 closing when the transactions are recorded in books of original entry and posted to the ledger. How- 
 ever, this is not true in practice, because many bookkeepers prefer the direct method of closing 
 even though the transactions are recorded in books of original entry and posted. It is quite evident 
 that the journal entry method is the better because it facilitates auditing by providing a record of 
 the closing entries in a book of original entry. 
 
 § 59. Journal Entry Method. When the closing entries are made in the 
 journal, they are recorded in the same manner as those necessary to record trans- 
 actions. All the entries are made under date of the last day of the fiscal period. 
 The five journal entries required to close the ledger of W. A. Gordon (Model Set) 
 on pages 70-73 are shown in the illustration on page 90. The posting of these 
 closing entries is shown in the illustration on pages 91 and 92; pages 70 and 71 
 are not repeated because none of the accounts on these two pages are atTected by 
 the closing entries. An analysis of the closing entries is given on pages 94, 95 and 96. 
 
 § 60. Direct Method of Closing. When the closing entries are made direct 
 in the ledger and not in the journal, they are recorded in the same manner as 
 transactions (§§ 19, 29 and 35), except it is customary to use red ink in the entry 
 which balances an account. The ledger page is given in each entry for reference. 
 The entries are made under date of the last day of the fiscal period. The process 
 of closing the ledger of W^ A. Gordon (Model Set) on pages 70-73 by the direct 
 method is explained and illustrated in Appendix B. 
 
 The direct method of closing is illustrated in Appendix B, separate from the journal entry 
 method in this chapter to avoid confusion. The student should compare the two methods because 
 a knowledge of both is necessary to a thorough understanding of each. The final results are the 
 same with either method, but preference is given to the journal entry method in this text because 
 it is preferred and recommended by practicing accountants. The reason for this preference is 
 that the entries in the journal facilitate auditing Before auditing a ledger which has been closed 
 by the direct method, it is necessary for the auditor to prepare journal entries so that he may know 
 that each entry has been posted. 
 
 § 61. Balancing an Account. When it is desired to rule an account 
 which does not balance and carry the balance down below the ruling on the same 
 page or forward it to a new page, the process is referred to as balancing an account. 
 This is effected by entering the balance on the smaller side under the date on which 
 the account is balanced and ruling the account. It is customary to use red ink for 
 the date, figures and the ruling, but its use is not arbitrary. The balance is brought 
 down with black ink on the opposite side of the account below the ruling or under 
 the title of the account on a new page. The method of balancing the Cash account 
 is shown on page 70 and the proprietor's Capital account on page 91. 
 
 § 62. A Post-Closing Trial Balance is a list of the open accounts in the 
 ledger with the balance set opposite the name of each account, prepared after 
 all the adjusting and closing entries have been made in the accounts. The facts 
 shown on this Trial Balance are the same as those shown on the Balance Sheet 
 and should be checked with it before the Balance Sheet is submitted to the owner 
 for his approval. This Trial Balance is necessary in order that the bookkeeper may 
 know that the accounts in the ledger agree with the facts shown on the Balance 
 Sheet, and that the ledger is in balance before the transactions performed in the 
 next fiscal period are recorded.
 
 90 
 
 JOURNAL ENTRIES TO CLOSE THE LEDGER 
 
 
 
 
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 Illustration No. 43, Page 2 of the General Journal for Model Set. 
 
 EXPLANATION. This illustration shows the five entries (§ 57) to close the ledger for W. 
 A Gordon Model Set, made in journal form (§ 59). The information is obtamed from the State- 
 ment of Profit and Loss, Illustration No. 42. These entries are analyzed and further explamed on 
 pages 94, 95 and 96.
 
 CLOSING ENTRIES POSTED 
 
 91 
 
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 Illustration No. 44, Page 3 of the Ledger for Model Set. 
 
 EXPLANATION. This page is the same as page 72 except the Capital account has been 
 credited with the net profit and is balanced as explained on page 93. Pages 70 and 71 are not 
 repeated here because they are not affected by the closing entries.
 
 92 
 
 CLOSING ENTRIES POSTED 
 
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 Illustration No. 45, Page 4 of the Ledger for Model Set. 
 
 EXPLANATION. This page is the same as page 73 except the journal entries on page 90 
 have been posted and the accounts "in balance" have been footed and ruled. Pages 72 and 73 would 
 appear the same as pages 91 and 92 if the closing entries had been posted to them.
 
 POST-CLOSING TRIAL BALANCE. 
 
 93 
 
 /^^^^^-tf^^-^ a.<n^ ■^i^^^:^,,^^ 
 
 Illustration No. 46, Profit and Loss Account, Model Set 
 
 The above account would be opened on page 5 of the ledger for the Model Set, the first four 
 pages being full as shown on pages 70, 71, 91 and 92. This account is the result of closing the Pur- 
 chases, Sales and Expense accounts; the balance has been transferred to W. A. Gordon, Capital, 
 as shown in the illustration at the bottom of page 91. 
 
 BALANCING THE CAPITAL ACCOUNT 
 
 If desired, the owner's Capital account may be ruled and his present capital (proprietary 
 interest in the business) carried down under date of the beginning of the next fiscal period. If this 
 plan is followed, the present capital is entered on the debit side with red ink, and the balance carried 
 down on the credit side under date of the beginning of the next fiscal period as in the illustration 
 at the bottom of page 91. 
 
 POST-CLOSING TRIAL BALANCE 
 
 / 
 
 
 
 / V 
 
 
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 \jr/ 
 
 A^£. 
 
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 Illustration No. 47, Post-Closing Trial Balance for Model Set 
 
 This Trial Balance is made from the ledger accounts on pages 70^ 71, 91 and 92; the Accounts 
 Receivable and Accounts Payable are each shown in one amount because these were not affected 
 by the clo^ng entries. The accounts are arranged in the same order as the accounts appear in the 
 ledger. The facts on this Trial Balance are the same as (hose shown by the Balance Sheet. The 
 post-closing Trial Balance proves that the ledger is in balance after the closing entries are posted. 
 
 Combined Journal Entry 
 
 If desired, the accounts used in making the Statement of Profit and Loss may be closed with 
 their balances by a combined journal entry. The journal entry at the right shows this method of 
 closing the accounts which 
 were closed by the five sep- 
 arate entries on page 90. 
 This form of closing is not 
 recommended by account- 
 ants because the Profit and | 
 Loss account is omitted. 
 It is desirable to have in the 
 ledger a summary of all the accounts showing a profit or loss such as that provided by the Profit 
 and Loss account, because this information is very valuable for statistical purposes. The student 
 will understand this better after he is more familiar with the accounting procedure developed later 
 in the course. 
 
 Inventory 
 Sales 
 
 Purchases 
 
 H77 
 234S 
 
 65 
 
 3112 
 
 50 
 
 Expense 
 
 W. A. Gordon, Capital 
 
 
 
 327 
 3S5 
 
 40 
 90
 
 94 
 
 ANALYSIS OF CLOSING ENTRIES. 
 
 (^c^ 
 
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 V::^r>'Z-'Z^-C'm^Z^-3*-^ 2 
 
 ANALYSIS OF CLOSING ENTRIES ON PAGE 90 
 
 The First Entry is that required to record the merchandise inventory at the close of 
 period. This entry is necessary because the cost of sales is ascertained on the Statement 
 and Loss by subtracting the 
 inventory at the close of the ^^..^t'-c^X^^f..^^-,;.^^ 
 
 fiscal period from the net . 
 
 purchases. The Inventory 
 account is debited to record 
 the asset; the Purchases ac- 
 count is credited for the in- 
 ventory so that when it is 
 posted, the subtraction will 
 be indicated. It is custom- 
 ary to write "Mdse. Inv." 
 in the explanation column 
 of the Inventory account, 
 and "Inventory" in the ex- 
 planation column of the 
 Purchases account. 
 
 The illustration at the 
 right shows the Purchases 
 account at the close of the 
 fiscal period, the journal 
 entry to record the inven- 
 tory at the close of the period, 
 and the Inventory and Pur- 
 chases accounts as they ap- 
 pear after the journal entry 
 has been posted. 
 
 The Second Entry is 
 
 the Sales account. This entry 
 of Profit and Loss by sub- 
 tracting the cost of mer- 
 chandise sold from the net 
 sales. The Sales account is 
 debited for the cost of sales 
 so that when it is posted, 
 the subtraction will be indi- 
 cated; Purchases is credited 
 because this account shows 
 the cost of sales. When this 
 entry is posted, the Pur- 
 chases account will balance 
 and be ruled, and the bal- 
 ance of the Sales account 
 will show the net profit on 
 sales as shown by the State- 
 ment of Profit and Loss. It 
 is customary to write "Cost 
 of Sales" in the explanation 
 column of each of these 
 accounts. 
 
 The illustration at the 
 right shows the Sales and 
 Purchases accounts before 
 the second entry has been 
 posted, the journal entry to 
 close the Purchases account 
 into the Sales account, and 
 the Sales and Purchases ac- 
 counts after this journal 
 entry has been posted. The 
 balance of the Sales account 
 now shows the net profit 
 made by selling merchandise 
 because the credit side shows 
 sales and the debit side cost. 
 
 the fiscal 
 of Profit 
 
 >;»■ £ o 
 
 ^77 
 
 V7 
 
 that required to transfer the balance of the Purchases account to 
 is necessary because the profit on sales is ascertained on the Statement 
 
 "^ — 
 
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 ANALYSIS OF CLOSING ENTRIES. 
 
 95 
 
 
 ,^^>A£^^ 
 
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 J/ 
 
 
 
 >J^V 
 
 
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 The Third Entry is that required to transfer the balance of the Sales account to the Profit 
 and Loss account. This entry is necessary because it is customary to show in the ledger a summary 
 of the facts shown by the 
 
 Statement of Profit and Loss ^^iAt-^Z^L,^^ ^ 
 
 Sales is debited because this 
 account shows the profit 
 on sales; the Profit and Loss 
 account is credited because 
 this account is credited for 
 all income. When this entry 
 is posted, the Sales account 
 will balance and be ruled, and 
 the Profit and Loss account 
 will show the profit on sales. 
 It is customary to write 
 "Profit on Sales" in the 
 explanation column of each 
 of these accounts. 
 
 The illustration at the 
 right shows the Sales ac- 
 count before the third entry 
 has been posted, the journal 
 entry to close the Sales ac- 
 count into the Profit and Loss 
 account, and the Sales and 
 Profit and Loss accounts 
 after this journal entry has 
 been posted. The profits and 
 losses could be closed direct 
 into the proprietor's account 
 instead of Profit and Loss 
 as explained in § 56. 
 
 
 O-O: 
 
 J/ 
 
 
 
 7 / J J 
 
 
 J / 
 
 
 
 T'J^M 
 
 
 J/ 
 1 / 
 
 
 
 
 
 3 ■> i V 
 
 
 
 
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 -5"/ yf 
 
 
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 The Fourth Entry is that required to transfer the balance of the Expense account to the Profit 
 and Loss account. This entry is necessary because the net profit is ascertained on the Statement of 
 Profit and Loss by subtrac- 
 ting the expense from the 
 profit on sales. The Profit 
 and Loss account is debited 
 so that when it is posted, the 
 subtraction will be indicated; 
 the Expense account is cred- 
 ited because this account 
 shows the expense for the 
 period. When this entry is 
 posted, the Expense account 
 will balance and be ruled, and 
 the balance of the Profit and 
 Loss account will show the 
 net profit. It is customary 
 to write "Profit and Loss" 
 in the explanation column of 
 the Expense account, and 
 "Expense" in the explana- 
 tion column of the Profit 
 and Loss account. 
 
 The illustration at the 
 right shows the Profit and 
 Loss and the Expense ac- 
 counts before the fourth 
 entry has been posted, the 
 journal entry to close the 
 Expense account into the 
 Profit and Loss account, and 
 the Profit and Loss and the 
 Expense accounts after this 
 entry has been posted. 
 
 a^. 
 
 ^^<t^>.i-^^^.i^ £-7 
 
 
 0-^3, 
 
 o-^ ^ 
 
 J/ l^e^a^u^^^^, 
 
 
 e'i^o
 
 96 
 
 ANALYSIS OF CLOSING ENTRIES. 
 
 O-c^ Jy 
 
 f y.^ 
 
 'a^ U/ 
 
 O-c^ 
 
 O-o^. 1^/ 
 
 Oc.-ZS'^^^^-T*- 
 
 
 ^ fs^'fa 
 
 y. 
 
 The Fifth Entry is that required to transfer the balance of the Profit and Loss account to the 
 proprietor's Capital account. This entry is necessary because the purpose of closing the ledger is to 
 transfer the net profit to _the ^_, . ^ 
 
 proprietor's account. The 
 Profit and Loss account is 
 debited because this account 
 shows the net profit; the 
 proprietor's Capital account 
 is credited because this profit 
 is equivalent to an additional 
 investment. When this entry 
 is posted, the Profit and Loss 
 account will balance and be 
 ruled, and the proprietor's 
 Capital account will show 
 his present proprietorship as 
 shown by the Balance Sheet. 
 It is customary to write the 
 name of the proprietor's 
 Capital account in the ex- 
 planation column of the 
 Profit and Loss account, and 
 "Profit and Loss" in the ex- 
 planation column of the 
 proprietor's account. 
 
 The illustration at the 
 right shows the Profit and 
 Loss account and the account 
 with W. A. Gordon, Capital, 
 before the fifth entry has 
 been posted, the journal 
 entry to close the Profit and 
 Loss account, and the Profit 
 and Loss and W. A. Gordon 
 Capital accounts after this 
 entry has been posted. 
 
 If desired, the proprietor's 
 Capital account may be bal- 
 anced and ruled as explained 
 on page 93 and illustrated at the bottom of page 91; this plan is usually followed. 
 
 y^<i:^j.^^<«i^^ (^^<ijoZ- 
 
 (^c> 
 
 
 l>-o a I 
 
 
 \ 
 
 \6^^ 
 
 t^^--^^/ 
 
 
 Closing the Inventory Account 
 
 If desired, the inventory of merchandise at the close of the fiscal period may be transferred 
 to the Purchases account at the beginning of the next fiscal period. If it is not transferred to the 
 Purchases account at the beginning of the 
 
 JVoi>. J. J02 
 
 Purchases 
 
 hiventory 
 To close the Inventory 
 
 account at beginning 
 
 of fiscal period 
 
 H77 
 
 15 
 
 U77 
 
 15 
 
 period, then it will be necessary to trans- 
 fer it to this account at the close of the period 
 because the cost of merchandise on hand at 
 the beginning of the period must be added 
 to the cost of merchandise purchased during 
 the period to ascertain the total cost of 
 all merchandise. The form of entry for 
 transferring the merchandise inventory to 
 
 the Purchases account is the same whether _ 
 
 it is made at the beginning or the close of the period. The entry necessary to transfer the mventory 
 to the Purchases account for W. A. Gordon, Model Set, is shown at the right. The date, November 
 I, at the top, indicates that this entry was made at the beginning of the next fiscal period. After 
 this is posted, the Inventory account will be in balance, and the value of the inventory will appear 
 on the debit side of the Purchases account under date of November i ; it is customary to write 
 "Inventory" in the explanation column of the ledger. 
 
 Exercise No. 37, Closing the Ledger, Journal Entry Method. 
 
 Prepare a Balance Sheet and Statement of Profit and Loss, each in report 
 form, from the Trial Balance of C. U. Steele, resulting from recording the trans-
 
 SUMMARY— CHAPTERS VI, VII AND VIII 97 
 
 actions in Exercises Nos. 17, 20 and 23 (merchandise inventory, $6,127.50). Close 
 the ledger by the journal entry method and take a post-closing Trial Balance. 
 
 The student was instructed to retain the Trial Balance and ledger sheets at the conclusion 
 of Exercise No. 23. 
 
 Exercise No. 38, Closing the Ledger, Direct Method. 
 
 Prepare a Balance Sheet in account form and a Statement of Profit and 
 Loss in report form from the Trial Balance of Donald D. Sells, resulting from 
 recording the transactions in Exercise No. 24 (merchandise inventory, $762. 78). 
 Close the ledger by the direct method, and take a post-closing Trial Balance. 
 
 The student was instructed to retain the Trial Balance and ledger at the conclusion of Exer- 
 cise No. 24. 
 
 Exercise No. 39, Closing the Ledger, Journal Entry Method. 
 
 Prepare a Balance Sheet in account form and a Statement of Profit and Loss 
 in report form from the Trial Balance of H. A. Popp, resulting from recording 
 the transactions in Exercise No. 25 (merchandise inventory, $396.54). Close the 
 ledger by the journal entry method, and take a post-closing Trial Balance. 
 
 The student was instructed to retain the Trial Balance and ledger at the conclusion of Exer- 
 cise No. 25. 
 
 Exercise No. 40, Closing the Ledger, Combined Journal Entry. 
 
 Prepare a Balance Sheet and Statement of Profit and Loss, each in report 
 form, from the Trial Balance of J. N. Fulton, resulting from recording the trans- 
 actions in Exercise No. 26. Close the ledger by a combined journal entry as ex- 
 plained at the bottom of page 93, and take a post-closing Trial Balance. 
 
 The student was instructed to retain the Trial Balance and ledger at the conclusion of Exer- 
 cise No. 26. 
 
 Summary of Chapters VI, VII and VIII. The Model Set in Chapter VI 
 illustrates the method of recording transactions, posting and taking a Trial Balance. 
 Illustrations are provided so that the student may see the connection between the 
 transactions and the Trial Balance at the end of the month. 
 
 The Balance Sheet is a report showing the assets, liabilities and proprietor- 
 ship. The Statement of Profit and Loss is a report showing a list of the income, 
 costs and net profit. The proprietorship as shown by the Balance Sheet less the 
 net profit or plus the net loss as shown by the Statement of Profit and Loss equals 
 the proprietorship at the beginning of the fiscal period. 
 
 "Closing the ledger" is a term used to describe the method of transferring 
 the profit or loss to the owner's Capital account. Certain entries are required to 
 make this transfer. These entries may be made direct in the ledger in the same 
 manner as transactions may be recorded direct in the ledger, or they may be re- 
 corded in the general journal and posted to the ledger. The accounts to be closed 
 are those used in connection with the Statement of Profit and Loss; they include 
 cost and income accounts. The Profit and Loss account is used in the process of 
 closing; when all accounts have been closed, the balance of the Profit and Loss 
 account is transferred to the owner's Capital account. The post-closing Trial 
 Balance proves that the equality of debits and credits has been maintained 
 throughout the closing process. 
 
 QUESTIONS 
 
 1. Explain the meaning of the term "closing the ledger." 
 
 2. Is it necessary to close the ledger? Why? 
 
 3. When is the ledger closed? 
 
 4. Name the two methods of closing the ledger.
 
 98 QUESTIONS ON CLOSING THE LEDGER 
 
 5. What is the purpose of the Profit and Loss account? 
 
 6. Why is the account not named "Loss and Gain" since losses appear on the 
 
 debit side and gains on the credit side? 
 What is the purpose of the post-closing Trial Balance? 
 Why are accounts ruled when the two sides are equal? How? 
 Why is it necessary to open an account with Inventory at the close of the 
 
 fiscal period? 
 
 10. Name the five entries usually required in connection with closing the ledger. 
 
 11. If the business had made a profit other than that shown by the Purchases, 
 
 Sales and Inventory accounts, would a separate entry be required to close 
 this profit into the Profit and Loss account? If the profit is credited to a 
 Profit on Sales of Real Estate account, name the accounts debited and 
 credited in the closing entry. 
 
 12. A business owned a horse which it used in connection with the delivery of its 
 
 merchandise; this horse died and the loss was debited to a "Loss on Dead 
 Horse" account. Would a special entry be required to close the balance of 
 this account into the Profit and Loss account? Name the accounts debited 
 and credited in this closing entry. 
 
 13. After the ledger is closed, what accounts remain open? 
 
 14. What relation does the credit to the owner's Capital account after it is closed 
 
 have to the assets and liabilities shown by the accounts that remain open 
 after the ledger is closed? 
 
 15. Describe the process of closing the ledger by the direct method. 
 
 16. Describe the process of closing the ledger by the journal entry method. 
 
 17. Which method of closing the ledger is considered the better? Why? 
 
 18. Are the debits and credits equal in each closing entry? Why is this necessary? 
 
 19. If an account is closed with an incorrect amount, what effect will this have 
 
 on the Trial Balance of the first month of the next fiscal period? 
 
 20. Mention an error in the closing of the ledger which would effect future Trial 
 
 Balances. 
 
 21. Why is the Cash account balanced at the close of the fiscal period? 
 
 22. Describe the entry necessary to close the balance of the Inventory account 
 
 into the Purchases account. When should this entry be made? 
 
 23. Is it necessary to balance each customer's account and each creditor's account 
 
 in the ledger at the close of the fiscal period? Give reasons for your answer, 
 
 24. Is it necessary to balance the Capital account after the net profit or net loss 
 
 for the period has been credited or debited to it? 
 
 25. Why is red ink used for closing the Capital account even though the other 
 
 accounts may be closed by journal entries?
 
 Chapter IX 
 
 BUSINESS FORMS AND VOUCHERS 
 
 The Purpose of this and the two Succeeding Chapters is to explain and 
 illustrate those business forms used most frequently in connection with the per- 
 formance of business transactions. A printed statement of the business transac- 
 tion which has been completed is sufficient for determining the debits and credits 
 in connection with the transaction, but a knowledge of business forms is necessary 
 because they represent transactions to the bookkeeper. 
 
 § 63. A Business Form or Voucher is a written statement concerning 
 a business transaction to be performed or one that has been completed. The two 
 terms are used with the same meaning, but the term "voucher" usually refers to 
 a business form which is an evidence of a cash payment. Business forms prepared 
 for a specific purpose are usually printed with blank space for the information 
 desired in connection with a transaction. These forms are referred to by name, 
 as purchase order, invoice, purchases invoice, sales invoice, bill, sales ticket, receipt, 
 deposit ticket, check, note, sight draft, time draft, trade acceptance, etc. The 
 various business forms will be explained and illustrated as they are needed in 
 the recording of transactions in the practice sets. In this chapter, those which 
 relate to the purchases and sales of merchandise are explained and illustrated. 
 
 § 64. Use of Business Forms. A business form serves two purposes: 
 (i) it provides written information in regard to a business transaction, thus avoid- 
 ing the misunderstanding which might result from a verbal contract; (2) it pro- 
 vides information for the basis of the entry made by the bookkeeper when he re- 
 cords the transaction. From the standpoint of the bookkeeper, business forms 
 are very important because they not only provide the information which he needs 
 in recording transactions, but also support his records when these are verified 
 by the auditor. 
 
 In the preceding chapters, the transactions have been recorded from a printed statement of 
 the facts; in practice, the bookkeeper would make his record from business forms because no 
 printed record of the transactions would be available. The usual process is (a) transactions performed 
 as evidenced by business forms; (b) a record of these transactions in books of original entry; (c) the 
 accounts in the ledger resulting from posting; (d) the Trial Balance at the end of the month to prove 
 the equality of the debits and credits; (e) a report of the assets and liabilities, and profits and losses 
 to the owner at the close of the fiscal period. 
 
 § 65. A Purchase Order, or "order" as it is sometimes termed, is the written 
 authority from the purchaser, authorizing the seller to make shipment of the mer- 
 chandise described therein. The printed form provided for a purchase order 
 should be made in duplicate, the original and duplicate printed on different-colored 
 paper, and each original and duplicate numbered the same, the numbers being 
 arranged consecutively. When the order is made, the same facts are shown on 
 the duplicate as on the original and the duplicate is filed for reference. When 
 this plan is followed, the purchaser has available all the information given in each 
 order and can check the list of the merchandise received with this to determine 
 whether the order has been filled as directed. 
 
 Merchandise may be ordered by letter, by telegraph, or by telephone; when the order is placed 
 by letter, a description of the merchandise desired is given on the order blank enclosed with the 
 letter, and not in the letter; when the merchandise is ordered by telegraph or by telephone, an 
 order, accompanied by the copy of the telegram or containing the date of the telephone message 
 is mailed to the seller confirming the telegram or the telephone call. Unfilled orders should be filed 
 numerically, and, when they have been filled, they should be placed in another file in the same order. 
 Illustration No. 48 shows one form of purchase order; others will be discussed and illustrated later. 
 
 99
 
 lOO 
 
 BUSINESS FORMS AND VOUCHERS. 
 
 MARK ORDER NO 
 
 ON ALL INVOICES 
 
 SOUTH-WESTERN PUBUSHING CO. 
 
 Publishers o( Comniercljil Text Books 
 
 309 WEST THIRD ST., CINCINNATI, OHIO 
 
 Order No. 3983 
 
 ..-J.^''^^\.^..?^.^®..^^-'^-^.^^°*-^.^.^"S---^°----^ Chidunati....MTiX.Zl..... ig. ZX 
 
 Rochester,__N._. Y. _ Terms- . 30 dajs. net 
 
 Ship taa- freight.. -.prepaid _.._ 
 
 MARK ORDER NO. ON OUTSIDE OF ALL PACKAGES AND CASES 
 
 DESCRIPTION 
 
 PRICE PER 
 
 ^106 Bases ) 
 
 3^59 Sections ) 
 
 #60 " ( 
 
 #22 " ( 
 
 110 finislw^ 
 
 10. oc 
 
 30. OC 
 31.00 
 33.50 
 
 ea. 
 
 Deliver no floods without a wrillcn Order on this form. 
 
 ^ontl) l^estern ^ublialimg Co. 
 
 By..&QJ^7.■..M.....- -. 
 
 Illustration No. 48, Purchase Order. 
 
 EXPLANATION. This illustration shows a purchase order issued by the South-Western 
 Publishing Co., Cincinnati, O., for filing devices manufactured by the Yawman & Erbe Mfg. Co., 
 Rochester, N. Y. The order is issued in triplicate; the original is mailed to the Yawman & Erbe 
 Mfg. Co., one copy is filed in the office, and the other is sent to the receiving department. The 
 instructions in the upper right hand corner are for information in checking the invoice; the instruc- 
 tions in regard to marking the cases are for the receiving department. 
 
 § 66. An Invoice is a written list of merchandise purchased or sold. The 
 purchaser usually refers to the invoice he receives as a "purchase invoice," and 
 the seller to one which he issues as a "sales invoice." If the printed form on which 
 the invoice is prepared is made in duplicate, the seller can, by the use of carbon 
 paper, retain a copy of the list of items sold each customer; the method of doing 
 this will be explained later. An invoice is authorized by a purchase order and 
 should contain all the information given in the order; this includes the date and 
 number of the purchase order, method of making shipment, detailed description of 
 the merchandise shipped, prices and extensions of each item, and the total. In 
 addition to this information, the invoice should show the date the merchandise was 
 shipped, which should be the date of the invoice; the terms which the seller allows; 
 the name and address of the seller; and any other information which the seller 
 may wish to include. If all the merchandise mentioned in the purchase order 
 is not shipped, an explanation of this omission should be given on the invoice, 
 because the purchaser, in checking the information on the invoice with his order, 
 will want to know the reason it has not been filled as specified. Illustrations Nos. 
 49 and 50 show two forms of invoices; other forms will be explained and illus- 
 trated later.
 
 BUSINESS FORMS AND VOUCHERS. 
 
 lOI 
 
 VawmanandF rbe Mfg.Cp. 
 
 Wood and Steel 
 
 Filing Devices 
 
 my 
 
 Office Systems 
 
 and Equipment 
 
 MAIN OFFICE AND FACTORIES. ROCHESTER. N. Y. 
 
 Sold To 
 
 South Western Publishing Co. 
 309 West Third St. 
 Cincinnati, Ohio. 
 
 Date 
 
 Your Order No. 
 
 Rochester No. 
 
 Branch No. 
 
 Shipped Via 
 
 Territory 
 
 5/34/21. 
 3983 
 
 234873 
 
 II Y C 
 66 
 
 TERMS:— Thirty Days Net— Payable in New York Eichange— Pay No Money to Representatives. 
 
 Quantity 
 
 2^ 
 
 2^ 
 2^ 
 
 Description 
 
 106 Bases 
 59 Sections 
 60 
 22 
 
 Price 
 
 .\mount 
 
 10 00 ''ea 20 00^ 
 
 30 00^ " 120 00-^ 
 
 31 OO'' " 62 00-/ 
 33 50^ " 67 OOy' 
 
 110 finleh 
 
 Total 
 
 5^869 00^ 
 
 Illustration No. 49, Purchase Invoice. 
 
 EXPLANATION. This invoice is in acknowledgment of the purchase order, Illustration 
 No. 48. The order has been filled complete. Space is provided on the invoice for information relative 
 to the date, the buyer's order number, the seller's number, the branch number, method of shipment, 
 and territory. The "66" after "Territory" indicates that there are a number of territories and that 
 the merchandise mentioned in this invoice was shipped into territory No. 66. The check marks 
 indicate that the merchandise has been received as ordered, that the prices agree with the order, 
 and^that the extensions and the total have been verified. 
 
 W. H . GOODWIN 
 
 X)E^VLEIt IN 
 
 Fancy Groceries, Provisions and Country Produce. 
 
 ._^^^<!^^1_^^^/Pj2^ 
 
 ,y^? fjy ..^^^..^^^..^^ >^ 
 
 /^. r 7^^^:^y>^_ -^^jt,^. 
 
 ^<^^g..=^^<Z>^,y-7V7>'- X J^^.A<^T.2^yl^i^y 
 
 ■.£^^ 
 
 
 ^^ 
 
 .^//. ■2^<iCy^yye:Z. ^^..^ 
 
 j^ 
 
 .^^ y^^^^y -^f^^1:^yt:;y-e.<Ly' (/oe^i^^) 
 
 '^ 
 
 -i-.s-c 
 
 ^. 
 
 ix^ 
 
 l^gt-o-t-^ ^^ y 
 
 Sh 
 
 .To 
 
 /^ 
 
 oZ,r 
 
 Illustration No. 50, Sales Invoice. 
 
 EXPLANATION. The information on this sales invoice is practically the same as that on 
 the purchase invoice except it is rendered by a retail merchant and he does not need the information 
 shown on the purchase invoice.
 
 I02 
 
 BUSINESS FORMS AND VOUCHERS. 
 
 § 67. A Sales Ticket is a form of sales invoice used by some retail mer- 
 chants. Sales tickets are usually printed in duplicate and bound in a book. Each 
 clerk is provided with a book, and, when he makes a sale, either on account or for 
 cash, he makes a list of the merchandise sold on the sales ticket. By the 
 use of carbon paper, the two copies 
 can be made at one time; one copy 
 is sent to the office for the information 
 of the bookkeeper and the other to the 
 wrapping department to be wrapped 
 with the merchandise sold ; additional 
 copies may be made at the same time 
 if they are needed in connection with 
 the accounting records. There are 
 many methods of arranging sales 
 tickets, but no attempt will be made 
 here to discuss all of these. The 
 method described will enable the stu- 
 dent to understand the meaning and 
 purpose of the sales ticket and its use 
 in connection with the sales invoice. 
 Illustration No. 51 shows one form of 
 sales ticket. The student is advised to 
 inquire from local merchants for other 
 forms and their use in the sales, pack- 
 ing, and accounting departments. 
 
 EXPLANATION. The information on 
 this sales ticket shows the date, the name of 
 the one to whom the sale was made, his ad- 
 dress, the number of the sale, the clerk, the 
 items sold, amount of each, and total amount. 
 The purchaser receives a copy of this with the 
 merchandise so that he may know that the 
 proper merchandise has been delivered. 
 
 Illustration No. 51, Sales Ticket. 
 
 § 68. A Bill is a business form given as evidence of service rendered. The 
 terms "bill" and "invoice" are sometimes used interchangeably, but the general 
 understanding is that an invoice is a list of merchandise or material purchased 
 
 
 
 LAST DAY OF PAYMENT OCTOBER lOth 
 
 y 
 
 CINCINNATI. O OCTOBER 1. 1921 j 
 
 */,fi>'/THE Cincinnati & Suburban Bell Telephone Co. 
 
 CASHIERS STUB 
 
 PLXASE RETURN THIS STUB WITH YOU 
 
 MAIL REMITTANCE OR PLACE YOUR 
 
 TELEPHONE NUMBER ON CHECK 
 
 > OCTOBER. 1021 
 
 JAS. W. BAia:R A3874 j 
 
 DELAWARE & KASOTA. ! 
 
 AVOU., CIKTl., 0. } 
 4.60 
 
 JAS. W. BAJiER 
 DELA'.VAHE & ilASOTA, 
 AVOIi., ClIiTl., 0. 
 
 1 OCTOBER. I»21 
 
 ^ 
 
 1 Leftal Holidays aad m 
 ixrlDS June. July. Aufl. 
 
 r 
 
 ^ 
 
 ■a « 
 
 A3874 
 
 4.50 
 
 Illustration No. 52, A Bill. 
 EXPLANATION. This bill is rendered for telephone service as stated therein. In addition 
 to regular service, there is a charge for toll or long-distance calls; this charge is usually supported 
 by a separate bill giving details. The notice in the upper left-hand corner is for the convenience of 
 the bookkeeper of the telephone company so that, when a remittance is received, he may know 
 whether the subscriber desires the bill to be receipted and returned.
 
 BUSINESS FORMS AND VOUCHERS. 
 
 103 
 
 or sold, and a bill is a statement of service rendered. Bills are rendered by at- 
 torneys, physicians, gas, electric, and telephone companies, and other individuals 
 or concerns which render service for which payment is to be made after the ser- 
 vice is rendered. Illustration No. 52 shows one form of bill. The arrangement 
 is usually the same as that of an invoice, but this depends largely on the purpose 
 for which the bill is rendered. 
 
 § 69. A Receipt is a written acknowledgment from the receiver to the 
 giver, of money or other property received in payment for some form of indebted- 
 ness. Receipts may be the result of transactions in connection with the purchase 
 or sale of merchandise or transactions in which service has been rendered. A 
 receipt may be written on a receipt form as in Illustration No. 53; it may be a 
 
 No. 
 
 To (^ 7PQj'/r?,0'Zf/r?.a/' 
 
 For ( 7r^^/yn^ 
 
 A moiin f^y/^A^ 
 
 •i, 
 
 ?/9^yy^y?^/ <? ^ .9/ 
 
 Jj^.^y- . 
 
 /Q^ 
 
 'y/fy?7y^ 
 
 .'J^y / c/jyy^/^J- 
 
 Illustration No. 53, Receipt Book with Stub. 
 
 EXPLANATION. The illustration shows the receipt book and stub. The information on 
 the stub is arranged in the same order as it is on the receipt for the convenience of the bookkeeper. 
 The purpose of a receipt should always be stated on the stub for the information of the bookkeeper 
 when he records the transaction (§ 27, \ 5), and on the receipt for the information of the holder. 
 
 The Philip Carey Compaisht 
 
 OBDCB NO. D-058676 
 
 Car No 
 
 F O. B. DEL'D 
 
 LOCK.LAND, CINCINNATI. OHIO. DEC. 31. 192 
 
 Req. No Shipped From 
 
 Freisht Invoice No. 
 
 VI* OUR TRUCK SALESMAN 
 
 To H. C. HAZEN CONTRACTIHG CO. 
 2070 READING ROAD, 
 
 CINCINNATI, 0. 
 
 LOCKLAND, OHIO 
 PLYMOUTH MEETING. PA. 
 
 ALL REMITTANCES 
 
 rfUST BE MADE PAYABLE 
 
 TO ORDER 
 
 OF THE COMPANY 
 
 Terms, Cash. Subiact to eight draft In 30 ds;s without further Douoe. Interest cbarsed on paat DUE ACCOUNTS. 
 
 3-PLY GRAY WALLBOARD IN BULD. 
 
 105 SHEETS 48" Z 6' 2520 SQ. FT. 
 
 SHIPPED TO H. C. HAZEN CONTRACTING CO.. 
 2070 READING ROAD. 
 
 CINCINNATI. 0. 
 
 35.00 M 
 
 88.20 
 
 y 
 
 Illustration No. 54, Receipted Invoice, 
 
 EXPLANATION. The blue stamp indicates payment. When an invoice is receipted this is 
 sufficient evidence of payment, hence a receipt in receipt form is not necessary.
 
 104 
 
 BUSINESS FORMS AND VOUCHERS. 
 
 receipted invoice or bill as in Illustrations Nos. 54 and 55; or it may be prepared 
 in any form which suits the convenience of the giver. Each business concern 
 which issues receipts should have these bound in a book with stubs as in Illus- 
 tration No. 53, as this provides a permanent record of all receipts issued. When 
 issuing a receipt similar to the illustration, the bookkeeper should always fill 
 out the stub first because this is his record of the receipt. 
 
 SEPT. 10, 1921 
 
 SEPT. 10, 1921 
 
 NOTICE 
 
 No Discount Allowed 
 on this Bill after 
 
 SEPT. 15th 
 
 3 
 
 J -W. BAKER 
 
 3261 DELAWARE AVE. 
 
 JWB 
 172-21 
 
 3-13 
 
 2.10 
 
 13 
 
 TO THE UNION GAS AND ELECTRIC CO. dr. 
 
 S. W. COR FOURTH AND PLUM STS., CINCINNATI, O. r\ kr\ 
 For ISatural Gas Consumed: /J.rtU 
 
 SEP 1 8 8 7 0^^ 
 AUG 1 8 8 10 ^^ 
 
 Amount Consumed ^ .-. OO 
 
 ,3U 
 210 
 
 Cu. Ft. 
 
 At the rate of 40c per M cubic feet, subject to discount 
 
 of 5c per M, if paid on or before Last Day of Discount. 
 
 Minimum Bill 35c net per month. 
 
 
 Plcaie Bring this Bill to be Receipted. POSTAGE must be enclosed for Return of Receipt. 
 OFFICE HOURS: 8 A.M. to 5 P M. . SATURDAY to 12 M Closed on Legal Holidays. 
 
 Illustration No. 55/ Receipted Bill. 
 
 EXPLANATION. The illustration shows a receipted bill from the gas company. The cashier 
 of the gas company would remove the right-hand end at the Une and retain this for his record. Both 
 ends are illustrated to show that the stub may be attached to the receipt and not bound in a book. 
 
 § 70. Filing Business Forms and Vouchers. All business forms and 
 vouchers should be properly filed because they are evidence of transactions either 
 completed or to be completed, and, unless properly filed, might not be available 
 when needed. The bookkeeper should pay particular attention to the filing of 
 business forms and vouchers which support his records so that he may have satis- 
 factory evidence of their correctness. No attempt will be made here to discuss 
 the method of filing business forms and vouchers, the purpose of the discussion 
 being to impress on the student of bookkeeping the importance of filing those 
 business forms and vouchers which support the bookkeeping records. 
 
 Exercise No. 41, Sales Tickets. 
 
 Prepare sales tickets for the sales made July 5, 8, 13, 16, 19, 22, and 26 in 
 Exercise No. 14 on page 40. You may use the sales tickets of a local grocer, blank 
 sales tickets, or forms ruled similar to Illustration No. 51. 
 
 Exercise No. 42, Sales Invoices. 
 
 Prepare sales invoices for the ten sales in Exercise No. 19, page 49. You 
 may use invoices of a local grocer, blank invoices for sale by stationery stores, 
 or forms ruled similar to Illustration No. 50.
 
 BUSINESS FORMS AND VOUCHERS. 105 
 
 Exercise No. 43, Purchase Order, Sales Invoice, and Receipt. 
 
 As purchasing agent for the Johnson Paint Co., Chicago, place an order, 
 under date of May 16, with the Globe-Wernicke Co., Cincinnati, manufacturers 
 of office furniture, for the following: 3 No. 503 Filing Cases at $12.00; 6 No. 67 
 Sections at $32.00; 3 No. 69 Sections at $35 00; 12 No. 37 Sections at $36.25, 
 Terms, net 30 days; shipment to be made by Pennsylvania freight. 
 
 As bill clerk for the Globe-Wernicke Co., render an invoice for this mate- 
 rial under date of May 19. 
 
 As receiving cashier for the Globe-Wernicke Co., prepare a receipt for the 
 remittance received from the Johnson Paint Co. in payment for this invoice. 
 
 If you can obtain an order blank and an invoice from some local business 
 concerns, these may be used instead of the names given. If you do not have blank 
 forms, rule writing paper similar to Illustrations Nos. 48, 49, and 53. 
 
 QUESTIONS 
 
 What business form supports the record of each transaction in the purchases 
 
 journal? 
 What business form supports the record of each transaction in the sales 
 
 journal? 
 
 3. Explain the check marks in Illustration No. 49. 
 
 4. Explain the meaning of the words "30 days net" after "Terms" in Illustration 
 
 No. 48. 
 Explain the meaning of the terms "Date," "Your Order No.," "Rochester 
 No.," "Branch No.," "Shipped via," and "Territory," and the informa- 
 tion given on a line with these in Illustration No. 49. 
 
 6. What is the purpose of indicating the territory number? 
 
 7. Explain "Mark order number on outside of all packages and cases" in Illus- 
 
 tration No. 48. 
 
 8. Explain "Deliver no goods without a written order on this form" in Illus- 
 
 tration No. 48. 
 
 9. When is the due date of the invoice in Illustration No. 49? 
 
 10. Why should a purchase order be made in duplicate? 
 
 11. Why should duplicate purchase orders be filed? 
 
 12. Can you suggest a method of filing duplicate orders so that the informa- 
 
 tion will be readily available when needed? 
 
 13. Why should a sales invoice be made in duplicate? 
 
 14. Could the duplicate sales invoices be used as a sales journal? 
 
 15- Suggest a means of filing the duplicate sales invoices if they are to be used 
 as a sales journal. 
 
 16. Distinguish between a purchases invoice and a sales invoice. 
 
 17. Robert Crouch made a number of purchases on account from a local grocer 
 
 during the month of June. July i he received a written statement from 
 the merchant, showing that he owed the merchant $28.60. How may Mr. 
 Crouch know that this amount is correct without asking the merchant for 
 additional information? 
 
 18. If a merchant sends a sales ticket with each sale on account, is it necessary 
 
 for him to render a sales invoice? 
 
 19. If you purchase a pair of shoes from a local merchant and wish to return 
 
 them, what evidence will he require in addition to the shoes? Why?
 
 I06 BUSINESS FORMS AND VOUCHERS. 
 
 20. Could the sales tickets be used by the merchant as the account with a cus- 
 
 tomer? 
 
 21. Distinguish between a bill and an invoice. 
 
 22. If a merchant has a purchase invoice receipted when he pays it, is a receipt 
 
 in receipt form necessary? 
 
 23. If a receipt for $21.50 is issued to a customer for this amount of cash received 
 
 from him on account, and the entry on the stub shows only $21.00, how 
 will the bookkeeper detect the error? 
 
 24. If a receipt is issued and the bookkeeper fails to record it on the stub, state 
 
 two ways by which he may ascentain the amount of the receipt. 
 
 25. If the bookkeeper issues receipts for all money received, what business forms 
 
 support his record of the transactions on the receipts side of the cash book?
 
 Chapter X 
 
 BUSINESS FORMS AND VOUCHERS— Continued 
 
 § 71. A Bank is a business organized for the purpose of making a profit 
 through dealing in money and securities. The capital investment, together with 
 the money deposited by customers, is loaned to those engaged in other business 
 enterprises. The principal income is the interest earned by these loans. Banks 
 are of great value to the community in which they are located because they pro- 
 vide a place for the safe-keeping of money and securities, and make possible the 
 "deposit and check" method of making payments, thus eliminating, to a great 
 extent, the use of money as a medium of exchange. 
 
 § 72. Opening an Account with the Bank. An account is opened with 
 a bank by depositing currency or cash items; the receiving teller will not accept the 
 first deposit from a depositor until it has been approved by the cashier or president 
 of the bank. It is necessary for the officials of the bank to become acquainted 
 with each depositor so as to avoid the possibility of the use of the bank account for 
 a fraudulent purpose. The receiving teller gives the depositor a receipt for the 
 amount of his deposit; this receipt is in the form of an entry in the pass book (§ 75), 
 showing the date of the deposit and the amount. The depositor is provided with 
 a book of blank checks (§ 76) for his use in withdrawing the money deposited; 
 these blank checks are necessary because no money can be withdrawn from the bank 
 except by check. The depositor is re- 
 quired to sign his name on a signature 
 card that the bank may verify his sig- 
 nature on the checks which he writes. 
 
 gVc3^/^^, 77 JL 
 
 '.^^^ £e<^^^ 
 
 :::;i^^j'^W^^/ii^'''"''M''yptk^^ 
 
 ^^:^^^. /^ /f ^ ^ 
 
 EXPLANATION. The illustration indi- 
 cates that T. L. Staples has opened an account 
 with the Merchants National Bank and that 
 his checks will be signed as indicated by his 
 signature on the card. His address, name of 
 the person by whom identified, telephone 
 number, and date of opening the account are 
 given for future reference. The card is 
 punched to fit a filing device in which it will 
 be filed alphabetically. Illustration No. 56, Signature Card. 
 
 § 73. A Deposit Ticket is a printed form supplied the depositors by the 
 bank, on which to list the currency or cash items which he wishes to deposit. 
 Space is provided for the date, name and address of the depositor, the various 
 kinds of currency and cash items deposited, and the total amount of the deposit. 
 Illustration No. 57 shows two deposit tickets, one on which the depositor has 
 listed currency only, and the other on which he has listed currency and cash items. 
 
 § 74. Method of Making a Deposit. The depositor should consult with 
 the receiving teller in regard to the preparation of his deposit ticket that he may 
 know the teller's desires in this matter and thus prepare his deposit to suit the 
 convenience of the clerks in the bank. Currency and cash items should be listed 
 
 107
 
 io8 BUSINESS FORMS AND VOUCHERS. 
 
 ALWAYS BRING YOUR PASS BOOK: ALWAYS BRING YOUR PASS BOOK. 
 
 Merchants National Bank 
 
 Merchants National Bank 
 
 .^ M^ Pjyyyy/A^j- 
 
 &I^ 
 
 V,/ iy £>f7^yy/j'y^J- 
 
 JA/_ 
 
 ^J^y.^- 
 
 .JS)/_ 
 
 LIST EACH CHECK SINGLY. 
 
 'SuT-renTM 
 
 / S-0 
 
 
 yr 
 
 
 
 ((^4<3r>^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 .*t 
 
 
 
 
 
 
 .^/n/. 
 
 / fOO 
 
 
 
 
 
 L/STEACH CHECK SINGLY. 
 
 Dolls. 
 
 Cfs. 
 
 '^/j/mm/y 
 
 te^ 
 
 /2,5 
 
 OO 
 
 <^y:£^^ 
 
 /3 
 
 So 
 
 'iEA^c/e^ ^y 9/y7^ywy7/y- 
 
 /32 
 
 CS 
 
 
 ( ..^/.yy?/?^^ 
 
 /// 
 
 io 
 
 
 ^//)'?/?M/r 
 
 ^/ 
 
 2S 
 
 
 ^//?rJy7/^lyi /[y^^ 
 
 /oo 
 
 00 
 
 
 y^y/yr/ //y7^y??7y7Jv 
 
 ss 
 
 /C 
 
 
 yi/yy/- MTT^y- 
 
 ¥2/ 
 
 CS 
 
 
 /?py?rJ7y7y??y^/7^y?7A 
 
 /9 
 
 U 
 
 
 
 
 
 S^^ 
 
 /07¥ 
 
 cc 
 
 
 
 
 
 Illustration No. 57, Deposit Tickets. 
 
 EXPLANATION. The deposit ticket at the left shows a deposit of currency only, and 
 that at the right, currency, silver, and checks. "City National" at the left of the first check 
 listed indicates that the check is payable by the City National Bank and that this is located in the 
 same city as the Merchants National Bank; this statement also applies to the fourth, fifth, and 
 seventh checks listed. "Chicago" written at the left of the second check listed indicates that this 
 check is payable on a bank in Chicago; this same statement applies to the third and sixth checks. 
 Some banks do not require this information while others require information In another form. It 
 is suggested in § 74 that the depositor learn the bank's wishes In regard to the listing of checks. 
 
 as instructed by the teller. The receiving teller has many deposits to enter each 
 day and will appreciate the cooperation of the depositor in complying with his 
 suggestions. The depositor should see that the date, his name, and the total 
 of the deposit appear on the deposit ticket, also that the currency and cash items 
 are arranged in the order listed. The depositor should retain a copy of the items 
 deposited, either by making a duplicate deposit ticket or by listing them on the 
 back of the stub from which the last check was removed. 
 
 § 75. The Pass Book is a small bound book ruled with columns for the 
 date, nature of the entry (deposit, discount, or collection), and the amount. As 
 explained in § 74, the receiving teller enters the date and amount of each deposit 
 in this book, this being the depositor's receipt for the deposit. The depositor 
 should always present the pass book with the deposit so that the teller can give 
 him a receipt for it; in case he should forget to bring the pass book, the teller will 
 give him a receipt on a duplicate deposit ticket, which should be retained until 
 the next deposit is made and the amount entered in the pass book at that time. 
 Illustration No. 59 (left side) shows deposits entered in a pass book; further ref- 
 erence is given to this illustration in § 79.
 
 BUSINESS FORMS AND VOUCHERS. 
 
 109 
 
 § 76. A Check is a written order by a depositor on his bank, designating 
 to whom he wishes the bank to pay a part or all of the money he has on deposit. 
 It is customary for the bank to provide its depositors with blank checks for the 
 same reason that blank deposit tickets are provided. Checks supplied depositors 
 by a bank are usually bound in book form, each check having attached to it a stub 
 for the depositor's record. Illustration No. 58 shows a check book with two checks 
 to a page and stubs attached, with perforated lines for detaching. 
 
 A check is not money, but, since it is used in the place of money, it is accepted as such in busi- 
 ness. Custom has established the term "cash" as one which includes money and checks (§ 15). 
 The use of checks for paying obligations is more satisfactory than the use of money because it pro- 
 vides a receipt and avoids errors in making change, and losses through theft. 
 
 Dtposit,^ 
 
 '.-4^ 
 
 .-3^^-L 
 
 ./S>Z_. 
 
 Amount, $ Jc^.rrr. 
 
 Balanct , 
 
 DrpaH.- 
 
 Ko.. 
 
 Dale ?£i^^^. 
 
 /I 
 Favert 
 
 For _CZ2,<.<Zf!SiSfc. 
 
 4nunmt, $ Z3L£A^^ 
 
 BoJ. Carried Foruard 
 
 H o 
 00 
 
 5^ 
 
 /S.S 
 
 oJ^_.JL 
 
 /-^J-.f, /PZ.^ 
 
 >Ierciiants National Bank 
 
 k2S^ 
 
 
 00 
 
 OK 
 
 G^^^_2_ 
 
 _^2l^/jp/^ 
 
 Merchants National Bank 
 
 
 ■^y?^r^yy7^,'7<>^^-i->7yy 
 
 Illustration No. 58, Check Book. 
 
 EXPLANATION. The information on the stub is arranged in the same order as that on the 
 check for the convenience of the depositor. The information after "For" is needed by the bookkeeper 
 in recording the transaction (§ 28, ^ 5). The ruled column at the right of the stub shows the de- 
 positor's account with the bank as explained in § 78. The name of the depositor at the left indicates 
 that he has had the checks prepared for his individual use. The dotted lines show perforations for 
 removing each check. 
 
 § 77. Instructions for Writing Checks. The check book provided by 
 the bank contains printed forms for use in writing checks, each of which is attached 
 to a stub containing space for all the information written in the check. The stub 
 is for the depositor's record of the check, hence the information to be written 
 in the check should be written on the stub first. The information written on the 
 stub includes the number, the date of issue, the person or business concern to whom 
 the check is written, the reason for writing, the amount, and, if desired, the name 
 of the account to be debited in the cash book. Each check and stub is numbered 
 the same and consecutively, beginning with "i"; these should be numbered at 
 the time the check book is received from the bank. 
 
 The information on the check is written in the following order: (i) the date, 
 
 (2) the name of the person or business concern to whom the check is to be paid, 
 
 (3) the amount in writing and in figures, and (4) the signature of the depositor, 
 which should be the same as that on the signature card. If desired, the reason 
 for writing may be stated on the check as well as on the stub. The information 
 on the stub and on the check should be arranged in the same order so that the
 
 no 
 
 BUSINESS FORMS AND VOUCHERS. 
 
 check can be written from the information given on the stub. Illustration No. 
 58 shows a check book with two checks to the page and the two stubs and checks 
 properly written, but with neither of the checks removed; the dotted lines show 
 the perforations which make the checks more easily removed. The information 
 in the ruled column at the right of the stub in Illustration No. 58 is for the de- 
 positor's convenience in keeping a record of his transactions with the bank, as 
 explained in § 78. 
 
 § 78. Depositor's Record of His Transactions with the Bank. Each 
 depositor should keep a record of the transactions which he performs with the 
 bank. This record may be kept in a special blank, on the front or back of the check 
 stub, or in an account in the ledger. Since the depositor should know that the bank 
 balance is sufficient to pay the check he is about to write, the front of the stub 
 is the best place to keep the account with the bank. A column is usually ruled 
 for this in the check book provided by the bank. Reference to Illustration No. 
 58 will show the method of keeping the bank account on the front of the check 
 stub; the other methods mentioned will be explained and illustrated later. 
 
 § 79. The Bank's Record of Transactions with Depositors. The de- 
 positor is credited with each deposit and debited with each check paid by the 
 bank. The entry in his account is made from the deposit tickets and the checks 
 which the bank has paid. On the first of each month, the bank renders the de- 
 positor a statement showing the date and amount of each deposit, the date paid 
 and amount of each check, the daily balance, and the balance due the depositor 
 at the end of the month. The checks listed on this statement are returned to the 
 depositor with the statement; the deposit tickets are kept on file in the bank. 
 Formerly it was the custom of banks to render this statement by listing the checks 
 in the pass book and ruling it at the end of the month as in Illustration No. 59. 
 With the use of special machines, it is more efficient to render a statement sepa- 
 rate from the pass book, as in Illustration No. 60. When the separate statement 
 is rendered, both sides of the pass book are usually used for listing deposits, though 
 some banks enter the total of the paid checks in the pass book and show the bal- 
 ance at the beginning of the month below ruled lines. 
 
 In Account with 
 
 Dr. MERCHANTS NATIONAL BANK 
 
 u 
 
 / 
 
 Jt&^2^CL<U^ 
 
 / S'OO 
 
 M 
 
 J 
 
 dAc^ 
 
 ! bl/ 
 
 
 
 A? 
 
 - /''^"""^^ 
 
 ^3 6 
 
 'S6- 
 
 S 
 
 
 
 }'^S 
 
 
 
 .2/ 
 
 „ 
 
 :l¥ 6 Co 
 
 / 
 
 
 / 9- 7 JO 
 
 
 
 
 
 /v? 
 
 
 / s 
 
 
 3 
 
 
 
 
 
 
 /7 
 
 
 / 
 
 i=o 
 
 
 
 
 
 
 / 7S 
 
 
 
 
 
 
 
 ^I^tz/o'in^QC/ 
 
 7 7 f 
 
 70 . 
 
 ¥5' 
 
 
 
 ^oAz^yi-^o^y^ 
 
 2 /// 
 
 /S ■ 
 
 
 
 
 3,/ i 
 
 / 
 
 /£- 
 
 %^ 
 
 _/. 
 
 / ^0 :i 
 
 ¥S 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Illustration No. 59, Bank Statement in the Pass Book. 
 
 EXPLANATION. The illustration shows the opposite pages of a pass book. The information 
 on the left page shows three deposits entered by the teller. The entries on the right show the checks 
 listed by the bookkeeper when the depositor's pass book was balanced at the end of the month. 
 The ruling is similar to the receipts and payments sides of a cash book. As explained in § 79, deposits 
 are usually entered on both sides of the pass book and the canceled checks listed on a separate state- 
 ment as in Illustration No. 60.
 
 BUSINESS FORMS AND VOUCHERS. in 
 
 ^latentPttt of 
 
 W. H. Goodwin 
 
 3lii arrnunt mtll| 
 
 jH^rdiants Nattnnal lank 
 
 6 Vouchers Returned 
 
 r.¥ f A or* irv AA/fTXTir at- rkXTr-P /IF NO ERRORS ARE REPORTED WITHIN TEN DAYS THE ACCOUNT 
 fLEAfJt. t/AAMUNlJ/ Al UJNCU/JYVILL BE CONSIDERED CORRECT AND VOUCHERS GENUINE 
 
 , ^ Deposit 1500.00 
 *®^- -'■ Check £8.00 
 
 5 
 
 5 
 
 8 
 
 15 
 
 17 
 33 
 S8 
 
 " 135.00 
 
 " 197.10 
 
 Deposit 435.55 
 
 Check 150.00 
 
 " 103.60 
 
 175.00 
 
 Deposit 345.60 
 
 Balance 1403.45 
 
 Illustration No. 6o, Bank Statement Separate from Pass Book. 
 
 EXPLANATION. This statement was prepared on a special machine manufactured for 
 making bank statements. The information in this statement is obtained from the account which the 
 bank keeps with the depositor; the statement is rendered monthly. The canceled checks ac- 
 company the statement when it is delivered to the depositor. 
 
 § 80. Reconciliation of Depositor's Account with the Bank State- 
 ment. The balance shown on the bank statement may or may not be the same 
 as that shown by the depositor's record. If all checks issued by the depositor 
 have been paid by the bank, if there have been no alterations and no errors in 
 addition or subtraction in the depositor's record, the two balances will be the 
 same; if all the checks issued have not been paid by the bank, or there have been 
 errors or alterations, the two balances will not agree. The depositor should audit 
 the bank statement with his record and reconcile the two balances when they 
 do not agree; this reconciliation should be made as soon as the statement is re- 
 ceived because alterations of checks should be reported to the bank immediately. 
 The calculations in this reconciliation should be shown on the back of the stub 
 from which the last check issued during the month for which the statement was 
 rendered, was removed. As a rule, the only discrepancy between the two balances 
 will be the amount of the check or checks issued by the depositor but not paid 
 by the bank. The reconciliation should be made in the following manner: 
 
 1. Check each deposit with the entry for the same on the check stub. If 
 there is a discrepancy, compare the check stub entry with the entry in the pass 
 book, and this entry with that on the statement. If there is a discrepancy in a 
 deposit ticket which can not be accounted for, it should be audited with the copy 
 on file in the bank. 
 
 2. Compare each canceled check received from the bank with the stub from 
 which it was removed; any discrepancy between the amount on the stub and that 
 on the statement should be reported to the bank immediately. Place a check 
 mark at the left of the number on the stub as each check is compared with its 
 corresponding stub.
 
 112 
 
 BUSINESS FORMS AND VOUCHERS. 
 
 3. On the back of the stub from which the last check written during the 
 month was removed, Hst the number and amount of each stub which does not have 
 a check mark at the right of the number; add these amounts to ascertain the total 
 of the checks issued but not paid by the bank. Write the balance shown by the 
 bank statement below the total unpaid checks, and subtract the amount of the 
 unpaid checks from the bank balance; the result should be the same as the check 
 stub balance. 
 
 \. MARK/ 
 
 '^ M^.^?/ V. 
 
 19l_ 3(o._91_" 
 
 ^/,//^§ 
 
 ^.YyQ^^ '/olf^.v/.r//i^^ ^^y:)'7!^/-m7^ya/??y/- 
 
 ^^offaii 
 
 |.^n ti^t^liAe JRa uUa\ \an (£0. 
 
 
 
 vJjrny 
 
 ^fCii& Areas'. 
 
 Illustration No. 61, Personal Check. 
 
 EXPLANATION. This illustration shows a check prepared by the depositor. It includes the 
 usual information and the name and trade mark of the business. 
 
 § 81. A Bank Draft is a check drawn by one bank on funds deposited 
 with another bank. Bank drafts are sometimes referred to as "exchange;" a draft 
 payable by a bank in New York, as "New York Exchange;" one payable by a 
 Chicago bank, as "Chicago Exchange;" etc. Bank drafts are used by banks in 
 payment of checks received for collection, sold to depositors for remitting to the 
 commercial centers, and sold to individuals for sending money through the mail. 
 Illustration No. 62 shows a bank draft payable by the Chase National Bank of 
 New York, hence might be referred to as "New York Exchange." The use of 
 bank drafts is discussed again in a subsequent chapter. 
 
 00 S2S '^ 
 
 '^xmB^^wm^WiM^M^M.^ x» 3459 
 
 Pay TOTIIK 
 
 OKDER OE 
 
 ^'^ CHASE NATIONAL BANK. 
 
 1-T4. NEW YORK. 
 
 rw£/^ryog^-g T> « 
 
 C-y^>"2€:-g?^0^???^>^^^^^^^^^ I 
 
 Illustration No. 62, New York Bank Draft. 
 
 EXPLANATION. This illustration shows a check drawn by the First National Bank, Tur- 
 lock, California, on funds which it has deposited with the Chase National Bank, New York.
 
 BUSINESS FORMS AND VOUCHERS. 
 
 113 
 
 § 82. A Cashier's Check is a check drawn on a bank by its cashier. It 
 is used in the payment of the operating expenses of the bank, in payment of the 
 proceeds of collections or discounts made by the bank, and in payment of other 
 obligations of the bank. Cashier's checks are sold to those who wish to use them 
 as a means of sending cash through the mails in the same manner as bank drafts. 
 Illustration No. 63 shows one form of cashier's check. 
 
 K'!n B» - -*- • X^?-«! 6X^ '»• --XB:a,ft3»«- '<«rTii«B^W^«TfJ^ SX-- -i*-^ 
 
 3r SPOKANE 
 
 Spok.\x*;AVash.._^ 19 No. 2355 
 
 
 CVSIIIER'S CHECK. 
 
 - -a-sK.* »: B»»%>3»g»-s«a;^ »«»**^«3^-*««!» 
 
 Illustration No. 63, Cashier's Check. 
 
 EXPLANATION. This illustration shows a check drawn by the cashier of the Security State 
 Bank, Spokane, Wash., and payable by this bank. 
 
 § 83. Money Orders. A money order is a check issued by one post- 
 master on funds deposited with another postmaster, by one agent of an express 
 company on funds deposited with another agent of the same company, or by a 
 bank on funds deposited with the Banker's Trust Company of New York. The 
 first is referred to as a "postal money order;" the second, an "express money 
 order;" and the third, an "American Bankers' Association (A. B. A.) check." 
 
 % 
 
 When Countersigned i=y.i;j:i^^tJir.i'i:ng'i:<n3K 
 
 BY AGENT AT PorNT OFISSUE 
 
 11-5684625 
 
 ^^erjrmi <^it^ g|jnt|j^ttir 
 
 Pay TO THE ORDER 0F_ 
 
 AGREES TO TRANSMIT AND 
 
 
 so 
 
 //^ 
 
 \ 
 
 The Sum of_ 
 
 ■^^ 
 
 V^-o^y- j'yyT^./'-'^/rpy:^-' 
 
 IoIDollars 
 
 (^J^/7.r^..7/^^ 
 
 Issued AT 
 
 = Date. 
 
 .Agent 
 
 State of //u/'J^.^ 
 
 
 Illustration No. 64, Express Money Order. 
 
 EXPLANATION. This illustration shows a money order issued by the American Express 
 Company. Carl C. Davidson, who wished to send money to Harold A. Waltham, presented $48.50 
 and the required fee to an agent of the American Express Company and received this money order for 
 it. The purpose of money orders is to provide a means of transferring money from one locality to an- 
 other with safety and convenience.
 
 114 
 
 BUSINESS FORMS AND VOUCHERS. 
 
 Postal money orders are for sale by each postmaster to those who wish to send 
 money through the mail; they are also used by postmasters in remitting for col- 
 lect on delivery parcel post shipments. Express money orders are for sale to those 
 who wish to send money through the mail and, in this respect, are used for the 
 same purpose as post-office money orders. Express money orders are arranged 
 in convenient form for those who need expense money for a business or pleasure 
 trip and do not wish to carry currency; they are also used by express company 
 agents for remitting on "collect on delivery" express shipments. Bank drafts are 
 used in the same way as express money orders — that is, for sending money through 
 the mail — and for the convenience of those v/ho wish to have available cash, but 
 cash without carrying currency. A detailed discussion of "collect on delivery" 
 shipments and a further discussion of 'the use of express money orders in con- 
 nection with making remittances, are given in a subsequent chapter. 
 
 § 84. Endorsements. An endorsement is any writing on the back of a 
 check or other commercial paper, placed there for the purpose of transferring the 
 title, receipting for part payment, or for the accommodation of some one or more 
 of the parties on the paper. For convenience the endorsement should be written 
 about one inch from the left-hand end of the paper, as in Illustration No. 65. 
 
 The endorsing of commercial paper should be well understood, as it trans- 
 fers the title to the holder and holds the endorser liable in case default is made 
 in payment. The law allows the same protection to commercial paper as it does 
 to money, and unless it is properly endorsed, if lost, the finder may dispose of it 
 to an innocent holder, in which case the loser can not recover it. 
 
 S'. /7^ /luyt/ut 
 
 C^ >/ If) 
 
 ^ti,'f 
 
 No 13SL 
 
 
 ^^C(y - y^M>cyLy~ 
 
 -^— ^A-gDoLLARS 
 
 Illustration No. 65, Position of Endorsement. 
 
 EXPLANATION. This check is payable to The National Lead Co. and endorsed by it for 
 deposit with the Third National Bank. The endorsement is placed on the left-hand end of the check 
 for convenience.
 
 BUSINESS FORMS AND VOUCHERS. 
 
 115 
 
 John Jones 
 
 Pay to the order of 
 C. W. King 
 John Jones 
 
 § 85. Endorsement for Transfer, There are a number of ways in which 
 the holder of a commercial paper may write his name in order to transfer the title, 
 but the four most frequently used are "in blank," "in full," "for deposit" and 
 "for collection." 
 
 ^ I. ''In Blank.'' An endorsement in blank is the 
 name of the payee or holder only, written across the 
 back. It has the same effect as making the paper pay- 
 able to bearer, and it may be transferred by any sub- 
 sequent holder, without further endorsement, but the 
 endorsement of each holder is generally required, for 
 identification. See illustration at the left. 
 
 II 2. "In Full.'" This endorsement is effected by 
 writing "Pay to the order of" above the name of the 
 person or firm to whom it is transferred, and signing 
 the name of the payee or holder. The person to whom 
 it is transferred must endorse it before any succeeding 
 holder can use it. All papers sent through the mail, 
 or to be held for some time should be endorsed in full. 
 See illustration at the left. 
 
 •[ 3. "For Deposit.'" These words should be 
 written above the name of the depositor on checks and 
 other cash items to be deposited in the bank. This 
 qualifies the endorsement and prevents their being used 
 except for deposit. If desired, a rubber stamp with the 
 words of the illustration at the left may be used for 
 this purpose. If a stamp is used, the one who makes 
 the deposit should indicate his name in connection 
 with the endorsement. 
 
 ^ 4. "For Collection." Commercial paper left at 
 a bank or other collection agency for collection, should 
 have "For Collection" written above the endorsement, 
 as in the illustration at the left. Unless the endorse- 
 ment is qualified in this manner, the owner might be 
 held responsible as an endorser for the collection of 
 the paper in case of the bankruptcy of the bank or 
 collection agency. This is a condition that might not 
 occur often, but, if it can be avoided by the qualified 
 endorsement, then the holder should protect his in- 
 terests through the endorsement. 
 
 The result of improper endorsements for collection may be illustrated by the following incident, 
 which is true with the exception of the names. Robert Smith endorsed a note in blank and left it 
 with his bank for collection. Mr. Smith died before the note was due. The bank failed and a receiver 
 was appointed. Transactions performed by the bank had not been recorded correctly and in sorne 
 cases there was doubt as to the ownership of the papers. The estate of Mr. Smith could submit 
 no evidence to show that the note endorsed by him was left for collection, hence the receiver of the 
 bank assumed that it was discounted, and held the estate responsible on account of Smith's endorse- 
 ment. 
 
 Pay to the order oj 
 
 Union Ba7ik 
 
 For deposit 
 
 W. H. Goodzvin 
 
 Pay to the order of 
 
 Union Bank 
 
 For collection 
 
 W . H. Goodzvin 
 
 Exercise No. 44, Personal Check. 
 
 As paying cashier for the Johnson Paint Co., Chicago, write the stub and 
 check required to pay for the merchandise purchased from the Globe-Wernicke 
 Co., Cincinnati, in Exercise No. 43. Use the first check and stub in Illustration 
 No. 58 as a model.
 
 ii6 
 
 BUSINESS FORMS AND VOUCHERS. 
 
 Exercise No. 45, Reconciliation of Bank Account. 
 
 J. E. Gill performed the following transactions with the Merchants National 
 Bank during the month of April: 
 
 2. 
 
 Deposit 
 
 
 $2 ,900 . 00 
 
 13. 
 
 Check No. 
 
 13 
 
 1457-74 
 
 2. 
 
 Check No. 
 
 I 
 
 208.80 
 
 14. 
 
 (1 11 
 
 14 
 
 48.10 
 
 2. 
 
 
 2 
 
 20.00 
 
 14. 
 
 (< II 
 
 15 
 
 273.42 
 
 3- 
 
 
 3 
 
 450.00 
 
 14. 
 
 Deposit 
 
 
 341-38 
 
 4- 
 
 
 4 
 
 101.00 
 
 16. 
 
 Check No. 
 
 16 
 
 150.00 
 
 5. 
 
 
 5 
 
 150.00 
 
 18. 
 
 II II 
 
 17 
 
 256.01 
 
 6. 
 
 
 6 
 
 75.00 
 
 21. 
 
 II II 
 
 18 
 
 94-75 
 
 7. 
 
 
 7 
 
 165.50 
 
 - 21. 
 
 Deposit 
 
 
 791.00 
 
 7. 
 
 
 8 
 
 40.00 
 
 24. 
 
 Check No. 
 
 19 
 
 141.32 
 
 7- 
 
 
 9 
 
 38.00 
 
 25- 
 
 II II 
 
 20 
 
 103.88 
 
 7- 
 
 Deposit 
 
 
 248.65 
 
 27. 
 
 II II 
 
 21 
 
 279.77 
 
 lO. 
 
 Check No. 
 
 10 
 
 445-23 
 
 28. 
 
 II II 
 
 22 
 
 38.00 
 
 II. 
 
 n n 
 
 II 
 
 60.00 
 
 30. 
 
 II II 
 
 23 
 
 567-43 
 
 II. 
 
 11 II 
 
 12 
 
 49-50 
 
 30. 
 
 Deposit 
 
 
 815.24 
 
 1. On a slip of paper, write "Bank Account on Check Stub," and below this 
 write the date and amount of each deposit, the date, number, and amount of each 
 check, showing the balance in the bank after each deposit has been added and 
 each check subtracted. 
 
 2. On a slip of paper, write "Reconciliation of Bank Account," and below 
 this show the reconciliation of Mr. Gill's bank account with the statement re- 
 ceived from the bank May i, which shows a balance of $1,667.57 and is accompanied 
 by all canceled checks except Nos. 9, 19, 22, and 23. 
 
 Exercise No. 46, Reconciliation of Bank Account. 
 
 Show the bank account on the front of the check stub for W. A. Gordon 
 (Model Set beginning on page 61) for the month of September and on the back 
 of the check stub for the month of October, assuming that all payments were 
 made by check, that the investment September i was deposited on that date 
 and other deposits were made each time cash was proved, and that the check 
 book contained two checks to the page.* 
 
 Show the reconciliation of the bank account on October i with the statement 
 received from the bank on that date, which shows a balance of $768.00 and is 
 accompanied by all canceled checks except No. 6. 
 
 Show the reconciliation of the bank account on November i with the state- 
 ment received from the bank on that date, which shows a balance of $703.39 and 
 is accompanied by all canceled checks except Nos. 12 and 16. 
 
 *When the bank account is kept on the front of the check stub, each check is subtracted as 
 it is written, each deposit is added at the time it is made, and the balance is carried forward at the 
 bottom of each page as in Illustration No. 58. When the bank account is kept on the back of the 
 check stub, the number and amount of each check issued since the last deposit was made are listed, 
 added, and subtracted from the sum of the preceding balance and the deposit that is to be made. 
 In September the student will subtract each check as it is issued from the deposit of September 
 1st until the next deposit is made; this deposit will be added to the balance left after subtracting 
 the last check, and succeeding checks will be subtracted as they are issued, showing in each case 
 the balance in the bank after each check is issued. In October the balance and the first deposit, 
 which is made at the time cash is proved, are added together; checks issued between October ist 
 and the date of the first deposit in October are listed, added, and their total subtracted from the 
 total of the balance and the deposit, the result showing the balance in the bank at the time cash 
 is proved. 
 
 QUESTIONS 
 
 1. Why do the officials of a bank require reference from a new depositor if they 
 
 are not personally acquainted with him? 
 
 2. What evidence does the depositor have that he has deposited money in the 
 
 bank?
 
 BUSINESS FORMS AiND VOUCHERS. 117 
 
 3. What evidence does the bank have that it has paid a part or all of the money 
 
 which the depositor has deposited? 
 
 4. Why should the bookkeeper retain a copy of each deposit ticket? 
 
 5. Name two ways of retaining this copy. 
 
 6. What additional information is contained in the copy of the deposit ticket 
 
 that is not shown by the entry in the pass book? 
 
 7. If you were auditing the entries on the receipts side of the cash book, what 
 
 need would you have for the copies of the deposit tickets and the entries 
 in the pass book? 
 
 8. If you were to find a check signed by a local merchant, payable to Robert Jones, 
 
 and "Robert Jones" was written on the back, how could you obtain the 
 money on this check? 
 
 9. If the bookkeeper writes a check and fails to fill out the stub, how will he 
 
 detect the error? 
 
 10. If you were keeping books for a local merchant and he withdrew $100.00 
 
 from the bank by check, using one of the blanks on the counter in the 
 bank, and failed to tell you that he had issued the check, when and how 
 would you learn about it? 
 
 11. Name two means of ascertaining the amount of a check if it is removed from 
 
 a check stub without the stub being filled out? 
 
 12. If the bookkeeper makes an error of $10.00 in subtracting the amount of a 
 
 check on the check stub, how will he detect the error? 
 
 13. If you were keeping books, would you prove cash before making a deposit? 
 
 Give reasons for your answer. 
 
 14. If there is an error of $10.00 in the addition of a deposit ticket and a cor- 
 
 responding error in the addition in the cash book, when and how will the 
 bookkeeper discover the error? 
 
 15. How is a check used in the place of money? 
 
 16. Explain why a check which has been paid by the bank may be regarded as a 
 
 receipt. 
 
 17. If you were making a trip in an automobile from New York City to San 
 
 Francisco, would you prefer your expense funds to be in money, to be 
 deposited in a Chicago bank subject to check, or in money orders? Give 
 reasons for your answer. 
 
 18. John Anderson in Atlanta, Georgia, wishes to send $35.00 to Henry Smith 
 
 in St. Louis, Missouri. Name four ways by which he can send this, and 
 state which you think would be the best. 
 
 19. Why is it better for the bookkeeper to keep the bank account on the front 
 
 of the check stub? 
 
 20. Name three reasons why the statement rendered by the bank on the first 
 
 of the month might be different from the depositoi's record on the check 
 stub. 
 
 21. If R. W. Sanderson leaves a check payable to himself at the bank for collec- 
 
 tion, how will he endorse it? 
 
 22. If you were keeping books for a local merchant and received a check from 
 
 a customer for $112.50 marked "In full of account," and his account showed 
 a balance of $117.50, what would you do? 
 
 23. Name some of the advantages to the bookkeeper when cash payments are 
 
 made by check instead of with currency. 
 
 24. Why does the bank return the paid checks when it sends the monthly state- 
 
 ment? 
 
 25. Why is the endorsement written on the left instead of the right end?
 
 Chapter XI 
 
 BUSINESS FORMS AND VOUCHERS— (Concluded) 
 
 § 86. A Note is an unconditional written promise to pay a fixed amount 
 of money at a stated time, and is signed by the person or persons agreeing to pay 
 it. If desired, the place at which the note is to be paid may be stated in it. A note 
 has two original parties, the maker and the payee. The maker is the one who 
 signs the note and thereby agrees to pay the amount stated in it; the payee is 
 the one in whose favor the note is made, that is, the one to whom the money is 
 to be paid. A note indicates that the maker is indebted to the payee and acknowl- 
 edges this indebtedness by agreeing to pay it at the time stated in the note. 
 
 1. The face of a note is the amount stated in it. This amount is shown as its 
 value in the account with notes (§ 102, ^ i, or § 103, If 2). 
 
 2. The maturity value of a note is the amount to be collected at maturity. If 
 a note reads "with interest after maturity," the face is the maturity value; if it 
 reads "with interest from date," the maturity value is the face plus interest at the 
 legal rate from date to maturity. 
 
 / V^ 
 
 
 Q)..-tr._ ^UZ. /<^" /f:!.. 
 
 .Am/;' />^~^<gC-<z-y-^^-^ 
 
 A^ .18 
 
 uA^^mJX 
 
 ~ ¥- 
 
 ^*5^u___>&^v.^^ ^U&it^,^umi' 
 
 '^,.,y '9P7^c<-A-.^ 
 
 ^^. ^^.^^..x-^,-.,^^ 
 
 S3^9£>SBZESE3SB£Ka3a&K3 
 
 ^SSEB^QSHCa 
 
 ^^/4/^a4^ytrtr/J^^,r7Zti^^^Xd 
 
 Illustration No. 66. Note With Stub Attached. 
 
 EXPLANATION. This note indicates that A. C. Williams owes W. H. Goodwin the amount 
 mentioned and has promised to pay it at the time and place indicated. 
 
 § 87. Use of Notes. Notes are used as written evidence of indebtedness 
 resulting (a) from a purchase of merchandise or other property, (b) from a loan, or 
 (c) from an extension of time for the payment of a past-due obligation as shown 
 by an account. With the advantages of the trade acceptance, notes are not often 
 given in payment for merchandise purchased at the time it is purchased. A bank 
 will require written evidence of an obligation resulting from money loaned; the 
 business man may give his own note as evidence of the loan, or he may sell to 
 the bank notes which he has received from his customers. When an account is 
 past due and the customer desires more time, he may make settlement by accept- 
 ing a draft or by giving his note; the results are the same in that he secures an 
 
 118
 
 BUSINESS FORMS AND VOUCHERS. 119 
 
 extension of time by giving a written promise to pay it at the time specified in 
 the note or draft. 
 
 (a) James Brown buys a piano from the Starr Piano Co. for $500.00. He pays $100.00 cash 
 and gives four notes for $100.00 each, due in three, six, nine, and twelve months respectively, in 
 payment for the piano. 
 
 (b) The Starr Piano Co. wishes to borrow $1,000.00 from the bank with which it does busi- 
 ness. A note is issued for this amount, bearing interest at 6% from date, payable in ninety days, 
 and this is presented to the bank for credit. The Starr Piano Co. will receive credit for the $1,000.00 
 in their pass book in the same manner as for a deposit. 
 
 (c) The Acme Amusement Co. purchased an electric player piano from the Starr Piano Co. 
 for $1,500.00, and paid $800.00 cash, balance to be paid in thirty days. At the end of the thirty 
 days the Acme Amusement Co. arranged with the Starr Piano Co. for an extension of sixty days by 
 giving their note for $700.00, with interest, payable to the Starr Piano Co. 
 
 § 88. Endorsement of Notes. There are three reasons for the endorse- 
 ment of a note: (a) accommodation (security), (b) transfer of ownership, and 
 (c) receipt for part payment. Endorsement for accommodation is usually made 
 as explained in § 85, ^ i ; endorsement for transfer of ownership is usually made 
 as explained in § 85, *f[ 2; endorsement for a receipt of $100.00 in part payment 
 of this note is made as follows: "Jan. 10, Received $100.00 in part payment of 
 this note." The holder will endorse the part payment on the note but should 
 not sign his name because this transfers ownership in case the note gets out of 
 his possession. 
 
 Banks sometimes require security in addition to the signature of the business concern borrow- 
 ing money. Should this have been required of the Starr Piano Co. in the loan of $1,000.00 mentioned 
 in § 87, (b), one of the individuals who owns an interest in the business would sign his name on the 
 back as explained in § 85, ^ i. Should the Starr Piano Co. wish to sell the note received from James 
 Brown, the endorsement would be "in full" as explained in § 85, ^ 2. If the note was to be trans- 
 ferred to the First National Bank, the endorsement would be "Pay to the order of the First National 
 Bank, Starr Piano Co., by (the name of the person authorized to sign for the company)." Should 
 the Acme Amusement Co. in the illustration pay $200.00 on the note given in extension of its account, 
 receipt for part payment would be indicated by writing the date and the amount received on the 
 back, as explained above. 
 
 § 89. Effect of Notes on the Bookkeeping Records. When a note is 
 issued by the business, full information in regard to it is retained on the stub from 
 which it was removed. An entry is required in a book of original entry because 
 the note would not have been issued unless value was received; the value received 
 might be an obligation canceled or a new obligation created. If the note cancels 
 a liability, the value received is the discharge of this obligation or liability, hence 
 the account which shows it is debited; if the note creates a new obligation, an 
 asset of equal value is received, hence the value received is this asset, and the 
 account with it is debited; the value parted with in either case is the obligation 
 created by the note, hence the account with notes issued by the business (§ 103, 
 ^ 2) is credited. When a note is received by the business, it may be in payment 
 for merchandise or other property purchased at the time the note was issued. 
 The value received is the note, hence the account which is to show the amount 
 of notes owned by the business (§ 102, % i) is debited. The value parted with is 
 the merchandise sold or the account with the customer, hence either the Sales or 
 the customer's account is credited. If desired, the sale can be entered in the sales 
 journal in the same manner as any other sale on account, debiting the customer's 
 account; in this case, the credit to the Sales account will be through the sales 
 journal, hence the credit for the note would be to the customer's account in the 
 same manner as if the note were received in payment of an account already in 
 the ledger.
 
 120 BUSINESS FORMS AND VOUCHERS. 
 
 Transactions in which notes are issued or received by the business are usu- 
 ally recorded in the general journal unless cash is received for a note issued or paid 
 for a note received, in which case the entry is made in the cash book. Special 
 journals may be provided for notes issued and received by the business; these are 
 explained and illustrated in a subsequent chapter. 
 
 Referring to the illustrations in § 87: 
 
 (a) The sale would be recorded in the sales journal, thus debiting James Brown and credit- 
 ing Sales; the cash would be recorded in the cash book, thus debiting Cash and crediting James 
 Brown; and the notes would be recorded in the general journal, debiting the account with notes 
 received (§ 102, H l) and crediting James Brown. 
 
 (b) The entry would be made on the receipts side of the cash book, thus debiting Cash and 
 crediting the account with the note issued by the business (§ 103, If 2.) 
 
 (c) The sale would be recorded in the sales journal, thus debiting the Acme Amusement Co. 
 and crediting Sales; the cash would be recorded in the cash book, thus debiting Cash and crediting 
 the Acme Amusement Co.; the note would be recorded in the general journal, debiting the account 
 with notes received (§ 102, ^ i) and crediting the Acme Amusement Co. 
 
 § 90. A Note Should Be Signed by the person or persons responsible for 
 its payment. If an agent is authorized to execute a note for another, he signs 
 the name of his principal and his name below, either preceded by "per" or "by" 
 or followed by "agent;" the omission of the word before or after the agent's name 
 might cause him to be held jointly with the principal. The one who signs a note 
 for another is regarded as the agent, and the one responsible for the payment, as 
 the principal; the agent should have a written statement from the principal author- 
 izing him to sign his name. The holder of a note will expect payment from the per- 
 son or persons whose names are signed to it; he will also hold responsible for the 
 payment each individual whose name appears on the back of the note. 
 
 Referring to the illustrations in § 87 : 
 
 (a) The notes would be signed by James Brown who purchased the piano. 
 
 (b) This note would be signed "Starr Piano Co.," by the individual authorized to sign, 
 usually the president or secretary if it is a corporation, or one of the partners if it is a partnership. 
 
 (c) This note would be signed in the same manner as that described in'(b) because the name 
 of the company is not that of an individual and means nothing when signed to a note unless accom- 
 panied by the name of the individual authorized to sign. 
 
 § 91. A Draft is a written order from one party to another, directing him 
 to pay a certain sum of money to a third party. A draft has three original par- 
 ties: the drawer, the drawee, and the payee. The one signing the draft is the 
 drawer; the one who is asked to pay the amount is the drawee; and the one to 
 whom the money is to be paid is the payee. The draft indicates that the drawee 
 is indebted to the drawer, and that he (the drawer) wishes the amount paid to 
 the payee. Drafts are usually drawn on blank forms bound in a book, each draft 
 being provided with a stub for a record of the facts shown by the draft. There 
 are three kinds of drafts, time drafts, sight drafts, and trade acceptances. 
 
 § 92. A Time Draft is one payable a certain number of days after pre- 
 sentation; it indicates that the drawer is willing to allow the drawee additional 
 time to make payment of the indebtedness due the drawer. This additional time 
 is indicated by stating in the draft that the amount is to be paid the designated 
 number of days after acceptance. The drawee of a time draft is not obligated 
 to accept it when it is presented by the payee. If he does accept it, this acceptance 
 is indicated by writing across the face of the draft the word "Accepted," followed 
 by the date of acceptance, and the drawee's signature; if desired, the place of 
 payment may also be indicated in the acceptance. If the drawee does not elect 
 to accept the draft when presented to him by the payee, the payee should im- 
 mediately leturn it to the drawer so that he may know the drawee has not complied 
 with his request. Illustration No. 67 shows one form of time draft.
 
 BUSINESS FORMS AND VOUCHERS. 
 
 121 
 
 I. An acceptance is a time draft after it has been accepted. It is the same as 
 a note because the acceptance is the written promise of the person who accepts it 
 to pay the amount mentioned within the number of days stated in the draft. The 
 account which shows a record of notes should also contain a record of accepted 
 drafts. 
 
 ■ \*^ 
 
 Draft for S4^^-^^^^ 
 
 On ^^ 
 
 PlaceJ 
 
 Timp C?c; <£,a^^ 
 
 Infavorof^ 
 
 
 J 
 
 
 
 2y^i 
 
 
 aw 1 
 
 &^<wamiw>i*vtwa.rwy^w*wiv->WMb^>ff->am<tywi^^ 
 
 Illustration No. 67, Time Draft Accepted and Returned. 
 
 EXPLANATION. The draft in the illustration was drawn June 10, sent to the bank for 
 presentation and acceptance, presented to the drawee and accepted by him on June 15, and returned 
 to the drawer by the bank. The draft is shown detached from the stub because the date of accept- 
 ance was entered on the stub by the bookkeeper for Donaldson & Joy after the draft was accepted 
 and returned. 
 
 The bookkeeper should indicate on the stub the final disposition of each sight and time draft 
 drawn by showing the acceptance on the stub as in the above illustration, or, if a sight draft, by 
 entering "Paid" and the date of payment on the stub, or by entering "Returned" and the date on 
 the stub if either the sight or time draft is not paid or accepted. The acceptance of a time draft and 
 the entry on the stub may be made with red or black ink; the use of red ink is optional with the 
 bookkeeper. 
 
 § 93. A Si^ht Draft is one which is payable upon presentation ; it in- 
 dicates that the indebtedness of the drawee to the drawer is due or past due, and 
 that the drawer desires it to be paid immediately. The drawee of a sight draft 
 is not obligated to pay it when it is presented to him by the payee, but if he does 
 pay it, he will hold the draft as his receipt for the payment; if he refuses payment, 
 the payee should return the draft to the drawer at once. Illustration No. 68 shows 
 one form of sight draft. 
 
 Draft for S ^^^^-/i £g- 
 Da t p ^a^J./^ /ai. 
 n i^:^^^zE^4is-5- 
 
 PI a C e.k^2til^a£^?Si:£_ 
 
 Timp xJ^-'oJzJ- 
 
 Infavor olMj^a^L^^ 
 
 ;vp_97 
 
 9i^lMI9l^^ilK^lM9iKKf^it^t9t9S^KKf9 ^iJX^iK>9&J&^l 
 
 %1^, 
 
 Chicago, III J^2^j./. J.O 
 
 
 
 JJ«iliii»vt»»/»nif«vlulw-<l 
 
 »t.tv;»I»a.l>iir>'«mr/r.«^^inmmfain>v;-«».j.-T««/iu..«««i^^ 
 
 Illustration No. 68, Sight Draft with Stub Attached. 
 
 EXPLANATION. The draft in this illustration indicates that W. H. Goodwin of San Antonio, 
 Texas, owes Anderson Bros, of Chicago, the amount mentioned in the draft. Anderson Bros, have 
 asked him to pay the amount to the First National Bank of San Antonio, Texas. This draft will be 
 sent to the First National Bank with instructions to present it for collection. If W. H. Goodwin 
 pays the draft when it is presented, the bank will write Anderson Bros, to this effect and send a 
 bank draft or cashier's check for the amount collected, less a small collection charge. If the draft 
 is not paid upon presentation, it will be returned to Anderson Bros.
 
 122 BUSINESS FORMS AND VOUCHERS. 
 
 § 94. A Trade Acceptance is defined by the Federal Reserve Board as 
 "a bill of exchange (time draft) drawn by the seller on the purchaser of goods 
 sold, and accepted by such purchaser," this acceptance being made on the date 
 of purchase or within a few days thereafter. The trade acceptance is in the form 
 of a draft, but it dififers from a draft in that it is accepted by the drawee at the time 
 the merchandise is purchased, while the acceptance of a draft is usually after 
 the debt is due, as shown by the drawer's account with the drawee. Trade ac- 
 ceptances and the accounting procedure in connection therewith are discussed 
 more fully in a subsequent chapter. 
 
 § 95. Use of Drafts. Sight drafts are used for collecting past-due debts 
 from out-of-town customers, and for collecting "collect on delivery" freight ship- 
 ments. Time drafts are used for collecting past-due debts from out-of town cus- 
 tomers, and for changing an account to a written promise to pay at a designated 
 time. Trade acceptances are used to secure written evidence of a sale at the time 
 the sale is made. 
 
 September lO Robert Anderson & Co., Chicago, sell merchandise to James Cowan, Louisville, 
 on thirty days' time. Mr. Cowan fails to send remittance when the debt is due October lo, and 
 Robert Anderson & Co. undertake to make collection by drawing a sight or time draft on him, pay- 
 able to the First National Bank in Louisville. When this draft is presented, Mr. Cowan will either 
 pay the (sight) draft or accept the (time) draft. If it is a sight draft and paid, the First National 
 Bank will send Robert Anderson & Co. a cashier's check or bank draft in payment; if it is a time 
 draft and accepted, the bank will follow the company's instructions in regard to retaining it for 
 collection or sending it to them. 
 
 September 15 Robert Anderson & Co. sell Albert Baker, Springfield, merchandise on ninety 
 days' time. October 10 Robert Anderson & Co. find that it will be necessary for them to borrow 
 money from the bank. They write Albert Baker for the privilege of drawing a sixty-day draft for 
 the amount of his indebtedness. It is quite probable that he will have no objections to accepting 
 the draft because it does not change the time of paying his obligation. If he accepts the draft, Rob- 
 ert Anderson & Co. will have a written statement of the amount he owes and can discount this at 
 the bank and thus secure the money which it needs. 
 
 § 96. Endorsement of Drafts. The only reason for any writing on the 
 back of a draft is to transfer title or to authorize collection. If the payee is a bank 
 located in the same city as the drawer, the endorsement will be for collection as 
 explained in § 85, ^ 4, to transfer it to a bank in the city where the drawee is 
 located. Several endorsements might be necessary in case the collecting bank 
 sends it through banks with which it does business; the form of endorsement in 
 each case would be the same as that described in § 85, ^4. In case the holder 
 of an accepted time draft wishes to sell it, the endorsement would be "in full" 
 as explained in § 84, ^ 5. 
 
 In the first illustration given in § 95, no endorsement would be required on the sight or time 
 draft in favor of the Louisville bank. If either the sight or time draft had been drawn in favor of 
 the Corn Exchange National Bank of Chicago, it would have been necessary for this bank to send 
 it to the Louisville bank for collection. The endorsement would be as illustrated in § 85, % 4. 
 
 When Robert Anderson & Co. discounted the acceptance of Albert Baker, described in the 
 second illustration given in § 95, the endorsement would be "in full" as explained in § 85, ^ 2. 
 
 § 97. Effect of Drafts on the Bookkeeping Records. When the owner 
 of a business draws a draft on an out-of-town customer, he retains a record of 
 the draft through the stub from which it was detached. Since he does not know 
 that the customer will pay the (sight) draft or accept the (time) draft upon pre- 
 sentation, no additional record is needed in regard to the draft. When the payee 
 advises him of the drawee's action in regard to the draft, he indicates the result 
 on the stub from which the draft was detached. When the drawee accepts a time 
 draft a record of this is made in the general journal because the indebtedness is 
 now in the form of a written agreement (the acceptance indicating this) and the 
 open account is canceled thereby. The value received is the draft, hence the ac- 
 count with accepted drafts (§ 102, ^ i) is debited; the value parted with is the
 
 BUSINESS FORMS AND VOUCHERS. 123 
 
 account with the customer (§ 27, ^f 2), hence it is credited. When the drawee pays 
 a sight draft upon presentation, the payee will send the drawer a cashier's check or 
 bank draft in payment for the draft, the draft having been left with the payee as 
 a receipt. When this remittance is received by the drawer, the customer is given 
 credit on the receipts side of the cash book in the same manner as if he had sent 
 his check in payment of the account. 
 
 When the business pays a sight draft drawn on it by a creditor, the same entry 
 is made in the cash book as if a check had been sent direct to the creditor in pay- 
 ment of his account. W^ien the business accepts a time draft drawn on it by a 
 creditor, an entry is required in the general journal ; the account with the creditor 
 (§ 28, ^ i) is debited because it is canceled, and the account which is to show a 
 record of written promises to pay (§ 103, T| 2) is credited because this account 
 will show the indebtedness until it is paid. 
 
 § 98. Protest. Each person or business concern whose name appears as 
 an endorser on any commercial paper (for instance, check, note, or draft) guar- 
 antees payment provided the holder will first present the paper to the one who 
 is responsible for payment and thus endeavor to make collection. The law pro- 
 vides that the only evidence the holder can use as a defense in a case of court ac- 
 tion is the protest by a notary public. This protest is a form which the notary 
 public sends to each endorser after he has presented the paper to the one respon- 
 sible for its payment and payment has been refused. 
 
 The Starr Piano Co. sells the note received from the Acme Amusement Co. (Illustration "c" 
 in § 87) to the First National Bank, endorsing the note as evidence of transfer. On the date the 
 note falls due, the bank presents it at the office of the Acme Amusement Co. and demands payment 
 from the official who signed the note; payment is refused. The note is given to a notary public and 
 he presents it to the same official. If payment is still refused, he notifies the Starr Piano Co. on the 
 proper legal form. Unless the bank had taken this procedure, the Starr Piano Co. would have been 
 relieved of the responsibility of making payment, and the bank would have lost the amount unless 
 it could collect from the Acme Amusement Co. 
 
 Exercise No. 47, Order, Sales Invoice, Acceptance, and Cashier's Check. 
 
 May 10 the Davis Printing Company, Pittsburgh, placed an order with Ault 
 & Wiborg, Cincinnati, manufacturers of printer's ink, for 150 lbs. of printer's ink 
 (black) at $1.25, and 75 lbs. of printer's ink (blue) at S1.50. May 15 Ault & Wiborg 
 acknowledged receipt of this order by an invoice. The merchandise was billed net 
 30 days and shipped via Steamer Queen City. The Davis Printing Company had 
 not paid this invoice June 15 and Ault & Wiborg drew a draft at ten days' sight, 
 payable to the Mellon National Bank in Pittsburgh, and sent the draft to it for 
 acceptance and collection. The bank presented the draft May 17 and the Davis 
 Printing Company accepted it. May 25 the bank notified the Davis Printing 
 Company that the draft was due May 27. The Davis Printing Company paid the 
 draft by check on the Mellon National Bank the day it was due. The bank sent 
 a cashier's check for the amount of the draft less $1.00 collection charges May 28. 
 
 Prepare the purchase order which the purchasing agent for the Davis Printing 
 Company would issue, the sales invoice which the bookkeeper for Ault & Wiborg 
 would make, the draft which the bookkeeper for Ault & Wiborg would draw, the 
 acceptance which the bookkeeper for the Davis Printing Company would make 
 on this draft, and the cashier's check which the cashier of the Mellon National 
 Bank would send to Ault & Wiborg. 
 
 Exercise No. 48, Order, Sales Invoice, Sight Draft, and Cashier's Check. 
 
 September 25 the Starr Piano Co., Chicago, sold the Jones Piano Co., Mil- 
 waukee, 100 Victrola records at 51c, terms 30 days; shipment was made via Amer- 
 ican Railway Express, charges collect. October 28 the bookkeeper for the Starr 
 Piano Co. drew a sight draft on the Jones Piano Co. for the amount of this invoice
 
 124 BUSINESS FORMS AND VOUCHERS. 
 
 payable to the First National Bank in Chicago, and left it with the bank for col- 
 lection. The bank sent the draft to the Second National Bank in Milwaukee with 
 instructions to present it to the Jones Piano Co. for payment. The draft was paid 
 by John Nash, an employee of the Jones Piano Co., upon presentation by a clerk 
 of the Milwaukee bank, and the Milwaukee bank sent the Chicago bank a cashier's 
 check for $50.75, retaining 25c for collecting the draft. The Chicago bank notified 
 the Starr Piano Co. that the draft had been collected and their account credited 
 with $50.75, the proceeds of the draft. 
 
 Prepare the purchase order which the purchasing agent for the Jones Piano 
 Co. would issue, the sales invoice which the clerk for the Starr Piano Co. would 
 make, the draft which the bookkeeper fpr the Starr Piano Co. would draw, and the 
 cashier's check which the First National Bank of Chicago would receive from the 
 Second National Bank of Milwaukee. Show the endorsement which the Chicago 
 bank would make on the draft before sending it to the Milwaukee bank, and the 
 entry the Chicago bank would make in the pass book of the Starr Piano Co. for 
 the cashier's check received in payment for the draft. 
 
 Exercise No. 49, Notes, Time Drafts, Sight Drafts, Bank Drafts, and Checks. 
 
 The following transactions in connection with notes and drafts were completed 
 by the Central Hardware Company of Buffalo during July and August: 
 
 July I. Received from Trowe Bros., Watertown, in full of account, a note for 
 $525-65, dated June 29, due in two months, with interest at 6% 
 after maturity, payable at the First National Bank of Watertown. 
 
 July 28. Accepted a draft drawn July 26 by the Harding Mfg. Co., Little Falls, 
 for $1,214.60, payable at thirty days' sight. This draft was drawn 
 in favor of the Citizens National Bank, Little Falls, and sent by this 
 bank to the Third National Bank of Buffalo, which presented it for 
 acceptance. 
 
 Aug. 17. Paid by check on the Third National Bank of Buffalo a sight draft for 
 $275.60, drawn by Rand & Co., Cleveland, Ohio, August 15. 
 
 Aug. 27. Gave the Third National Bank of Buffalo a check for $1,214.60 in pay- 
 ment for a bank draft drawn on the Chase National Bank, New York 
 City, for the same amount, and sent this draft to the Harding Mfg. 
 Co., Little Falls, in payment for the acceptance of July 28. 
 
 Aug. 31. Received from Trowe Bros, a new note, dated July 29, with interest at 
 6% from date, due in two months, payable at the First National 
 Bank of Watertown, and a cashier's check for $300.00 drawn on the 
 First National Bank of Watertown by M. A. Rand, cashier, in our 
 favor, in payment for their note due today. 
 
 Prepare the following business forms: 
 
 The note required in the transaction of July i. 
 
 The draft required in the transaction of July 28, with all endorsements. 
 
 3. The draft and check required in the transaction of August 17. 
 
 4. The check and bank draft required in the transaction of August 27. 
 
 The note and cashier's check required in the transaction of August 31; 
 the new note should be made payable at the same bank as the one renewed. 
 
 QUESTIONS 
 
 I. Would the Home Department Store, Pittsburgh, draw a sight draft on C. A. 
 Fades, 1262 Penn Ave., Pittsburgh, to collect a debt due from him? Why?
 
 QUESTIONS ON BUSINESS FORMS AND VOUCHERS. 125 
 
 2. Would this concern accept a note in settlement of the account? 
 
 3. U. B. Sweet owes the Candy Kitchen an account of $100.00 and secures an 
 
 extension of sixty days by giving his note for this amount, due at the ex- 
 piration of that time, (a) Have his liabilities decreased? (b) Have the 
 assets of the Candy Kitchen increased? (c) To whom will the note be paid? 
 
 4. Why should a draft be made payable to the bank at which the drawee does 
 
 business? 
 
 5. Would you consider it fair for one of your creditors to draw a sight or time 
 
 draft on you for an amount you owed without first notifying you? 
 
 6. Is it necessary for the drawee of a draft to pay or accept it when presented? 
 
 Why? 
 
 7. In what respects is a sight draft similar to a check? 
 
 8. In^what respects is an accepted time draft similar to a note? 
 
 9. If you sell merchandise to a customer in another city, how will you expect him 
 
 to pay for the merchandise? 
 
 10. Would you consider it fair for this customer to send you a draft drawn on one 
 
 of his customers in your city, asking you to collect your debt from this cus- 
 tomer? 
 
 11. How does the drawee of a time draft indicate that he will pay the amount of 
 
 the draft? 
 
 12. How does the drawee of a sight draft indicate that he will pay the amount 
 
 of the draft? 
 
 13. Explain the use of notes and drafts in business. 
 
 14. If the drawee pays a sight draft, what accounts are debited and credited? 
 
 15. If the drawee accepts a time draft, what account shows the value received? 
 
 the value parted with? 
 
 16. What accounts are affected when the owner of the business accepts a note 
 
 from a customer in full of account? 
 
 17. Name the accounts debited and credited when the business issues a note (a) 
 
 for borrowed money, and (b) to pay a creditor. 
 
 18. What accounts represent the value received and the value parted with to the 
 
 drawee of an accepted draft? To the drawer? 
 
 19. Why is a draft endorsed? a note? a check? 
 
 20. Distinguish between the face value and maturity value of a note. 
 
 21. If John Smith transfers a check to you by endorsement and the bank refuses 
 
 payment of the check because the one who drew it did not have sufficient 
 funds on deposit, how would you notify John Smith of the bank's action 
 so as to hold him responsible for the amount of the check? 
 
 22. Why is it advisable to have the receipt of part payment for a note endorsed 
 
 on the back instead of acknowledged by a separate receipt? 
 
 23. Why is it advisable for the holder of the note not to write his name in con- 
 
 nection with the endorsement of a receipt for part payment? 
 
 24. Explain the difTerence between a note and a check. 
 
 25. Whom does the holder of a note hold responsible for its payment?
 
 Chapter XII 
 
 ACCOUNTS WITH FIXED ASSETS, NOTES, AND INTEREST 
 
 The Purpose of this Chapter is to explain accounts with fixed assets, notes 
 and interest. A knowledge of these accounts is necessary because they are needed 
 in the recording of business transactions. Equipment is needed in connection 
 with the operations of the business; transactions frequently occur involving the 
 use of notes and drafts; and interest cost and interest income must be recorded. 
 
 § 99. Fixed Assets. The building or place in which the business conducts 
 its operations usually requires certain fixtures necessary in connection with the 
 operations of the business; these include shelving, show cases, desks, typewriters, 
 filing cases, etc. This property, when purchased, becomes a part of the assets 
 of the business; such assets are usually referred to as "fixed assets" to distinguish 
 them from "current assets," such as cash, merchandise in stock, accounts due 
 from customers, etc. The value of property purchased for use in the busi- 
 ness is recorded in a special account or accounts, in such a way that the cost value 
 of the property will always be shown; the balance should show cost to facilitate 
 insurance adjustment in case of fire and to determine the yearly depreciation 
 which is based on the cost. The Furniture and Fixtures account is the only fixed 
 asset account discussed in this chapter; a more complete discussion will be given 
 in a subsequent chapter. 
 
 FURNITURE AND FIXTURES ACCOUNT 
 § 100. The Purpose of this Account is to show the cost value of prop- 
 erty purchased for use in the office and store room, which includes desks, filing 
 cabinets, typewriters, show cases, scales, etc. A permanent record of each article 
 purchased should be kept, either in the explanation column of the account or 
 in a separate inventory book. 
 
 Debit the Furniture and Fixtures Acct.: Credit the Furniture and Fixtures Acct.: 
 
 *\ I. For the value of furniture and ^ 2. For the cost value of furniture 
 
 fixtures on hand at the be- or fixtures sold, the cost of 
 
 ginning of business, and for which was debited to this ac- 
 
 the cost value of such prop- count when purchased, 
 
 erty purchased. 
 
 \ 3. The Balance of the Furniture and. Fixtures Account shows the cost value 
 of the furniture and fixtures owned by the business* as the result of transactions 
 in which furniture and fixtures were purchased or sold. It is shown on the Balance 
 Sheet as one of the "Fixed Assets." 
 
 § 101. Transactions with Notes and Accepted Drafts require accounts 
 in which to record them. The reason for this is that a note is a written agreement, 
 while the amount in an account is subject to dispute even though it may be sup- 
 ported by business forms. Thus the account with James Atkin may show a debit 
 balance of $250.00, but this does not mean that Mr. Atkin will pay $250.00 be- 
 cause there might have been an error in recording the amount. On the other hand, 
 if James Atkin has given the business a written promise to pay $250.00 on a defi- 
 nite date, this is not subject to dispute as he will be required to pay this amount. 
 
 (Concluded on page 127.) 
 
 ♦The nature of the property will determine the method of taking care of the decrease in value 
 due to wear and tear resulting from use; this is explained in a subsequent chapter under the subject 
 of "Depreciation." 
 
 126
 
 ACCOUNTS WITH NOTES. 127 
 
 Should the written promise remain in possession of the business and errors de- 
 velop which change the amount, credit might be allowed for these errors; but. 
 if the business has sold the note, the holder will expect Mr. Atkin to pay the full 
 amount. For the reasons stated, it is customary to record the amount of each 
 written promise (note or acceptance) in which money is to be paid to the business, 
 in a "Notes Receivable" account, and each written promise (note or acceptance) 
 in which the business promises to pay money, in a "Notes Payable" account. 
 
 NOTES RECEIVABLE ACCOUNT 
 § 102. The Purpose of this Account is to show the amount due to the 
 business as evidenced by written obligations; these include notes (§ 86) signed 
 by others and time drafts (§ 92) accepted by others. 
 
 Debit the Notes Receivable Account: Credit the Notes Receivable Account: 
 
 ^ I. For the face of each note or ^ 2. For the face of each note or 
 
 acceptance* owned by the acceptance* when collected, 
 
 business at the beginning, and discounted!, or transferred, 
 
 for the face of each note or Partial payments are indi- 
 
 acceptance* received during cated as in § 27, ^ 5. 
 the operations of the business. 
 
 % 3. The Balance of the Notes Receivable Account shows the value of the 
 notes and acceptances belonging to the business as the result of transactions com- 
 pleted with notes and drafts receivable. It is shown on the Balance Sheet as a 
 current asset, and is usually listed between "Cash" and "Accounts Receivable." 
 
 NOTES PAYABLE ACCOUNT 
 § 103. The Purpose of this Account is to show the amount owed by the 
 business as evidenced by written obligations; these include notes (§ 86) signed 
 by the business and time drafts (§ 92) accepted by the business. 
 
 Debit the Notes Payable Account: Credit the Notes Payable Account: 
 
 1[ I. For the face of each note or 1[ 2. For the face of each note or 
 
 acceptance when paid. Par- acceptancef owed by the busi- 
 
 tial payments are indicated as ness at the beginning, and for 
 
 in § 28, ^ 5. the face of each note signed 
 
 or time draft accepted | by the 
 business during its operations. 
 
 ^ 3. The Balance of the Notes Payable Account shows the value of the 
 notes and acceptances owed by the business as the result of transactions completed 
 with notes and drafts payable. It is shown on the Balance Sheet as a current lia- 
 bility, and is usually listed before "Accounts Payable." 
 
 § 104. Interest is the use of money. The premium paid or received for 
 this use is also referred to as interest. To illustrate: A borrowed $100.00 from 
 B on twelve months' time, and at the end of the year paid $106.00, the principal 
 and the interest. A paid $6.00 for the use of the money borrowed, hence this 
 artiount is an interest cost to him; B received $6.00 for the use of the money loaned, 
 hence this amount is interest earned for him. 
 
 *Trade acceptances are usually shown in an account with Trade Acceptances Receivable; 
 this is discussed in a subsequent chapter. 
 
 flf notes and drafts discounted are credited to a Notes Receivable Discounted account, 
 Notes Receivable is not credited until they are paid; this is discussed in a subsequent chapter. 
 
 JTrade acceptances are usually shown in an account with Trade Acceptances Payable; this 
 is discussed in a subsequent chapter.
 
 128 ACCOUNTS WITH INTEREST 
 
 ^ I. Discount is interest paid in advance, that is, the one who borrows the 
 money pays the lender the interest at the time the loan is made and not at its 
 maturity. It is customary with many banks to deduct the interest from the face 
 of notes received as evidence of loans; the borrower receives cash or credit in 
 his pass book for the proceeds. The borrower may, if he desires, give the bank 
 his check for the interest, in which case he receives credit for the face of the note. 
 
 To illustrate: A borrowed $500.00 from his bank, giving his note payable in ninety days from 
 date, as evidence of the obHgation. The bank charges him eight per cent interest. When he pre- 
 sents his note for credit, he will either receive credit for $490 .00, or give the bank his check for $10 .00 
 and receive credit for $500.00. In either case the $10.00 is regarded as interest. Interest paid in 
 advance may be termed "discount," but it is better to consider all amounts paid for the use of money 
 as "interest," whether the amounts are paid at the.time the debt is created or at the time it is paid. 
 
 \ 2. Legal Rate. To prevent unreasonable charges for the use of money, 
 the various states have enacted laws fixing the rate that may be collected; this is 
 termed the legal rate. Some states provide that a higher rate may be collected 
 if mentioned in the contract; this is termed the contract rate. Both the legal 
 and the contract rate are based on a fixed charge for one year; thus 6% indicates 
 that $6.00 may be collected for each $100.00 for one year. 
 
 ^ 3, Time. The time is the number of da^^s, months or years for which 
 interest is to be calculated. In the case of a note the time is stated. A note dated 
 March 10, due in 90 days, would be due June 8. The same note if payable in three 
 months would be due June 10. 
 
 ^ 4. Method of Calculating Interest. A business year is regarded as 360 
 days' — 12 months, 30 days in each month. Since 6% is the legal rate in the majority 
 of states, and it is an aliquot part of 60, there are many rules for calculating interest 
 based on this. One of the simplest methods, especially where the time is less than 
 100 days, is as follows: multiply the principal with the decimal place moved three 
 places to the left by the result obtained by dividing the number of days by six. 
 The result is the interest at 6%. 
 
 To illustrate: Calculate the interest on $942.75, for 48 days, at six per cent. Move the decimal 
 point three places to the left, multiply this amount by 8 (48 divided by 6). The result is 754,200. 
 As there are five decimal places in the multiplicand, there must be five decimal places in the product, 
 which gives the interest, $7.54. The fraction to the right of this is less than one-half, and is not used. 
 If it had been one-half or more, the interest would have been $7.55. Do not drop the fraction until 
 the final result is obtained. 
 
 When the rate of interest is not 6%, divide the amount of the interest at 6% by six; this gives 
 the interest at i %. Multiply this by the given rate, and the result is the interest on the given amount 
 at the given rate. To illustrate: Calculate the interest on $368.95 for 48 days, at 8%: $368.95 
 with the decimal point moved three places to the left is .36895. 48-^-6 = 8; .36895X8 = 2.95160 
 (interest at 6%). 2.95160 -J-6 = .49193 (interest at 1%); .49193X8 = 3.93544 or $3.94, interest on 
 J.95 for 48 days, at 8%. 
 
 § 105. Accounts with Interest. Interest cost and interest earned should 
 be recorded in separate accounts While all the transactions with interest could 
 be recorded in one account, debiting it with interest cost and crediting it with 
 interest earned, yet it is better to keep two accounts because the balance of the 
 one account would not mean anything to the owner of the business. Where the 
 transactions with interest are recorded in two accounts, the information given 
 the owner on the Statement of Profit and Loss will show the net interest cost to hirji 
 separate from the net interest earned; if the transactions had all been recorded 
 in one account, the balance would not show this information, but only the differ- 
 ence between the total interest cost and the total interest earned. For the rea- 
 son stated it is customary to record interest transactions in which the business 
 gives cash or other property for interest, in an account with "Interest Cost," 
 and those transactions in which the business receives cash or other property for 
 interest, in an account with "Interest Earned."
 
 GENERAL RULE FOR DEBITS AND CREDITS 129 
 
 INTEREST COST ACCOUNT 
 
 § 106. The Purpose of this Account is to show the cost of interest to 
 the business, made necessary by the business having to pay for the use of money. 
 
 Debit the Interest Cost Account: Credit the Interest Cost Account: 
 ^ I. For interest on accounts and If 2. For any deductions which re- 
 notes payable.* Cash is us- duce the cost of interest as 
 ually credited, but some other shown by the debit side, 
 asset might be given in pay- 
 ment of interest. 
 
 ^ 3. The Balance of the Interest Cost Account shows the net cost of interest 
 to the business. It is shown on the Statement of Profit and Loss as Interest Cost 
 under the caption "Deductions from Income." 
 
 INTEREST EARNED ACCOUNT 
 
 § 107. The Purpose of this Account is to show the returns from interest 
 to the business, resulting from others paying for the use of money which belongs 
 to the business. 
 
 Debit the Interest Earned Account: Credit the loiter est Earned Account: 
 
 % I. For any deductions which reduce ^2. For interest income from ac- 
 
 the income from interest as counts and notes receivable.! 
 
 shown by the credit side. Cash is usually debited, but 
 
 some other asset might be 
 received for interest earned. 
 T[ 3. The Balance of the Interest Earned Account shows the net returns from 
 interest to the business. It is shown on the Statement of Profit and Loss as Interest 
 Earned under the caption "Other Income." 
 
 SUMMARY 
 
 § 108. General Rule for Debits and Credits. Debit the account which 
 represents the value received and credit the account which represents the value 
 parted with. This rule may be more explicitly expressed as follows: 
 
 Debit the Account which represents: Credit the Account which represents: 
 
 (a) The cash received or property (d) The cash paid or property sold, 
 
 purchased. (e) The person from whom cash is 
 
 (&) The person to whom cash is paid received or property is pur- 
 
 or property is sold on account. chased on account. 
 
 (c) The service for which cash or (/) The service for which cash or 
 
 other property is given in pay- other property is received, 
 
 ment. 
 The above rule was not given at the beginning because the student might 
 have felt obligated to memorize it, and this is not desirable. It is given at this time 
 in order that the student may correlate it with the preceding discussion and his 
 knowledge of the principles gained from the exercises and practice set. 
 
 In the formula given, (a) applies to ^i under the discussion of the Cash, 
 Purchases, Notes Receivable, and Furniture and Fixtures accounts; (b) to 1[i 
 under the discussion of the Accounts Payable and Accounts Receivable accounts, 
 
 (Concluded on page ijo.) 
 *Accrued interest on accounts payable, notes payable, and bonds payable will be discussed later. 
 fAccrued interest on accounts receivable, notes receivable, and bonds owned by the business 
 will be discussed later.
 
 130 
 
 OUTLINE OF ACCOUNTS. 
 
 and to ^ 2 of the Capital account; (c) to 1[i of the Expense, Interest Cost, and 
 Interest Earned accounts; (d) to H 2 of the Cash, Sales, and Furniture and Fix- 
 tures accounts; (e) to 1[ 2 of the Accounts Receivable and Accounts Payable ac- 
 counts, and to H 4 of the Capital account; (f) to ^ 2 of the Expense, Interest Cost 
 and Interest Earned accounts. 
 
 The student should learn to record transactions with the same ease that the driver operates 
 an automobile. He can do this only by constant practice. The purpose of the exercises in connec- 
 tion with the discussion and the practice set was to afford this practice. The first thought in the 
 mind of the bookkeeper when a transaction is presented to him should be the value received and 
 the value parted with; the second, the accounts that represent these values; the third, the book 
 of account in which to make the record; and the fourth, the process of recording so as to show these 
 facts. 
 
 OUTLINE OF ACCOUNTS 
 
 § 109. The Outline below includes those accounts which have been dis- 
 cussed in the preceding chapters. These are classified as current assets, fixed assets, 
 current liabilities, capital, income, operating, and special profits and losses. 
 
 ' Cash 
 Merchandise Inventory 
 Notes Receivable 
 Accounts Receivable 
 
 Current Assets. 
 
 Fixed Assets < Furniture and Fixtures 
 
 Current Liabilities. 
 
 f Notes Payable 
 \ Accounts Payable 
 
 Capital I Proprietor, Capital 
 
 [ Sales 
 
 Trading (Income) i Purchases 
 
 [ Merchandise Inventory 
 
 Operating (Cost) <^ Expense 
 
 Used in the preparation of 
 the Balance Sheet 
 
 Special Profit and Loss, s 
 
 Interest Earned 
 Interest Cost 
 
 Used in the preparation of 
 the Statement of Profit 
 and Loss 
 
 Current Assets are those assets which are in the form of cash or which will be 
 converted into cash in the regular operations of the business; they are usually 
 the result of transactions in connection with the purchase and sale of the commod- 
 ities in which the business deals. 
 
 Fixed Assets refer to the property purchased for use in the business. 
 
 Current Liabilities are those liabilities which will have to be paid within a 
 short time after they are incurred; they usually represent debts incurred in con- 
 nection with the purchase of merchandise. 
 
 Capital refers to the investment of the proprietor. 
 
 Trading or Income Accounts are those accounts which show the profit re- 
 sulting from the operations of the business. Each business is organized to make 
 a profit through certain specific operations, as selling merchandise (mercantile 
 business), selling service (telephone business), etc. 
 
 Operating Expenses refer to the cost of operating the business, which includes 
 rent, heat, light, telephone service, salaries, etc. 
 
 Special Profits and Losses refer to those profits and losses which occur out- 
 side of the regular operations of the business and may occur in one fiscal period 
 but not in another.
 
 EXERCISES IN NOTES AND DRAFTS. 131 
 
 Exercise No. 50, Notes and Drafts. 
 
 Record in journal form the following transactions in regard to notes and 
 drafts completed during the months of January — June by James Whitcomb, a 
 dealer in farm implements: 
 
 Jan. 5. Sold Jonathan Rigden, Centerville, one tractor, $850.00. Received in 
 
 payment his check for $250.00 and three notes for $200.00 each, due 
 
 in three, six, and nine months respectively, with interest at 6% from 
 
 date. 
 
 10. Purchased from the Orrville Mfg. Co., Mansfield, on 90 days' time, 
 
 merchandise per purchase invoice dated January 7, $1,295.60. 
 15. Sold Robert Shook, Scottsboro, on 30 days' time, farm implements per 
 
 sales invoice rendered, $425.00. 
 22. Accepted the Orrville Mfg. Co.'s 90-day draft for $1,000.00 on account 
 
 of purchase of the loth. 
 25. Borrowed $800.00 from the bank on Mr. Whitcomb's 60-day note, 
 bearing interest at 6%. Received credit in the pass book for the 
 face of the note. 
 31. Sold S. W. Walker, Clinton, on 30 days' time, farm implements per 
 sales invoice rendered, $209.75. 
 Feb. I. Discounted at the bank the three-months note received from Jonathan 
 Rigden January 5. Received credit in the pass book for the face of 
 the note. 
 
 14. Received from Robert Shook in settlement for the merchandise sold him 
 
 January 15, his note for $300.00, due in three months, with interest, 
 and his check for the balance of the account plus three months' 
 interest on the note at 8%. 
 28. Sold W. H. Miller, City, one tractor, $1,050.00. Received in payment 
 his check for $150.00 and three notes for $300.00 each, due in three, 
 six, and nine months respectively, with interest at 6% from date. 
 Mar. 8. Drew a 30-day draft through the Union Bank at Clinton on S. W. Walker 
 for the merchandise sold him January 31. Sent the draft to the bank 
 for acceptance, with instructions to retain it for collection if accepted. 
 
 15. Discounted at the bank the three- and six-months notes received from 
 
 W. H. Miller February 28. Received credit in the pass book for 
 $588.00, the proceeds of these notes after the bank deducted interest. 
 
 16. Received notice from the Union Bank at Clinton that the draft drawn 
 
 on S. W. Walker March 8 was accepted March 11, and the bank 
 would hold the draft for collection at maturity per our instructions. 
 
 24. Gave the bank in payment for the note discounted January 25 a new 
 
 60-day note for $500.00, with interest from date, and our check for 
 the balance of the old note and interest on same at 6% for sixty days. 
 
 25. Purchased from the Orrville Mfg. Co., Mansfield, on 90 days' time, 
 
 merchandise per purchase invoice dated March 20, $2,546.52. 
 April I. Received from Jonathan Rigden a check for $203.00 in payment for 
 his three-months note given January 5 and interest, the bank having 
 failed to send him a notice. 
 3. Sold M. B. Adams, Uniontown, one thresher with full equipment, 
 $1,500.00. Received in payment $500.00 cash, a 60-day note for 
 $500.00, and a 90-day note for $500.00, each with interest at 6%. 
 14. Received a cashier's check from the Union Bank at Clinton for $208.50 
 in payment for the draft accepted by S. W. Walker, less $1.25, their 
 charges for collection.
 
 132 
 
 EXERCISES IN NOTES AND DRAFTS 
 
 10. 
 
 15- 
 
 Apr. 20. Gave our bank a check for $498.58 and the 60-day note received from 
 M, B. Adams April 3, in settlement for the 90-day draft drawn by 
 the Orrville Mfg. Co. and accepted by us January 22; the bank 
 accepted the Adams note at its present value, $501.42 (face value, 
 $500.00, plus interest to date, $1.42). 
 25. Received a check from W. H. Miller in payment for the nine-months 
 note received February 28, for the face of the note and interest from 
 the date of the note up to and including April 24. 
 May I. Gave the Orrville Mfg. Co. the 90-day note received from M. B. Adams 
 April 3, our note for $1,000.00 due in ninety days, our note for 
 $1,000.00 due in four months, and our check for $374.79 in payment 
 for balance due on the purchase invoice of January 10 and in full of 
 purchase invoice of March 25, and interest on our notes at 6% from 
 date; the Orrville Mfg. Co. accepted the Adams note at its present 
 value, $502.33 (face value, $500.00, plus interest to date, $2.33). 
 Sold C. H. Becker, Lexington, one thresher and outfit, $1,800.00. Re- 
 ceived in payment his check for $300.00, and three notes for $500.00 
 each, due in 30, 60, and 90 days respectively, with interest at 6%. 
 Purchased from the Orrville Mfg. Co., Mansfield, on 90 days' time, 
 merchandise per purchase invoice dated May 12, $1,365.90. 
 18. Sold Robert Shook, Scottsboro, one tractor, $850.00. Received on 
 account of this sale his check for $150.00 and a note for $600.00 in 
 his favor, signed by B. A. Small, dated March 7 and payable in 
 ninety days. Allowed him credit for the proceeds of the note, which 
 include the face and interest at 6% from the date of the note to May 
 18. The balance of this account is to be paid within thirty days. 
 June I. The bank notified us that the three-months note for $300.00 received 
 from W. H. Miller February 28 and later discounted, has not been 
 paid. Gave the bank our check for $4.50 interest and our note for 
 $300.00, with interest at 6% from date, payable in thirty days. 
 Debit the account with W. H. Miller for the face of the note plus the interest, and 
 credit Notes Payable and Cash. 
 
 3. Received from Robert Shook a 3-months note for $200.00, dated 
 June 2, and a check for $104.00 in payment for 3-months note dated 
 February 14, and interest on the new note at 8% from date to 
 maturity. 
 12. Received from C. H. Becker his check for $502.50 in payment for 30-day 
 note dated May 10 and interest at 6% on the same from date of the 
 note up to and including June 9. 
 
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 Exercise No. 51, Sight Draft. 
 
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 John C. Franklin of Scranton, Pa., owes Dean & Dean of Salt Lake City as 
 shown by the account (in the ledger of John C. Franklin) in the illustration 
 above. Dean & Dean have drawn the draft at the top of page 133 in settlement
 
 EXERCISES IN NOTES AND DRAFTS. 
 
 133 
 
 of the past due items of August 5 and September 9, with interest at 6% from the 
 due date up to and including the date of the draft. 
 
 
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 The student is required to show the following: 
 
 (i) Interest calculations made to approve the amount of the draft. 
 (2) The entry in journal form that the drawee would make when he paid 
 the draft. 
 
 Exercise No. 52, Note Transferred. 
 
 
 
 
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 The check in the illustration below and the note at the top of page 134 were 
 received in full payment for the account shown in the illustration above. The 
 customer pays interest on the past-due items from their due date to the date of 
 settlement as shown by the date of the check; he is allowed the accrued interest 
 in the note from date up to and including the date of settlement. 

 
 134 
 
 EXERCISES IN NOTES AND DRAFTS. 
 
 
 The student is required to show the following: 
 
 (i) Interest calculations made to approve the amount of the check. 
 
 (2) Endorsement to transfer the note. 
 
 (3) The entry in journal form required to close the account and show a 
 record of the interest and note. 
 
 Exercise No. 53, Time Draft. 
 
 
 
 
 
 
 
 
 
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 The draft in the illustration below was drawn in settlement for the balance 
 of the sale made March 10 as shown by the debit to the account with the customer 
 in the illustration above. Interest at 6% for thirty days on the balance due was 
 included in the face of the draft. 
 
 
 
 ./J?_ 
 
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 ^l€^ 
 
 
 
 
 
 »?g^«vn>ivwj>w»wwn/TOm'WF.TOiMM;«i<af^^ 
 
 The student is required to show the following: i 
 
 (i) Interest calculations made by the bookkeeper when he ascertains the 
 amount of the draft. 
 
 {Concluded on page 133.)
 
 EXERCISES IN NOTES AND DRAFTS. 
 
 135 
 
 (2) The stub from which the draft was detached. 
 
 (3) The entry in journal form made by the bookkeeper who drew the draft. 
 
 Exercise No. 54, Sight Draft, Note, and Check. 
 
 The illustration below shows three ledger accounts which appear in the ledger 
 of the Cochran Mfg. Co., Toledo, Ohio: 
 
 
 
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 {Concluded on page Ij6.
 
 136 JOURNAL ENTRIES, NOTES AND DRAFTS. 
 
 The following is required: 
 
 (i) Draw at sight on the Auto Radiator Repair Co. for the balance due June 
 1st, including interest on all past due items, less interest on the payments up to 
 and including the date of the draft. Make the draft payable to one of the banks in 
 the city in which the school is located, it being assumed that this city is the address 
 of the Auto Radiator Repair Co, 
 
 (a) Show in journal form the entry made by the bookkeeper for the Coch- 
 ran Mfg. Co. to record the draft and interest. 
 
 (2) Prepare a sixty-day interest-bearing note in favor of A. Strange & Co., 
 payable at the Jackson National Bank, for the balance due January i, including 
 interest on all purchases from the due date up to and including January i, and 
 allowing interest on all payments from date up to and including January i. 
 
 (a) Show in journal form the entry made by the bookkeeper for the Coch- 
 ran Mfg. Co. to record the note and interest. 
 
 (3) July I R- H. Donnelley of the R. H. Donnelley Company wishes to 
 transfer the note shown below their ledger account, and give the company's check 
 in settlement for the account. He is to pay interest on each past-due item and to 
 be allowed interest on each payment from date up to and including July i, also 
 to be allowed credit for the accrued interest in the note. 
 
 (a) Write the check for Mr. Donnelley to sign. 
 
 (b) Show the calculations necessary to ascertain the amount of the check. 
 
 (c) Show in journal form the entry necessary to close the account and to 
 record the value of the note and interest. 
 
 Exercise No. 55, Journal Entries, Notes and Drafts. 
 
 Journalize the following transactions using the numbers as the days of the 
 current month, and present the work to the teacher for approval. 
 
 1. Gave Simpson Bros, our sixty-day note, dated today, for $250.00, to apply 
 on account. 
 
 2. John Howard gave us his thirty-day note, dated today, for $128.36, in 
 full of account. 
 
 3. Sold James Morgan, on his note for thirty days, 200 bu. oats at 49 cents. 
 
 4. Received $150.00 from A. C. Williams, in payment of his note due today. 
 
 5. Accepted Martin Bros.' ten-day draft for $329.86, in part payment of 
 account. 
 
 6. Received $286.48 from M. J. Thompson, on his note, due today. 
 
 7. Bought from the Hall Safe & Lock Co., for $200.00, one fireproof safe, and 
 gave in payment check for $50.00, and our note due in sixty days, for $150.00. 
 
 8. Drew a ten-day draft on A. C. Weaver for $150.00, the balance he owes 
 us, and sent the draft to Arnold Bros., to apply on account we owe them. Mr. 
 Weaver has accepted the draft. 
 
 Transactions of this nature are not fair to the creditor, but when they occur, the one who 
 draws the draft (drawer) debits the account with the creditor to whom the draft is given (payee), 
 and credits the account with the customer on whom it is drawn (drawee), if the draft is accepted or 
 paid. The drawee debits the account with the drawer, and credits the Notes Payable account if he 
 accepts the (time) draft or the Cash account if he pays the (sight) draft. The payee debits the Notes 
 Receivable account if the (time) draft is accepted or the Cash account if the (sight) draft is paid, 
 and credits the account with the drawer. 
 
 9. Bought from Payne & Hart, merchandise per invoice of this date, $869.48. 
 Gave in payment our ninety-day note, dated today. 
 
 10. James Milligan gave us his note for $125.00, due in thirty days from 
 today to apply on account.
 
 RADIO SET 
 
 137 
 
 11. Received from R. M. Upman, a ten-day draft on Hall Bros., for $150,00, 
 to apply on an account Upman owes us. Hall Bros, have accepted the draft. 
 
 12. Purchased from Remington Typewriter Co., one No. 11 Remington 
 typewriter, for $100.00. Gave in payment our check for $25.00, and three notes 
 for $25.00 each, due in thirty, sixty and ninety days. 
 
 This transaction requires an entry with one debit and four credits — one for the cash paid and 
 one for each note. 
 
 13. Drew a ten-day draft on Yeager Bros, for $354.81, the amount they owe 
 us, and sent it to Dawson & Perry to apply on account. (See instructions in No. 8.) 
 
 14. J. J. Darling gave us his note for $175.00 due in sixty days from today; 
 and his check for $86.14, in full of account he owes us. 
 
 15. Bought from the Consolidated Milling Company, merchandise per in- 
 voice of this date, $689.28. Gave in payment a note which we hold (Notes Receiv- 
 able) for $127.65, our note due in thirty days for $400.00, and our check for the 
 balance. 
 
 16. Borrowed $400.00 from the bank on our thirty-day interest-bearing note 
 for this amount. 
 
 17. Accepted Marblehead & Co.'s draft at ten days for $681.29, in full of 
 account. 
 
 18. Paid Donaldson Bros. $250.00 in payment of a note which is due today. 
 
 19. Our note for $500.00 is due at the bank today. Gave them a check for 
 $250.00, and a new note with interest for $250.00 in settlement of this. 
 
 20. Accepted Martin Bros.' ten-day draft for $150.00, to apply on account. 
 
 21. Paid our note for $200.00 due today. 
 
 22. Our note for $800.00, in favor of Stillman Bros., is due today. We have 
 settled the same by giving them our check for $300.00, and two interest-bearing 
 notes for $250.00 each, due in thirty and sixty days, respectively. 
 
 23. Robert Davis owes us a note for $627.65, which is due today. He settles 
 the same by giving us his note for $300.00, a note that has been transferred to him 
 for $127.65 which we owe, and his check for the difference. 
 
 24. A. L. Day owes us $582.65. He settles the account as follows: his thirty- 
 day note for $250.00, our note for $210.00 (Notes Payable) which he holds, and 
 his check for $122.65. 
 
 25. We owe Anderson Bros. $427.55. They accept our check for $127.55, 
 and three notes of equal amount dated today, due in thirty, sixty and ninety days, 
 in full of account. 
 
 RADIO SET 
 
 This is a practice set without vouchers, and consists of the transactions for 
 a period of two months performed by Robert A. McFarland who is engaged in the 
 radio supply business. The transactions are separate from the text and are included 
 with the books of account necessary to record them. The purpose of this set is 
 to provide a review of the principles discussed in the text and in the W, H. Good- 
 win practice set. The student will follow the teacher's instructions in regard to 
 the completion of this set.
 
 138 QUESTIONS. 
 
 QUESTIONS 
 
 1. Under what conditions would the cost of a desk be debited to the Purchases 
 
 account? 
 
 2. Under what conditions would the cost of a desk be debited to the Furniture 
 
 and Fixtures account? 
 
 3. W. H. Banks, owner of Banks' Drug Store, rented a typewriter on January i 
 
 for one year at a rental of $3.00 per month. What accounts would his 
 bookkeeper debit and credit when the ^monthly rent was paid? 
 
 4. January i of the next year Mr. Banks purchased a new typewriter for $100.00 
 
 cash, and on December 31 of the same year he sold it for $75.00 cash, (a) 
 What accounts would his bookkeeper debit and credit when the typewriter 
 was purchased? (b) What accounts would his bookkeeper debit and credit 
 when the typewriter was sold ? 
 
 5. How much did Mr. Banks save by owning his own typewriter? 
 
 6. If he had not sold the typewriter December 31, should he have considered 
 
 it still worth $100.00? 
 
 7. If he wished to show that it had decreased in value, could you suggest a means 
 
 of doing this? 
 
 8. Why should the credit to the Furniture and Fixtures account show cost and 
 
 not selling price? 
 
 9. If a desk which has been purchased for sale is transferred from stock for use 
 
 in the office, what accounts will be debited and credited? 
 
 10. Would an automobile truck used for delivering merchandise sold be regarded 
 
 as one of the fixed assets of the business? 
 
 11. If the business buys a safe for $400.00 and pays freight $50.00, will the cost 
 
 of the safe shown in the Furniture and Fixtures account be the cost of the 
 safe at the factory or this cost plus the freight? 
 
 12. If fixtures belonging to the business are destroyed by fire, will the insurance 
 
 be adjusted on the cost value of the same or the present value? 
 
 13. What is the legal rate of interest in your home state? 
 
 14. Does the law of your state permit the collection of a rate higher than the 
 
 legal rate? 
 
 15. Explain the difference between interest and discount. 
 
 16. In what respect does the Interest Cost account resemble the Expense ac- 
 
 count as they both relate to the operations of the business? 
 
 17. When is interest a cost to the business? 
 
 18. When is interest an income to the business? 
 
 19. Why does the law limit the income from interest when it does not limit the 
 
 income from the operations of a business? 
 
 20. If a customer owes the business $500.00 which is due, and gives his note for 
 
 this amount, due in ninety days, should he be required to pay interest? 
 Why? 
 
 21. (a) What is the due date of a note dated May 9 and payable ninety days 
 
 after date? (b) What is the due date of a note dated May 9 and payable 
 three months after date? 
 
 22. Why is the interest on a note for $169.27 for sixty days at 6%, $1.69? 
 
 23. Explain the difference between current assets and fixed assets and the reason 
 
 for this difference. 
 
 24. Explain the difference between the profit on merchandise sold in a mercantile 
 
 business, and the profit resulting from interest earned. 
 
 25. What is the first thought of a bookkeeper when a business form representing 
 
 a transaction is given to him? the second thought? the third? the 
 fourth?
 
 Part Two — Partnership 
 
 Chapter XITI 
 
 THE PARTNERSHIP CONTRACT AND ACCOUNTS WITH PARTNERS 
 
 § 110. Introduction. The purpose of the discussion in this division is to 
 give the student further information in regard to the principles of accounting in 
 connection with the recording of transactions, and practice through the exercises 
 in applying these principles. Two practice sets, separate from the text, accompany 
 this division. While the title of the division is "Partnership" and the business in 
 each of the practice sets is conducted by partners, yet the principles discussed and 
 illustrated may be applied to a business owned and operated by an individual. 
 This chapter contains a discussion of the partnership and the accounts necessary 
 to record the transactions with the partners. 
 
 § 111. Accounting is the science which treats of the proper recording, 
 classification, presentation, and interpretation of the financial facts relating to a 
 business enterprise. Bookkeeping is that part of accounting which relates to the 
 recording of business transactions. It is difficult to determine just where book- 
 keeping ends and accounting begins, because the transactions should be classified 
 as they are recorded if the proper analysis is to be made from the reports prepared 
 at the close of the fiscal period. 
 
 In the preceding chapters no attempt was made to consider the classification 
 of transactions and the analysis of reports. Now that the student understands 
 the method of recording transactions and preparing reports, he can better appreciate 
 the reason for classification and analysis. A course in bookkeeping without a 
 discussion of classification and analysis would not be fair to the student because 
 he would be handicapped in his work as a bookkeeper, and as a manager of his 
 own business he could not -interpret the information which would come to him 
 from the accounting department. 
 
 § 112. A Partnership is the relation existing between two or more persons 
 who have associated their time, labor, skill and capital in some business enterprise 
 for their joint profit. The partners are the persons who have entered into the 
 agreement to form a partnership. 
 
 § 113. The Purpose of Forming a Partnership is the mutual benefit of 
 all interested. The qualifications and natural ability of each person difi"er widely. 
 One person seldom possesses all the essential requirements for an ideal business 
 man; for this reason, the association of two or more partners is often very desirable. 
 A mercantile business owned and operated by a shrewd buyer, a good salesman, 
 and an efficient collector as partners will be sure of success if the three partners are 
 congenial. While the necessary capital for conducting the business is usually the 
 
 139
 
 140 CAPITAL OF A PARTNERSHIP 
 
 chief incentive to the formation of a partnership, yet the natural ability and in- 
 tegrity of each partner should always be considered, especially if each is to take 
 an active part in the management of the business. 
 
 James Brown operates a garage for storage. Robert Davis is salesman for a local automobile 
 concern. Frank Jones is an expert auto repair mechanic. These three men form a partnership for 
 the purpose of operating a garage, selling passenger cars, and conducting a repair shop. If the 
 partners work together and there is no discord, the business should be a success. 
 
 § 114. The Capital of a Partnership consists of (a) assets invested at the 
 beginning of business, and (b) subsequent investments. The net assets of the 
 partnership are the total assets less the liabilities; these net assets do not belong 
 to any one partner either as a whole or in part, but belong to all of them in com- 
 mon. The capital of a partnership is the same as the capital of a business owned 
 by an individual, except that the net capital of the individual business belongs 
 to the owner, while the net capital of the partnership belongs to the partners, but 
 neither is permitted to withdraw his share without the consent of the others. 
 
 A. L. Day owns and operates a groceiy business. He decides to discontinue the business and 
 dispose of the assets at auction. After paying his liabilities, he can use the remainder of his assets 
 in any way which he desires. O. L. Garber and C. N. Simpson operate a hardware business as 
 partners. Mr. Garber wishes to retire, but Mr. Simpson does not want him to do so. If Mr. Garber 
 insists upon retiring, he will be responsible to Mr. Simpson for any damage caused by his action. 
 If the two partners cannot agree upon some plan of action, it will be necessary to ask a court of 
 equity to appoint a receiver to sell the assets, pay the liabilities, and, after the liabilities are paid, 
 divide the remainder of the assets between the partners. 
 
 § 115. The Articles of Copartnership is the contract entered into between 
 the partners at the beginning of the business and must conform to the laws of 
 the state in which the partnership business is located. The agreement between 
 the partners should be in writing and signed by each partner. It should contain 
 the following information: 
 
 (i) The date, and time the partnership is to continue. 
 
 (2) The name of each partner and the firm name under which the business 
 will be operated. 
 
 (3) The amount invested by each partner. 
 
 (4) The city and state in which the business is to be located. 
 
 (5) The nature of the business. 
 
 (6) The duties of each partner. 
 
 (7) The compensation each partner is to receive for his services. 
 
 (8) The division of the profits. 
 
 (9) Any special conditions that may be agreed upon by the partners. 
 
 Illustration No. 69 shows the partnership agreenient between C. W. Keeland 
 and A. D. Munson, partners in a retail hay, grain, feed and coal business. 
 
 § 116. The Relation Between the Partners is such that neither partner 
 should take action in important cases without consulting the other partners. The 
 individual owner of a business may operate the business without consulting any 
 one as he alone is responsible for its operations, but each partner in a partnership 
 is responsible to the other partners, hence should consult them even though, ac- 
 cording to the agreement, it might not be necessary for him to do so. The success 
 of a partnership can be assured only with the full cooperation of all the members, 
 and this cooperation can be best efifected when the partners are in accord on all 
 business transactions of any importance. 
 
 No matter how well qualified the partners may be, unless their relations are agreeable the 
 business cannot be a success. In the case of Garber and Simpson in the illustration under § 114, 
 it is possible that each was well qualified to perform the duties under the Articles of Copartnership, 
 but the fact that one of them wanted to sell might indicate that their relations were not satisfactory.
 
 ARTICLES OF COPARTNERSHIP 141 
 
 ARTICLES OF COPARTNERSHIP 
 
 ^^ii Contract, -l/atZe and entered into on the .Sep.QP.'l day of 
 
 .... .Ap.ri.l 19 by and between. . .9... .^V . _ Keelan d _ of _ _C inc imiat i ,_ _ Ohio , _ _ _ 
 
 pax ty...of . th.e .f ir s t :par t ^ _ and A .. .p... .Munson o f _ .C inp_innati_,_ _ Ohi o , _ 
 
 p.arti[_ of __the second part, 
 
 WITNESSETH: That tlie said parties have this day formed a copartnership for the purpose of engaging in and 
 
 co«rf«c/;ni7..a..reJ_a_il_hay,_grai ^ 
 
 business under the following stipulatiotis which are made a part of this contract: 
 
 FIRS T: The said copartnership is to continue for a term of yJ^VP. §. .^^6%?.? 
 
 from date hereof. 
 
 SECOND: The business shaU be conducted under tlie tfirm name of. . .Q . . .W... . Ke el an d .&. .Q .0. • 
 
 THIRD: The inveHments are as follows:.Q.-..^.-.K§.^.l?J^§il..^^.5.§X?..^S_shgwi_'bj_the. 
 
 Balance Sheet of his business, prepared March 31] the partnership. 
 
 iissames the liabilities shown by this Balance Sheet. 
 A. D. LIunson, cash, Five Thousand Dollars f|5,000.00). 
 
 FOURTH: All profits or losses arising from said business are to be shared as follows: • 
 
 C. W...K.eeland, one-half j_ A. D. Munson, one -half 
 
 FIFTH: A systematic record of all transactions is to be kept in a double entry set of books, which are to be open 
 for the inspection of each partner. On.the..l.a.S.t..da^..Of .June and .pec_.___fte„aj<er a statement of 
 the business is to be made, the books closed and each partner credited with the amount of the gain. A statement may be 
 made at such other time as the partners agree upon. 
 
 SIXTH: Each partner is to devote his entire time and attention to the business and to engage in no other busi7iess 
 enterprise without the written consent of the other. 
 
 SEVENTH: Each partner is to have a salary of S. 2.QP.»y.Qper month, the same to be tvitMravm at S7tch time 
 or times as he may elect. Neither partner is to willidraw from the business an amount in excess of his salary ivithout 
 the written consent of the other. 
 
 EIGHTH: The duties of each partner are defined cs follows:.. Q.: .W.t.i£e.el.an.d..is..tp..h&V.e. 
 
 general sugervision of the business and act as pur chasing. _ag:.en.t ..and... 
 credit man;_A. D. Munson is to act as sales manager._ 
 
 NINTH: Neither partner is to become surety or bondsman for anyone unihoutihe written consent of the other. 
 IN WITNESS WHEREOF, The parties aforesaid have hereunto set their hands and affixed their seals on the 
 day and year above written. 
 
 ..^■_.,^..Z 
 
 Illustration No. 69, Articles of Copartnership. 
 
 EXPLANATION. This contract is the partnership agreement between C. W. Keeland and 
 A. D. Munson. It includes all the conditions mentioned in § 115 and a special condition in which 
 the partners agree not to become surety for another during the term of the contract.
 
 142 INCOME TAX FOR A PARTNERSHIP 
 
 § 117. Method of Forming a Partnership. A partnership is formed by 
 the partners signing the Articles of Copartnership. Each partner is expected to 
 invest the property mentioned in the agreement. One copy of the agreement 
 should be kept on file in the office, and if desired, a vsynopsis of it may be made in 
 the general journal. The business to be operated by the partners may be a continua- 
 tion of a business which has been in operation by one or more of the partners, or 
 it may be a new business. The capital of the partnership at the beginning consists 
 of the property invested by the individual partners, less any liabilities that may 
 be assumed. 
 
 § 118. Admission of a Partner. A partner may be admitted into a going 
 concern at any time, but it must be upon the agreement of all the partners. If the 
 amount of his investment is not dependent on the present worth of the business, 
 it is not necessary to prepare a Balance Sheet and a Statement of Profit and Loss 
 nor to close the ledger. However, it is better to ascertain the present condition of 
 the business through these reports because the new partner will be better satisfied 
 with his investment if he has full information in regard to the past operations of 
 the business and its present financial condition. The admission of a partner cancels 
 the copartnership agreement of the former partners and requires the preparation 
 of new Articles of Copartnership to be signed by all the members. 
 
 § 119. Retirement of a Partner. One or more of the members in a part- 
 nership may retire at any time upon consent of all the partners. One partner 
 might retire without the consent of all the others, but such action would cause him 
 to be responsible to the other partners for any loss resulting therefrom. When the 
 value of the retiring partner's interest in the business can be determined without 
 the preparation of the Balance Sheet and Statement of Profit and Loss, these re- 
 ports are not necessary Since the retirement of a partner cancels the Articles of 
 Copartnership and requires a new agreement, it is customary to prepare the Balance 
 Sheet and Statement of Profit and Loss and close the ledger so that the new agree- 
 ment may begin a fiscal period. 
 
 § 120. Income Tax for a Partnership. The income of each business 
 operated as a partnership is subject to the Federal Income Tax; however, the tax 
 is not paid by the partnership as such, but by the partners individually. Quoting 
 from Section 218 of the Re\enue Act of 1921. "Individuals carrying on a business 
 in partnership shall be liable for income tax only in their individual capacity;" and 
 quoting from Section 224 of the same act: "Every partnership shall make a return 
 for each taxable year, stating specifically the items of its gross income and the 
 deductions allowed by this title, and shall include in the return the names and 
 addresses of the individuals who would be entitled to share in the net income if 
 distributed and the amount of the distributive share of each individual The re- 
 turn shall be sworn to by any one of the partners." See Appendix C. 
 
 § 121. Accounts Peculiar to a Partnership. The accounts required to 
 show the results of the operations of a partnership may be the same as those needed 
 to show the results of the operations of a similar business owned by an individual 
 except that a separate Capital account will be required for each partner. The nature 
 of each of these Capital accounts will be the same as that of the one Capital account 
 for a business owned and operated by a sole proprietor, as explained in § 34. Trans- 
 actions affecting the compensation of partners as per the Articles of Copartnership 
 and that part of the profit to be withdrawn should be recorded in an account sepa- 
 rate from the one showing the investment and withdrawals from the investment. 
 For this reason it is customary to have two accounts with each partner, a Capital 
 account and a Personal or Drawing account. 
 
 PARTNER'S CAPITAL ACCOUNT 
 § 122. The Purpose of this Account is to show the investments and with- 
 drawals of the partner, also his share of the net loss or net profit resulting from the
 
 ACCOUNTS WITH PARTNERS 
 
 143 
 
 operations of the business. The nature of the account is the same as that of the 
 Capital account of an individual as explained in § 34. 
 
 Credit the Partner's Capital Account: 
 
 If 4. 
 
 116. 
 
 Debit the Partner's Capital Account: 
 
 % I. For debts owed by him at the 
 beginning of business and as- 
 sumed by the partnership. 
 
 ^ 2. For amounts withdrawn from 
 the capital invested. 
 
 T[ 3. For his share of the net loss. 
 
 ^ 7. The Balance of the Partner's Capital Account during the fiscal period 
 shows his net investment, and, at the end of the fiscal period after the ledger is 
 closed, his proprietorship in the partnership. The sum of the proprietorship of all 
 the partners is the proprietorship or net capital of the partnership. The net invest- 
 ment of each partner is shown on the Balance Sheet (Illustration No. 92) in the 
 same manner as the investment of an individual as explained in § 34. 
 
 For his investment at the begin- 
 ning of the partnership. 
 
 For all subsequent investments. 
 
 For his share of the net profit 
 which is to remain in the 
 business. 
 
 Credit the Partner's Personal Account: 
 
 \ 4. For his salary as per Articles of 
 Copartnership. 
 
 ^ 5. For cash paid by him out of 
 funds advanced to him (H 3) 
 or paid out of his private funds 
 in the interests of the business. 
 
 *\\ 6. For that part of the profit which 
 the partners have agreed may 
 be withdrawn. 
 
 PARTNER'S PERSONAL ACCOUNT 
 
 § 123. The Purpose of this Account is to show a record of those trans- 
 actions with the partner which do not affect his Capital account. These include 
 withdrawals from salary or that part of the profit set aside for withdrawal; also 
 special transactions, such as temporary loans to the partnership on open account, 
 cash advanced to the partner for traveling expenses, etc. 
 
 Debit the Partner's Personal Account: 
 
 H I. For cash paid him by the part- 
 nership for (a) salary as per 
 Articles of Copartnership and 
 (b) profit withdrawn. 
 
 1[ 2. For merchandise which he takes 
 out of stock to apply on (a) 
 salary or (b) profit withdrawn. 
 
 ^ 3. For cash paid to him to be used 
 by him for the business. 
 
 ^ 7. The Balance of a Partner's Personal Account, if a debit, shows the 
 amount he owes the partnership for overdraft on account of salary or profits to be 
 withdrawn; if a credit, the amount due him by the partnership on account of 
 salary or profits to be withdrawn. 
 
 As a rule, the Personal account of each partner will be in balance at the close of the fiscal 
 period. If, for any reason, a Personal account remains open, the balance, if a debit, is shown on 
 the Balance Sheet as a deduction from the balance of his Capital account; if a credit, as an addition 
 to the balance of his Capita! account. 
 
 § 124. Opening Entries for a Partnership. When a partnership has been 
 formed by the partners signing the Articles of Copartnership, the cash or other 
 assets invested by each partner become the property of the partnership, and should 
 be recorded as such in the books of account; each asset invested is recorded on the 
 debit side of an account and each partner's investment is recorded on the credit 
 side of his Capital account. When the partnership is formed to continue the op- 
 eration of a going business or to combine one or more going businesses, it is cus- 
 tomary for the partnership to assume the liabilities of the business or businesses 
 to be operated by it. This means that the sole proprietor or partners who own 
 the going business will be credited for the value of the assets belonging to the busi- 
 ness and debited for the liabilities which the partnership assumes.
 
 144 
 
 OPENING ENTRIES FOR A PARTNERSHIP 
 
 October l James Brown and Robert Duncan form a partnership for the purpose of operating 
 a retail grocery business which has been owned and operated by James Brown as a sole proprietor. 
 It is agreed that James 
 
 ^^c.^^£^'-U-e--if- / / 
 
 f 
 
 
 ^^X^O-^-Z..^^ ^A;??-*^*-^*'*-?^ C-<:^^-«>Z^«-<> 
 
 
 T'SJ.'^f 
 
 >-a-^; 
 
 /3 M^ fO 
 
 Brown is to have credit for 
 the value of his assets as 
 shown by the Balance Sheet, ^^ 
 and is to be debited with the 
 liabilities shown by the same 
 report. Robert Duncan is to 
 invest $2,000.00 in cash. 
 The value of the assets be- 
 longing to James Brown are 
 as follows: cash, $1,200.00; 
 merchandise, $1,356.50; ac- 
 counts receivable, $935.60; 
 notes receivable $300.00. The 
 liabilities are accounts pay- 
 able, $1,345.90, and notes 
 payable, $1,000.00. The cash 
 invested by Brown and Dun- 
 can would be entered on the 
 receipts side of the cash book in the same form as the cash investment shown by the first entry in 
 the cash book for the Model Set (Chapter VI). The other assets invested by James Brown and his 
 liabilities assumed would be recorded in the general journal as in the illustration above. If desired, 
 this entry might be preceded by a synopsis of the partnership agreement as explained in § 1 17, 
 
 § 125. Entries for the Admission or Withdrawal of a Partner. When 
 a partner is admitted, the entry for the assets invested by him is the same as the 
 entry for the investment of a partner at the beginning of a business. Thus, if the 
 new partner invests cash, the entry will be made on the receipts side of the cash 
 book; if he invests merchandise, notes, personal accounts, or other assets, the 
 entry will be made in the general journal. If the partnership assumes debts owed 
 by the new partner, his Capital account will be debited with these in the same 
 manner as if the liabilities were assumed at the beginning of a business. 
 
 When a partner withdraws from the business, it is necessary to close his Capital 
 account by debiting it and crediting Cash or the account which shows the asset 
 accepted by the retiring partner in settlement for his interest in the business. 
 If the partnership does not pay the retiring partner the full amount agreed upon, 
 the balance due him is a liability. If this balance owed the retiring partner is 
 evidenced by a written agreement, it will be recorded in the Notes Payable ac- 
 count; if by a verbal agreement, it will be recorded as an account payable. If 
 the amount which the retiring partner accepts for his interest in the business does 
 not balance his Capital account, this account should be closed into a special account, 
 the balance of which will represent the profit or loss to the partnership because 
 of the withdrawal. 
 
 Exercise No. 56, Articles of Copartnership and Opening Entry. 
 
 W. L. Westbrook owns and operates a garage for the purpose of storing cars. 
 He wishes to add a repair department and to act as selling agent for passenger 
 cars. In order that he may secure the needed capital and assistance in the operations 
 of the business, he forms a partnership, on January i, with W. W. Woodward, an 
 experienced salesman, and C. H. Armstrong, an expert mechanic. The partner- 
 ship is to continue for three years, and the business is to be operated under the 
 name of the Central Garage. 
 
 W. L. Westbrook invests the building in which the garage is operated, valued 
 at $4,500.00; the lot on which the building is located, $1,500,00; accounts re- 
 ceivable due from those who have space rented in the garage, $753-50 1 and cash, 
 $500.00. He owes the Citizen's Bank and Trust Company a note for $2,500.00, 
 which the partnership assumes.
 
 PARTNERSHIP EXERCISES 145 
 
 W. VV. Woodward invests" a demonstration car which he owns, valued at 
 $1,500.00; two new cars which he has purchased for sale, valued at $1,750.00 
 each; a note for $530.50, signed by A. W. Miller; and cash, $1,223.00. He owes 
 the First National Bank a note for $2,000.00 which the partnership assumes. 
 
 C. H. Armstrong invests machinery and tools, valued at $2,500.00, which he 
 has been using in a shop operated by himself; and cash, $1,000.00. He owes L. 
 I. Milford an account of $500.00 which the partnership assumes. 
 
 Mr. Westbrook will have charge of the office and the general operations of the 
 business; Mr. Woodward will devote his time to the sales of automobiles; and 
 Mr. Armstrong will have charge of the repair department. Each partner is to 
 receive a salary of $200.00 per month. The profits are to be divided as follows: 
 Mr. Westbrook and Mr. Woodward, each three-eighths; Mr. Armstrong, one- 
 fourth. No partner is to become surety for any one during the time of the part- 
 nership, nor engage in any other business. 
 
 Prepare (i) the Articles of Copartnership and (2) the opening entries in the 
 journal (including a synopsis of the agreement) and cash book, for the assets 
 and liabilities invested by each partner. The value of the building is to be recorded 
 in a Building account, and that of the lot, in a Land account; the student will 
 select titles for the accounts to record the other assets and the liabilities (§ 4). 
 
 Exercise No. 57, Admission of a Partner, and Transfer of Net Profit 
 to Partners' Capital Accounts. 
 
 First Division. July i Robert MacFarland, one of the salesmen employed by the 
 Central Garage (Exercise No. 56), wishes to purchase an interest in the business and 
 the three partners agree to sell him a one-fourth interest for $3,000.00 payable 
 $1,000.00 cash; one Liberty bond, accepted at par value, $1,000.00; and his note, due 
 in six months, for $1,000.00. The assets invested by him become the partnership 
 property. It is agreed that each partner will share equally in the profits of the 
 partnership from July i, but that the books will not be closed until the end of the 
 business year. All the partners agree to the other conditions in the original Articles 
 of Copartnership. 
 
 Prepare (i) the entry for the assets invested by Robert MacFarland, and (2) 
 show the changes that will be necessary in preparing new Articles of Copartnership. 
 
 Second Division. December 31 the Statement of Profit and Loss prepared by 
 the bookkeeper for the Central Garage shows the net profit for the year to be 
 $2,495.75. Make the general journal entry to credit each partner's Capital ac- 
 count for his share of the profit, taking into consideration the agreement made 
 with Robert MacFarland July i. The student may assume that this net profit 
 stands as a credit to the Profit and Loss account, and that one half of the profit 
 is applicable to the first half of the year and the remainder to the latter half. 
 
 Exercise No. 58, Opening Entry, and Transfer of Net Profit 
 to Partners' Capital and Personal Accounts. 
 
 First Division. H . W. Meyer owns and operates a gasoline station at 32 75 Grand- 
 view Avenue. James C. Dexter owns and operates a gasoline station at 716 Cooper 
 Street of the same city. A. L. Burwell is a salesman for the Moore Oil and 
 Refining Co. These three men agree to form a partnership for the purpose of 
 continuing the operations of the two gasoline stations and establishing a new 
 station at 4721 Poplar Street. The partnership is to continue for a period of 
 two years from October i. The business is to be conducted under the name of 
 "The Merchants Oil and Gas Co." The investment of each partner is as follows:
 
 146 QUESTIONS ON PARTNERSHIP 
 
 H. W. Meyer invests gasoline in stock, $2i6.-5o; oil in stock, $175.95; equip- 
 ment, $1,600.00; notes receivable, $200.00; accounts receivable, $309.50; cash, 
 $1,000.00; building, $2,500.00; lot, $1,500.00. He owes notes payable, $1,500.00; 
 accounts payable, $375.50. 
 
 James C. Dexter invests gasoline in stock, $1,459.20; oil in stock, $1,298.65; 
 cash, $835.50; rent paid in advance, $200.00; accounts receivable, $1,630.25; and 
 notes receivable, $984.40. He owes a note payable, $562.50. 
 
 A. L. Burwell invests gasoline, $450.60; oil, $322.20; and cash $5,000,00. 
 He owes an account payable, $250.00. 
 
 Mr. Meyer is to have charge of one oil station and supervise the buying; Mr, 
 Dexter is to have charge of the other t)il station and keep the books of account; 
 Mr, Burwell is to have charge of the new oil station and supervise the selling. 
 Each partner is to receive a salary of $250.00 per month; profits are to be divided 
 equally. Each partner agrees not to engage in any other line of business. 
 
 The student is required to make the opening entry in the general journal, 
 showing a synopsis of the Articles of Copartnership, 
 
 Second Division. September 30 of the following year, the Statement of Profit 
 and Loss shows a profit of $6,387.68. It is agreed that each partner's Capital account 
 shall be credited with $1,500.00 of this profit and each partner's Personal account 
 credited with the remainder of his share of the profit. The amount credited to 
 the Personal accounts may be withdrawn within ninety days, but not more than 
 one-third is to be withdrawn within any one month. 
 
 The student is required to show in journal form the entry necessary to transfer 
 the net profit from the Profit and Loss account to the Partners' Capital and Per- 
 sonal accounts; also the entry October 31, when each partner withdraws one- 
 third of the profit credited to his Personal account. 
 
 QUESTIONS 
 
 1. Explain the distinction between bookkeeping and accounting. 
 
 2. Would you consider it advisable to enter into a partnership agreement with 
 
 an individual who had an undesirable reputation? Why? 
 
 3. Name three local business concerns which are conducted as partnerships. 
 
 4. Name the essential elements of the Articles of Copartnership and state the 
 
 reasons why the partnership agreement should be in writing. 
 
 5. If one partner should sell the entire stock of goods for cash without the 
 
 consent of the other partners, and deposit the cash in the bank in the name 
 of the partnership, could the other partners rescind the sale? 
 
 6. If a partner whose capital account shows a balance of $9,600.00, sells his 
 
 interest in the partnership to the other partners for $9,000.00 cash, what 
 entry is required to record the transaction on the books of the partner- 
 ship? 
 
 7. Why does the Federal Government require each partnership and each partner 
 
 to submit a separate income tax return? 
 
 8. (a) Why is an account debited with each asset invested by a partner? (b) 
 
 Why is the partner's Capital account credited? 
 
 9. Why is it advisable to keep two accounts with each partner? 
 
 ID. If a note invested by one of the partners proves worthless, what account 
 should be debited? If the partner had guaranteed payment, would this 
 change the account debited?
 
 Chapter XIV 
 
 ACCOUNTS WITH FIXED ASSETS 
 
 The Purpose of this Chapter is to explain the accounts necessary to record 
 the value of the various fixed assets usually needed in connection with the opera- 
 tions of a mercantile business, and also to show the method of recording the depreci- 
 ation on each group. It is necessary to have a separate account with each group of 
 fixed assets because the loss resulting from the use of these assets affects different 
 operating costs. 
 
 § 126. Fixed Assets consist of property purchased for use in the business 
 which will not be entirely consumed by its use (§ 99). This property may be the 
 building in which the business is operated, fixtures in connection therewith, auto- 
 mobile trucks or horses and wagons for delivering goods, store fixtures, etc. The 
 nature and use of a fixed asset will determine the account in which its value 
 should be recorded. The accounts necessary to record the fixed assets usually 
 owned by a mercantile business are Office Equipment, Store Fixtures, Delivery 
 Equipment, Buildings, and Land. 
 
 It is necessary to keep two accounts with each group of fixed assets, one to 
 show the cost of the assets and the other to show the decrease in value on account 
 of use, and lapse of time. The debit side of a fixed asset account should show cost 
 and the credit side cost so that the balance will show cost (§ 99). If any other 
 value than cost is recorded on the credit side of a fixed asset account, the balance 
 will mean nothing to the management when adjusting fire losses or determining 
 the amount of decrease in the value of the property. The necessity for keeping 
 two accounts with each group of assets requires an explanation of depreciation. 
 
 § 127. Depreciation refers to the decrease in the value of fixed assets through 
 their use in connection with the operation of the business and the lapse of time. 
 A typewriter purchased for $100.00 on January i and used throughout the year 
 will not be worth $100.00 at the end of the year. An automobile truck purchased 
 for $2,000.00 on January i and used throughout the year for delivering merchandise 
 will not be worth $2,000.00 at the end of the year. A building purchased for 
 $5,000.00 on January i and used as a home for the business throughout the year 
 will not be worth $5,000.00 at the close of the year. 
 
 The decrease in the value of fixed assets depends largely on the nature of the 
 asset. A safe will not depreciate so rapidly as a typewriter; an automobile truck 
 will depreciate more rapidly than scales or fixtures used in the storeroom; a frame 
 building will depreciate more rapidly than a brick or concrete biiilding. The 
 purpose of the discussion here is not to consider the various methods of arriving 
 at the depreciation of fixed assets but to show the student the reason for deprecia- 
 tion so that he may see the necessity for taking care of it through a record in the 
 proper accounts. 
 
 The amount of the yearly decrease in the value of fixed assets due to depre- 
 ciation is usually based on a percentage of the cost of the fixed asset. If it is 
 estimated that a fixed asset can be used for a period of ten years, the amount of the 
 depreciation each year would be ten per cent of the cost. If it is estimated that 
 the fixed asset can be used for twenty years, the depreciation each year would be 
 five per cent of the cost. This percentage is calculated on the cost price and not 
 on the present value ; this is one reason for showing cost value in the account with 
 each group of fixed assets. 
 
 147
 
 148 ACCOUNTS WITH FIXED ASSETS 
 
 In all cases the amount of depreciation recorded will be based on estimate 
 only. There is no means of knowing the exact amount of the depreciation. How- 
 ever, the policy should be to depreciate the fixed assets so that the difference be- 
 tween the account which shows the cost value of the asset and the account which 
 shows the estimated depreciation will show the approximate present value of the 
 property. If furniture and fixtures which cost $4,000.00 are destroyed by fire, the 
 adjustment will be made on the present value of these fixtures. If the account 
 with Furniture and Fixtures shows the cost value $4,000.00 and the account with 
 depreciation shows the estimated decrease $1,000.00, the insurance adjuster will 
 have a basis (present value $3,000.00) on which to adjust the fire loss. 
 
 The reserve for depreciation of a- group of fixed assets is usually recorded in 
 an account with the same title as that which shows the cost value of the asset, pre- 
 ceded by "Reserve for Depreciation of." "Reserve for Depreciation of Ofifice Equip- 
 ment" used as the title of an account indicates that the account shows the depreci- 
 ation on equipment purchased for use in the office. 
 
 Depreciation is an operating cost and the amount is recorded on the debit side of an expense 
 account at the same time it is recorded on the credit side of the Reserve for Depreciation account. 
 The nature and use of the fixed asset \\411 determine the expense accounts affected; this is explained 
 further in Chapter XVI. 
 
 OFFICE EQUIPMENT ACCOUNT 
 
 § 128. The Purpose of this Account is to show the cost of the property 
 purchased for use in the office, which includes desks, chairs, typewriters, safes, 
 files, bookcases, tables, etc. 
 
 Debit the Office Equipment Account: Credit the Office Equipment Account: 
 
 1[ I. For the invested value of office *\ 2. For the cost value of office equip- 
 
 equipment on hand at the ment sold, exchanged, stolen, 
 
 beginning of the business, and destroyed, or discarded, 
 for the cost value of office 
 equipment purchased. 
 
 ^ 3. The Balance of the Office Equipment Account shows the cost value of 
 the office equipment owned by the business. It is shown as a fixed asset on the 
 Balance Sheet (Illustration No. 92). 
 
 RESERVE FOR DEPRECIATION OF OFFICE EQUIPMENT ACCOUNT 
 
 § 129. The Purpose of this Account is to show the estimated amount of 
 depreciation on office equipment. This depreciation is usually five or ten per cent 
 of the cost of office equipment, depending on the nature of the equipment: it is 
 quite evident that a typewriter will depreciate more rapidly than a safe or a desk. 
 
 Debit the Reserve for Depreciation Credit the' Reserve for Depreciation 
 
 of Office Equipment Account: of Office Equipment Account: 
 
 *\ I. For the cost value of office equip- ^ 3. At the close of each fiscal period, 
 
 ment discarded or destroyed.* for the estimated amount of 
 
 ^ 2. For the depreciation applicable depreciation on account of the 
 
 to office equipment sold or use of office equipment during 
 
 exchanged. the period. 
 
 1[ 4. The Balance of the Reserve for Depreciation of Office Equipment Account 
 shows the reserve set aside for the depreciation of office equipment, the cost value 
 of which is debited to the Office Equipment account. The cost value of office 
 
 *It is assumed that the reserve for depreciation on the equipment discarded or destroyed ap- 
 proximately equals its cost value; if this is not the case, the debit to the reserve account will be 
 for the depreciation only, the balance being debited to a non-operating expense account with an 
 appropriate title.
 
 ACCOUNTS WITH FIXED ASSETS 149 
 
 equipment (balance of the Office Equipment account) is shown as a fixed asset on 
 the Balance Sheet and the depreciation (balance of the Reserve for Depreciation 
 of Office Equipment account) is shown as a deduction from this amount (111. No. 
 92). 
 
 The reserve account should always show a credit balance. If at any time the debits are approx- 
 imately the same as the credits, it is evidence that an error is being made by setting up a reserve 
 too small or by debiting this account with more than the depreciated value of ofifice equipment 
 discarded, stolen, or destroyed. When errors of this kind occur, they are corrected by an entry 
 in the general journal to record the additional depreciation or to adjust the amounts debited to 
 the account. The entry to record the additional depreciation affects the same accounts as the entry 
 required to record the depreciation at the end of the fiscal period; the entry to adjust the debits 
 transfers the amount adjusted to an expense account or to a special loss account. 
 
 ^ 5. Entry to Record Depreciation of Office Equipment. At the close of each 
 fiscal period an entry is made in the general journal to record the estimated depre- 
 ciation of office equipment. The Administrative Expense account is debited and 
 the Reserve for Depreciation of Office Equipment account credited. If the cost 
 of office equipment owned by the business, as shown by the balance of the Office 
 Equipment account, is $500.00, and the estimated depreciation is five per cent, 
 the entry in journal form will appear as in the illustration below. 
 
 
 The use of the ofifice equipment will determine the expense account to be debited for the depre- 
 ciation. Unless there are a number of departments in the ofifice, the depreciation may be regarded 
 as an administrative cost (Chapter XVI). 
 
 STORE FIXTURES ACCOUNT 
 
 § 130. The Purpose of this Account is to show the cost of property pur- 
 chased for use in the storeroom, which includes shelving, show cases, scales, trucks, 
 etc. The nature of this account is the same as that of the Office Equipment account 
 and the various debits and credits are similar. If desired, the cost of office equip- 
 ment and store fixtures may be recorded in one account under the caption "Office 
 Furniture and Store Fixtures"' or "Furniture and Fixtures" (§ 100). 
 
 Debit the Store Fixtures Account: Credit the Store Fixtures Account: 
 \ I. For the invested value of store ^ 2. For the cost value of store fix- 
 fixtures on hand at the begin- tures sold., exchanged, stolen, 
 ning of the business, and for destroyed, or discarded, 
 the cost value of store fixtures 
 purchased. 
 
 1[ 3. The Balance of the Store Fixtures Account shows the cost value of the 
 store fixtures owned by the business. It is shown as a fixed asset on the Balance 
 Sheet (Illustration No. 92). 
 
 RESERVE FOR DEPRECIATION OF STORE FIXTURES ACCOUNT 
 
 § 131. The Purpose of this Account is to show the net amount of the 
 reserve set aside to take care of the estimated depreciation of store fixtures. This 
 depreciation is usually from three to ten per cent of the cost of the fixtures, depend-
 
 150 
 
 ACCOUNTS WITH FIXED ASSETS 
 
 ing on the nature of the property. The debits and credits are the same as those 
 given in § 129 except that they apply to store fixtures. The balance of the Reserve 
 for Depreciation of Store Fixtures account shows the net amount of the reserve 
 set aside for the depreciation of the store fixtures. The cost value of store fixtures 
 (balance of the Store Fixtures account) is shown as a fixed asset on the Balance 
 Sheet and the depreciation (balance of the Reserve for Depreciation of Store 
 Fixtures account) is shown as a deduction from this amount (111. No. 92). 
 
 ^ I. Entry to Record Depreciation of Store Fixtures. At the close of each 
 fiscal period an entry is made in the general journal to record the estimated depre- 
 ciation of store fixtures. The Selling Expense account is debited and the Reserve 
 for Depreciation of Store Fixtures account credited. If the cost of store fixtures 
 owned by the business, as shown by balance of the Store Fixtures account, is 
 $600.00, and the estimated depreciation is four per cent, the entry in journal form 
 will appear as in the illustration below. 
 
 >-/yr| 
 
 The use of store fixtures will determine the operating account affected by the depreciation. 
 Unless there are a number of departments in which the store fixtures are used, their decrease in value 
 on account of depreciation may be regarded as a selling cost (Chapter XVI). 
 
 DELIVERY EQUIPMENT ACCOUNT 
 
 § 132. The Purpose of this Account is to show the cost of property pur- 
 chased for use in delivering merchandise sold, which includes teams, wagons, 
 harness, automobiles, or any other conveyances used by the business in delivering 
 merchandise to customers. The nature of the account is the same as that of the 
 OfBce Equipment account, and the various debits and credits are similar. 
 
 Debit the Delivery Equipment Account: 
 \ I. For the invested value of deliv- 
 ery equipment on hand at the 
 beginning of the business, and 
 for the cost value of delivery 
 equipment purchased. 
 
 Credit the Delivery Equipment Account: 
 
 % 2. For the cost value of delivery 
 
 equipment sold, exchanged, 
 
 stolen, destroyed, or discarded. 
 
 % 3. The Balance of the Delivery Equipment Account shows the cost value 
 of the delivery equipment owned by the business. It is shown as a fixed asset on 
 the Balance Sheet (Illustration No. 92). 
 
 RESERVE FOR DEPRECIATION OF DELIVERY EQUIPMENT ACCOUNT 
 
 § 133. The Purpose of this Account is to show the net amount of the 
 reserve set aside to take care of the depreciation of delivery equipment. This 
 depreciation is usually from ten to twenty per cent of the cost of delivery equip- 
 ment, depending on the nature of the equipment. The debits and credits are the 
 same as those given in § 129 except that they apply to delivery equipment. The 
 balance of the Reserve for Depreciation of Delivery Equipment account shows the
 
 ACCOUNTS WITH FIXED ASSETS 
 
 151 
 
 net amount of the reserve set aside for the depreciation of delivery equipment. 
 The cost value of delivery equipment (balance of the Delivery Equipment account) 
 is shown as a fixed asset on the Balance Sheet and the depreciation (balance of the 
 Reserve for Depreciation of Delivery Equipment account) is shown as a deduction 
 from this amount (Illustration No. 92). 
 
 ^ I. Entry to Record Depreciation of Delivery Equipment. At the close of 
 each fiscal period an entry is made in the general journal to record the estimated 
 depreciation of delivery equipment. The Selling Expense account is debited 
 and the Reserve for Depreciation of Delivery Equipment account credited. If 
 the cost of the delivery equipment owned by the business, as shown by the balance 
 of the Delivery Equipment account, is $1,850.00 and the estimated depreciation 
 is ten per cent, the entry in the journal form will appear as in the illustration below. 
 
 c'/lZ^k--<:^£'<>^?^u-i^-e^y~' 
 
 3/, /^?- 
 
 If the cost of delivering merchandise sold to customers is recorded in a special account with 
 Delivery Expense (Chapter XVI), this account would be debited for the depreciation. 
 
 LAND ACCOUNT 
 
 § 134. The Purpose of this Account is to show the cost of land owned by 
 the business, on which is located the buildings in which the business is conducted 
 or on which buildings are to be constructed. When real estate is purchased, a 
 separate value should be placed on the land and the buildings. 
 
 Credit the Land Account: 
 \ 2. For the cost of any part or all of 
 
 Hi. 
 
 Debit the Land Account: 
 For the invested value of the 
 
 land owned by the business the land sold, 
 
 at the beginning of the busi- 
 ness, and for the cost of land 
 purchased during the oper- 
 ations of the business. 
 
 \ 3. The Balance of the Land Account shows the cost value of the land owned 
 by the business, on which the home of the business is located or on which buildings 
 X^ill be constructed for use in connection with the operations of the business. It 
 is shown on the Balance Sheet as one of the fixed assets of the business (111. No. 92). 
 
 The cost of land purchased by the business includes the purchase price of the land plus the 
 cost of securing the title. Improvements of a permanent nature, such as sidewalks, grading, streets, 
 etc., should be regarded as part of the cost of the land and debited to the Land account. Taxes and 
 expenses in connection with the upkeep of the land are not a part of its cost, and should be recorded 
 in an account which shows operating expense. If an account is kept with Building Expense, the 
 taxes and cost of the upkeep of the land may be debited to this account. No depreciation account 
 is necessary in connection with land because land does not depreciate on account of use. 
 
 BUILDINGS ACCOUNT 
 
 § 135. The Purpose of this Account is to show the cost of the buildings 
 owned by the business as a home. In the larger cities buildings are sometimes
 
 152 
 
 ACCOUNTS WITH FIXED ASSETS 
 
 owned as a home for the business without the business holding title to the land, 
 but as a rule, the buildings and land are both owned by the business. 
 
 Credit the Buildings Account: 
 ^ 2. For the cost price of buildings 
 sold, razed, or destroyed. 
 
 Debit the Buildings Account: 
 ^ I. For the invested value of build- 
 ings owned at the beginning 
 of the business, for the cost 
 of buildings erected on land 
 owned by the business, and 
 for permanent improvements 
 which add to the value of the 
 buildings. 
 
 ^ 3. The Balance of the Buildings Account shows the cost value of the build- 
 ing or buildings used as a home for the business. It is shown on the Balance 
 Sheet as one of the fixed assets (Illustration No. 92). 
 
 The cost of maintaining the building is one of the operating costs of the business and should 
 be recorded in an account which shows operating cost. The cost of maintaining the buildings in- 
 cludes repairs and the other expense incident to keeping the building in first-class condition. Repairs 
 of such a nature that they increase the value of the building should be regarded as a part of the cost 
 of the building and debited to the Buildings account. The replacing of a shingle roof with the same 
 kind of material would be one of the expenses incident to keeping the building in good order; the 
 replacing of the shingle roof with a slate or tile roof would increase the value of the building, hence 
 should be regarded as an increase in the amount of capital invested in the asset. 
 
 RESERVE FOR DEPRECIATION OF BUILDINGS ACCOUNT 
 
 § 136. The Purpose of this Account is to show the net amount of the 
 reserve set aside to take care of the depreciation of buildings. The yearly de- 
 preciation is usually from two to five per cent of the cost of the buildings, depending 
 on the nature of the construction. The debits and credits are the same as those 
 given in § 129, except that they apply to buildings. The balance of the Reserve 
 for Depreciation of Buildings account shows the net amount of the reserve set 
 aside for the depreciation of buildings. The cost value of buildings (balance of 
 the Buildings account) is shown as a fixed asset on the Balance Sheet and the 
 depreciation (balance of the Reserve for Depreciation of Buildings account) is 
 shown as a deduction from this amount (Illustration No. 92). 
 
 ^ I. Entry to Record Depreciation of Buildings. At the close of each fiscal 
 period an entry is made in the general journal to record the estimated depreciation 
 of buildings. The Administrative Expense account is debited and the Reserve 
 for Depreciation of Buildings account credited; if an account with Building Ex- 
 pense (§ 156) is maintained, this account is debited instead of Administrative 
 Expense. If the cost of the buildings owned by the business, as shown by the 
 balance of the Buildings account, is $5,000.00, and the estimated depreciation is 
 one per cent, the entry in journal form will appear as in the illustration below. 
 
 c='<_^^,-il.,e-<^C?'Z-€^-^<?^ 
 
 U?/ / ^'>^ 
 
 
 ^o 
 
 The use of the building will determine the operating expense account affected by the depre- 
 ciation. Unless a number of departments are maintained, the depreciation may be regarded as 
 a rent cost, hence a debit to Administrative Expense.
 
 EXERCISES IN FIXED ASSETS ' 153 
 
 Exercise No. 59, Recording Transactions with Fixed Assets 
 and Depreciation. 
 
 A truck was purchased January i, 1919, for $2,000.00 cash. At the close of 
 each year, fifteen per cent was allowed for the depreciation during the year. What 
 is the book value of the truck December 31, 192 1? Show (a) the entry in journal 
 form required to record the purchase of the truck, (b) the entry required at the 
 close of each year to record the estimated depreciation, and (c) the posting of 
 these entries to the proper accounts; also show (d) the entry in journal form 
 required to record the purchase of a new truck January ib, 1922, for $3,000.00, 
 cash $1,900.00, exchange value of the old truck, $1,100.00, and (e) the posting of 
 this entry to the ledger accounts. 
 
 Exercise No. 60, Recording Transactions with Fixed Assets, 
 Depreciation and Fire Loss. 
 
 The following office equipment was purchased January i, 1917: safe, $200.00, 
 bookkeeper's desk, $75.00; stool, $5.00; typewriter desk, $60.00; typewriter, 
 $100.00; chair, $9.50; roller top desk, $90.00; chair, $12.50; filing cabinet, $65.00; 
 adding machine, $350.00. The safe was purchased from the Hall Safe and Lock 
 Co., terms one-half cash and one-half sixty-day note without interest. The add- 
 ing machine was purchased from the Dalton Adding Machine Co., for cash 
 $250.00, and two notes for $50.00 each, due in six and twelve months without 
 interest. Cash was paid for the desks, chairs, typewriter and filing cabinet. 
 
 At the close of each year, up to and including December 31, 192 1, this equip- 
 ment was depreciated as follows: desk, 5%; chairs, 10%; typewriter, 123^%; 
 adding machine, 10%; files, 5%; safe 4%. 
 
 All equipment, except the safe, was damaged by fire Jan. 17, 1922. The insur- 
 ance adjuster settled by paying fifty per cent of the book value Jan. i, 1922 and 
 allowing the owner to retain the equipment. Jan. 22 the typewriter was exchanged 
 for a new one, price $100.00, with an exchange allowance of $25.00, cash being 
 paid for the difference. The adding machine was exchanged for a new one> price 
 $350.00, with an allowance of $100.00 and cash paid for the difference. The desks, 
 chairs, and files were sold to a junk dealer for $50.00. New desks, chairs and files 
 were purchased January 23 for cash at the same price as the old ones. 
 
 The student is required to show (a) the entry in journal form for the furniture 
 when it was purchased, (b) the entry in journal form for the depreciation at the 
 close of each year, and (c) the posting of these entries to the proper accounts; 
 (d) the entry in journal form for the fire adjustment, and (e) the posting of this 
 entry to the proper accounts; (f) the entry in journal form for the purchase of 
 the new typewriter and adding machine, (g) the entry for the sale of the desks, 
 chairs, and files, (h) the entry for the purchase of the new desks, chairs, and files, and 
 (i) the posting of these entries to the proper accounts. 
 
 When equipment is sold or exchanged, the actual depreciation only should be debited to the 
 Reserve for Depreciation account. The difference between the present book value of the equipment 
 (cost less depreciation) and its exchange or selling price is the amount of the loss on account of the 
 fire and should be debited to an account with "Fire Loss." The amount received from the insurance 
 adjuster reduces this loss, hence should be credited to the Fire Loss account. When these entries 
 have been made and posted, the Office Equipment account will show the cost of office equipment 
 owned by the business, the Reserve for Depreciation account will show the depreciation on the safe, 
 and the Fire Loss account will show the net loss on account of the fire. (See note at the bottom of 
 page 148.) 
 
 Exercise No. 61, Recording Transactions with Fixed Assets and 
 Depreciation, Adjustment of Fire Loss, and Report to the Owner. 
 
 The facts recorded in the ledger accounts on page 154 show the Office Equip- 
 ment and Reserve for Depreciation of Office Equipment accounts on December 10, 
 1922, at which time the equipment was partially destroyed by fire; the books of 
 account, which were in the safe, were not damaged. On December 15 the insur- 
 ance company settled by paying cash for sixty per cent of the book value of the
 
 154 
 
 QUESTIONS ON FIXED ASSETS 
 
 equipment at the time of the fire and allowing the owner to retain the fixtures. 
 December i8, the owner sold the equipment to a junk dealer for $50.00. 
 
 The student is required to show (a) the entries in journal form for the equip- 
 ment when purchased, assuming that cash was paid for all equipment, except 
 typewriter No. 2, at the time of purchase; the entry in journal form for the depre- 
 ciation, December 31, 1921; (c) the entry in journal form for the exchange of 
 typewriter No. i for typewriter No. 2, assuming that the exchange value of the 
 former was $90.00 and that cash was paid for the difference; (d) the entry in 
 journal form for the adjustment of the insurance company assuming that 5% 
 depreciation is allowed from January i, 1922, to the date of the fire; (e) the entry 
 in journal form for the sale of the equipment; (f) a statement to the owner show- 
 ing his loss on office equipment on account of the fire. 
 
 The student will observe that the equipment is described in the explanation column of the 
 ledger account. When typewriter No. i is exchanged, the new typewriter is shown as No. 2 instead 
 of No. I. Equipment should always be numbered when purchased and the number attached to it 
 by tag or tack; it should be known by this number through the description in the explanation column 
 of the account or in a special inventory book. 
 
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 ^.^z^^i.e.<K^-y ^o:')^ 
 
 ^ 
 
 
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 ^■^^^^^-e.i.c'-,^ y^o. / j^. 
 
 pS^^^j'^f^TS^ 
 
 
 ^ 
 
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 I 
 
 2 
 
 3 
 4 
 5 
 6 
 
 7 
 8 
 
 9 
 10 
 
 QUESTIONS 
 
 Why is it necessary to have two accounts with each group of fixed assets? 
 What amount will the insurance adjuster use as a basis for adjusting a fire 
 
 loss on a truck, cost $4,000.00, reserve for depreciation $1,500.00? 
 Why should the cost value of delivery equipment be recorded in an account 
 
 separate from that in which the cost value of office equipment is shown? 
 Under what conditions would the depreciation on buildings be regarded as 
 
 a selling expense? 
 Why is it necessary to show the cost value of buildings in one account and 
 
 the cost value of land in another? 
 Under what conditions would the depreciation on office equipment be regarded 
 
 as a buying expense? 
 Why does the Federal Government limit the amount of depreciation? 
 Would the percentage of depreciation on a brick building be greater or less 
 
 than that on a frame building? Why? 
 When is the cost of repairs on a building debited (a) to the Building account? 
 
 (b) to Administrative Expense? (c) to Building Expense? 
 Under what conditions might a Reserve for Depreciation account show a 
 
 debit balance?
 
 Chapter XV 
 
 OPERATING AND NON-OPERATING INCOME 
 
 The Purpose of this Chapter is to explain the accounts needed to record the 
 principal income and the special income of the business during the fiscal period; an 
 income to a business is the profit made through the operations of the business. The 
 owner should know the amount of the principal income separate from special in- 
 come in order that he may better control future operations of his business. 
 
 § 137. Every Business is organized for the specific purpose of making a 
 profit. This profit may result (a) from the purchase and sale of merchandise, (b) 
 from the manufacture and sale of merchandise, or (c) from the sale of services. 
 The profit resulting from the sale of merchandise or services is usually referred to 
 as the operating income of the business. Other profits which result from the oper- 
 ation of the business are usually referred to as non-operating income. Non-operating 
 income includes interest earned, discount on merchandise purchased, profit on 
 sales of real estate, and other profits of this nature which may or may not occur 
 during each fiscal period. 
 
 The operating income of a mercantile business is the profit resuhing from selling merchandise; 
 a newspaper publishing business, the sale of advertising and subscriptions; a street railway, the 
 sale of transportation; a telephone company, the sale of telephone service. The non-operating 
 income in all of these businesses may be the same; that is, the merchant, the publisher, the street 
 railway, and the telephone company may each earn interest on notes, make a profit through dis- 
 counting its bills, or sell at a profit real estate purchased for use in the business. The owner of the 
 business will base the future operations of his business on the operating income because this will 
 occur in each fiscal period, while non-operating income may occur only occasionally. 
 
 § 138. Accounts with Merchandise. The operating income of a mercan- 
 tile business results from the sale of merchandise which has been purchased for 
 sale. As explained in §§ 17 and 18, the cost of merchandise purchased may be 
 recorded in one account with Purchases, and the sales of this merchandise in one 
 account with Sales. When this plan is followed, the Purchases account is debited 
 with the invoice, freight and drayage cost, and credited with returns and allowances; 
 the Sales account is credited with the sales, and debited with returns and allow- 
 ances. Where the operations of the business are not extensive, the information 
 obtained from the Purchases and Sales accounts will be all that the owner needs; 
 but where the amounts involved in connection with freight costs, returns, and 
 allowances are large, he will want to know the amount of each item separate from 
 the invoice cost of merchandise and the returns from sales. When this informa- 
 tion is needed, the invoice cost is recorded in the Purchases account, sales in 
 the Sales account, the freight and drayage cost in a separate account, and returns 
 and allowances both on account of purchases and sales each in separate accounts. 
 
 The discussion of accounts with Purchases, Freight In, Purchases Returns, 
 Purchases Allowances, Inventory, Sales, Sales Returns, and Sales Allowances, 
 which follows, relates to the merchandise accounts necessary to give the manage- 
 ment detailed information in regard to the cost of the merchandise sold and the 
 returns from sales. 
 
 If desired, one account may be kept with Merchandise which will show all the facts relating 
 to its purchase and sale. Ho.wever, if this is done, it causes returned sales to be recorded as if they 
 were purchases and returned purchases to be recorded as if they were sales, which is incorrect. It 
 also requires the cost price to appear on the debit side and the sale price on the credit side of the 
 same account, which is contrary to the accounting principle that equal values should appear on 
 each side of the same account, as in Cash and in Accounts Receivable.
 
 156 OPERATING INCOME ACCOUNTS 
 
 PURCHASES ACCOUNT 
 
 § 139. The Purpose of this Account is to show the net invoice cost of 
 merchandise purchased. When the account is kept for this purpose, returns, allow- 
 ances, and freight and drayage cost are recorded in separate accounts. The owner 
 of the business needs to know the invoice cost of the merchandise purchased in 
 order to compare the purchases of the current period with those of preceding 
 periods, and for use as a guide in making future purchases. 
 
 Debit the Purchases Account: Credit the Purchases Account: 
 
 1[ I. For the invoice cost of mer- ^ 2, For adjustments which reduce 
 
 chandise purchased. . the invoice cost of merchan- 
 
 dise purchased as shown by 
 the debit side. 
 
 ^ 3. The Balance of the Purchases Account shows the net invoice cost of 
 merchandise purchased during the fiscal period. It is shown on the Statement of 
 Profit and Loss as one of the costs of the merchandise sold (111. No. 93). 
 
 PURCHASES RETURNS ACCOUNT 
 
 § 140. The Purpose of this Account is to show the net value of merchan- 
 dise purchased and later returned to the concern from which it was purchased. 
 It is quite evident that merchandise purchased would not be returned unless it 
 were unsatisfactory; if the amount of the returns is unusually large, the manage- 
 ment will know that it is advisable to place orders with other concerns which will 
 deliver the grade and quality of goods desired. 
 
 Debit the Purchases Returns Account: Credit the Purchases Returns Account: 
 
 \ I. For any adjustments which re- Tf 2. For the invoice cost of mer- 
 
 duce the amount of mer- chandise returned to the seller 
 
 chandise returned as shown by by the business, 
 the credit side. 
 
 ^ 3. The Balance of the Purchases Returns Account shows the net amount 
 of purchases returned to the seller. It is shown on the Statement of Profit and 
 Loss as a deduction from the net invoice cost of purchases (balance of the Pur- 
 chases account) to ascertain the net purchases (Illustration No. 93.) 
 
 PURCHASES ALLOWANCES ACCOUNT 
 
 § 141. The Purpose of this Account is to show the net amount of allow- 
 ances granted to the business on account of merchandise purchased being received 
 in damaged condition or not according to sample. If the amount is unusually 
 large, it is quite evident that it will not be good policy for the business to continue 
 to buy merchandise from those who must be continually making allowances be- 
 cause the merchandise is carelessly packed or otherwise not according to specifi- 
 cations. If desired, purchases allowances may be combined with purchases returns 
 and recorded in an account with Purchases Returns and Allowances because they 
 are both deductions from the invoice cost. 
 
 Debit the Purchases Allowances Account: Credit the Purchases Allowances Account: 
 
 \ I. For any adjustments which re- ^ 2, For the amount of allowances 
 
 duce the amount of allow- granted to the business by its 
 
 ances granted to the business creditors. 
 
 as shown by the credit side. 
 
 ^ 3. The Balance of the Purchases Allowances Account shows the net amount 
 of allowances granted to the business by the seller on account of merchandise
 
 OPERATING INCOME ACCOUNTS 157 
 
 purchased being unsatisfactory. It is shown on the Statement of Profit and Loss 
 as a deduction from the net invoice cost of purchases (balance of the Purchases 
 account) to ascertain the net purchases (Illustration No. 93). 
 
 FREIGHT IN ACCOUNT 
 
 § 142. The Purpose of this Account is to show the freight, drayage, ex- 
 press, and postage cost of merchandise purchased. The word "in" is used in con- 
 nection with the title of this account to distinguish the account from that which 
 shows the record of freight and drayage on merchandise sold, usually designated as 
 "Freight Out." Freight and drayage on merchandise purchased are part of the 
 purchase cost of the merchandise, while freight and drayage on merchandise sold 
 are part of the selling cost; hence the necessity for recording the two classes of 
 freight and drayage in separate accounts. 
 
 Debit the Freight In Account: Credit the Freight In Account: 
 
 Tf I. For transportation (freight, ex- \ 2. For any adjustments which re- 
 press, and postage) cost and duce the transportation and 
 drayage cost on merchandise drayage cost as shown by the 
 purchased. debit side. 
 
 ^ 3. The Balance of the Freight In Account shows the transportation and 
 drayage cost of merchandise purchased; the drayage cost may be shown in a 
 separate account if desired. The balance of this account is shown on the State- 
 ment of Profit and Loss as a part of the cost of the merchandise purchased. (Il- 
 lustration No. 93.) 
 
 INVENTORY ACCOUNT 
 
 § 143. The Purpose of this Account, as explained in § 55, is to show the 
 value of the merchandise inventory at the close of a fiscal period. Cost value in- 
 cludes the invoice and transportation cost; it is customary to include these two 
 costs as one amount in making the extensions on the inventory sheet. The value 
 of this merchandise may be transferred to the Purchases account at the beginning 
 of the next fiscal period, or it may be allowed to remain in the Inventory account 
 throughout the period and closed into Purchases at the close of that period. 
 
 Debit the Inventory Account: Credit the Inventory Account: 
 
 1[ I. At the close of the fiscal period, % 2. At the beginning of the next 
 
 with the value of the mer- fiscal period or at its close, for 
 
 chandise in stock as shown by the value of the merchandise 
 
 the inventory made at that in stock as shown by the 
 
 time. debit entry. 
 
 ^ 3. The Balance of the Inventory Account. The value of the merchandise 
 in stock at the beginning of a current fiscal period will be shown recorded either 
 in the Inventory account or in the Purchases account depending on when the 
 entry mentioned in ^ 2 is made; this value is shown as an addition to the cost 
 of purchases on the Statement of Profit and Loss (Illustration No. 93). The 
 value of merchandise on hand at the close of a current fiscal period will appear on
 
 158 OPERATING INCOME ACCOUNTS 
 
 the debit side of the Inventory account; it is shown as a current asset on the 
 Balance Sheet (Illustration No. 92) and as a deduction from the net cost of mer- 
 chandise purchased on the Statement of Profit and Loss (Illustration No. 93). 
 
 If desired, the value of merchandise on hand at the close of the fiscal period may be recorded 
 in an Inventory account with the year written after the name of the account, in which case the 
 amount would remain in the Inventory account until the close of the next fiscal period and the 
 inventory at the close of the next fiscal period would be recorded in an Inventory account under 
 the year. This may be illustrated as follows: Davis Bros, began business January i, 1920. De- 
 cember 31, 1920, the merchandise inventory was $5,651.75; this was recorded in an account with 
 "Inventory 1920" and was allowed to remain in this throughout the year 1921. December 31, 1921, 
 the inventory was $6,278.85. This was recorded in an account with "Inventory 1921." After the 
 ledger was closed December 31, 1921, the "Inventory 1920" account was in balance and the value 
 of merchandise in stock December 31, 1921 was shown throughout the year 1922 in the "Inventory 
 1 921" account. 
 
 SALES ACCOUNT 
 
 § 144. The Purpose of this Account is to show the gross returns from the 
 sales of merchandise; when the account is kept for this purpose, the returns and 
 allowances are recorded in separate accounts. As explained in § 18, the account 
 may show the net returns from sales, in which case returns and allowances are 
 recorded in the Sales account and not in separate accounts. 
 
 Debit the Sales Account: Credit the Sales Account: 
 
 ^ I. For the amount of errors which ^ 2. For the selling price of mer- 
 
 reduce the returns from mer- chandise sold, 
 
 chandise sold as shown by the 
 credit side. 
 
 ^ 3 The Balance of the Sales Account shows the gross sales during the fiscal 
 period. It is shown on the Statement of Profit and Loss as "Gross Sales" under 
 the caption "Returns from Sales" (Illustration No. 93). 
 
 SALES RETURNS ACCOUNT 
 
 § 145. The Purpose of this Account is to show the net value of merchan- 
 dise sold and later returned by the one to whom it was sold. If the amount is un- 
 usually large, the management will know that the merchandise it offers for sale is 
 not giving satisfaction to customers and can take proper steps to remedy this con- 
 dition. 
 
 Debit the Sales Returns Account: Credit the Sales Returns Account: 
 
 ^ I. For the selling price of mer- ^ 2, For any adjustments which re- 
 
 chandise returned to the busi- duce the value of merchandise 
 
 ness by customers. returned as show^n by the debit 
 
 side. 
 
 ^ 3. The Balance of the Sales Returns Account shows the net amount of sales 
 returned by customers. It is shown on the Statement of Profit and Loss (Illus- 
 tration No. 93) as a deduction from the gross returns from sales (balance of the 
 Sales Account). 
 
 SALES ALLOWANCES ACCOUNT 
 
 § 146. The Purpose of this Account is to show the net amount of allow- 
 ances granted by the business to its customers; these allowances are usually granted 
 because the merchandise is not equal to the sample, or was received by the customer 
 in bad condition because of imperfect manufacture or carelessness in packing. 
 Sales allowances should be recorded separately from sales returns because these 
 allowances are a loss, while merchandise returned is placed in stock for resale.
 
 NON-OPERATING INCOME ACCOUNTS 159 
 
 Debit the Sales Allowances Account: Credit the Sales Allowances Account: 
 
 ^ I. For the amount of allowances If 2. For any adjustments which re- 
 
 granted by the business to its duce the amount of allow- 
 
 customers. ances granted to customers as 
 
 shown by the debit side. 
 
 \ 3. The Balance of the Sales Allowances Accotmt shows the net amount of 
 allowances granted to customers on account of merchandise sold being unsatis- 
 factory. It is shown on the Statement of Profit and Loss (Illustration No. 93) as 
 a deduction from the gross returns from sales (balance of the Sales account). 
 
 § 147. Merchandise Discount refers to the discount deducted from pur- 
 chases and sales invoices as per terms. The discount deducted on purchases invoices 
 is usually referred to as "purchases discount" or "discount on purchases"; the 
 discount deducted from sales invoices is usually referred to as "sales discount" or 
 "discount on sales." The purpose of merchandise discount is to encourage prompt 
 payment. It is quite evident that the buyer will make an effort to pay for mer- 
 chandise within the terms of discount because by so doing he can cancel an obli- 
 gation with an asset of less value and thus make a profit. 
 
 PURCHASES DISCOUNT ACCOUNT 
 
 § 148. The Purpose of this Account is to show the net amount of discount 
 resulting from the payment of purchases invoices subject to discount within the 
 terms of the discount as stated in the invoices. The discount is the difference 
 between the amount of the check required to pay the purchases invoice and the 
 net amount of the purchases invoice. 
 
 Debit the Purchases Discount Account: Credit the Purchases Discount Account: 
 
 ^ I. For adjustments which reduce ^ 2. For the discount deducted on 
 
 the amount of the purchases purchases when paid within 
 
 discount as shown by the the terms of the invoices 
 
 credit side of the account. either in full or in part. 
 
 1[ 3. The Balance of the Purchases Discount Account shows the net amount 
 of the discount deducted for prompt payment of purchases invoices during the 
 time for which the record is kept. If the management regards purchases discount 
 as a non-operating income, it is listed with the other income on the Statement of 
 Profit and Loss (Illustration No. 93) ; if purchases discount is regarded as a deduc- 
 tion from the cost of merchandise purchased, it is shown on the Statement of 
 Profit and Loss as a deduction from the cost of purchases. It is usually deducted 
 from the gross purchases in the preparation of the income tax return (Art. 1583, 
 Treasury Reg. No. 62). 
 
 NOTE — The purpose of the discussion of purchases discount as given here is to show the 
 debits and credits applicable to the account; these are the same whether purchases discount is 
 regarded as a deduction from the cost of merchandise purchased or as a non-operating income. 
 Since the statistical information gained from the facts shown by the Purchases Discount account 
 is the same no matter how it is regarded, and since the net profit is the same, it is not deemed ad- 
 visable to enter into a discussion as to whether it is better to regard it as a deduction from purchases 
 cost or as a non-operating income. It \^ regarded as a non-operating income in the exercises in this 
 text and in the practice sets, and as a deduction from gross purchases on the income tax return. 
 
 INTEREST EARNED ACCOUNT 
 
 § 149. The Purpose of this Account, as explained in § 107, is to show the 
 interest income to the business through the use of its money by others. This is 
 regarded as a non-operating income because it is an income that may not occur 
 in every fiscal period.
 
 i6o 
 
 EXERCISES 
 
 Debit the Interest Earned Account: Credit the Interest Earned Account: 
 
 ^ I. For any deductions which reduce 1[ 2, For interest income from ac- 
 
 the income from interest as counts and notes receivable. 
 
 shown by the credit side. 
 ^ 3. The Balance of the Interest Earned Account shows the net returns from 
 interest to the business. It is shown on the Statement of Profit and Loss as one 
 of the non-operating incomes (Illustration No. 93). 
 
 Exercise No. 62, Purchases and Purchases Discount. 
 
 The student is required to show (a) the entry in journal form when the pur- 
 chase in the invoice below was made; (b) the entry in journal form when the 
 invoice w^as paid by the check below; and (c) the posting of these entries to the 
 Purchases and Purchases Discount accounts. 
 
 Terms 
 
 SOLD TO 
 
 2/30, n/60 
 
 CINCINNATI 
 
 6/18 192 
 
 •Accounts to be settled Monthly 
 
 South-western Publishing Co. 
 209 U. Third St., 
 
 Cincinnati, Ohio. 
 
 M Cimms aitoued on tfiis Bill unless marie within FiveDcufs /^rreceipt(f Goods. 
 Pay mrthin^ to^^^ents unless by our written .-lutlionty. 
 
 50207 9 X 14i String and Button Fasten 
 
 Envelopes per M 19.75 
 
 991 
 
 59 
 
 Purchases Invoice Subject to Discount. 
 
 g>0Utl|-Wpetpni P«bUBl)tng Company 
 
 3iirorpnrateJl 
 3119 m^X Zm ^trrrt ClNCIN]>LXTI,OlIIO Z,^^ 
 
 \^ ORDER OF 
 
 The Cinoinnati Cordage & Paper Co. --------- % 971.76 
 
 No 91202 
 192 
 
 Pi^:YS97ia!is76^;i§; 
 
 Dollars 
 
 toTheFifth-Ihird National B^VNK.) ^y n'^ y. 
 
 OF CiNCIXXATI. 
 
 Check in Payment of Purchases Invoice Less Discount.
 
 EXERCISES 
 
 i6i 
 
 Exercise No. 63, Recording Transactions with Purchases 
 and Purchases Discount. 
 
 (^^^p^'t-^^y-l^'y!^ Y-JS:^V'^7-Z^ 
 
 ^/?Z-rX,-lZ^<>'?'L^, -*^«t^ 
 
 ^#V^«K-^ 
 
 A 
 
 / 6 > 
 
 ^a 
 
 2^, 
 
 '-r 
 
 /6 
 
 ^7c.^^ 
 
 -r ^ > 
 
 The student is required to show (a) the entries in journal form for the amounts 
 recorded in the above ledger account; (b) the check stub tilled out when the check 
 was issued in payment of the invoice on the day it was due; (c) the entry in journal 
 form to record the payment. 
 
 Exercise No. 64, Recording Transactions with Capital, Purchases, 
 Sales, Returns, Allowances, and Purchases Discount. 
 
 Record in journal form the following transactions performed by Lewis & 
 Statler, during the month of August: 
 
 Aug. I. S. A, Lewis and C. F. Statler formed a partnership, each investing 
 $2,500.00 cash. 
 Purchased from L. J. Kent Mfg. Co., Pittsfield, merchandise per pur- 
 chases invoice dated today, terms 2% 10 days, $2,000.00. They pre- 
 paid the freight on this shipment, $214.50, which was added to the 
 amount of the purchase on the invoice. 
 
 3. Cash sales to date per cash register, $43.40. 
 
 Sold Holmes & Warder, Richmond, on account, merchandise per sales 
 invoice rendered, $164.50. 
 
 6. Received credit from the L. J. Kent Mfg. Co. for $35.00, value of mer- 
 chandise returned. 
 
 10. Paid the L. J. Kent Mfg. Co. $2,140.20 in full for purchases invoice 
 received on the ist, less discount on the purchase as per terms. 
 Cash sales for the week per cash register, $175.11, 
 
 12. Sold Holmes «& Warder, Richmond, on account, merchandise per sales 
 invoice rendered, $290.20. 
 
 15. Purchased from the L. J. Kent Mfg. Co., Pittsfield, merchandise per 
 purchases invoice dated August 13, terms 2% 10 days, $855.00. They 
 prepaid the freight on this shipment, $70.50, which was added to the 
 amount of the purchase on the invoice, 
 
 17. Cash sales for the week per cash register, $198.20, 
 
 19. Allowed Holmes & Warder credit for $16.50, value of merchandise^ 
 
 returned. 
 
 20. Purchased merchandise for cash, $2,000.00, 
 
 22. Received credit from the L. J. Kent Mfg. Co. for $13.80 because part 
 of the merchandise delivered on the 15th was received in damaged 
 condition, 
 * {Concluded on page 162.) ,
 
 i62 QUESTIONS 
 
 {Exercise No. 64 — Continued from page 161.) 
 
 23. Paid the L. J. Kent Mfg. Co. for purchases invoice received on the 
 
 15th, including the freight, less allowance of the 22d and discount 
 on the purchase as per terms. 
 
 24. Cash sales for the week per cash register, $341.19. 
 
 26. Sold S. T. Hollowell, City, on account, merchandise per sales invoice 
 rendered, $69.80. 
 
 28. Allowed S. T. Hollowell credit for $5.00 because part of the merchandise 
 sold him on the 26th was defective. 
 
 31. Cash sales for the week per' cash register, $437.60. 
 
 When the above transactions have been recorded in the journal as instructed, 
 open the necessary accounts on a sheet of ledger paper, allowing five lines for each 
 account except Cash, L. J. Kent Mfg. Co., and Sales, each of which requires ten 
 lines; post, and take a Trial Balance. 
 
 QUESTIONS 
 
 Why is it advisable for the bookkeeper to show operating income separate 
 from non-operating income on the Statement of Profit and Loss? 
 
 Name the operating income and one or more non-operating incomes of a 
 business engaged in the manufacture of ice. 
 
 Why and when is the balance of the Inventory account closed into the Pur- 
 chases account? 
 
 (a) What does the balance of the Sales Allowances account indicate to the 
 management? (b) the balance of the Sales Returns account? 
 
 (a) What does the balance of the Purchases Allowances account indicate to 
 the management? (b) the balance of the Purchases Returns account? 
 
 (a) What does the balance of the Freight In account show? (b) What does 
 this mean to the management? (c) What does the balance of the Freight 
 In account determine with regard to the location of the business? (d) 
 Give an example. 
 
 7. What is the purpose of merchandise discount? 
 
 8. What does the failure of a customer to pay a sales invoice subject to a three 
 
 per cent discount within the terms of the discount indicate to the owner 
 of the business? 
 
 9. Why is the discount deducted from purchases invoices an income to the business? 
 
 10. (a) How will the amount of purchases discount be shown on the Statement 
 of Profit and Loss if the management prefers to regard it as a non-operating 
 income? (b) How will it be shown if the management prefers to regard it 
 as a deduction from the cost of merchandise purchased? (c) What effect 
 will each of these methods have on the net profit of the business?
 
 Chapter XVI 
 
 OPERATING AND NON-OPERATING EXPENSE 
 
 The Purpose of this Chapter is to explain the accounts necessary to record 
 the expenses which are anticipated at the time the business is organized, and the 
 accounts which are needed to record other expenses that may occur in the oper- 
 ations of the business. The owner of the business should know the cost of oper- 
 ating the business separate from special costs in order to control better the future 
 operations of the business. 
 
 § 150. Operating Expense. When a business is organized the owner or 
 owners know that certain expenses will be incurred through its operations; these 
 include the cost of rent, salaries, advertising, insurance, and taxes. Expenses of 
 this nature are usually referred to as operating expenses because they are necessary 
 in the operations of the business and will occur in every fiscal period. Operating 
 expenses may be classified into three groups: (a) those applicable to the buying 
 of merchandise or service which the business sells; (b) thos'e which refer to the 
 general administration of the business; and (c) those applicable to the selling of 
 the merchandise or service which the business sells. 
 
 BUYING EXPENSE ACCOUNT 
 
 § 151. The Purpose of this Account is to show the cost of purchasing 
 merchandise. This includes the salaries of the buyer and his assistants, traveling 
 expenses paid by the buyer, and any other expenses applicable to the purchase 
 of merchandise. If an account is not kept with Buying Expense, the cost of 
 buying merchandise is debited to the Administrative Expense account. 
 
 Debit the Buying Expense Account: Credit the Buying Expense Account: 
 
 ^ I. For all expenses incurred in con- ][ 2. For any adjustments which re- 
 
 nection with the purchase of duce the cost of purchasing 
 
 merchandise. merchandise as shown by the 
 
 debit side. 
 
 If 3. The Balance of the Buying Expense Account shows the net cost of pur- 
 chasing merchandise; it is shown on the Statement of Profit and Loss as one of 
 the operating costs of the business. 
 
 SELLING EXPENSE ACCOUNT 
 
 § 152. The Purpose of this Account is to show the cost of selling merchan- 
 dise. This includes the salaries of the sales manager and his assistants, sales clerks, 
 and traveling salesmen; expenses of the sales manager, his assistants, and traveling 
 salesmen in connection with making sales; advertising cost, insurance on merchan- 
 dise and store fixtures, depreciation on store fixtures, and other selling costs of 
 similar nature. The cost of delivering merchandise sold is a selling cost and is 
 recorded in the Selling Expense account if an account is not kept with Delivery 
 Expense. The owner needs to know the cost of selling goods because this cost 
 should be a reasonable percentage of the sales. 
 
 163
 
 164 OPERATING EXPENSE ACCOUNTS 
 
 Debit the Selling Expense Account: Credit the Selling Expense Account: 
 
 *\ I. For all expenses directly incurred ^ 2. For any adjustments which re- 
 
 in connection with the sales duce the cost of selling mer- 
 
 of merchandise. chandise as shown by the 
 
 debit side. 
 
 ^ 3. The Balance of the Selling Expense Account shows the net cost of selling 
 merchandise; it is shown on the Statement of Profit and Loss as one of the oper- 
 ating costs of the business (Illustration No. 93). 
 
 DELIVERY EXPENSE ACCOUNT 
 
 § 153. The Purpose of this Account is to show the cost of delivering 
 merchandise sold; this includes the wages of drivers and chauffeurs, repairs on 
 wagons or automobiles used in the delivery of merchandise, insurance and depre- 
 ciation on delivery equipment, and any other costs applicable to the delivery of 
 merchandise sold. Merchandise shipped by freight must be delivered to the rail- 
 road or steamship company and the cost of this delivery is a part of the delivery 
 expense the same as the delivery of merchandise direct to the customer. The cost 
 of delivering merchandise sold is a part of the selling expense and may be recorded 
 in the Selling Expense account. The owner needs to know the cost of delivering 
 merchandise sold because this should be a reasonable percentage of the sales; 
 another reason is that he may determine the most economical method of making 
 delivery. 
 
 Debit the Delivery Expense Account: Credit the Delivery Expense Account: 
 
 Tl I. For all expenses directly incurred ^2. For any adjustments which re- 
 
 in connection with the delivery duce the cost of delivering 
 
 of merchandise. merchandise as shown by the 
 
 debit side. 
 
 ^ 3. The Balance of the Delivery Expense Account shows the net cost of 
 delivering merchandise sold; it is shown on the Statement of Profit and Loss as 
 one of the operating costs of the business (Illustration No. 93). 
 
 LOSS ON DOUBTFUL ACCOUNTS ACCOUNT 
 
 § 154. The Purpose of this Account is to show the amount which it is 
 estimated will be lost on account of uncollectible accounts receivable. This account 
 is opened at the close of the fiscal period when the estimated amount is recorded, 
 and is closed into the Profit and Loss account when the ledger is closed. It remains 
 in balance during the fiscal period. 
 
 Debit the Loss on Doubtful Accounts Credit the Loss on Doubtful Accounts 
 
 Account: Account: 
 
 ^ I. For the amount of estimated ^ 2. For the amount shown on the 
 
 loss on accounts receivable. debit side at the time the 
 
 ledger is closed. 
 
 ][ 3. The Balance of the Loss on Doubtful Accounts Account shows the loss 
 resulting from the reserve for doubtful accounts (§ 162, ^ 4). It is usually shown 
 on the Statement of Profit and Loss as one of the selling expenses, because credit is 
 extended through the sales department and this loss is the result of the extension 
 of credit (Illustration No. 93).
 
 OPERATING EXPENSE ACCOUNTS 165 
 
 ADMINISTRATIVE EXPENSE ACCOUNT 
 
 § 155. The Purpose of this Account is to show the cost of administration 
 to the business. This includes the salaries of the manager and his assistants, 
 salaries of bookkeepers, stenographers, and other office assistants, rent, heat, 
 light, postage for use in the office, insurance and depreciation on office equipment, 
 taxes, repairs, and other operating expenses which are not applicable to the cost of 
 buying, selling, or delivery. If the business owns its own home, insurance, depre- 
 ciation, taxes, and repairs on buildings are also shown in this account unless a 
 separate account is kept with Building Expense, in which case these costs are 
 debited to the Building Expense account (§ 156). The management needs to know 
 the cost of administering the affairs of the business because this should be a reason- 
 able percentage of the sales. 
 
 Debit the Administrative Expense Acct.: Credit the Administrative Expense Acct.: 
 
 ^ I. For all costs applicable to the *^ 2. For any adjustments which re- 
 
 administration of the business. duce the cost of administering 
 
 the affairs of the business as 
 shown by the debit side. 
 
 *[[ 3. The Balance of the Admiiiistrative Expense Account shows the net cost 
 of administration to the business; it is shown on the Statement of Profit and Loss 
 as one of the operating costs of the business (Illustration No. 93). 
 
 BUILDING EXPENSE ACCOUNT 
 
 § 156. The Purpose of this Account is to show the cost of maintaining 
 the buildings owned by the business and occupied by it as a home. The cost of 
 maintaining the buildings is one of the operating costs of the business of the same 
 nature as rent. 
 
 Debit the Building Expense Acconnt: Credit the Building Expense Account: 
 
 ^ I. For amounts paid for maintain- *\ 3. For adjustments which reduce 
 
 ing the buildings, such as the maintenance cost as shown 
 
 painting, papering, reroofing by the debit side, 
 
 with the same kind of mate- 
 rial, reflooring with the same 
 kind of material, etc. 
 ][ 2. For insurance, taxes, and depre- 
 ciation on the building. 
 
 ^ 4. The Balance of the Building Expense Account shows the cost to the 
 business of owning its own home; it is shown on the Statement of Profit and Loss 
 as one of the operating costs of the business (Illustration No. 93). 
 
 If an income is derived through the rent of any part of the building, the amounts received as 
 rent may be credited to the Building Expense account or to a special account with Building Revenue. 
 The use of the building will determine the expense account affected by the cost of maintaining it; 
 unless a number of departments are maintained, the cost of owning its own home may be regarded 
 by the business as an administrative cost. 
 
 § 157. Non-operating Expense. There are many expenses in connection 
 with the operations of the business which may occur in one fiscal period but not 
 in another; these include interest cost, the discount deducted by customers for 
 prompt remittance for sales invoices, attorneys' fees for special purposes, and many 
 other miscellaneous expenses. Interest Cost and Sales Discount are the two non- 
 operating expense accounts discussed at this time.
 
 166 NON-OPERATING EXPENSE ACCOUNTS 
 
 INTEREST COST ACCOUNT 
 
 § 158. The Purpose of this Account is to show the expenses incurred by 
 the business through the premiums paid for the use of money, as explained in 
 § io6. Interest cost is one of the expenses of the business because it represents a 
 service cost (for the use of money) the same as salaries and rent. 
 
 Debit the Interest Cost Account: Credit the Interest Cost Account: 
 
 ^ I. For interest on accounts and *\ 2. For any adjustments which re- 
 
 notes payable. duce the cost of interest shown 
 
 by the debit side. 
 ^ 3. The Balance of the Interest Cost Account shows the net cost of interest 
 to the business; it is shown on the Statement of Profit and Loss as a non-operating 
 expense (Illustration No. 93). 
 
 SALES DISCOUNT ACCOUNT 
 
 § 159. The Purpose of this Account is to show the net amount of dis- 
 count resulting from customers paying sales invoices within the terms of discount. 
 When remittance is received from a customer within the terms of discount, the 
 amount received will be less than the amount debited to his account because of 
 the discount deducted. One asset (the customer's account) is canceled with an- 
 other asset (cash), but, since the amount of the latter is less than the former, there 
 is a cost to the business for this collection. This cost may be regarded as reducing 
 the returns from sales or as a deduction from income in the same manner as pur- 
 chases discount may be regarded as reducing the cost of merchandise purchases 
 or as a profit resulting from the business paying its bills promptly.* 
 
 Debit the Sales Discount Account: Credit the Sales Discount Account: 
 
 If I. For the discount deducted on ^ 2. For any adjustments which re- 
 
 sales when paid within the duce the amount of discount 
 
 terms of the sales invoices. deducted by customers as 
 
 shown by the debit side. 
 ^ 3. The Balance of the Sales Discount Account shows the net amount of 
 discount deducted by customers for the prompt payment of sales invoices during 
 the time for which the record is kept. If the management regards sales discounts 
 as a non-operating expense, it is shown as such on the Statement of Profit and 
 Loss (Illustration No. 93) ; if sales discount is regarded as a deduction from the 
 returns from sales, it is deducted from the gross sales on the Statement of Profit 
 and Loss. It is usually deducted from the gross sales in the preparation of the 
 income tax return. (Office Decision 146.— Sec. 234 — Art. 561). 
 
 *Sales discount is treated as a non-operating expense in the exercises in this text and the 
 practice sets, and as a deduction from gross sales on the income tax return. 
 
 Exercise No. 65, Sales and Sales Discount. 
 
 The Excelsior Mfg. Co., Providence, completed the following transactions 
 with the Boot Shop, a customer in Springfield, during the first six months of 1923: 
 Jan. ID, sale No. 26421, terms 3/10, n/30, $276.50; Jan. 19, received check from 
 the Boot Shop in full of sale of the loth; Mar. 6, sale No. 27491, terms 2/30, 
 n/6o, $279.60; Mar. 26, sale No. 27671, terms 4/10, n/60, $125.16; Apr. 5, re- 
 ceived check from the Boot Shop in full of account; May 3, sale No. 30009, terms 
 2/30, n/6o, $198.65; May 18, sale No. 31 117, terms i /lo, n/30, $261.48; June 2, 
 received check from the Boot Shop in full of account. 
 
 The student is required to (a) make in journal form the entries required to 
 record the transactions on the books of the Excelsior Mfg. Co., allowing discount 
 when check was received within the discount period, (b) post, and (c) take a Trial 
 Balance of balances.
 
 EXERCISES 
 
 167 
 
 Exercise No. 66, Recording Transactions with Sales and Sales Discount. 
 
 Show (a) the entry in journal form when the sales invoice shown below was 
 issued; (b) the entry in journal form when the check shown below was received in 
 payment for the invoice, less discount; and (c) the posting of these entries to the 
 proper accounts. 
 
 
 
 9120 
 
 V y 
 
 June 14, 192 
 
 Mason Book & Stationery Co., 
 4179 Llain St. 
 Berwick, Pa, 
 
 
 2/10, n/30 
 
 PP 4th zone 
 
 10 rms. 8|- X 11 Penmanship Paper 
 5 " Balance Sheet Paper 
 
 /■ — X 
 
 1.20 12 00 
 
 5.00 25 00 27 00 
 
 rD 
 
 Postage 80 
 
 
 £7 80 
 
 Carbon Copy of Sales Invoice Subject to Discount. 
 
 I 
 
 Be r>vick. Pa. J^^^q 20 19 No. le^ 
 
 The Bekhtck^atioival Bank eo 713 
 
 60-713 
 
 Pavto South-Western Publishing Cc- 
 Tw.enty- seven and 26/lQO ------ - 
 
 OR ORDER $ 27.26 
 
 ' ~ " " " " DOIXAUS 
 
 SAFE DEPOSIT BOXES 
 
 FOR RE^a 
 
 MASON BOOK AND STATIONERY CO. 
 per ?y^ ??^. ??^ c 
 
 Check in Payment of Sales Invoice Less Discount. 
 
 Exercise No. 67, Recording Transactions witli Expense. 
 
 Record direct in the accounts discussed in this chapter, the following transac- 
 tions, performed by A. R. Pendleton & Co., wholesale merchants: 
 
 July I. Paid rent, $250.00. (§ 155.) 
 
 2. Gave A. R. Pendleton a check for 
 
 .50, expenses on a buying trip.
 
 i68 QUESTIONS 
 
 8. Gave Waite & McBride a check in payment for our note No. ii due 
 
 today, and $3.25 interest on the same. 
 
 9. Paid $2.25 express on shipment to an out-of-town customer, our agree- 
 
 ment being to deliver the merchandise without extra charge. 
 
 11. Paid for the following services: telephone, $12.50; lighting, $18.30; 
 
 repairs on delivery truck, $12.75. 
 
 12. Payroll: office, $280.00; store, $600.00; drivers, $150.00. 
 
 15. Paid the City Ice Co. $6.00, ice for water-cooler. 
 
 16. Bought ink, carbon paper and rubber stamps for use in the office, $10.00. 
 
 18. Received a cashier's check from the Merchants National Bank in pay- 
 
 ment for note left for collection, less 50c collection charges. (§ 155.) 
 
 19. Paid $3.50 for installing plate glass store window. 
 
 21. Returned a part of the office supplies purchased on the i6th and re- 
 
 ceived credit for $1.50. 
 
 22. Paid the Times-Star $695.60 for advertising space. 
 
 25. Gave A. R. Pendleton a check for $21.75, expenses on a selling trip. 
 
 26. Payroll: office, $280.00; store, $600.00; drivers, $150.00. 
 
 28. Received a check from B. M. Lardner in full of account, less $6.38 
 
 discount. 
 
 29. Gave Harris Bros, our note in full of account; the face of this note 
 
 included $5.15 interest. 
 31. Monthly payroll: purchasing agent, $150.00; traveling salesmen, 
 $750.00; general manager, $300.00; advertising agent, $150.00. 
 At the close of the fiscal period, the estimated depreciation is as follows: 
 office equipment, $100.00; store fixtures, $225.00; delivery equip- 
 ment, $450.00; The estimated loss on uncollectible accounts re- 
 ceivable is $135.60. 
 
 QUESTIONS 
 
 1. (a) Why does the business man need to know the cost of buying goods? 
 
 (b) Would you consider it advisable to include the cost of buying as a part 
 of the cost of merchandise purchased? (c) Why? 
 
 2. Why is it necessary to record the cost of hauling merchandise purchased 
 
 from the station to the store separate from the cost of hauling merchandise 
 sold from the store to the customer? 
 
 3. If the business owns its own home, will the balance of the Building Expense 
 
 account be considered as the total cost of rent or will interest on the invest- 
 ment in the building be added? 
 
 4. Why are expenses classified as "operating" and "non-operating?" 
 
 5. Why do merchants deliver to their customers the merchandise sold? 
 
 6. Why is the delivery cost a part of the selling cost? 
 
 7. Under what conditions would it be advisable to record the cost of advertising 
 
 separate from the selling cost? 
 
 8. Why is interest paid for the use of money an expense to the business? 
 
 9. (a) What are the two methods of showing sales discount on the Statement 
 
 of Profit and Loss? (b) Explain each. 
 
 10. If a partner devotes his time equally to the buying and selling of mer- 
 chandise, what accounts are debited for his salary?
 
 Chapter XVII 
 
 CONTROLLING ACCOUNTS 
 
 The Purpose of this Chapter is to explain controlling accounts, one of the 
 most important time-savers applicable to the work of the bookkeeper. The busi- 
 ness man is interested in time-saving methods because they reduce the cost of 
 operating his business; the bookkeeper is interested in time-saving methods be- 
 cause they increase his efficiency. 
 
 § 160. A ControUing Account is one which represents in total the facts 
 shown in detail in a number of other accounts. Controlling accounts are used 
 most frequently with accounts receivable and accounts payable because a great 
 number of accounts are required to record the transactions with customers and 
 creditors. If the accounts with customers and creditors can be eliminated from 
 the Trial Balance, the work of the bookkeeper in preparing the Trial Balance will 
 be greatly reduced. 
 
 If there are in the ledger one hundred accounts with creditors and two hundred 
 accounts with customers, and twenty-five accounts which relate to the operations 
 of the business, the Trial Balance will contain 325 accounts; if the one hundred 
 accounts with creditors can be represented by one account and the two hundred 
 accounts with customers by one account, then the Trial Balance will contain only 
 twenty-seven accounts. This elimination can be effected by having an account 
 with Accounts Payable which will show in total the transactions recorded in all 
 of the accounts with creditors, and an account with Accounts Receivable which 
 will show in total the transactions recorded in all of the accounts with customers. 
 When this plan is followed, it is customary to open the accounts with creditors and 
 with customers in separate divisions of the main ledger or in separate ledgers. 
 
 The purpose of the controUing account is to save time in taking the Trial Balance and in check- 
 ing the posting in case the Trial Balance does not balance. This is made clear by reference to Illus- 
 tration No. 70 and the explanation in connection therewith. 
 
 ACCOUNTS RECEIVABLE ACCOUNT 
 
 § 161. The Purpose of this Account is to show in total the detailed 
 debits and credits to accounts with customers in another part of the same ledger 
 or in a separate ledger. If all the transactions with customers are recorded in 
 this account, it will not be necessary' to show the various accounts with customers 
 on the Trial Balance. This is a controlling account because it shows in total the 
 transactions recorded in a group of related accounts. When only one ledger is 
 needed for the accounts with customers, only one controlling account with 
 Accounts Receivable is necessary. When the operations of the business are exten- 
 sive, the accounts receivable ledgers may be grouped by territories, in which case 
 the name of the controlling account will not be Accounts Receivable, but the 
 territory represented by the accounts in the ledger as "City Ledger," "Texas 
 Ledger," "California Ledger," "Southern Ledger," etc. It is not necessary to 
 keep a separate controlling account with each ledger, as one controlling account 
 may control several ledgers, but it is better to have a controlling account with 
 each because of the time saved in detecting errors. 
 
 169
 
 170 
 
 CONTROLLING ACCOUNTS 
 
 Controlling Account 
 ACCOUNTS RECEIVAELS 
 
 ACCOUITTS RECEIVABLE PROOF 
 
 Accounts Receivable Ledger 
 
 A - Dr. §908.50, Cr. 
 
 B - Dr. I2IE.OO, Cr. 
 
 C - Dr. |318.25, Cr. 
 
 D - Dr. §238.50. Cr. 
 
 S775.OO, Bal. $133.50 
 
 1117.70, Bal. I 97,30 
 
 I16O.9O, Bal. |l57.35 
 
 ^154.50, Bal. |_14^Q.0 
 
 Totals ,$1680.25, ,$1208.10. 
 
 .$ 472.15, 
 
 Controlling Aooount 
 
 Accounts Receivable Dr. 
 Accounts Receivable Cr. 
 
 t- Balance 
 
 $1680.25 
 I12O8.IO 
 
 $ 472.15 
 
 Illustration No. 70, Chart Showing Operation of a Controlling Account. 
 
 EXPLANATION. This chart contains a record of ten sales in the sales journal, two cash 
 payments to customers in the cash book, one debit to a customer in the general journal, eight cash 
 receipts from customers in the cash book, and five receipts of assets other than cash from customers 
 in the general journal; also an account in the general ledger with Accounts Receivable, the separate 
 accounts with the four customers in the accounts receivable ledger, and the proof of the subsidiary 
 ledger at the end of the month. The red lines indicate posting from the books of original entry to 
 the accounts in the accounts receivable ledger, the posting of the totals to the Accounts Receivable 
 account in the general ledger, and the relation of the proof to the accounts in the accounts receivable 
 ledger and the Accounts Receivable account in the general ledger. The dates are omitted and 
 letters are used to indicate the names of the customers to conserve space. It is assumed that cash 
 received from customers is entered in a special column on the receipts side of the cash book, and 
 that credit amounts to customers recorded in the general journal are entered in a special column. 
 The two amounts recorded on the payments side of the cash book are posted to accounts in the ac- 
 counts recei\able ledger and are posted separately to the controlling account; this is also true of 
 the one amount recorded in the general journal as a debit to an account receivable.
 
 RESERVE FOR DOUBTFUL ACCOUNTS 
 
 171 
 
 Debit the Accounts Receivable Accotmt: 
 T[ I. For the total of the sales journal 
 at the end of the month. 
 (If amounts to be debited to accounts 
 in the accounts receivable ledger are 
 recorded in the general journal or on 
 the payments side of the cash book, 
 each amount should be posted to the 
 Accounts Receivable account at the 
 time it is posted to the account in the 
 accounts receivable ledger.) 
 
 Credit the Accounts Receivable Account: 
 
 ^ 2. For each amount recorded in the 
 general journal or on the re- 
 ceipts side of the cash book 
 as a credit to an account in the 
 accounts receivable ledger; 
 these amounts are usually of 
 sufficient frequency to require 
 a special column in each of 
 these books of original entry, 
 in which case the posting is at 
 the end of the month. 
 
 % 3. The Balance of the Accounts Receivable Account shows the total due 
 from all customers and must be the same as the total of the various balances shown 
 in the accounts receivable ledger. It is a current asset and is shown as such on 
 the Balance Sheet, being listed after Cash and Notes Receivable (111. No. 92). 
 
 \ 4. Accounts Receivable Proof. The Trial Balance is made from the accounts 
 in the general ledger, the balance of the Accounts Receivable account being used 
 instead of the various balances of the accounts in the accounts receivable ledger. 
 When the correctness of the posting to the general ledger has been proved by the 
 Trial Balance, it is necessary to prove the correctness of the posting to the accounts 
 in the accounts receivable ledger. The total of all the debit balances in the accounts 
 receivable ledger less any credit balances should be the same as the balance of the 
 Accounts Receivable account in the general ledger. 
 
 If a sale to a customer is recorded in the sales journal as $26.10 but is posted to the account 
 in the accounts receivable ledger as $26.00, it is quite evident that there will be a discrepancy be- 
 tween the balance of the Accounts Receivable account in the general ledger and the total of the 
 balances in the accounts receivable ledger. It is to detect errors of this nature that a proof is made 
 of the posting to the accounts in the accounts receivable ledger. 
 
 RESERVE FOR DOUBTFUL ACCOUNTS ACCOUNT 
 
 § 162. The Purpose of this Account is to show the reserve set up to take 
 care of the possible loss resulting from failure to collect from customers. No 
 matter how careful a credit man may be in extending credit, some of the accounts 
 are almost sure to prove uncollectible. Unless this is taken into consideration at 
 the time the Balance Sheet is prepared, the report to the management will show 
 an inflated value for the asset Accounts Receivable. 
 
 While the amount of the reserve may be more or less than is necessary to take care of the loss 
 due to uncollectible accounts, yet it does indicate to the management that this loss has been taken 
 care of as far as possible. The reserve is usually based on a percentage of the total sales on account 
 or the total amount due from customers at the close of the period. The 192 1 Revenue Act provides 
 a deduction for "debts ascertained to be worthless and charged oft" within the taxable year (or, in 
 the discretion of the Commissioner, a reasonable addition to a reserve for bad debts)." 
 
 Debit the Reserve for Doubtful A ccounts Credit the Reserve for Doubtful A ccounts 
 Account: Account: 
 
 ^i. For the amount that cannot be H 2. At the close of each fiscal period, 
 collected from a customer, for the amount of reserve 
 
 whether it is a part or all of designated by the owner or 
 
 the balance of his account. management of the business. 
 
 ^ 3. The Balance of the Reserve for Doubtful Accounts Account shows the 
 net amount of the reserve available to take care of worthless accounts; it is shown 
 on the Balance Sheet as a deduction from Accounts Receivable so that the man- 
 agement may know the amount due from customers, the estimated loss, and the 
 net amount that it is expected will be collected.
 
 1/2 
 
 ACCOUNTS PAYABLE ACCOUNT 
 
 ^ 4. Entry to Set Up Reserve for Doubtful Accounts. At the close of each 
 fiscal period an entry is made in the general journal to record the estimated loss 
 on doubtful accounts and to set up a reserve to take care of this loss. The Loss 
 on Doubtful Accounts account (§ 154) is debited and the Reserve for Doubtful 
 Accounts account credited. If the total amount owed the business by customers, 
 as shown by the balance of the Accounts Receivable account, is $5,575.00, and 
 it is estimated that one per cent of these accounts is uncollectible, the entry in 
 journal form will appear as in the illustration below. 
 
 T T 
 
 ■^^ 7-^. 
 
 
 y- 
 
 /' 
 
 The Loss on Doubtful Accounts account is regarded as a selling expense as explained in § 154. 
 
 ACCOUNTS PAYABLE ACCOUNT 
 
 § 163. The Purpose of this Account is to show in total the detailed 
 debits and credits to accounts with creditors in another part of the same ledger 
 or in a separate ledger. If all the transactions with creditors are recorded in this 
 account, it will not be necessary to show the various accounts with creditors onthe 
 Trial Balance. This is a controlling account because it shows in total the trans- 
 actions recorded in detail in a group of related accounts. 
 
 When the operations of the business are extensive and cover a wide territory, the accounts 
 payable, like the accounts receivable, may be kept in separate ledgers, each of which is given a title 
 designating a specific territory. A controlling account may be kept with each ledger or with a group 
 of ledgers. 
 
 Debit the Accounts Payable Account: 
 ^ I. For each amount recorded in 
 the general journal or on the 
 payments side of the cash 
 book as a debit to an account 
 in the accounts payable led- 
 ger; these amounts are usu- 
 ally of sufificient frequency to 
 require a special column in 
 each of these books of original 
 entry, in which case the post- 
 ing is at the end of the month. 
 
 Credit the Accounts Payable Account: 
 \ 2. For the total of the purchases 
 journal at the end of the 
 month. 
 
 (If amounts to be credited to 
 accounts in the accounts payable 
 ledger are recorded in the general 
 journal or on the receipts side of 
 the cash book, each should be 
 posted to the Accounts Payable 
 account at the time it is posted to 
 the account in the accounts payable 
 ledger.) 
 
 Tl 3. The Balance of the Accounts Payable Account shows the total owed to 
 all creditors and must be the same as the total of the various balances shown in 
 the accounts payable ledger. It is a current liability and is shown as such on the 
 Balance Sheet being listed after Notes Payable (Illustration No. 92). 
 
 \ 4. Accounts Payable Proof. The accounts payable are proved in the same 
 manner as accounts receivable. (§ 161, H 4.) 
 
 Ledgers containing accounts with customers and with creditors are referred to as subsidiary 
 ledgers. Only those accounts resulting from posting the sales journal and the purchases journal are 
 opened in the subsidiary ledgers; other personal accounts resulting from sales and purchases of 
 property belonging to the business are opened in the general ledger.
 
 OUTLINE OF ACCOUNTS 173 
 
 OUTLINE OF ACCOUNTS 
 
 § 164. The Outline below includes those accounts required in connection 
 with the recording of transactions in the C. W. Keeland & Co. practice set; refer- 
 ences are given to the discussion of those accounts which have not been developed 
 in this or preceding chapters. The classification is the same as that in the first 
 division of this text. 
 
 OUTLINE OF ACCOUNTS USED IN THE PARTNERSHIP SET. 
 
 Cash. 
 
 Merchandise Inventory. 
 
 Current Assets | Notes Receivable. 
 
 Accounts Receivable. 
 
 Accrued Interest Earned (§ 193). 
 
 [Land. 
 
 I Buildings. 
 
 Fixed Assets Office Equipment. 
 
 Store Fixtures. 
 [Delivery Equipment. 
 
 Deferred Charges to Operations Lg^^^^"PP ^^^' 
 
 [Notes Payable. 
 
 Current Liabilities Accounts Payable. 
 
 I Accrued Wages (§197). 
 [Accrued Interest Cost (§ 201). 
 
 [Reserve for Depreciation of Office Equipment. 
 Reserves j Reserve for Depreciation of Store Fixtures. 
 
 I Reserve for Depreciation of Delivery Equipment. 
 [Reserve for Doubtful Accounts. 
 
 Capital f Partner, Capital. 
 
 [Partner, Personal. 
 
 Inventory. 
 
 Purchases. 
 
 Purchases Returns and Allowances. 
 
 Operating Income J Freight In. 
 
 j Sales. 
 
 I Sales Returns. 
 
 [Sales Allowances. 
 
 [Selling Expense. 
 [Traveling Expense. 
 
 Operating Expense \ Loss on Doubtful Accounts. 
 
 I Administrative Expense. 
 [Building Expense. 
 
 Non-Operating Income . . . . /Interest Earned. 
 
 [Sales Discount. 
 
 [Interest Cost. 
 Non-Operating Expense. . ■-! Purchases Discount. 
 
 [Loss on Dead Horse (§ 157).
 
 174 
 
 EXERCISES IN CONTROLLING ACCOUNTS 
 
 Exercise No. 68, Accounts Receivable Proof. 
 
 Sales Journal — May 
 
 2 
 
 W. D. Jayne 
 
 Springfield 
 
 Account 
 
 I 
 
 $ 450 -oo 
 
 3 
 
 R. W. Starling 
 
 St. Louis 
 
 
 
 2 
 
 185.50 
 
 5 
 
 C. H. Watt 
 
 Bristol 
 
 
 
 3 
 
 79-30 
 
 5 
 
 R. L. Sutherland 
 
 Richmond 
 
 
 
 4 
 
 328.40 
 
 8 
 
 0. R. Martin 
 
 Lincoln 
 
 
 
 5 
 
 211. 15 
 
 9 
 
 R. W. Starling 
 
 St. Louis 
 
 
 
 6 
 
 137-50 
 
 12 
 
 J. A. Moore 
 
 Clifton 
 
 
 
 7 
 
 50.30 
 
 15 
 
 R. L. Sutherland 
 
 Richmond , 
 
 
 
 8 
 
 293-35 
 
 19 
 
 C. H. Watt 
 
 Bristol 
 
 
 
 9 
 
 45-95 
 
 26 
 
 R. W. Starling 
 
 Sales, Cr. — 
 
 St. Louis 
 
 Accounts Receivable, Dr. 
 
 II 
 
 10 
 
 203.50 
 
 31 
 
 $1,984.95 
 
 The student is required (a) to post the individual sales to the customers' 
 accounts in the accounts receivable ledger; (b) to post the total to the Accounts 
 Receivable and Sales accounts; (c) to show the proof of the individual accounts 
 with the Accounts Receivable account. 
 
 Exercise No. 69, Accounts Payable Proof. 
 
 Purchases Journal — May 
 
 3 
 
 Jemison & Co. 
 
 City 
 
 2% 10 days 
 
 I 
 
 $ 895.75 
 
 7 
 
 Jewell Tea Co. 
 
 St. Albans 
 
 account 
 
 2 
 
 50.00 
 
 7 
 
 Ralph 0. Wells 
 
 City 
 
 account 
 
 3 
 
 573.20 
 
 9 
 
 Keaton Grocery Co. 
 
 Manchester 
 
 3% 10 days 
 
 4 
 
 1,542.18 
 
 14 
 
 Tracy & Tracy 
 
 Newport 
 
 1% 30 days 
 
 5 
 
 627.35 
 
 17 
 
 Keaton Grocery Co. 
 
 Manchester 
 
 3% 10 days 
 
 6 
 
 956.31 
 
 19 
 
 Jemison & Co. 
 
 City 
 
 2% 10 days 
 
 7 
 
 193-75 
 
 23 
 
 Tracy & Tracy 
 
 Newport 
 
 1% 30 days 
 
 8 
 
 359-40 
 
 26 
 
 Keaton Grocery Co. 
 
 Manchester 
 
 3% 10 days 
 
 9 
 
 1,894.26 
 
 28 
 
 Jewell Tea Co. 
 
 Purchases, Dr. — 
 
 St. Albans 
 
 Accounts Payable, Cr. 
 
 account 
 
 10 
 
 75.00 
 
 31 
 
 $7,167.20 
 
 The student is required (a) to post the individual purchases to the creditors' 
 accounts in the accounts payable ledger; (b) to post the total to the Purchases 
 and Accounts Payable accounts; (c) to show the proof of the individual accounts 
 with the Accounts Payable account. 
 
 Exercise No. 70, Construction of Charts for Controlling Accounts. 
 
 Prepare two charts similar to Illustration No. 70, one for accounts receivable 
 and the other for accounts payable, from the following transactions performed 
 during the month of March by Gary & Burke, a partnership engaged in selling 
 woolen cloth. Use a sheet of paper S^/o x 11 inches for each chart, allowing two 
 inches for the controlling account at the top, six inches for the personal accounts 
 in the center, and two inches for the proof at the bottom. Complete all work with 
 a pen unless permitted to use pencil. 
 
 Mar. I. Purchased from Holbrook & Thoma, City, on account, merchandise, 
 $1,298.50. 
 3. Purchased from the Spencer Woolen Mills Co., Taunton, terms, 2% 
 10 days, merchandise, $563.70. They prepaid the freight on this ship- 
 ment, $4.95, which was added to the amount on the invoice. 
 (Continued on page. I /^.)
 
 EXERCISES IN CONTROLLING ACCOUNTS 175 
 
 {Exercise No. 70 — Continued from page 174.) 
 
 6. Paid Holbrook & Thoma $750.00 to apply on account. 
 
 7. Sold P. M. Penrod, 61 Ward Ave., City, on account, merchandise, $356.20. 
 
 8. Purchased from Holbrook & Thoma, City, terms, 1% 30 days, mer- 
 
 chandise, $925.45. 
 
 9. Sold J. S. Henry, 231 1 Park Ave., City, on account, merchandise, $85.00. 
 
 10. Received $200.00 from P. M. Penrod to apply on account. 
 
 11, Sold merchandise on account as follows: 
 
 J. S. Henry, 2311 Park Ave., City, $112.50. 
 O. J. Merrell, 126 Beatty St., City, $516.60. 
 Received in part payment of the sale to O. J. Merrell a sixty-day note 
 for $200.00, signed by D. P. Hart, dated January 25, with interest 
 at 6% from date; allowed Mr. Merrell credit for the interest accrued 
 on the note to date. 
 
 13. Paid the Spencer Woolen Mills Co. $557.38 in full for purchase of the 
 
 3d, less discount, and freight on the same. 
 Sold J. S. Henry, 231 1 Park Ave., City, 75c worth of cord which was 
 purchased for use in the store. Charge this to his account. 
 
 14. Received $50.00 from J. S. Henry to apply on account. 
 
 Sold O. J. Merrell, 126 Beatty St., City, on account, merchandise, 
 
 $141.50. 
 Received notice of credit from Holbrook & Thoma for $70.00, value of 
 two bolts of cloth purchased on the 8th and returned per agreement. 
 16. Purchased from Bowman Bros., West End, on account, merchandise, 
 
 $1,809.07. 
 18. Sold P. M. Penrod, 61 Ward Ave., City, on account, merchandise, $663.96. 
 Notified Bowman Bros, of an error of $2.00 in making the extensions 
 for purchase of the i6th, and received instructions from them to 
 debit their account for this amount. 
 
 20. Received $141.50 from O. J. Merrell in full for sale of the 14th. 
 Sold merchandise as follows: 
 
 O. J. Merrell, 126 Beatty St., City, on account, $245.15. 
 M. W. Grinnell, Silvergrove, terms, 2% 10 days, $1,514.80. 
 Paid Bowman Bros. $750.00 to apply on account, 
 
 21, Received $100.00 from J. S. Henry to apply on sale of the nth, and 
 
 $500.00 from P, M. Penrod to apply on account. 
 Paid Holbrook & Thoma $2,000.00 to apply on account. 
 
 22, Sold J. S. Henry, 231 1 Park Ave., City, on account, merchandise, $125.60. 
 
 23. Purchased from the Spencer Woolen Mills Co., Taunton, terms, 2% 10 
 
 days, merchandise, $342.50. They prepaid freight on this shipment, 
 $3.45, which was added to the amount on the invoice. 
 O. J, Merrell reported that there was an error of $1.00 in his favor in 
 the extensions for sale of the 20th. Debit his account with the $1.00. 
 
 24, Sold P. M. Penrod, 61 Ward Ave., City, on account, merchandise, $62.35. 
 Allowed J. S. Henry credit for $35.00, value of one bolt of cloth sold 
 
 him on the 22d and returned. 
 
 25. Sold J. S. Henry, 23 11 Park Ave., City, on account, merchandise, $284.50. 
 Received credit from the Spencer Woolen Mills Co, for $15.00 because 
 
 part of the merchandise purchased from them on the 23d was 40 per 
 cent cotton when our order specified all wool. 
 Allowed P. M. Penrod credit for $5.00 on account of an error in our 
 favor in extensions for sale of the 24th. 
 27. Purchased from Holbrook & Thoma, City, terms, 1% 30 days, mer- 
 chandise, $1,625.85. 
 
 (Concluded on page 176.)
 
 176 QUESTIONS 
 
 {Exercise No. 70 — Continued from page 175.) 
 
 27. Sold J. S. Henry, 231 1 Park Ave., City, 50c worth of stamps which 
 
 were purchased for use in the store. Charge this to his account. 
 Received $12.50 from J. S. Henry in full for sale of the nth, and $200.00 
 from P. M. Penrod to apply on sale of the i8th. 
 
 28. Accepted a thirty-day draft for $500.00, drawn on us by Bowman 
 
 Bros., to apply on purchase of the i6th. 
 Received $315.10 from O. J. Merrell in full for sale of the nth. 
 Sold J. S. Henry, 231 1 Park Ave., City, on account, merchandise, $71.40. 
 
 Per Mr. Henry's instructions, shipped this merchandise by prepaid 
 
 express to A. B. Knox, Clinton; debit Mr. Henry's account with 
 
 $1.40, cash paid for the express charges. 
 
 29. Received a check for $1,000.00 from M. W. Grinnell in part payment 
 
 for sale of the 20th; allowed him discount on this payment per terms 
 of the sale. 
 Sold P. M. Penrod, 61 Ward Ave., City, on account, merchandise, $427.89. 
 
 30. Received $100.00 from J. S. Henry to apply on account. 
 
 Received notice of credit from Holbrook & Thoma for $33.50, value of 
 one bolt of cloth returned per agreement. 
 
 31. Sold M. W. Grinnell, Silvergrove, terms, 2% 10 days, merchandise, 
 
 $165.75- 
 Received $90.60 from J. S. Henry in full for sale of the 22d, and $300.00 
 from P. M. Penrod to apply on sale of the 29th. 
 
 QUESTIONS 
 
 1. If there is a difference of 27c between the total of the balances in the accounts 
 
 receivable ledger and the balance of the Accounts Receivable account in 
 the general ledger, how will the bookkeeper locate the error? 
 
 2. If an account in the accounts receivable ledger which shows a balance of 
 
 $10.00 is ruled, how will the bookkeeper discover the error? 
 
 3. If all the accounts in the accounts payable ledger are in balance, how will the 
 
 Accounts Payable account in the general ledger appear? 
 
 4. If a creditor agrees to deliver merchandise purchased and, when this is re- 
 
 ceived, the freight has not been paid, how will the check given the railroad 
 company in payment for the freight be recorded and posted if a controlling 
 account is kept with Accounts Payable? 
 
 5. If a customer requests that the freight on a shipment of merchandise sold to 
 
 him be prepaid and charged to his account, how will the check given the 
 railroad company in payment for this freight be recorded and posted if a 
 controlling account is kept with Accounts Receivable? 
 
 6. In what way does the use of a controlling account with Accounts Receivable 
 
 make the work of the bookkeeper more efficient? 
 
 7. Why are special columns provided in books of original entry for controlling 
 
 accounts? 
 
 8. What special columns are required in the cash book and general journal when 
 
 controlling accounts are kept with Accounts Receivable and Accounts 
 Payable? 
 
 9. If a check is given in payment for freight on merchandise purchased and 
 
 debited to the Freight In account, what effect does this have on the con- 
 trolling account with Accounts Payable? Give reason for answer. 
 10. (a) If a creditor by request prepays the freight on merchandise purchased 
 and includes the amount in the purchases invoice, how will the transaction 
 be recorded and posted if a controlling account is kept with Accounts 
 Payable? (b) How will the entry be made and posted if no controlling 
 account is maintained? 
 
 J
 
 Chapter XVIII 
 
 BOOKS OF ACCOUNT 
 
 The Purpose of this Chapter is to explain and illustrate the use of special 
 columns in the cash book and general journal. The use of special columns is a 
 great time-saver for the bookkeeper, hence should be understood by the student 
 of bookkeeping. The explanation of special columns will enable the student to 
 appreciate the time saved through the use of controlling accounts. 
 
 § 165. The Books of Original Entry usually required in connection with 
 the recording of transactions for a mercantile business consist of a purchases journal, 
 sales journal, cash book, and general journal. The purpose of each of these blanks 
 is always the same, but the form of ruling may vary with the particular needs of 
 the business. The books of account required in connection with the exercise at 
 the conclusion of this chapter and the first practice set (C. W. Keeland & Co.) 
 which is separate from this text, are explained and illustrated in the discussion 
 which follows. 
 
 § 166. The Purchases Journal is a book of original entry in which pur- 
 chases of merchandise are recorded (§ 38). The ruling in this book should be 
 such that each purchase may be recorded on one horizontal line; this is usually 
 the same as in Illustrations Nos. 17 and 25. If a record is to be kept of different 
 classes of merchandise purchased or of the merchandise purchased for separate 
 departments, a separate column may be provided for each class or department. 
 If separate accounts are maintained with Purchases and Freight In, and prepaid 
 freight charges are included in the invoice, the amount of the freight should be 
 recorded in a special column for "Freight In" or by a separate entry in the gen- 
 eral journal. 
 
 § 167. The Sales Journal is a book of original entry in which sales of mer- 
 chandise are recorded (§ 40). If desired, the carbon copy of each sales invoice 
 may be filed in a binder as one page in the sales journal; when this plan is fol- 
 lowed, no ruled sales journal (Illustration No. 20) is necessary. Each customer's 
 account in the accounts receivable ledger is debited with the amount of his pur- 
 chase as shown by the carbon copy of the sales invoice rendered; at the end of 
 the month the total of all the sales invoices is posted to the debit of the Accounts 
 Receivable account and to the credit of the Sales account in the general ledger. 
 
 Each sales invoice should be numbered consecutively, the carbon copy having the same number 
 as the sales invoice. The carbon copies should be filed in a binder in numerical order. Failure to re- 
 cord a sales invoice will not affect the Trial Balance, hence will not be detected unless the customer 
 files complaint. If each sales invoice is numbered consecutively and copies are filed in a binder in 
 regular order, omissions can be detected easily. 
 
 § 168. The Cash Book. As explained in § 43, cash received may be recorded 
 in a cash receipts journal and cash paid in a cash payments journal, or cash receipts 
 and payments may be recorded on opposite pages of one cash book, receipts on the 
 left and payments on the right. All amounts received may be entered in one column 
 on the receipts side of the cash book and all amounts paid in one column on the 
 payments side as in Illustrations Nos. 22 and 23, or the transactions may be classified 
 by the use of separate columns. This classification is especially desirable when 
 controlling accounts are maintained with accounts receivable and with accounts 
 payable. The reason for this is that the Accounts Receivable account in the general 
 
 ^ 177
 
 178 
 
 CASH BOOK 
 
 ledger is credited with the total of the amounts credited to the accounts in the ac- 
 counts receivable ledger, and the Accounts Payable account in the general ledger 
 is debited with the total of the amounts debited to the accounts in the accounts 
 payable ledger. If all the amounts affecting the controlling accounts are entered 
 in special columns, the total of all the amounts in each special column can be posted 
 at the end of the month. 
 
 Other special columns may be provided for recording transactions affecting 
 cash sales, cash purchases, administrative expense, selling expense, etc. If the 
 cash sales for each of the twenty-six business days in the month are recorded in 
 one amount, twenty-six postings to the Sales account would be required; but if 
 the cash sales for each day are recorded, in a special column, the total of this 
 column can be posted in one amount at the end of the month. 
 
 £='Oie-C<£<7!»z.,^*-7r • 
 
 ' i:?:-«^^*4^ 
 
 ^^^2-<i-a<!,(i.Zi/' 
 
 Date 
 
 LI 
 
 y^ame of Account 
 
 ExplanatLon 
 
 Accts Uec. 
 Cr. 
 
 Sal(?s 
 Cr. 
 
 General 
 Cr 
 
 
 -^6 f Cf 
 
 ^ O O J^ 
 
 
 ''cf \\ / O 
 
 // 
 
 /■y 
 
 0:'?^.^-^^ 
 
 97a 
 
 ^'-ZS^ 
 
 V- 
 
 ^i-c^'^ vj? o g'l ^ S" 
 
 tp'2-Z5<><-&,^<^ (i5?>7^T>e-e^cf Ci>yTy ioS(fTj~ey .'■^z-e'^Zi^ 
 
 ^ A II 
 
 7^ o 7- 
 
 ^O 
 
 d'-C.'C^ 
 
 
 6 .2- / 
 
 C o 
 
 
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 7 '^ 
 
 7-/ 
 
 r 4 ^ 
 
 
 
 -f- — 
 
 S^ C o 
 
 cj- r c o\X -^ 
 
 
 \ ^..? ^ r J _. 
 
 Illustration No. 71, Receipts Side of Cash Book with Special Columns. 
 
 EXPLANATION. The amount of cash received from a customer on account or in full of 
 account is entered in the first column, cash received in payment for cash sales in the second column, 
 and all other amounts of cash received in the third column. Each amount entered in the first column 
 is posted to the credit of the account in the accounts receivable ledger written on the same line with 
 it; the total of this column is posted to the credit of the Accounts Receivable account in the general 
 ledger at the end of the month. Each amount entered in the second column is not posted, but the 
 total of the column is posted to the credit of the Sales account at the end of the month. Each amount 
 entered in the third column is posted to the credit of the account in the general ledger written on the 
 same line with it; the totals of the first and second columns are extended into the third column as in 
 the illustration, and the total of the three columns (less the balance at the beginning of the month) 
 is posted to the debit of the Cash account in the general ledger at the end of the month. 
 
 *The break indicates a number of entries omitted.
 
 CASH BOOK 
 
 179 
 
 Illustration No. 71 shows the receipts side of the cash book with three money 
 columns, and Illustration No. 72 shows the payments side of the cash book with 
 the same number of money columns; the use of each column is explained by the 
 printed heading and the explanation of the illustration. 
 
 ^ I. To Prove Cash. At the time it is desired to prove cash, each of the 
 three columns on the receipts and payments sides of the cash book is footed in 
 small pencil figures as in Illustrations Nos. 71 and 72. The total of the first and 
 third columns on the payments side deducted from the total of the three columns 
 on the receipts side should be the same as the cash in the bank plus that on hand 
 if it is not all deposited. In practice it is customary to prove cash before depositing 
 the checks and currency in the bank. 
 
 <57CZ<Z-CiS-i»»z,-<£tf^ / 
 
 ^y^c^i-^-^>-'?t..£^^rzS^^^ 
 
 Date 
 
 L.r 
 
 /Jame of Accouivt/ 
 
 Explanatiorb 
 
 Accounts Payaoie Dr>. 
 
 Gerter 
 
 'al 
 
 yNet Amii. 
 
 Pur. Dis-. Qx? 
 
 Dr. 
 
 / 
 > 
 
 J- 
 
 - 
 
 
 •-^ /aa."' sf,^a 
 
 ^ ^3 
 
 
 7 
 
 
 / 3 S' 
 3 3 
 
 / 
 3 
 
 3 
 
 7-^ 
 
 
 
 
 
 
 OS 
 7 ^ 
 
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 7 ? 
 
 ^ 
 
 yC 
 
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 ~^ 
 
 
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 3 -}- C 
 
 7 ^ 
 
 
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 ^> 
 
 
 
 
 
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 ^ 7 
 
 
 
 
 
 
 
 
 
 ^ S <? vT 
 
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 re? . 
 
 
 
 
 
 Illustration No. 72, Payments Side of Cash Book with Special Columns. 
 
 EXPLANATION. The amount of cash paid a creditor on account or in full of account is 
 entered in the first column, discount deducted for payment of purchases invoices within the discount 
 period is entered in the second column, and all other amounts of cash paid in the third column. 
 Each amount entered in the first and second columns is posted to the debit of the account in the 
 accounts payable ledger written on the same line with it; the total of the first column is posted to 
 the debit of the Accounts Payable account, and the total of the second column is posted to the credit 
 of the Purchases Discount account and to the debit of the Accounts Payable account in the general 
 ledger at the end of the month. Each amount entered in the third column is posted to the debit of 
 the account in the general ledger written on the same line with it; the total of the first column is 
 extended into the third column as in the illustration, and the total of these two columns is posted 
 to the credit of the Cash account in the general ledger at the end of the month. 
 
 *The breaks indicate a number of entries omitted.
 
 i8o 
 
 GENERAL JOURNAL 
 
 § 169. General JournaL When controlling accounts are maintained with 
 accounts receivable and accounts payable, four columns are usually provided in 
 the general journal as in the illustration below. 
 
 c><:iSi2^i!,^<;>^>z.-f^--,e<7^ 
 
 ■^, /f 
 
 Accts Pay 
 Dr. 
 
 Di? 
 
 U. 
 
 yName o\! Accounts aiLd^ 
 IxplanatioiL 
 
 LI 
 
 general 
 Cr. 
 
 /a / / -^ 
 
 
 \ja--. 
 
 
 / ^> / / J~ 
 
 
 
 n 
 
 
 ^ / 
 
 
 ^-^ -^ 
 
 
 
 3 a o 
 
 
 
 Gx-/r/^ -nc^^a ^£-tz^ ^zt-<f-^^iy ^^^xZt&tr/ 
 
 
 
 
 yS o a 
 
 
 
 
 
 9 7 
 
 
 
 
 ^ £1 a 
 7 4 f 
 
 7-^ 
 
 
 
 / 3. r J 
 
 
 7 ^ f 
 aU^^ 
 
 3- »-' 
 
 
 
 9 7 O > 
 
 ?7 
 
 yj 7 <> I)- 
 
 ^7- 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 Illustration No. 73, General Journal with Two Special Columns. 
 
 EXPLANATION. The two debit columns are ruled at the left and the two credit columns 
 at the right to avoid errors in posting. The total of the two columns at the left should at all times 
 equal the total of the two columns at the right. At the conclusion of each page these totals should 
 be proved and forwarded; this proof should also be made before posting the totals of the 'Ac- 
 counts Payable, Dr." and 'Accounts Receivable, Cr." columns at the end of the month. 
 
 *The break indicates a number of entries omitted.
 
 LEDGER i8i 
 
 The amount in each transaction which affects the debit side of an account in 
 the accounts payable ledger is entered in the "Accounts Payable, Dr." column; 
 the amount in each transaction which affects the credit side of an account in the 
 accounts receivable ledger is entered in the "Accounts Receivable, Cr." column. 
 This permits the posting of each amount to the proper account in the accounts 
 payable or accounts receivable ledger at the time of entry, and the posting of the 
 total of the special debit column to the Accounts Payable account and the total 
 of the special credit column to the Accounts Receivable account at the end of the 
 month. Illustration No. 73 shows one form of a special column journal. 
 
 § 170. The Ledger. As explained in § 14, the ledger contains all the ac- 
 counts necessary to show the complete record of the transactions performed. The 
 accounts in the ledger should be arranged in the same order as they will appear on 
 the Balance Sheet and Statement of Profit and Loss. The reason for this is that 
 these reports are prepared from the Trial Balance, and the Trial Balance is made 
 from the ledger. Illustration No. 88 shows a Trial Balance with the correct ar- 
 rangement of the accounts. 
 
 When controlling accounts are maintained with accounts receivable and accounts payable, 
 the individual accounts with customers and creditors should be kept in a separate division of the 
 ledger or in separate ledgers; this will depend on the number of creditors from whom the business 
 buys on account and the number of customers to whom the business sells on account. 
 
 § 171. An Auxiliary Book is one which provides detailed information in 
 regard to the transactions recorded in the books of original entry. Its purpose is 
 to simplify the explanation in the books of original entry and to provide information 
 which would not be available even though the explanation might be given in detail. 
 The notes receivable book, notes payable book, bank check book, and insurance 
 policy record are the auxiliary books discussed and illustrated in this chapter; 
 additional auxiliary books will be explained in subsequent chapters. 
 
 § 172. The Notes Receivable Book is an auxiliary book which contains 
 detailed information in regard to notes and acceptances receivable. The ruling 
 should provide columns for (a) the date, (b) the number, (c) the drawer or en- 
 dorser, (d) the maker or drawee, (e) the payee, (f) where payable, (g) the date of 
 paper, time, and due date, (h) the amount, (i) the rate of interest, (j) when paid, 
 and (k) remarks. This arrangement permits full information in regard to a note 
 or draft to be written on one horizontal line. Illustration No. 74 shows a popular 
 form of ruling for the notes receivable book. 
 
 § 173. The Notes Payable Book is an auxiliary book which contains de- 
 tailed information relative to notes signed and drafts accepted by the business. 
 The ruling should provide columns for (a) the date, (b) the number, (c) the drawer 
 or endorser, (d) the maker or drawee, (e) the payee, (f) where payable, (g) the date 
 of paper, time, and due date, (h) the amount, (i) the rate of interest, (j) when paid, 
 and (k) remarks. This arrangement permits full information in regard to a note or 
 draft to be written on one horizontal line. Illustration No. 75 shows a popular 
 form of ruling for the notes payable book. 
 
 If desired, the notes receivable and payable books may be used as posting mediums, in which 
 case one is referred to as the notes receivable journal and the other as the notes payable journal; 
 these are explained and illustrated in a succeeding chapter. 
 
 § 174. Insurance Policy Record. The purpose of this book is to provide 
 a record of each insurance policy. The information in it should show (a) the 
 date of the policy, (b) number, (c) name of the insurance company, (d) kind of 
 property insured, (e) amount of the policy, (f) date of expiration, and (g) the 
 premium paid for the policy. Additional columns should be provided for the 
 
 {Continued on page 182).
 
 1 82 
 
 AUXILIARY BOOKS 
 
 
 
 
 
 NOTES RECEIVABLE 
 
 i 
 
 
 Oiir 
 
 
 MakCT or Drawn 
 
 
 
 Roclvol 
 
 No. 
 
 (DraftJ (Note] 
 
 (Note) (Drall) 
 
 (PayeeJ 
 
 
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 t^ 
 
 / ^ . y(.ieA>:y?-Z'<?-9-t'Cf^^'L-^ 
 
 ^^ClJ^-T^-^*-,^ 
 
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 d:^ Tsf^i.,^^ (^^^Pikz/.M'T^it^J^^ 
 
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 Illustration No. 74, Left Page of Notes Receivable Book. 
 
 EXPLANATION. Each note receivable or acceptance receivable is recorded on one line at 
 the time it is received; the number given this may be used as the explanation of the entries in the 
 general journal and cash book. 
 
 NOTES PAYABLE 
 
 In WTiose Favor 
 
 
 M^ 
 
 /O 
 / 
 
 /O 
 /^ 
 
 /o 
 
 
 f3^4^^.^.W. (^ 
 
 y^J!'i'Tr>^,et^yi.tyy?,!tJ^/^2a^n^ 
 
 
 Illustration No. 75, Left Page of Notes Payable Book. 
 
 EXPLANATION. Each note signed by the business and each draft accepted by it is recorded 
 in this book at the time of issue or acceptance; the number given each may be used as the explana- 
 tion of the entries in the genera! journal and cash book. 
 
 INJ'UDANCE Policy I^ecoisd. 
 
 Dateof Policy | A^ 
 
 i^ame of Compaip^ 
 
 "Propeiiylni'urcd 
 
 Amount j Expiree Preiniiffli 
 
 
 
 6 f / s-j 
 / a o / 
 
 / ^ / 3S- 
 
 <^ 3 / / ' I 
 
 
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 ri^ cZ^^c.t^c-^^2^\ 
 
 ■ ry C i*=pz</ '^^^.^^T'ii^^z^^cK- yC^,>c.i^£e6.<^->^ 
 
 y £> a 
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 ^C o o 
 
 Illustration No. 76, Left Page of Insurance Policy Record. 
 
 EXPLANATION. The book is ruled so that all the information desired in connection with 
 each policy may be recorded on one horizontal line. A description of the policy is written on the 
 left-hand page, and the monthly value of the premium which expires is shown in the columns on 
 the right-hand page. Premiums on policies which do not expire during the year in which the policies 
 are issued, are distributed in the next year. 
 
 amount which expires during each month; with this information the bookkeeper 
 can easily determine the value of the expired and unexpired insurance at the close 
 of the fiscal period. The insurance which has expired during the year is debited to
 
 AUXILIARY BOOKS 
 
 183 
 
 
 
 
 
 
 
 
 
 
 
 NOTES 
 
 RECEIVABLE 
 
 
 
 
 
 
 ~ 
 
 Dale of P>p« 
 
 Tlmt 
 
 When Due 
 
 Anuutt 
 
 K2--! 
 
 W^Paid 
 
 Roaib 
 
 W IkniMUl 
 
 la 
 
 ft 
 
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 % 
 
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 Illustration No. 74, Right Page of Notes Receivable Book. 
 EXPLANATION. The total of the unpaid notes and acceptances should always equal the 
 balance of the Notes Receivable account in the general ledger, also the total of the notes and accept- 
 ances in the safe and in the hands of agents for collection. 
 
 NOTES PAYABLE 
 
 Qite ol Paper 
 
 Time 
 
 When Due 
 
 
 Rate of 
 Interest 
 
 
 
 
 iMT 1 iMiMni 
 
 I- 'ffi '(S 
 
 
 iC 
 
 57 
 
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 s? 
 
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 Illustration No. 75, Right Page of Notes Payable Book. 
 EXPLANATION. When a note or draft is paid, the date should be entered in the "When 
 Paid" column. The total of the unpaid notes and drafts should at all times equal the balance of 
 the Notes Pavable account in the general ledger. A proof of this should be prepared monthly. 
 
 IN^UDANCE Policy I^ecord. 
 
 Monthly lExpiraiiorur ' 
 
 Jan. Tab. 
 
 March i^il Maj^ 1 Jurvoi July Auy. 
 
 .Jfept. 
 
 Oct. 
 
 /fov Dec. 
 
 Amount IT 
 CaTried Fbrvratrd 
 
 ^^o XMo ^.'^^ ^"^^ -^^^ 
 
 A^r 
 
 ^/ir Mr ^^ .^f 
 s:r3 cr.?3 ^rj 
 
 /.>o /.>o /.y-ff 
 /.>ty />(? /■>o 
 
 /.ro 
 
 >^c >,'/o "y./^o, >.t/^(/ >.u<' 
 
 ^y ye yr vi' ^^ 
 
 ^r^ ^fj ^.fs ^^''.^ ^r^^ 
 
 /.7-0 /,>o /.>o />(> /.y-o 
 
 /7-0 /,>0 /.>^ />-^ /.?-0 
 
 / /" ^ /.ro /j-o /.("o /.Fo 
 
 ^eo K^.oo^ 3.00 k3.oo ^,00 
 
 /o ra\ 
 
 /fOff 
 
 Illustration No. 76, Right Page of Insurance Policy Record. 
 The distribution by months is shown only for the current year, the amount of unexpired 
 premium being entered in the last column at the right. At the beginning of the next year, this 
 unexpired premium will be distributed in the columns representing the months to which it is 
 applicable. It is necessary to show the nature of the property insured because this determines the 
 operating account affected; thus, expired insurance on delivery equipment and merchandise is 
 debited to Selling Expense, expired insurance on office equipment to Administrative Expense, etc. 
 
 the proper operating accounts at the close of the year, at which time the book- 
 keeper should transfer the unexpired insurance to a new page in the insurance 
 policy record. Illustration No. 76 shows a popular form of the insurance policy record.
 
 1 84 
 
 EXERCISE 
 
 § 175. The Bank Check Book contains blank checks to be used by the 
 depositor for withdrawing funds deposited in the bank. The check book provided 
 by the bank may contain one, two, or three blank checks to the page. Illustration 
 No. 58 shows a check book with two checks to the page and with the bank account 
 kept on the front of the check stub. The record on the front of the check stub is 
 reconciled with the monthly bank statement as explained in § 80. 
 
 Exercise No. 71, Retail Furniture Business 
 
 The Trial Balance given below was taken from the books of Gobel & Mitchell, 
 partners engaged in a retail furniture business. It shows the results of the opera- 
 tions of the business from January i to November 30. 
 
 Gobel & Mitchell, Trial Balance, November 30, 1922. 
 
 Cash (4) 
 
 Notes Receivable (7) 
 
 Accounts Receivable (4) 
 
 Reserve for Doubtful Accounts (4) 
 
 Ofhce Equipment (5) 
 
 Reserve for Depreciation of Ofhce Equip. (4) 
 
 Delivery Equipment (4) 
 
 Reserve for Depreciation of Del. Equip. (4). 
 
 Building (4) 
 
 Land (4) 
 
 Office Supplies (5) 
 
 Insurance (4) 
 
 Notes Payable (6) 
 
 Accounts Payable (10) 
 
 J. R. Gobel, Capital (6) 
 
 J. R. Gobel, Personal (7) 
 
 W. H. Mitchell, Capital (6) 
 
 W. H. Mitchell, Personal (7) 
 
 Sales (8) 
 
 Sales Returns (5) 
 
 Sales Allowances (5) 
 
 192 1 Inventory (4) 
 
 Purchases (7) 
 
 Freight In (6) 
 
 Purchases Returns and Allowances (6) 
 
 Selling Expense (15) 
 
 Administrative Expense (12) 
 
 Interest Earned (6) 
 
 Purchases Discount (5) 
 
 Commission (5) 
 
 Interest Cost (6) .- ' 
 
 Sales Discount (6) 
 
 Notes Receivable: 
 
 Note signed by M. B. Wallace, dated July 12, due in six months, with 
 
 interest at 6% from date $600 . 00 
 
 Note signed by J. H. Weber, dated October 15, due in sixty days, with 
 
 interest at 6% from date 201 . 50 
 
 $4,696.91 
 
 
 801.50 
 
 
 4,118.76 
 
 
 79-31 
 
 $ 101.76 
 
 650 . 00 
 
 
 
 30.00 
 
 4,000.00 
 
 
 
 350.00 
 
 3,500.00 
 
 
 2,500.00 
 
 
 329.12 
 
 
 401 .60 
 
 
 
 2,000.00 
 
 
 3.021. 51 
 
 
 15.376.50 
 
 20.00 
 
 
 
 15.376.50 
 
 
 30.00 
 
 
 37,431-44 
 
 107.00 
 
 
 51.89 
 
 
 18,522.45 
 
 
 28,187.65 
 
 
 2,107.56 
 
 
 
 211.08 
 
 2,680.40 
 
 
 1,819.78 
 
 
 
 42.19 
 
 
 576.50 
 
 
 118.50 
 
 51.20 
 
 
 40.85 
 
 
 $74,665.98 
 
 $74,665.98
 
 EXERCISE 
 
 185 
 
 406 Lincoln Ave., City 
 
 Oct. 
 
 15, 
 
 60 days 
 
 $ 311-50 
 
 530 Craig St., City 
 
 Nov. 
 
 5. 
 
 30 days 
 
 101.75 
 
 City 
 
 Nov. 
 
 I, 
 
 account 
 
 412.41 
 
 Clifton 
 
 Nov. 
 
 15, 
 
 account 
 
 60.05 
 
 702 Pike St., City 
 
 Nov. 
 
 I, 
 
 30 days 
 
 101.15 
 
 609 Market St., City 
 
 Nov. 
 
 10, 
 
 30 days 
 
 619.00 
 
 427 Elm St., City 
 
 Nov. 
 
 15. 
 
 account 
 
 441.60 
 
 13 W. 7th St., City 
 
 Nov. 
 
 20, 
 
 account 
 
 118.70 
 
 217 Delta Ave., City 
 
 Oct. 
 
 12, 
 
 30 days 
 
 217.60 
 
 Elm wood 
 
 Oct. 
 
 16, 
 
 60 days 
 
 300 . 00 
 
 Reading 
 
 Oct. 
 
 2, 
 
 60 days 
 
 260.00 
 
 2527 Erie Ave,. City 
 
 Nov. 
 
 20, 
 
 30 days 
 
 1,160.00 
 
 15 Burnet Ave., City 
 
 Oct. 
 
 I, 
 
 30 days 
 
 15.00 
 
 Accounts Receivable: 
 O. H. Roth (4) 
 J. H. Weber (5) 
 West Side Furn. Exch. (4) 
 Schott Decorating Co. (4) 
 C. E. Perry & Co. (4) 
 S. A. Burkhart (4) 
 Just Rite Furn. Co. (4) 
 J. N. Hook & Co. (4) 
 W. A. Newman (4) 
 R. R. Phillips (4) 
 
 E. E. Frank (4) 
 W. D. Wolfe (4) 
 
 F. X. Vance (4) 
 
 Insurance Premiums Paid: 
 
 On merchandise, $205.15; on delivery equipment, $106.16; on building, $90.29; 
 total, $401.60. 
 
 Notes Payable: 
 
 Note in favor of Merchants National Bank, dated October 10, due in 
 
 sixty days, with interest at 6% from date $2,000.00 
 
 Accounts Payable: 
 C. H. Campbell Furn. Co. (6) 
 Hasselbarth-Wheton Co. (4) 
 The Robt. Mitchell Furn. Co. 
 The Brookville Furn. Co. (4) 
 De Luxe Upholstery Co. (4) 
 Kearns Furniture Co. (5) 
 
 (4) 
 
 Shelbyville 
 Utica 
 Cincinnati 
 Brookville 
 Grand Rapids 
 
 Nov. 15, 
 Nov. 12, 
 Oct. 25, 
 Nov. 5, 
 Oct. 12, 60 days 
 
 2/30, n/60 
 2/30, n/60 
 60 days 
 2/30, n/60 
 
 High Point Nov. 30, 2/15, n/30 
 
 $ 601.05 
 201 .70 
 475 00 
 350.00 
 800 . 00 
 593 • 76 
 
 On ledger paper open an account with each account shown on the Trial Bal- 
 ance, allowing for each the number of lines indicated by the number in parenthesis 
 after the name of the account. In the explanation column of the Notes Receivable, 
 Notes Payable, and Insurance accounts write the special information in regard 
 to the notes and insurance; the two notes due the business should be entered as 
 separate amounts in the Notes Receiv^able account. Since there is a controlling 
 account in the general ledger for accounts receivable and another for accounts 
 payable, the individual accounts with customers and creditors will be opened on 
 ledger sheets separate from the ones used for general ledger accounts. 
 
 The transactions for December are to be recorded in the purchases journal, 
 sales journal, cash book, and general journal. Loose sheets of paper will be used, 
 ruled similar to Illustrations Nos. 25, 26, 71, 72 and 73. The cash balance shown 
 on the Trial Balance should be entered in the "General" column on the receipts 
 side of the cash book before any transactions are recorded. 
 
 December . 
 
 1. Gave the Werk Realty Co. a check for $100.00 in payment for rent of ware- 
 
 house for December, and N. R. Hayes Garage a check for $38.50 in pay- 
 ment for November garage rent and repairs on delivery truck. 
 
 Debit Selling Expense for both payments. 
 
 Bought from the C. H. Campbell Furniture Co., Shelbyville, terms 2/20, 
 n/60, furniture per purchases invoice No. 156, $320.00. 
 
 Received a check from the Schott Decorating Co. in full of account. 
 
 2. Sold J. H. Weber, 530 Craig St., City, terms 30 days, i davenport, per sales 
 
 invoice No. 851, $78.50. 
 Gave the C. J. Krehbiel Co. a check for $33.75 in payment for 2,000 circulars
 
 i86 EXERCISE 
 
 Received $35.75 for cash sales. 
 
 3. Received from C. E. Perry & Co. their note dated December i, due in thirty 
 
 days, with interest at 6% from date, in full of account. 
 Sold C. A. Anderson, Linwood, terms 60 days, i dining room suite per sales 
 
 invoice No. 852, $525.00. 
 Received $72.50 for cash sales. 
 
 4. Gave the Brookville Furniture Co. a check in full of account, less discount. 
 Sold J. N. Hook & Co., 13 W. 17th St., City, terms account, i library table 
 
 per sales invoice No. 853, $45.00. 
 
 5. Withdrew $70.00 from the bank and paid the following: stamps, for letters, 
 
 $10.00; J. R. Gobel and W. H., Mitchell, each $30.00 for personal use. 
 Debit Office Supplies for the stamps purchased. 
 Returned to the Kearn Furniture Co. i chair, cost price, $8.00. 
 
 6. Received a check from J. H. Weber in payment for invoice dated Nov, 5. 
 Sold R. O. Burns, Richmond, terms 30 days, i kitchen cabinet per sales 
 
 invoice No. 854, $85.00. 
 Withdrew $200.00 from the bank to pay the weekly pay roll as follows: 
 office employees, $50.00; employees in selling department, $150.00. 
 
 8. Bought from the Brookville Furniture Co., Brookville, terms 2/30, n/60, 
 
 furniture per purchases invoice No. 157, $675.00. 
 Received $90.75 for cash sales. 
 
 9. The note due at the bank today and interest on the same was paid as follows: 
 
 note for $1,000.00 dated today, due in sixty days, and check for $1,030.00, 
 balance due on the old note and interest on the new note at 6%. 
 
 Received $100.00 from West Side Furniture Exchange to apply on account. 
 
 Transferred from stock to the office, i table (cost, $28.00) and 3 chairs (cost, 
 $4.00 each). 
 
 10. Sold C. E. Herzog, 2034 Eastern Ave., City, terms account, 6 dining room 
 
 chairs per sales invoice No. 855, $40.00; Just Rite Furniture Co., City, 
 terms account, 3 wardrobes per sales invoice No. 856, $180.00. 
 Bought from the Imperial Furniture Co., Grand Rapids, terms 2/15, n/30, 
 furniture per purchases invoice No. 158, $520.00. 
 
 11. Received a check from O. H. Roth in full of account less 1% discount per 
 
 special agreement. 
 Make the entry for the sales discount in the general journal. 
 Gave the Hasselbarth-Wheton Co. a check in full of account, less discount. 
 
 12. Sold S. A. Burkhart, 609 Market St., City, terms 30 days, i tea wagon per 
 
 sales invoice No. 857, $18.00; C. tj. Newton, 102 Front St., City, terms 
 account, i upholstered rocker per sales invoice No. 858, $28.00. 
 Received $68.00 for cash sales. 
 
 13. Purchased an Underwood typewriter for $100.00. Gave in payment the old 
 
 typewriter (cost $80.00, book value $60.00) and our check for $50.00. 
 
 Sold R. R. Phillips, Elmwood, terms 60 days, i oak buffet per sales invoice 
 No. 859, $39.00; H. C. Kern, 253 Earnshaw Ave., City, terms account, 
 I 5-piece living room suite per sales invoice No. 860, $1,015.00. 
 
 Withdrew $200.00 from the bank to pay the weekly pay roll. 
 
 Gave the Kearns Furniture Co. a check in full of account, less credit for 
 chair returned and less discount. 
 15. Bought from the Connersville Furniture Co., Connersville, terms 1/15, 
 n/30, furniture per purchases invoice No. 159, $505.00. 
 
 Paid freight on furniture purchased, $128.76. 
 
 Bought from the Pounsford Stationery Co., City, terms account, miscel- 
 laneous office supplies, $28.75. 
 
 Enter in the general journal as this is not a purchase of merchandise. 
 
 Received a check from J. H. Weber in payment for note and interest, due on 
 the 14th.
 
 EXERCISE 187 
 
 Gave the C. H. Campbell Furniture Co. a check in payment for invoice 
 
 dated November 15, less discount. 
 Prove cash (balance, $2,182.86). 
 
 16. Sold L. A. Sanderson, Louisville, terms net 30 days, i dining room suite per 
 
 sales invoice No. 861, $475.00. 
 H. C. Kern claimed that the armchair belonging to the living room suite sold 
 
 him on the 13th was not up to standard. We allowed him a credit for 
 
 $20.00, and put in a claim for this amount against the De Luxe Upholstery 
 
 Co. from whom this furniture was purchased. 
 Only one entry is required at this time. 
 Received a check from the West Side Furniture Co. for balance due on invoice 
 
 dated November i. 
 
 17. Our attorney reported that the amount due from F. X. Vance is uncollectible. 
 Gave each partner $40.00 for personal use. 
 
 Received $187.65 for cash sales. 
 
 18. Received a credit bill from the De Luxe Upholstery Co. for $20.00, amount 
 
 of claim which we filed on the i6th. 
 Gave C. H. Campbell Furniture Co. check in full of account, less discount. 
 E. E. Frank accepted our lo-day draft in full of account. 
 
 19. Gave the De Luxe Upholstery Co. our note dated today, due in thirty days, 
 
 with interest at 6% from date, in full of account. 
 Sold J. H. Weber, 530 Craig St., City, terms 30 days, i chifforobe, $70.00, 
 and I dressing table, $60.00, per sales invoice No. 862. ■ 
 
 20. Received $101.60 for cash sales. 
 
 Withdrew $200.00 from the bank to pay the weekly pay roll. 
 
 Received a check from S. A. Burkhart in full for invoice dated November 10. 
 
 22. Gave the Daily Tribune a check for $50.00 in payment for advertisement. 
 Bought from Kreimer Bros. & Co., Cincinnati, terms 30 days, furniture per 
 
 purchases invoice No. 160, $819.75. 
 Sold E. E. Frank, Reading, terms 60 days, i armchair per sales invoice No, 
 863, $26.00. 
 
 23. J. H. Weber returned the dressing table sold him on the 19th, Gave him 
 
 credit for the selling price. 
 Received a check for $50.00 from the Delco-Light Co., local distributors of 
 
 the "Frigidaire," in payment for commission on sales of these iceless 
 
 refrigerators. These are not carried in stock, but commission is allowed 
 
 on refrigerators sold. 
 Gave the Imperial Furniture Co. a check in full of account, less discount. 
 W. H. Mitchell sent to his home i library table and i rocker. Charge his 
 
 Personal account with the cost price, $52.00. 
 Received $160.80 for cash sales. 
 
 24. Accepted a ten-day draft drawn on us by the Robt. Mitchell Furniture Co. 
 
 in full of invoice dated October 25. 
 Received checks as follows: J. H. Weber, in payment for invoice dated 
 December 2; C. E. Herzog, in full of account; H. C. Kern, in full of account 
 less 1% discount per special agreement. 
 
 26. Received $68.00 for cash sales. 
 
 Paid $1.00 for telegram. Debit Administrative Expense. 
 
 27. Sold R. O. Burns, Richmond, terms 30 days net, i serving table per sales 
 
 invoice No. 864, $16.00. 
 Received $8.01 from the C. & O. Ry., rebate on freight paid on the 15th. 
 Withdrew $418.00 from the bank to pay the following: pay roll, $200.00; 
 
 W. H. Mitchell, $108.00, and J. R. Gobel, $110.00, for personal use.
 
 i88 QUESTIONS 
 
 29. Received check from E. E. Frank in payment for draft accepted on the i8th. 
 Received $75.60 for cash sales. 
 
 Sold O. H. Roth, 406 Lincoln Ave., City, terms net 60 days, i chiffonier per 
 sales invoice No. 865, $43.00. 
 
 30. Bought from Hasselbarth-Wheton Co., Utica, terms 2/30, n/6o, furniture 
 
 per purchases invoice No. 161, $451.70. 
 Gave the Connersville Furniture Co. a check in full of account, less discount. 
 Received a check from the Just Rite Furniture Co. in full of account. 
 
 31. Received from R. R. Phillips his 30-day note dated December 14, with interest 
 
 at 6% from date, in full of invoice dated October 16. 
 Paid freight on furniture purchased; $78.76. 
 
 Credit each partner's personal account with $200.00, salary for the month. 
 Debit § 155 for J. R. Gobel's salary and § 152 for W. H. Mitchell's salary. 
 When the foregoing transactions have been recorded, proceed as follows: 
 
 1. Prove cash (balance, $3,600.17). 
 
 2. Post from all books of original entry, including the totals of the special 
 columns, and take a Trial Balance. Allow four lines for each new account opened. 
 
 Retain the Trial Balance and all books of account for use in Exercise No. 80. 
 
 QUESTIONS 
 
 1. (a) What accounts are debited and credited with the total of the purchases 
 
 journal at the end of the month when a controlling account is kept with 
 Accounts Payable? (b) What accounts are affected if no controlling ac- 
 count is kept? 
 
 2. (a) What accounts are debited and credited with the total of the sales journal 
 
 at the end of the month if a controlling account is kept with Accounts 
 Receivable? (b) What accounts are affected if no controlling account is 
 kept? 
 
 3. Why is the balance of cash on hand at the beginning of the month deducted 
 
 from the total of all the columns on the receipts side of the cash book be- 
 fore posting the cash receipts for the month? 
 
 4. (a) If there are 312 business days during the year and cash sales are recorded 
 
 on the receipts side of the cash book each day, how many entries will be 
 required to record and post these cash sales if the Trial Balance is made 
 monthly and a special column is provided for cash sales on the receipts side 
 of the cash book? (b) How many entries would have been required, in- 
 cluding the posting, if the special column had not been used? 
 The term "entry" here refers to the writing of the amount for each cash sale and each total, 
 both in the cash book and the ledger. 
 
 5. What entry will be required in the general journal for a $500.00 note received 
 
 from S. J. Shook in full of account on January 9 if this note is described as 
 No. 50 in the notes receivable book? 
 
 6. How does the bookkeeper prove that the notes payable record is correct as 
 
 compared with the Notes Payable account? 
 
 7. If all cash received is deposited in the bank, what relation does the pass book 
 
 have to the entries on the receipts side of the cash book? 
 
 8. How does the bookkeeper reconcile the bank statement with his bank ac- 
 
 count on the check stub? 
 
 9. What is the purpose of the insurance policy record? 
 
 10. Describe in detail the method of proving cash with a cash book ruled similar 
 to Illustrations Nos. 71 and 72.
 
 Chapter XIX 
 
 BUSINESS FORMS AND VOUCHERS 
 
 The Purpose of this Chapter is to explain and illustrate business forms and 
 vouchers which have not been discussed in previous chapters. The student needs 
 to understand the various business forms which represent transactions in business 
 if he is to record the transactions correctly. 
 
 § 176. Each Transaction is represented to the bookkeeper by a business 
 form or voucher, as explained in Chapter IX. When the bookkeeper has recorded 
 the transaction from the facts given in the business form, it is filed for future refer- 
 ence. The purchases order, invoice, receipt, deposit ticket, check, bank draft, 
 cashier's check, money order, draft, and note were discussed and illustrated in 
 previous chapters; others are explained and illustrated in this chapter. 
 
 § 177. A Business Letter is a written communication relative to a trans- 
 action to be completed or confirming the completion of a transaction. The subject 
 
 C.W. KEELJVNO 
 
 TELEPHONE 358 A.O.MUNSON 
 
 ^m 
 
 1 €.l0Mmlm^ k €0. 
 
 e 
 
 m DEALERS IN ^■^^''*'\olT'"^^^ 
 
 ^F f J -^ . -_ , ; /^ 1 *S REPRESENTED. 
 
 Hay,urain,Feed and Coal 
 
 
 ClIVCIiViVATI,OHIO, April 7, 192 
 
 
 Young & Doyle, 
 1306 Grand Ave. , 
 Cincinnati, Ohio. 
 
 
 Gentlemen: 
 
 
 Replying to your letter of this date asking for 
 price on No. 2 Hay in carload lots, will quote you $15.00 
 per ton, delivered at your place of husiness. We have a 
 car in the yards and cin have it placed on your siding to- 
 morrow. 
 
 • 
 
 Please advise us at once, as we could not make 
 this price unless we were permitted to unload the car at 
 your warehouse. 
 
 
 Sincerely, 
 
 
 C. W. KEELAKD & CO. 
 
 
 
 S/K per^2.^>^:'<V^::Ii^, / 
 
 Illustration No. 77, Business Letter. 
 
 EXPLANATION. This letter is written on the letterhead of the firm and is a reply to an 
 inquiry for price on hay in carload lots. The letter has been reduced about one-third in size. 
 
 189
 
 190 
 
 BUSINESS FORMS AND VOUCHERS 
 
 matter in the business letter should be explicit and so arranged that the reader 
 may easily interpret its meaning. If the nature of the letter is such that the facts 
 given therein will be needed for the completion of the transaction or the interpreta- 
 tion of the transaction completed, a copy of the reply should be attached to the 
 letter and filed for convenient reference. The answer to the business letter should 
 not be written on the letter itself because this would necessitate its being returned, 
 hence the writer would not have a copy of the letter or the answer in his files. No 
 special form of business letter is necessary, but the arrangement should be such 
 that the facts stated in the letter may be clearl}^ set forth, as in Illustration No. 77. 
 § 178. A Certified Check is a personal check, payment of w^hich is guar- 
 anteed by the bank authorized to pay it; this guarantee is effected by the cashier 
 or other official of the bank writing across the face "Certified" together with the 
 name and official title of the officer making certification. Without certification 
 the holder of a check does not know that it will be paid upon presentation; with 
 certification the holder knows that it will be paid upon presentation. The form 
 of certification is shown in Illustration No. 78. The drawer or the holder of a 
 check may have it certified. Certified checks are used as a bond to guarantee 
 fulfillment of a contract, in settlement of notes payable at a bank other than the 
 one on which the check is drawn, in payment of real estate when purchased, pay- 
 ment of judgment in courts, and in other cases where it is necessary for the holder 
 to know that the check will be paid upon presentation. 
 
 '>^_3?7 
 
 ^<r /.9/ 
 
 
 
 Illustration No. 78, Certified Check. 
 
 § 179. A Bill of Lading is the receipt issued by a transportation company 
 for merchandise or other property received by it for shipment. The Interstate 
 Commerce Commission, which has supervision of all railroads in the United States 
 doing an interstate business, requires three copies of the bill of lading for each 
 shipment, each copy to conform to the requirements imposed by the Commission. 
 These three copies are described as "original", "shipping order," and "memoran- 
 dum." The size is 83^2 x 7 or 83/^ x 11. See Illustration No. 79 on pages 191, 192, 
 193 and 195. 
 
 When a shipment is to be made by freight, the shipper prepares the three 
 bills of lading; by the use of carbon paper the three copies may be made at the 
 same time. The three forms are arranged in the follow^ing order: (i) original, 
 (2) shipping order, and (3) memorandum. The original and shipping order are 
 presented to the agent of the transportation company with the merchandise to be 
 shipped, and, when this is accepted for shipment, they are signed by him. The 
 agent retains the shipping order and the shipper retains the original. The original 
 should be mailed to the consignee — that is, the one to whom the merchandise was 
 shipped — because the merchandise in transit belongs to him and he holds the trans- 
 portation company responsible for its delivery. If the merchandise is delivered
 
 BUSINESS FORMS AND VOUCHERS 
 
 191 
 
 Uniform DomratU StntcSl BUI of Ladlnc Adopted br Carritn. March 1&. IflX 
 
 Uniform Straight Bill of Lading «"'-»"» ^-^ 
 
 (PRESCKIBED BY THE INTERSTATE COMMERCE COMMISSION) 
 
 ORIGINAL—NOT NEGOTIABLE ^^""''' ^o 
 
 B.. 8: O.S.. W.. Railroad 
 
 Company 
 
 Received, subject to the classificsticns and tariffs in effect on the date o£ the issue of this Bill of Ladinc, 
 
 at .Cl.G.Qlnnat.i..,,....Ohlp M&J..,3..,. 192.-... 
 
 from - C..,...W.«....KiaalaM..&...C,o.;. 
 
 the property described below, in apparent good order, except as noted (contents and condition of contents of packafres unknown), 
 marked, consigned, and destined as indicated below, which said company (the word company being understood throughout this 
 contract as meaning any person or corporation in possession of the property under the contract) agrees to carry to Its usual place 
 of delivery at said destination, if on its own road or its own water line, otherwise to deliver to another carrier on the route to said 
 destination. It is mutually agreed, as to each carrier of all or any of said property over all or any portion of said route to destin- 
 ation, and aa to each party at any time interested in all or any of said property, that every service to be performed hereunder 
 shall be subject to all the conditions not prohibited by law, whether printed or written, herein contained, including the conditions 
 on back hereof, which are hereby agreed to by the shipper and accepted for himself and his assigns. 
 
 Consigned to W..,....H.,... Ingram 1873 Elm St . 
 
 Destination ., PittSlDUrgh. State of Pa . County of Allegheny... 
 
 Route Yo»i...lina 
 
 Car Initial Car No 
 
 No. 
 Packages 
 
 DESCRIPTION OF ARTICLES. SPECIAL 
 MARKS. AND EXCEPTIONS 
 
 •WEIGHT 
 (Subject to 
 Correction) 
 
 Class 
 or Rate 
 
 Check 
 Column 
 
 If this shipment is to bo 
 delivered to the consignee 
 without recourse on the con- 
 
 60 
 
 3ck3. #1 Corn 
 
 6082# 
 
 
 
 signor, the consignor shall 
 sign the following statement: 
 
 ....60 . 
 
 . " #2 Corn 
 
 6ii4# 
 
 
 
 Tha carrier shall not make 
 delivery of this shipment 
 without payment of freight 
 
 ....5.0. 
 
 " Oats. _ 
 
 3.8.491 
 
 
 
 
 
 
 
 and all other lawful charges. 
 (See section 7 of conditions.) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 (Signature of consignor.) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 If charges are to be prc- 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Received $ 
 
 
 
 
 
 
 to apply in prepayment of 
 
 
 
 
 
 
 the charges on the property 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Agent or Cashier. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 •Tf the shipment moves between two ports by a carrier by water, the law requires that the bill of lading shall state 
 whether it is "carrier's or shipper's weisht." 
 
 only tht amount prepaid.) 
 
 Note. 
 writing th 
 
 The a 
 not exceec 
 
 — \V here the rate is dependent on value, shippers s 
 e agreed or declared value of the property, 
 greed or declared value of the property is hereby sp 
 ing-— per 
 
 re required to st 
 ecifically stated bj 
 
 ate speci 
 the ship 
 
 fically in 
 per to be 
 
 Charges advanced; 
 
 C.^...W ^..Ze.eland & Co , shipper. 
 
 Per C3<4- -(S' (3^^^^%^. Per 
 
 Permanent post-office address of shipper 8.08. .CQianierGe...St v, CinClliaati.,....Qij.lO...... 
 
 Illustration No. 79, Original Straight Bill of Lading. 
 (For- back, shipping order and memorandum see pages 192, 193 and 195.) 
 
 promptly and in good condition, the consignee may not be required to present 
 the bill of lading, but, if it is received in "bad order" or is lost in transit, the con- 
 signee will have to submit the original bill of lading as evidence of his ownership 
 of the merchandise. The transportation company will adjust with the consignee 
 any claims for damages or loss to the merchandise while in transit. 
 
 The memorandum is retained by the shipper as evidence of the shipment. 
 In case the merchandise shipped is not delivered promptly, the consignee may 
 request the shipper to ask for a "tracer." This tracer is a written communication
 
 192 
 
 BUSINESS FORMS AND VOUCHERS 
 
 Sec 1. (a) Tbe i 
 
 be liable ^s at commoD 
 
 (b) No carnef oi 
 
 delay caused by Ore c 
 
 CONTRACT TBRAIS 
 
 r party Id possession of aor of ibe property herein described chall 
 
 lUbUlty sbali tw thai < 
 
 AJtfo coNO/r/OJvs 
 
 • allowed -by tarllTs lawfully i 
 
 : the port of export <lf InteniJeiJ for 
 to. and after plicemeot of the property for deli«ry 
 ' property to tbe patty entitled 
 
 r party In pouetsion (and I 
 ler or party In possession). 
 
 «n made. Except in case i 
 mrden to prote freedom from such net 
 carrier or party io possession sbaJl i 
 property Is stopped and beld io tran 
 
 •carrier's responsibility shall < 
 
 I urrler's iudemest, and in any such tase 
 se when properly Is so dUchirgcd, or property may be murned 
 I shipping point, earning tfelEhl both ways, QuaraDlme tipeoses 
 1 or In respect Io property shall tie borne by the owneri of tb« 
 Tbe carrier shall not be liable for loss or damage occasioned 
 1 or olhef acts required or done by cmaranliDe regulations or 
 e may hate been done by carrier's officers, ageots. or employees, 
 nage of any kind occasioned by cruaraotlJie or the eDforcesBeot 
 ible. eieept Id case of negligence, for any Dksuke or loarniracy 
 
 regulailoos. The shipper shall bold tbe 
 or damages thry nay bt required to pay, 
 by this contract Into any place against 
 
 See. 2. <a) No 
 
 
 rier is bound to transport said property by any particular train or 
 lessel. or In lime for any particular market or otbcrriso tlian with reasonable dispatch. Eiery 
 carrier shall haie the right in case of physical necessity to forward said property by any 
 carrier or route belncen the point of shipmcot and the point of destination. In all cases not 
 prohibited by law, vhere a lower taluc than actual ralue has ~ 
 shipper or has been agreed upon to writing as the released 
 
 by 1 
 if paid : 
 
 ! classiScalio 
 be 
 
 stiffs I 
 
 I tbe r 
 
 maiiouiD amount to be recoiered. 
 
 Injury to property ' 
 
 I lower Talue plus Iteiglit charges 
 ler or not such loss or damage 
 
 ttalflc. 
 
 ke deiliery. then within six months (or t 
 time for dellTery has elapsed: pronded tt 
 damage while being loaded or unloaded. 
 
 refused by consignee or i 
 It shall tail to retttve 
 ot further deterioraitoo, 
 Tbat If time senes tot 
 
 ■ procedure proilded I 
 
 has been transported hereunder to destinstioQ b 
 ceire II, or said consignee or party entitled to recelie 
 irrler may. In Its discretion, to prevent deltrlor&llon 
 le best adraolage at ptiiate or pvblie sate: Pnttded. 
 ' consignor ot owner of the telusa] of the ptoperty 
 <t dispojilioo of tbe property, such DOtiScalloa shall 
 t due diligence requires, btfote the property is fuld. 
 in tbe t«o paragraphs last ptecedjog is oot possible. 
 
 , sale, snd other i 
 
 prvperiy, it proper care ot the same requires special apense, 
 
 shall be paid to tbe owner of tbe property sold hereunder. 
 
 (f) Property destined to or taken truo a Elation, wbail 
 regubrly appointed freight agent shall be entirely at risk i 
 
 1 should there be a balance U 
 ' landing at vhkb there b do 
 
 ' delifered to such i 
 
 1 attet tbey ate detached ftom locumotite < 
 
 3 and a stipulated i 
 
 9 articles are ludijrsed 
 See. 6. Eiery party, whether principal or agent, shipping eiplosire) or dangerous goods. 
 
 lawful charges accrtilng on said property: but. eic^pt in those Instances where it may lawfully 
 be authorized to do so. no eatrlet by ralltoad shall dellrer or relinquish possesion at destina- 
 tion of the property corered by this bill ot lading until all tariff rates and charga thereon 
 hate beta paid. The consignor shall be lUble fot tbe ttelghl and all other bwful eha«es, 
 except that If the consignor stipulates, by signature. In the space provided for that purpose 
 on the face of this bill of lading that the carrier shall not make dellrery without tequlrtng 
 
 such stipulation. 
 
 make dellrery 
 
 herein shall limit the right ot the carrier to 
 Euaraclee of the charges- If npon inspection 
 DQt those described in thb bill of lading, tbe 
 actually shipped. 
 
 for such charges. Nothing 
 requite at time ot shipment the prepajmeot ot 
 It Is ascerUloed < 
 freight charges on 
 
 I of lading, shall be i 
 
 ! Instituted only within 
 
 ' loss, damage, injury. 
 
 delitery ha: elapsed: Provided, That in case 
 writing within sit months, nt nine months ic 
 fuch claim is required as i 
 
 precedent to recfterj), suit shall be instituted not later 
 :e In writing is given by the carrier to the claimant that 
 ' any part or parts thereof speciOed in the notice. 
 m account of loss of or damage to any of lald property 
 ranee that may hare been effected upon or on account ot 
 " ■ I policies or contracts ot Insurance: Provided, 
 
 ' cooperage and baling at owner's cost, E 
 I be transported hereunder shall hare I 
 
 ' reimburse the clai 
 
 Sec. 3. Except where such : 
 property shall be subject to necess; _ 
 whose route cotton or cotton llnters 1 
 its own cost and risk, of compressing I 
 and shall not be held responsible for derbtion or unaroid 
 pression. Grain Io bulk ci>nsigned (o a point where theri 
 elnator, may {unless otherwise expressly ooted herein, and 1 
 be thrre drlnrrrd and plared with other grata of the same 
 onner':h;r (and prompt notice thereof shall be clten to the 
 be subject to a lien for einator charges in addition to all other charces betrundfr. 
 
 Sec. 4. (a) Ptoperty oot remoted by the party entitled to receife It within the free time 
 allowed by tariffs, lawfully on flie (such tree time to be computed as therein ptJtIded), tflet 
 Dolire of the arriial of the property at destination or at the port of export (If Intended for 
 esp[«rt) has been duly sent or glTpn, and after placement of the property for deliieiT at desti- 
 nation has been made, may be kept Io vessel, car, depot, warehouse or place of dellTery ot 
 age and to carrier's responsibility as warehouse- 
 
 man, only. 01 at the option of the carrier, may be remoTed 
 warehouse af the place of delhery or other available place, at the cost of the owner, and Ihetc 
 held without liability on the part of tbe carrier, and subject to a lien for all freight and other 
 lawful charges, including a reasonable charge for strrage. 
 
 (bl Where nonpertshable property which has been transported 
 refused by rnnslgnee or the party entitled to receive It. or said coi 
 
 receive It falls to receive It within IS days after notice of arrival shall have been duly sent 
 or given, the carrier may sell the same at public auction to the highest bidder, at such place 
 
 have first mailed, cent. 
 >r remains unclaimed, as 
 win be subject to sale tinder the terms ot the Mil of ladlne If 
 disposition be not arranged for, and shall have published notice containing a description of th« 
 property, the name of the party to whom consigned, or, if shipped order notify, the name ot 
 tbe party to be ootiQed. and the time and place ot sale, once a week for two successive weeks. 
 In a newspaper of general circulation at the place of tale or nearest place where ineh news- 
 paper Is published: Provided. That 30 day) shall have elapsed before pubtiratinn of notice of 
 
 ute I 
 or give 
 
 said notice that the property was refused or remains unclaimed 
 
 
 [cmptions from liability contained in. 
 
 limited liability, and I 
 
 I provisions of. and 
 the I'nlted BUles, 
 
 >t the protectlcD of 
 , Inconsistent thete- 
 
 r shall be Ibble fot any 1 
 
 
 shafts, unless caused by 
 (c) If the owner s 
 seaworthy and properly manned, equipped, 
 
 d due dlligenc 
 supplied. 
 
 bursting ot bollets ot bteakag^ ef 
 making the vessel la all respects 
 
 carrier shall be liable for i 
 'damage" resulting ftom the perils of the lakes, seas, or other waters. o» from latent 
 defects In hull, machinery, or appurtenances whether existing prior to, at the time of, 
 saillce. or from collision, sttanding. or other accidents i" 
 voyage, And, when for any teason It Is necessary. 
 
 
 properly hrtetn described shall be i 
 
 liber 
 
 and be towed, to Iransfet. 
 goods at any time, to assist vessels In distress, 
 property, and for docking and repairs. Except in 
 responsible tor any loss or damage to property if J 
 
 call 
 
 from prolonEatloo i 
 t tessel eattylng i 
 . any pott ( 
 
 aU ot I 
 
 ■ lighter. Io lead and discharge 
 Q deviate for the purptite of Gavlng life or 
 case of negligence wcii carrier shall not be 
 . be peccssary or b usual to carry tbe tame 
 
 (d) Ceneral Everage shall be payable acecrding to Torl-ADlwctp Buks, 1890^ and 
 tn any matter not therein provided for. according to the law and ' """ """* 
 
 Tork. If the owners shall have exercised due diligence to make 
 (eaworlhy and properly manned, equipped and supplied. It Is hereby agreed 
 danger, damage or disaster resiling from faults or errors In tiaTlgatt' 
 
 
 
 from unseaworthrn 
 
 1 the T 
 
 (prorided the latent or other defects < 
 
 > beginning ot < 
 
 discoverable 
 
 due diligence), the shippers, conslgne-s and/ot owners of the cargo shall cei 
 
 iialtige and any special charges Incurred In respect of the cargo, and shall e 
 
 thtleis 
 
 tribute with the shipowner In general 
 
 of a general average nature that may be made 
 
 ■ IncBTTed for tbe i 
 
 ptoridea that any carrier 
 
 carriers the provisions of this section shall be nodlfled 
 Bions, which shall be regarded as Incorporated _ 
 
 (f) TTie term "water carriage" In this section shall not be conitnied 
 crage In or across rivers, harbors, or lakes, when performed by 
 
 of thb blU of lading- 
 
 Sec. 10, Any atterxtlon. addition. 
 I the special notation hereon of tbe agent ( 
 
 in this bill of lading which i 
 
 Illustration No. 79— Continued. Reverse Side of Straight Bill of Lading. 
 (For front of bill of lading, see page 191.) 
 from the agent who received the shipment to the agent_ to whom it is consigned, 
 or the agents at transfer points between the shipping point and destination. 
 
 There are two forms of bill of lading, "straight" and "order." The straight 
 bill of lading is used when the merchandise is shipped to the consignee on open 
 account, or when he pays for the merchandise before it is shipped. The order 
 bill of lading is used when the merchandise is shipped by freight collect on delivery; 
 that is, when the consignee is not to have possession until he pays for the mer- 
 chandise. Illustration No. 79 (pages 191, 192, 193 and 195) shows the three copies 
 required in connection with a straight bill of lading; the order bill of ladmg is 
 shown in Illustrations Nos. 84 and 85. '
 
 BUSINESS FORMS AND VOUCHERS 
 
 193 
 
 UnifsTB Doaimtk Stnivbl BUI of Lodioc Adopted by C*rTl«ra. March 16. 19:1 
 
 rrWTC CTTTPPTAJP niJnFl? must be legibly filled in, in Ink, in Indelible Pencil, or in Shipper's No- 
 
 XniC^ ^^nlrl'li'^i\J \JMXUCaSX carbon, and reUined by the Agent. 
 
 Agent'a No. 
 
 ^ _ B,..&:..0,. S,,...W., Railroad Compaiiy 
 
 RECEIVED, subject to the classifications and tariffs in effect on the date of the issue of this Shipping Order, 
 
 at C.inc.imi&..t;l.....Qhi.o. - Max..§.A 192 
 
 from - C.,i...l......Ks,alaM.S;...C.ft.r 
 
 the property described below, in apparent good order, except as noted (contents and condition of contents of packages unknown), 
 marked, consigned, and destined as indicated below, which said company (the word company being understood throughout this 
 - ' ■-'* af • ^ — "ne sdv nprson or corporation in nossession of the property under the contract) agrees to carry to itp usual place 
 
 -'herwiso t" -■->(•- -nnth --=— «- •■ .te to said 
 
 EXPLANATION. The shipping orcier is the same size as the original bill of lading illus- 
 trated on page 191; it is not all repeated here because that part not shown is the same as on page 
 191. 
 
 § 180. A Credit Bill is a receipt in invoice form, setting forth in detail the 
 nature of the credit for which it is issued. A credit bill may be rendered for cash, 
 merchandise returned, an allowance, service, or anything of value with which the 
 account of the one to whom it is sent has been credited. The forms provided for 
 credit bills are usually printed with a different colored ink from the sales invoice 
 forms. Illustration No. 80 shows one form of credit bill. 
 
 CREDIT BILL 
 
 C. W. KEELAND 8c CO. 
 
 DEALERS IN 
 
 HAY. GRAIN, FEED 
 AND COAL 
 
 "^SCCi 
 
 ^^^g^^ /^ 
 
 J^^^^z^ 
 
 y^^^_^^^z^^^^ 
 
 WE CREDIT YOUR ACCOUNT AS FOLl-OWSl 
 
 <^^Ci9r^^^^Zg^^ (^^^y^^/l^^^-y'i^ii^^i/J J2/ ' 
 
 / 
 
 J2.^ 
 
 A 
 
 T'T-'^p^-gf-yi 
 
 ti^-y-^ 
 
 -^^^^i^y]^^ 
 
 Illustration No. 80, Credit Bill. 
 
 § 181. A Telegram is a communication or message sent by means of a 
 telegraph company. The rate for transmitting a message is based on a minimum 
 number of words and the time of sending. There are four classes of telegrams: 
 the fast day message, day letter, night message, and night letter. 
 
 ^ I. A Fast Day Message is accepted by the telegraph company to be sent 
 as soon as received and delivered at its destination as soon as received. The rate 
 is based on ten words with a fixed charge for each word in excess of ten. See 
 Illustration No. 81. 
 
 *\ 2. A Day Letter is accepted by the telegraph company to be sent some 
 time during the day and delivered when received at its destination. Fast day 
 messages take precedence over day letters both in the sending and the delivering. 
 The rate is based on fifty words with a fixed charge for each word in excess of fifty.
 
 194 
 
 BUSINESS FORMS AND VOUCHERS 
 
 POSTAL 1 
 
 rELEGRAPH - COMMERCIA 
 
 CLARENCE H. MACKAY, PRESIDENT 
 
 TELEGRAM 
 
 THE POSTAL TELEGRAPH-CABLE COMPANY [INCORPORATED! 
 TRANSMfTS AND DELIVERS THIS MESSAGE SUBJECT TO THE 
 TERMS AND CONDITIONS PRINTED ON THE BACK OF THIS BLANK. 
 
 L CABLES 
 
 CLASS OF SERVICE DESIRED 
 
 RECEIVER'S NUMBER 
 
 FAST DAY TELEGRAM 
 
 X 
 
 NIGHT TELEGRAM 
 
 
 CHECK 
 
 NIGHT LETTERGRAM 1 
 
 SITE THE CLASS OF SERVICE DESIRED: 
 
 OTHERWISE THE TELEGRAM 
 
 WILL BE TRANSMITTED AS A 
 
 FAST DAY TELEGRAM 
 
 TIME FILED 
 
 SEND the following Telegram, tubject to the 
 terms on back hereof, which are hereby agreed to 
 
 Cincinnati, Ohio., May 12, 192 
 Short Bros. , 
 
 Cleveland. 
 Number one corn sixty seven cents bushel f. o. b. cars here. 
 
 C. W. ZEELAND &: CO. 
 
 PREPAID 
 
 Illustration No. 8i, Fast Day Message, % i. 
 
 ^3. A Night Message is accepted by the telegraph company to be sent 
 during the night and delivered the next morning. The rate, which is based on 
 ten words with a fixed charge for each word in excess of ten, is less than that for 
 the fast day message. 
 
 ^4. A Night Letter is accepted by the telegraph company to be sent during 
 the night and delivered the next morning. The rate, which is based on fifty words 
 with an extra charge for each word in excess of fifty, is the same as that for the 
 fast day message. 
 
 CLASS OF SERVICE DESIRED 
 
 Telegram I 
 
 Day Letter j 
 
 Night Message 
 
 Night Letter X 
 
 Patrons should mark an X oppo- 
 site the class of service desired: 
 OTHERWISE THE MESSAGE 
 WILL BE TRANSMITTED AS A 
 FULL-RATE TELEGRAM 
 
 WESTERN UNION 
 TELEGRAPH CO. 
 
 TELEGRAM 
 
 NEWCOMB CARLTON, President 
 
 GEORGE W. e. ATKINS, First Vice-President 
 
 Send the following message, subject to the terms 
 on back hereof, which are hereby agreed to 
 
 Anderson, Peck & Pov/ler, 
 
 Cincinnati, Ohio, May 14, 192 
 
 Clinton. N. Y. 
 
 Past freight Short Bros., Cleveland, one car number one corn, 
 and W. H. Ingram, Pittsburg, one car number one hay. Show 
 freight rate on bill of lading sent each consignee. Send 
 invoice to us and charge to our account. Advise us freight 
 rate on each shipment. 
 
 PREPAID 
 
 C. W. XEELAND & CO. 
 
 Illustration No. 82, Night Letter, ^ 4.
 
 EXERCISES 
 
 195 
 
 Uniform Donalk Smith) BUI of Lsdlni Alopud fcr Carricra. Mucb It. KU 
 
 *rif|n UCIUIAD AUI\7TU i^ an acknowledgment that a Bill of Lading has been issued and is 
 
 llllO Ill£lUUlUlill/Ufll "»t 'he Original Bill of Lading, nor a copy or duplicate, covering the 
 
 property named herein, and is intended solely for filing or record. 
 
 Shipper's No... 
 Agent'a No 
 
 B. & 0. S. W. Hallroad 
 
 ■Company 
 
 RECEIVED, subject to the classifications and tariffs in effect on the date of the receipt by the carrier of the property described 
 in the Original Bill of Lading, 
 
 gj .Cincinnati, Ohio _ , .M^.y....^.. 192 
 
 £„m'7'""'''-'''''''''---''''--^-''------^ '■■" 
 
 the property described below, in apparent good order, except as noted (contents and condition of contents of packages unkrtown), 
 marked, consigned, and destined as indicated below, which said company (the word company being understood throughout this 
 contract as meaning any person or '•'^'•-^'^ration in possession of *>" " " — '"^v unri^r t.he contracts agrees to carry to its usual place 
 ■ "Hfi deatinati''" •' -■ . * • -.,,,.;,., _ 
 
 EXPLANATION. The position of the three forms of the bill of lacJing is illustrated by pages 
 191, 193 an(J 195; these pages contain all the information for the three forms, that part omitted on 
 forms two and three being shown on pages 191 and 192. 
 
 § 182. Statement of Account. It is customary for business concerns to 
 send each customer a statement of his account on the first of the month. The 
 purpose of this statement is to permit the customer to audit his account and report 
 any discrepancies. The information given on the statement is obtained from the 
 ledger account with the customer to whom it is sent. The statement should show 
 (a) the balance due from the customer at the beginning of the month, (b) the date 
 and amount of each debit entry, (c) the date, nature, and amount of each credit 
 entry, and (d) the balance due from the customer at the end of the month. 
 
 On the first of the month the business will usually receive a statement from each of its creditors 
 showing the transactions completed during the month. The statement should be compared with the 
 account with the creditor and errors reported promptly. 
 
 MONTHLY STATEMENT OF ACCOUNT 
 
 ',. ""^^° M 
 
 ONTHLY STATEMENT OF ACCOUNT 
 
 i^>,^.^ X 19 
 
 --^-Z^y/ IQ 
 
 IN ACCOUNT WITI 
 
 
 ^ 
 
 C, W. KEELAND a CO. 
 
 HAV, GRAIN, FEED AND COAL 
 
 C. W. KEELAND a Co. 
 
 HAY, GRAIN, TEED AND COAL 
 
 
 
 Ralanrr 
 
 
 
 
 
 ^^^ 
 
 y-x 
 
 M,hr p" fl'" Rf"!'-'"! 
 
 jiy^ 
 
 f7^ 
 
 
 
 y 
 
 
 
 ^^ 
 
 /yy 
 
 rr 
 
 /^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 ■^ 
 
 \hltr prr Bill RrnrlrrrJ 
 
 "^^Z.^^^ 
 
 ^X 
 
 ..2^ 
 
 f^ ^^ 
 
 ^^ ' 
 
 ,/v 
 
 .y( t/ 
 
 .Zjr . 
 
 £^ 
 
 ^;z^ 
 
 Illustration No. 83, Statements of Account. 
 
 EXPLANx'\TION. The statement at the left was prepared from a ledger account showing 
 two debits and no credits and the one at the right from a ledger account showing a balance from 
 a preceding month, a debit and two credits. 
 
 Exercise No. 72, Business Letters and Credit Bill 
 
 March 17, Rice Bros., Clinton, returned to the Julian Shoe Company, New 
 York, six pairs shoes which were billed at $6.20 per pair in invoice of March i. 
 The shoes were returned because the sizes were not according to specifications 
 in the order. Credit, is asked for the value of the shoes. 
 
 1. Prepare on a sheet of paper 8J4 inches by 11 inches, the letter which 
 Rice Bros, would write, signed "Rice Bros." by your name. 
 
 2. Prepare on a sheet of paper 8>^ inches by ii inches, an answer to this 
 letter under date of March 25, acknowledging receipt of the shoes and enclosing 
 credit bill.
 
 196 
 
 EXERCISES 
 
 Exercise No. 73, Straight Bill of Lading. 
 
 July 7 the Evans Bros. Hardware Company, 519 Broadway, Cincinnati, 
 shipped via B. & O. freight to Wolf & Church, 305 Main St., Marysville, Union 
 County, Ohio, 10 kegs nails, 100 lbs. each; i case, 12 gal. paint, 125 lbs.; i case, 
 2 doz. picks, 75 lbs.; i bundle containing 2 doz. handles, 25 lbs.; i case containing 
 I doz. shovels, 30 lbs. 
 
 Rule a sheet of paper similar to the illustration on page 191, and write on this 
 in the proper position the information required to prepare the bill of lading for 
 this shipment. It will not be necessary to make the two extra copies nor to copy 
 the printing in the illustration. 
 
 Exercise No. 74, Statements of Account. 
 
 Render a monthly statement for each of the following accounts under date 
 of November i : 
 
 
 
 
 
 
 
 
 
 (^C-Z?t,.-c!^^''7*-7^-'V-'€^ 
 
 
 
 
 '?>- 
 
 
 
 
 
 
 /f>- 
 
 
 
 
 
 
 0^ 
 
 / 
 
 ^ 5- »-. .i-o 
 
 Ju 
 
 > > ■>■ 
 
 d^a 
 
 0.^ 
 ^1^ 
 
 'I 
 
 Jt^^-^t-^^^W-- O^^t-'^-^^. ' 
 
 3,6 
 
 / c 
 
 
 
 
 
 
 _J»2^^ 
 
 /ij' 
 
 / t/.f^O 
 
 J.. 
 
 / / ^ 
 
 ?-^ 
 
 
 '^'>' 
 
 
 (I,. 
 
 / /y a 
 
 
 (^a- 
 
 ■^ 
 
 
 <J-J-r 
 
 / j^-r 
 
 
 d^r^ 
 
 T-S- 
 
 Cyf^C^^p-e^o^TPi^'p^L'^:'^^ y- cT 
 
 / ?- 
 
 J'O 
 
 
 /^ 
 
 if.^0 
 
 J,. 
 
 J J r 
 
 
 
 >^ 
 
 
 Qyd 
 
 >- 6 > 
 
 ^. 
 
 Use blank statements of account which may be purchased from a stationery 
 store, or blank forms used by a local merchant; if neither of these is available, 
 rule paper similar to one of the statements in Illustration No. 83. Use your name 
 as the name of the merchant who is rendering the statements. 
 
 QUESTIONS 
 
 I. (a) Why should a copy of each letter written be retained? (b) Why should 
 
 this copy be filed? (c) Why should the letter which it answers be filed 
 
 with it? 
 (a) Why does a merchant send each of his customers a statement on the 
 
 first of the month? (b) What facts are shown on- each statement? 
 Why are statements of account usually rendered on the first of the month? 
 What term is used to describe the receipt issued by a transportation company 
 
 for merchandise accepted by it for shipment? 
 Why are the railroad companies required to use a uniform size blank for 
 
 issuing receipts for merchandise accepted for shipment? 
 What information should be given in the receipt issued by a transportation 
 
 company for merchandise accepted for shipment? 
 Why would the City National Bank require certification of a check drawn 
 
 on the First National Bank, and presented to it in payment for a note 
 
 which it holds? 
 Why would it be advisable for an individual who wished to open an account 
 
 with the bank, using a check as his first deposit, to have the check certified 
 
 before presenting it for deposit? 
 Is there any distinction between the terms "business form" and "voucher?" 
 Why should the bookkeeper file each business form or voucher which serves 
 
 as a basis for the bookkeeping record? 
 
 2. 
 
 3- 
 4- 
 
 5- 
 
 9. 
 10.
 
 Chapter XX 
 
 GENERAL INFORMATION 
 
 The Purpose of this Chapter is to explain trade customs and bookkeeping 
 procedure with which the student of bookkeeping should be familiar. The student 
 cannot be expected to record correctly transactions involving discount because 
 of prompt payment unless he thoroughly understands the subject of merchandise 
 discount. Each student should know the method of procedure followed by ex- 
 perienced bookkeepers in detecting and correcting errors. 
 
 § 183. Terms on Invoices. When merchandise is sold on account, a 
 definite date of settlement is expressed or implied. If the date of settlement is 
 not expressed, it is usually implied that the amount is due on the first of the follow- 
 ing month. When a specific date of settlement is agreed upon, or when discount 
 is allowed for payment within a specified time, this information is written on the 
 invoice. Space is usually provided on the invoice after the word "Terms" for all 
 information in regard to the terms of sale. Thus, "30 days" indicates that the 
 amount of the invoice is due thirty days from the date of the invoice; "2/10, n/30" 
 indicates that the full amount of the invoice is due thirty days from its date, but 
 if the purchaser pays it within ten days from the date, a discount of 2% may be 
 deducted from the amount of the invoice; an invoice rendered September i with 
 ''5/10, 3/30, n/6o" written after "Terms" indicates that the seller has given the 
 buyer sixty days from September i for full settlement of the invoice, or will allow a 
 discount of 5% if paid within ten days or a discount of 3% if paid within thirty 
 days from September i. 
 
 § 184. Payment of Invoice Subject to Discount. When the purchaser 
 pays an invoice subject to discount within the terms of the purchases invoice, he 
 ascertains the amount of the check by deducting from the amount of the invoice 
 the discount mentioned in the terms. Thus, if the terms are 2% 10 days, and 
 the amount of the invoice, $150.00, the check would be written for $147.00. The 
 one issuing the check debits the firm to whom it is issued for the full amount of 
 the invoice ($150.00), and credits Cash for amount of the check ($147.00) and 
 Purchases Discount for the amount of the discount ($3.00). The one who 
 receives this check debits Cash for the amount of the check ($147.00) and Sales 
 Discount for the amount of the discount ($3.00), and credits the account with 
 the drawer of the check for the full amount of the sale ($150.00). 
 
 If only a part of an invoice subject to discount is paid within the terms of the 
 bill, the same accounts are affected, but it is necessary to divide in order to ascer- 
 tain the amount with which the creditor's account is debited. Thus, if the amount 
 of the payment is $98.00 and the terms are 2%, the creditor will be debited with 
 $100.00 and he in turn will credit his customer with $100.00. It is necessary to 
 divide because each 98c paid represents a dollar in value. 
 
 When an invoice subject to discount is paid in full, multiply the amount of 
 the invoice by the discount mentioned in the terms to ascertain the amount of the 
 discount. When a partial payment is made on an invoice subject to discount, 
 divide the amount of the payment by 100% less the rate of discount; the quotient 
 will be the amount to be debited to the creditor's account; the amount of the dis- 
 count is ascertained by subtracting the payment from the amount debited to the 
 creditor's account. 
 
 197
 
 198 GENERAL INFORMATION 
 
 § 185. Collecting Notes and Drafts. The holder of a note or an accepted 
 draft may require the maker or drawee to pay the note or acceptance at his office or 
 at a bank. Where the holder and the maker reside in the same city, it is customary 
 for the holder to leave the note for collection with the bank at which he does busi- 
 ness. Where the holder resides in a different city from that of the maker or drawee, 
 the collection may be made through the bank at which the holder does business 
 or a bank in the same city in which the maker or drawee resides. As a rule the 
 maker of a note will give the name of the bank at which he does business as the 
 place of payment, and the drawee of a draft will accept it as payable at the bank 
 which presents it for acceptance. When the name of the bank is specified in the 
 note, the holder should leave the note gr draft at this particular bank before the 
 due date. The endorsement of a note or time draft left for collection should be 
 qualified by writing "For collection" as explained in § 85, ^ 4. 
 
 A sight draft is usually made payable to the bank which is to collect it — 
 that is, the bank at which the customer does business or one in the same city. 
 If the collecting bank collects the sight draft, the drawee retains the receipted 
 draft as his receipt and the collecting bank pays the drawer with bank draft or 
 cashier's check (§§ 81 and 82). If the drawee refuses to pay the sight draft, the 
 bank returns it to the drawer. 
 
 It is customary for banks to charge a small fee for collecting notes, time drafts, and sight 
 drafts. If this fee is paid by the holder it is an expense to him; the amount may be debited to 
 Administrative Expense or to an account with Collection and Exchange. 
 
 § 186. Exchange is a term applicable to a sight draft drawn by one bank on 
 funds deposited with another bank; it is sometimes referred to as a bank draft. 
 Exchange takes its name from the city in which the bank on which it is drawn is 
 located. A bank draft drawn on a bank in New York City is referred to as "New 
 York exchange" ; a bank draft drawn on a bank in Chicago, as "Chicago exchange," 
 etc. When the bank on which the draft is drawn is located in the same country, 
 the draft is designated as "domestic exchange"; when it is located in a foreign 
 country, as "foreign exchange." Domestic exchange is represented by one draft; 
 foreign exchange may be represented by one draft or three; if three drafts are 
 drawn, each is sent by a different route with instructions to the effect that when 
 one is paid the other two are not to be paid. 
 
 Exchange is due to the volume of business in the large cities. New York City 
 sells far more merchandise to merchants throughout the world than the merchants 
 throughout the world sell to New York City. By requiring each merchant who 
 buys merchandise from New York to pay for the same with a check on a bank in 
 New York, much time can be saved in the collection of these checks. Since busi- 
 ness concerns in New York usually insist on customers paj'ing their obligations 
 with checks on banks in New York, practically every bank in the United States 
 has funds on deposit with a New York bank so that the customers of the bank 
 may be provided with New York exchange when they wish to purchase it for re- 
 mitting to creditors in New York. 
 
 A small fee is usually charged by the bank issuing the exchange to cover the interest and the 
 expense in connection with issuing the exchange. This charge is an expense to the purchaser of the 
 exchange; it is debited to Administrative Expense or to an account with Collection and Exchange. 
 
 § 187. C. O. D. Shipments. When the purchaser agrees to pay for the 
 
 merchandise on delivery, the terms are designated as "C. O. D.," an abbreviation 
 of "cash on delivery." When the customer to whom the merchandise is sold on 
 C. O. D. terms resides in the same city, collection can be made by the messenger 
 who delivers the merchandise; if the customer resides in another city, it is necessary 
 to have the transportation company collect for the merchandise before making 
 delivery. The postmaster collects for C. O. D. parcel post shipments, the agent of
 
 GENERAL INFORMATION 
 
 199 
 
 tTntfom DomMtle Onirr Bttt of Lading AdoptH by Curlers. Mu-eh 15. 19Z2 
 
 UNIFORM ORDER BILL OF LADING 
 
 (PRESCRIBED BY THE INTERSTATE COMMERCE C0MMI88IUN) 
 
 ORIGINAL 
 
 Shipper's No... 
 Agent's No 
 
 New York, New Haven & Hartford Railroad 
 
 Company 
 
 Received, subject to the classificatiLns and tariff's in ctfect on the date of the issue of this Hill of Ladin;,-, 
 
 3t Cincinnati, Ohio September 14 192 
 f„^ C. •». Keelarid & Co; ^^^ 
 
 the property described below, in apparent good order, except as noted (contents and condition of contents of packages unknown), 
 marked, consigned, and destined as indicated below, which said company (the word company being understood througjiout this 
 contract as meaning any person or corporation in possession of the property under the contract) agrees to carry to its usual place 
 of delivery at said destination, if on its own road or its own water line, otherwise to deliver to another carrier on the route to said 
 destination. It is mutually agreed, as to each carrier of all or any of said property over al! or any portion of said route to destin- 
 ation, and aa to each party at any time interested in all or any of said property, that every service to be performed hereunder 
 shall be subject to all the conditions not prohibited by law, whether printed or written, herein contained, including the conditions 
 on back hereof, which are hereby agreed to by the shipper and accepted for himself and his assigns. 
 
 The surrender of this Original ORDER Bill of Lading properlj- indorsed shall be required before the delivery of the property. 
 Inspection of property covered by this bill of lading will not be permitted unless provided by law or unless permission is indorseid 
 on this original bill of lading or given in writing by the shipper. 
 
 /Mail or atrcet address of consigne* — l-'ot purposu of ooUficatioD onljA 
 
 ( 64 Public Sq. , Huntsville, Ark) 
 Consigned to ORDER OF ^ .. . W v. Keeland & Co 
 
 Destination... Huntsville, state o{....AT'&&n9.B.a County of.ifa.'i.i.aOXl 
 
 Notify Ifr Jeffries Je. Co. 
 
 At Huiitsville _ state of Arkansas County of Madisop 
 
 Route 19M. X^M _ _ 
 
 Car Initial Car No 
 
 No. 
 Packages 
 
 DESCRIPTION OF ARTICLES. SPECIAL 
 MARKS. AND EXCEPTIONS 
 
 ♦WEIGHT 
 
 (Subject to 
 Correction) 
 
 Class 
 or Rate 
 
 Check 
 Column 
 
 If this shipment is to be 
 delivered to the consignee 
 without recourse on the con- 
 
 3 bbls. New Orleans Molasses 
 
 800# 
 
 
 
 signor, the consignor shaU 
 sign the following statement: 
 
 I bijl. Com Sy -up 
 
 350# 
 
 
 
 The carrier shall not make 
 delivery of this shipment 
 
 5 cases Coffee 
 
 SOOjf 
 
 
 
 4 
 
 3 
 
 bags Coffee 
 
 Mi^!?I' Wrapping' Pajer"^ Z^ "IZ 
 
 cases N. C. Baking Powder 
 
 54 2| 
 i"28# 
 
 
 
 and all other lawful charges. 
 (■S^e section 7 of conditions.) 
 
 10 
 
 ii05# 
 
 
 
 
 15 
 
 .bbi.3.,....gtie.k..aaM^ 
 
 1604# 
 
 
 
 iSignoture of conBiRnor.) 
 
 
 
 
 
 
 
 
 
 
 
 
 If charges are to be pre- 
 paid, write or stamp here. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Received $ 
 
 
 
 
 
 
 to apply in prepayment -of 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Agent or Cashier. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 •If the shipment moves between two porta by a carrier by water, the law requires that the bill of ladlns ahall state 
 whether it is '•carrier's or shipper's weight." 
 
 (The fiipnature here Rcknowledje* 
 only the amount prepaid.) 
 
 Note. 
 writing th 
 
 The a 
 not exceed 
 
 —Where the rate is dependent on value, shippers are required to state specifically in 
 
 e agreed or declared value of the property. 
 
 greed or declared value of the property is hereby specifically stated by the shipper to be 
 
 Charges advanced: 
 
 $ _... 
 
 —E ^^____^-_^_______^_^__^= 
 
 
 C, W, ZESLANI).& CO. shipper 
 
 Per 0<^...£^r.. (Q«rtr^t-r?^. _ Per 
 
 ...... , i- , 208 Commerce St., 
 
 Permanent post^ffice address of shipper — li. 
 
 208 Commerce St., Cincinnati, Ohio. 
 
 Illustration No. 84, Front of Order Bill of Lading. 
 EXPLANATION. This form is used when a shipment is sent by freight C. O. D. 
 
 the express company for C. O. D. express shipments, and the bank for C. O, D. 
 freight shipments. When the terms are C. O. D. and the purchaser resides in 
 another city, the seller should collect part payment; otherwise he may lose the 
 transportation charges both ways should the shipment be refused and returned. 
 ^ I. Freight Shipments. When a C. O. D. shipment is made by freight, the 
 package is addressed to the shipper at the address of the consignee with a notation 
 to notify the consignee. An "order" bill of lading (§ 179) is signed by the agent
 
 200 GENERAL INFORMATION 
 
 CONTRACT TERMS ANU CONDITIONS 
 
 S«. 1. (a) The carrier or party la pnssesswo ct aoy of the properly btrelo described tbaU . (c) Where perlsliable pruperly which has been UMSported hereunder to destination b 
 
 be liable as at common law for any losa thereof or damage thurelo. eicept as herelnsftpr proiided. - refused by cocsipiee or parly enlilled to receite It, or sM ccnslsnee or party eolllled to recelre 
 
 (b) No cflftler or party lo possessioa of all or apy of the property herein described Etiall It shall fall (o receire it promptly, the carrier may. Id Its discretion, to prereot delerlorallon 
 
 be liable tor any loss thereof or (*•• ' -•"' or delay caused by the act of Cod, the piihUc I or furUier deUrloralioD, sell the same '■ *' '"it ad»«'-- ■ ■'» .-• »' 
 
 Illustration No. 85, Reverse Side of Order Bill of Lading, 
 
 EXPLANATION. This shows the back of the order bill of lading with the endorsement 
 necessary. The shipping order and memorandum are the same as those illustrated at the top of 
 pages 193 and 195, hence are not repeated. That part of the conditions not shown in this illustration 
 is the same as the conditions for the straight bill of lading on page 192. 
 
 of the receiving railroad and the merchandise forwarded to its destination, where 
 it will be held by the agent of the railroad until the consignee presents the original 
 bill of lading. The shipper must get this original bill of lading into the possession 
 of the consignee, but at the same time he must secure payment for the merchandise 
 before it is delivered; this is effected through a bank. The seller draws a sight 
 draft for the amount of the sale, attaches it to the original bill of lading, and sends 
 these for collection to a bank in the city where the purchaser resides. When the 
 bank receives this draft and bill of lading, it notifies the drawee, who secures the 
 bill of lading by paying the draft. The purchaser presents the original bill of 
 lading to the agent of the railroad and receives the merchandise. The bank remits 
 the amount of the draft to the seller. If the purchaser does not pay the draft, it 
 will be returned to the drawer (seller) and the merchandise will remain in the 
 possession of the agent until he receives instructions from the seller as to its disposi- 
 tion; this accounts for the suggestion that the seller collect a part of the value of 
 the merchandise before making shipment. 
 
 The "order" and "straight" bills of lading are discussed in § 179. The form is practically 
 the same except that the order bill of lading contains space on the back for the endorsement, as it 
 is necessary for the shipper to endorse it in order to transfer title to the consignee. 
 
 ^ 2. Express Shipments. When a C. O. D. shipment is made by express, 
 the express company will not deliver the merchandise until the purchaser pays the 
 charges and value of the shipment. The sales invoice is not sent to the customer 
 but is enclosed in an envelope (Illustration No. 86), which is attached to the pack- 
 age. When the merchandise arrives at its destination the express company agent 
 will hold it until the consignee pays the amount of the invoice in the envelope. 
 After the consignee has paid the amount of the invoice, he secures possession of 
 the merchandise; the express company agent places in the envelope an express 
 money order (Illustration No. 64) for the amount of the collection and returns the 
 envelope to the shipper. The shipper should specify that the consignee is to pay 
 the charges for issuing the money order sent in payment for the C. O. D. shipment; 
 otherwise, the express agent issuing the same will deduct the amount from the 
 amount of the invoice. 
 
 ^ 3. Parcel Post Shipments. When a C. O. D. shipment is made by parcel 
 post, a special ticket provided by the Post Office Department is attached to the
 
 GENERAL INFORMATION 
 
 201 
 
 s 
 
 IF NOT DELIVERED IN THREE DAYS RETURN TO 
 TREASURER 
 
 Southeastern Express Company 
 
 (INCORPORATED) 
 ATLANTA. GA. 
 
 ) 
 
 c. 
 
 \7. 
 
 * 
 Ke eland & Co. 
 
 FORM No. 16 
 
 
 PLACE 
 
 POSTAGE 
 
 STAMP 
 
 HERE 
 
 
 
 
 
 
 
 208 Commerce St. 
 
 
 
 
 
 
 Cincinnati 
 
 
 
 
 Ohio 
 
 
 
 
 
 
 SHIPPER-M.rk shipment "C.O.D." and omounl lo be collected, encloii 
 
 FOR GOODS SHIPPED 
 
 C. B. Ja c ks on 
 
 
 G.O.D. 
 
 16789 
 
 188 Wayne Blvd. 
 
 Smnter^ S. C. 
 
 Cincinnati, Q . Jmie 6 
 
 -19- 
 
 «mount ol C. 0. 0. $.91jl0?_ 
 Charge for Collecting "-nu. 
 and return ol proceeds $ 
 
 Are above charges to be I TES 
 oollected from consignee {••^Ift- 
 
 Onless otherwise instructed, desti- 
 nation ollice will so collecL 
 
 POSTMASTER--Please forward to address on reverse side 
 SHIPPERS SPECIAL INSTRUCTIONS 
 
 AGENT— Agent at ehippioff point must eee that shippers name and addreaa are plainly written or prInUd on the 
 :de and Agent at destination muet pass pen lisfhtly throogh name of coneigTiee before maillnff proceeds In 
 
 nvclope. Examine invoice encloped and follow any epeciaj initructione of shipper thereon or in this envelope 
 conflict vritb the Company'e rules. 
 
 Illustration No. 86, Both Sides of C. O. D. Express Envelope. 
 
 y UHlfEOSTJUSWAlL 
 / 15 C.O.D. PARCEL NUMBER 
 
 No. 2355 J 
 U. S. Maii-C.O.D. Parcel '• 
 
 , .„ CPo.lma.l. ol) 
 
 / ^A (Deliiei) Office) 
 
 Number of Moner Order 
 
 (Postmark of) 
 (MAILING OFFICE) 
 
 IPestm 
 u 'fMAILINO 
 
 OFFICE) 
 
 Date of Issue 
 
 Parcel Oehvcred br 
 
 I W j „ SEND 
 
 V . / PoBlmsslor at dell 
 
 ER will FILL IN • 
 
 )«c«. aeLOW 
 
 — 
 
 V'til 
 
 1 
 
 s 
 : 
 
 i 
 
 s 
 1 
 
 
 ^--^ CHARGES 
 
 ju*^ (teStndsr bf il.O.) 
 
 5sil From C. -,7. 
 
 S 57 1 89 
 
 \ 0. FEE 
 
 / See Schedule el \ 
 \ Fees es ■•:> . 
 
 ■~'^ 
 
 ill 
 
 liffli 
 
 Keeland 5; 
 
 Co. 
 
 
 "^ll fn'ltj: 208 Comir.erce St. 
 
 \Z%% T^'ir Cincinnati 
 
 _ IS Ohio 
 
 ""'■^fl Tn J. H. i;oble 
 
 \ "^'^ l^^S, 1175 Elm St. 
 
 \ ar Canton 
 
 ui.i Ohio 
 
 ^^ • — — 
 
 
 
 "• 
 
 
 Recelfed the parcel descfibed on Ihe (roni ol this lag In good condilioa 
 
 o> 
 
 ( Person receiving parcel and signing to 
 
 3Cmedi;le of »«. a fe 
 
 For Orders From « 01 to S ISO 
 From » ISl to S 5.00 
 
 From 110 01 to S MOO . 
 From Sai.OI to 8 ilOOO 
 Fr.im tlO 01 to S U 00 
 
 From S5O0I to S 6U.0O 
 Frnm ») 01 to S 75 00 
 From >75.0I to >10O.in 
 
 -Si 
 
 "..'. Scents. 
 
 !!! lOret.ts. 
 '.'.'!.'l5cei.l5. 
 .!.. ZOcrot.. 
 iiZnO ceuis. 
 
 Illustration No. 87, Both Sides of Tag for C. O. D. Parcel Post Shipment.
 
 202 GENERAL INFORMATION 
 
 package. This ticket shows the amount to be collected before delivery is made. 
 When the merchandise arrives at its destination, the postmaster at that point will 
 not deliver it until the consignee pays the amount mentioned on the ticket. When 
 the consignee pays for the merchandise, the postmaster will send the shipper a 
 post-office money order for the amount of the sale. 
 
 § 188. Method of Recording C. O. D. Shipments. When the terms are 
 C. O. D., the sale is recorded in the sales journal in the same manner as a sale on 
 account. The amount of the sale may be debited to the account with the customer 
 or to a "C. O. D. Shipments" account,- Since "C. O. D." applies to the terms of 
 payment in the same manner as "3/10, n/30" applies to the terms of payment, it 
 is the better practice, especially where the sales are made to regular customers, to 
 record the amount of the sale in the account with the customer. When this plan 
 is followed, it is necessary to keep a supplementary record of the C. O. D. shipments 
 so that the bookkeeper may know at all times that the proper attention has been 
 given to each shipment. When the value of C. O. D. shipments is recorded in an 
 account with "C. O. D. Shipments," the name of the customer is written in the 
 explanation column on the debit side of this account; when remittance is received 
 for the shipment, the entry is made on the same line on the credit side. Where an 
 account is kept with C. O. D. Shipments, it is best to have separate accounts with 
 those made by freight, express, and parcel post, in which case the captions of the 
 accounts may be "C. O. D. Freight Shipments," "C. O. D. Express Shipments," 
 and "C. O. D. Parcel Post Shipments;" the caption may be the name of the rail- 
 road company, the local express company, or the post office, 
 
 § 189. How to Correct Errors. Errors in recording transactions in a book 
 of original entry or in posting should not be made, but when they occur, must 
 be corrected. Errors in recording transactions in a book of original entry should 
 be corrected by an entry in the general journal; errors in posting may be corrected 
 by drawing a red line through the figures only and writing the correct amount 
 above. Do not erase in a book of original entry. 
 
 § 190. Arrangement of Accounts in the Ledger. The accounts in the 
 ledger are arranged in the same order as they appear on the Balance Sheet and 
 Statement of Profit and Loss to facilitate the preparation of these reports. This 
 arrangement is shown in the illustrations of the ledger in this text and in the outline 
 of accounts needed to record the transactions in the practice sets. Accounts with 
 customers should be kept in an accounts receivable ledger and controlled by the 
 Accounts Receivable account in the general ledger. Accounts with creditors 
 should be kept in the accounts payable ledger and controlled by the Accounts 
 Payable account in the general ledger. 
 
 § 191. Index to the Ledger. The position of each account in a ledger 
 should be indicated in the index so that the bookkeeper may readily locate it. 
 The method of indexing will depend entirely upon whether a loose-leaf or bound 
 ledger is used. No matter which form of ledger is used, the bookkeeper should 
 indicate the location of a new account in the index at the time the account is 
 opened; otherwise, he will be sure to have trouble locating it when the information 
 recorded in the account is needed. The purpose of the discussion at this time is 
 to impress the student with the importance of indexing at the time accounts are 
 opened and not to describe the various forms of ledgers in use.
 
 EXERCISES 203 
 
 § 192. Detecting Errors in a Trial Balance. If the Trial Balance does 
 not balance it indicates an error in (i) posting, (2) additions or forwarding in 
 the books of original entry, (3) additions or subtractions in the ledger, (4) trans- 
 ferring the amounts from the ledger to the Trial Balance, or (5) addition of the 
 Trial Balance. The error can be detected only by checking the work; the process 
 of checking should be the reverse of its completion — that is, (i) addition of the 
 Trial Balance, (2) amounts transferred from the ledger to the Trial Balance, (3) 
 additions and subtractions in the ledger, (4) additions and forwarding in the books 
 of original entry, and (5) posting. The checking should be indicated by check 
 marks similar to those in the illustrations of the books of original entry and ledger 
 for the first month in the Model Set, Chapter VI. 
 
 The careful bookkeeper, before checking, will look for an amount equal to the error or to 
 one-half the error, and ascertain if the amount is divisible by nine. Failure to post an amount 
 equal to the error would result in the amount of the error. Posting an amount equal to one- 
 half of the error, to the wrong side of an account, would result in the amount of the error. If the 
 amount of the error is a multiple of nine (divisible by nine without a remainder), it may indicate trans- 
 posed figures Any number composed of two figures, the difference between which is the same as 
 the result of dividing the error by nine, when transposed, will give the amount of the error. Thus, 
 if the Trial Balance is out of balance 45c, it may indicate that an amount of 5c has been posted as 
 50c, i6c as 61C, 27c as 72c, 38c as 83c, 49c as 94c, 50c as 5c, 6ic as i6c, 72c as 27c, 83c as 38c or 94c 
 as 49c. Forty-five divided by nine equals five; the difference between the first and second figures 
 in each amount in the preceding sentence is five. 
 
 Exercise No. 75, Recording Transactions Involving Merchandise Discount. 
 
 The following transactions relative to purchases and sales of merchandise 
 and payments and receipts thereon were completed during the months of April 
 and May. Record these transactions in journal form (on a sheet of journal paper), 
 post to the ledger and take a Trial Balance. 
 
 April I. Bought from the L. H. Mabley Mfg. Co., Kalamazoo, merchandise 
 per purchases invoice dated March 25, $162.95; terms, 3 /lo, n /30. 
 
 3. Sold M. D. Puterbaugh, City, merchandise per sales invoice of this 
 
 date, $429.86; terms 4/10, n/30. 
 
 4. Sent the L. H. Mabley Mfg. Co., check for purchases invoice of March 
 
 25, less discount. 
 10. Bought from the Union Mfg. Co., Chicago, merchandise per purchases 
 invoice dated April 7, $529.48; terms, 3/30, n/60. 
 
 13. Received a check from M. D. Puterbaugh for $200.00 to apply on sales 
 
 invoice of April 3. 
 
 30. Bought from Anderson & Mumford, Crawfordsville, merchandise per 
 
 purchases invoice dated April 28, $1,642.87; terms, 5/10, 3/30, n/60. 
 May 4. Sold Charles Crawford, City, merchandise per sales invoice of this date, 
 $629.52; terms, 3/10, 2/30, n/90. 
 
 5. Sent the Union Mfg. Co., check in full for invoice of April 7. 
 
 6. Sent Anderson & Mumford check for $800.00 to apply on purchases 
 
 invoice dated April 28. 
 10. Sold Wilbur York, City, merchandise per sales invoice of this date, 
 $1,263.48; terms. May 20 — 2/10, 1/30, n/60. 
 
 14. Received a check from Charles Crawford for $200.00 to apply on sales 
 
 invoice of May 4. 
 
 25. Bought from Davis Bros., Akron, merchandise per purchases invoice 
 
 dated May 20, $2,992.50; terms, 4/10, 2/30, n/90. 
 
 26, Sent Anderson & Mumford a check for $776.74 in full of account. 
 
 28. Sent Davis Bros, a check for $1,000.00 to apply on purchases invoice 
 dated May 20. 
 
 31. Received check for $150.00 from Charles Crawford to apply on sales 
 
 invoice of May 4.
 
 204 QUESTIONS 
 
 Exercise No. 76, C. O. D. Freight Shipment. 
 
 December lo the Whitaker Paper Company received an order from Marsh 
 Bros, of Atlanta for five dozen boxes of Christmas stationery to be shipped by 
 freight, with instructions to rush the shipment and send C. O. D. unless it was 
 desired to extend credit. The Whitaker Paper Company had had no previous 
 dealings with Marsh Bros., and as it was a rush order, they sent it C. O. D. The 
 sale was entered on December ii as sales invoice No. 36475, total $82.50, the 
 price being $16.50 per dozen. The draft and bill of lading were sent to the Atlanta 
 National Bank for collection. 
 
 Prepare (a) the sales invoice; (b) the original bill of lading; (c) the draft 
 payable at the Atlanta National Bank;' and (d) show the marking on the case. 
 Use blank paper ruled similar to Illustrations Nos. 50, 68, and 84 unless blank 
 forms are available; the original only of the bill of lading need be prepared. 
 
 Exercise No. 77, Arrangement of Accounts. 
 
 Arrange the following accounts in the order in which they should appear in 
 the ledger as explained in §§ 164 and 190. 
 
 J. W. Macon, Capital Notes Payable Selling Expense 
 
 Office Equipment Purchases Discount Interest Earned 
 
 Interest Cost Cash _ Inventory 
 
 Reserve for Depreciation of Delivery Equipment Notes Receivable 
 
 Delivery Equipment Sales Returns J. B. Hill, Capital 
 
 Accounts Receivable Freight In Sales Allowances 
 
 J. W. Macon, Personal J. B. Hill, Personal Purchases Returns 
 
 Administrative Expense Purchases and Allowances 
 
 Sales Sales Discount Reserve for Depreciation of 
 
 Reserve for Doubtful Accounts Payable Office Equipment 
 
 Accounts 
 
 QUESTIONS 
 
 1. What is the least amount that will be required to pay an invoice of $1,651.75, 
 
 terms 3/10, 2/30, n/6o? 
 
 2. What is the amount of the debit for a payment of $362.50 on an invoice, 
 
 terms 3/10, n/60, the payment being made within ten days from the date 
 of the invoice? 
 
 3. (a) What is the due date of an invoice with the terms Feb. i, 1922, 3 /lo, n /60? 
 
 (b) When should check be sent in payment of this invoice in order to secure 
 the discount? 
 
 4. Why is it advisable for the drawer of a draft to make it payable at the bank 
 
 where the drawee does business and send it to this bank for collection? 
 
 5. What procedure should John Smith of Chicago follow if he wishes to collect 
 
 a note signed by Henry Jones of Atlanta, Georgia, made payable at the 
 Atlanta National Bank? 
 
 6. Why do merchants and manufacturers in New York City require their cus- 
 
 tomers to send checks payable on New York banks in payment for mer- 
 chandise sold them? 
 
 7. Why will a bank in Dallas, Texas, accept a check payable on a bank in New 
 
 York at its face value? 
 
 8. What will be the marking on a case of merchandise shipped by freight C. 
 
 O. D. to A. R. Dodd, Hope, Ark., by Roberts Bros., Decatur, 111.? 
 
 9. How does the seller collect for a C. O. D. freight shipment? 
 
 10. Why is it advisable to arrange the accounts in the ledger in the same order 
 as they appear on the Balance Sheet and Statement of Profit and Loss?
 
 Chapter XXI 
 
 ACCRUALS AND DEFERRED ITEMS 
 
 The Purpose of this Chapter is to explain the method of recording those 
 assets and Habihties which are not shown by accounts at the close of the fiscal 
 period. These are usually referred to as accrued assets, accrued liabilities, deferred 
 charges to operation, and deferred credits to income. Accrued assets result from 
 obligations owed to the business on account of income earned during the current 
 fiscal period but not due and payable until a succeeding fiscal period. Accrued 
 liabilities result from services rendered to the business during the current fiscal 
 period but not due and payable until a succeeding period. Deferred charges to 
 operation refer to property or services purchased by the business during the cur- 
 rent fiscal period which will not be consumed until a succeeding fiscal period. 
 Deferred credits to income refer to the income which has been received during the 
 current fiscal period but which will not be earned until a succeeding fiscal period. 
 
 § 193. Accrued Interest Earned is an accrued asset resulting from accrued 
 interest on interest-bearing notes which are not due and payable until a succeeding 
 fiscal period, and on past-due notes and accounts receivable. This may be illus- 
 trated as follows: a note for $900.00, dated October 2, due in four months, with 
 interest at 6% from date, is accepted' from a customer in payment of his account. 
 At the close of the fiscal period, December 31, this note is worth $913.50 (face of 
 note $900.00, interest $13.50). When the Balance Sheet is prepared on December 
 31, the book value of the note, as recorded in the Notes Receivable account, is 
 only $900.00 because the interest has not been recorded, it being customary not 
 to record interest until collected. If the Balance Sheet is to show the true value of 
 the assets belonging to the business and the true proprietorship of the business, 
 it will be necessary to record the $13.50 interest and to show it on the Balance 
 Sheet as a part of the assets. Interest accrued on notes receivable and accounts 
 receivable is recorded at the close of the period in an account with Accrued Interest 
 Earned. 
 
 ACCRUED INTEREST EARNED ACCOUNT 
 
 § 194. The Purpose of this Account is to show the asset resulting from 
 accrued interest on notes receivable and accounts receivable. This account is 
 opened only at the close of the fiscal period. 
 
 Debit the Accrued Interest Credit the Accrued Interest 
 
 Earned Account: Earned Account: 
 
 ^ I. At the close of each fiscal period, ^[ 2. After the ledger is closed, for the 
 
 for the amount of accrued amount shown on the debit 
 
 interest on notes receivable side; or for the amount of 
 
 and accounts receivable. accrued interest when col- 
 lected in the next fiscal period. 
 
 H 3. The Balance of the Accrued Interest Earned Account shows the amount 
 due the business for interest which has not been collected; it is one of the current 
 assets of the business and is shown as such on the Balance Sheet (111. No. 92). 
 
 205
 
 2o6 
 
 ACCRUALS AND DEFERRED ITEMS 
 
 § 195. Entry to Record Accrued Interest Earned. As explained in the 
 preceding discussion, the amount of the accrued interest earned should be shown 
 on the Balance Sheet in order to show the true assets and true proprietorship of 
 the business. Since the facts shown on the Balance Sheet should also be recorded 
 in accounts on the ledger, it is necessary to record the amount of the accrued in- 
 terest in the general journal and post it to the proper account in the ledger; this 
 entry is usually referred to as one of the adjusting entries (§46, 1[ 4) because its 
 purpose is to record in an account the value of an asset which does not appear on 
 the ledger. Applying this to the accrued interest in § 193, the record in the 
 general journal will be as in the illustration below. 
 
 3 / /' 
 
 
 Recording the asset Accrued Interest Earned increases the income from in- 
 terest the same as if cash had been received, for the interest. When this entry is 
 posted, the $13.50 will appear as an asset on the debit side of the Accrued Interest 
 Earned account, and as an income on the credit side of the Interest Earned account. 
 
 § 196. Entry to Close the Accrued Interest Earned Account. The 
 
 accrued interest earned may be allowed to remain in the Accrued Interest Earned 
 account until the interest is collected, or the balance of this account may be trans- 
 ferred to the Interest Earned account by an entry in the general journal after the 
 ledger is closed. The latter practice is possibly the better because it avoids the 
 necessity of separating accrued interest earned from interest earned when notes 
 or accounts affected by the accrued interest are collected in a subsequent period. 
 
 Referring to the illustration in § 195, if the accrued interest is allowed to 
 remain in the Accrued Interest Earned account until the note is collected on Feb- 
 ruary 2, the entry, in journal form, will be as in the illustration below. 
 
 _J^dg^«>5'^-z>«i-«?>^><-^ 7^^ /f 
 
 > 
 
 ! 
 
 (Lt:z..<:^^A^ ^ / S- 
 
 1 
 
 
 
 
 
 
 y 
 
 Ai 

 
 ACCRUALS AND DEFERRED ITEMS 
 
 207 
 
 If the balance of the Accrued Interest Earned account is transferred to the 
 Interest Earned account after the ledger is closed, the entry will be as in the il- 
 lustration below. 
 
 c'^l^ie-c^-^^^^'Z^^i^Te^?^ v^/ /^T' 
 
 /J c^a\ 
 
 /^J ^a 
 
 u/c<^^?'-<^c~£^^'^::^y'i'^Ce^'/<.^i^£^ Scz^j^'-t-z-^:-^^^ 
 
 .-^o^^x-^^^n^e^ ^'^^zf^yzS^k^-T'-c^d^ i5a--7'->T-iS't5|[ c 
 
 When the note is collected on February 2, the entry, in journal form, will be 
 as in the illustration below. 
 
 rr ^f^ 
 
 y7iii-^€e^ /C€^<:.^'-(^'Z^-rpc-'--<^^ 
 
 / n 
 
 
 A comparison of the Interest Earned account after each entry is posted, shows 
 that the final results are the same. In the first case, the Interest Earned account 
 is credited with $4.50; in the second case, the Interest Earned account is debited 
 with $13.50 and credited with $18.00, showing a net credit balance of $4.50. 
 
 § 197. Accrued Wages is an accrued liability which results when the close 
 of the fiscal period occurs on a date different from the usual time of paying em- 
 ployees. ' This may be illustrated as follows: the weekly pay roll for Jenkins 
 Bros., retail merchants, is $600.00, payable at the close of business on Saturday of 
 each week. The end of the fiscal period is on Wednesday, December 31. If the 
 Balance Sheet and Statement of Profit and Loss are to show the true results, the 
 bookkeeper will either pay the employees on Wednesday evening, or show the $300.00 
 due them as a liability on the Balance Sheet and as an increase to the operating 
 cost on the Statement of Profit and Loss. Since the employees are not concerned 
 with the closing of the books and will not expect their wages before the usual time, 
 it is customary to show the amount due the employees at the close of the fiscal 
 period in an account with Accrued Wages. 
 
 ACCRUED WAGES ACCOUNT 
 
 § 198. The Purpose of this Account is to show the amount due employees 
 at the close of the fiscal period because the end of the fiscal period falls on a date 
 different from that on which the pay roll is paid. This account is opened only at 
 the close of the fiscal period.
 
 208 
 
 ACCRUALS AND DEFERRED ITEMS 
 
 Debit the Accrued Wages Account: Credit the Accrued Wages Account: 
 
 ^ I. After the ledger is closed for the ^ 2. For the amount due employees 
 
 amount shown on the credit at the close of the fiscal period, 
 
 side; or for the accrued wages 
 when paid. 
 
 1[ 3. The Balance of the Accrued Wages Account shows the amount due 
 employees at the close of the fiscal period; it is a current liability and is shown as 
 such on the Balance Sheet (Illustration No. 92). 
 
 § 199. The Entry to Record Accrued Wages is made in the general journal 
 at the close of the fiscal period; it is regarded as one of the adjusting entries (§ 46, 
 *\\ 4) because it places in the ledger a liability which has not been recorded. Re- 
 ferring to the pay roll for Jenkins Bros, mentioned in § 197 (assuming that $100.00 
 is for office employees, $50.00 for the buying department, and $150.00 for the selling 
 department), the entry in the general journal necessary to record this liability will 
 be as in the illustration below. 
 
 '^/ /^ 
 
 2-- 
 
 (::^^^*^^^>^>e-«>^?^-.(i..=ii.2^5^'^x.-2S;zXHe-- ^'^^C.^x-eo'Z.,:^.^^^ 
 
 / a o 
 
 ^ (? a 
 
 When this entry is posted, the $300.00 will appear on the credit side of the 
 Accrued Wages account and the amounts applicable to the Buying Expense, Selling 
 Expense, and Administrative Expense accounts will appear on the debit side of 
 these accounts; consequently the ledger will show a liability and an operating 
 cost of $300.00. 
 
 § 200. Entry to Close the Accrued Wages Account. The Accrued Wages 
 account may be allowed to remain open until the wages have been paid and then 
 debited with the amount for which it is credited, or the balance may be transferred 
 to the operating accounts affected, after the ledger is closed. Since the pay roll 
 will be paid in a few days after the books are closed, the amount is usually allowed 
 to remain in the Accrued Wages account and this account closed when the pay 
 roll is paid. Referring to the pay roll in § 197 and the entry in § 199, the required 
 entry on Saturday, January 3, when the pay roll is paid, will be as in the illustra- 
 tion below. 
 
 j^4«-^?-z-*^ise.-^'*-^ -B ^ / '^ 
 
 
 >- 
 
 0^c^(>'/'^-t-<^^.-^ >^^'y^C'tx-it<^ 
 
 
 ■^ 
 
 300 
 / o o 
 
 ^00
 
 ACCRUALS AND DEFERRED ITEMS 
 
 209 
 
 When this entry is posted, the Accrued Wages account will be in balance and 
 only one-half of the pay roll for the week will be debited to the expense accounts, 
 this being that part of the pay roll for the week which is applicable to the next 
 fiscal period. 
 
 If the Accrued Wages account is closed after the ledger is closed, the post- 
 closing entry necessary to transfer the balance of the Accrued Wages account to 
 the proper operating accounts will be as in the illustration below. 
 
 ,,:,<^;;)Le<:..^<^:^2>j^e<^ J /, / f^ 
 
 0^i:^--7<?'h^c^^^'i'-o<^^^7'rz^^^<>z/'-ey 
 
 / o o 
 
 When this entry is posted, the Accrued Wages account will be in balance and 
 the amount of the accrued wages applicable to each of the expense accounts 
 will appear on the credit side of that account. When the pay roll is paid on January 
 3, the entry, in journal form, will be as in the illustration below. 
 
 J/z:r^^?-7.^t.^c^:^i^?^-^ -^^ / f^- 
 
 \_..-£^L-^:(<A^ 
 
 / a o 
 ■^00 
 
 -3 
 
 (^00 
 
 When this entry is posted, the full pay roll for the week will appear on the 
 debit side of the expense accounts to which it is applicable, but there will be a 
 credit to each of these accounts which makes the balance the same as when the 
 Accrued Wages account is closed at the time the pay roll is paid. The student 
 should post these entries and compare the results. 
 
 § 201. Accrued Interest Cost is an accrued liability resulting from the 
 accrued interest on interest-bearing notes issued by the business prior to the close 
 of the fiscal period but not due and payable until a succeeding fiscal period, and 
 on past-due notes and accounts payable. This may be illustrated as follows: De- 
 cember I, the business borrows $5,000.00 from the bank on its note, due in ninety 
 days, with interest at 6% from date. December 31, at the close of the fiscal period 
 the amount of this indebtedness will have increased to $5,025.00 because of the 
 accrued interest. If the Balance Sheet is to show the true amount of the liabilities 
 owed by the business and the true proprietorship, it will be necessary to record 
 the additional indebtedness of $25.00 and to show it on the Balance Sheet as a 
 part of the liabilities. Interest accrued on notes payable and accounts payable is 
 recorded at the close of the period in an account with Accrued Interest Cost.
 
 210 
 
 ACCRUALS AND DEFERRED ITEMS 
 
 ACCRUED INTEREST COST ACCOUNT 
 § 202. The Purpose of this Account is to show the amount of accrued 
 interest owed by the business at the close of the fiscal period because the notes to 
 which it is appHcable are not due or the accounts to which it is applicable are past 
 due and unpaid. This account is opened only at the close of the fiscal period. 
 
 Credit the Accrued Interest Cost Acct.: 
 
 *f[ 2. At the close of each fiscal period, 
 
 for the amount of accrued 
 
 interest on notes payable and 
 
 accoi^nts payable. 
 
 Debit the Accrued Interest Cost Acct.: 
 T[ I. After the ledger is closed, for the 
 
 amount shown on the credit 
 
 side; or for the amount of 
 
 accrued interest when paid in 
 
 the next fiscal period. 
 
 ^ 3. The Balance of the Accrued Interest Cost Account shows the amount 
 owed by the business for interest which has not been paid ; it is a current liability 
 and is shown as such on the Balance Sheet (Illustration No. 92). 
 
 § 203. Entry to Record Accrued Interest Cost. At the close of the 
 fiscal period, it is necessary to record in the general journal the amount of accrued 
 interest cost. This entry is usually referred to as one of the adjusting entries (§ 46, 
 ^ 4) because its purpose is to record in an account in the ledger the amount of a 
 liability which does not appear there. The entry in the general journal for the 
 accrued interest mentioned in § 201 will be as in the illustration below. 
 
 <=p<2!^^&^:-^'^><*2-'t^t5-^^ 
 
 ^/ /fT^ 
 
 
 ^^OO'f'-Cli.A^if^ 
 
 -'.,'5'-z.<;»-Z-E.!=''-^^!eZ'^;^><5Z-t^-t^/| 
 
 >. 
 
 Recording the liability Accrued Interest Cost increases the cost of interest 
 the same as if cash had been paid for the interest. When this entry is posted, the 
 $25.00 will appear as a liability on the credit side of the Accrued Interest Cost 
 account, and as an expense on the debit side of the Interest Cost account. 
 
 § 204. Entry to Close the Accrued Interest Cost Account. The accrued 
 interest cost may be allowed to remain in the Accrued Interest Cost account until 
 it is paid, or the balance of this account may be transferred to the Interest Cost 
 account by an entry in the general journal after the ledger is closed. The latter 
 practice is possibly the better because it avoids the necessity of separating accrued 
 interest cost from interest cost when notes or accounts affected by the accrued 
 interest are paid in a subsequent period. 
 
 Referring to the illustration in § 203, if the accrued interest is allowed to re- 
 main in the Accrued Interest Cost account until the note is paid on March i, the 
 entry required at that time, in journal form, will be as in the illustration below. 
 
 ^S*^Y^5Z.-7<-tl--#C-' 
 
 /, /f7^ 
 
 
 
 '-jf'O 7 'Jf 
 
 ^ ^''^'0—c:c^''CZ^-^ . 
 
 7'
 
 ACCRUALS AND DEFERRED ITEMS 
 
 211 
 
 If the balance of the Accrued Interest Cost account is transferred to the 
 Interest Cost account after the ledger is closed, the entry will be as in the illus- 
 tration below. 
 
 ,^/j:.&^c.£^^^^..-i^-e^i^ ^/ /f 
 
 
 When the note is paid on March i, the entry, in journal form, will be as in 
 the illustration below. 
 
 ■^^--^^-ri^^^Cx / /tf^- 
 
 
 ' -^Z^— 2?>e:Z--i, ' 
 
 7^ 
 
 7' 
 
 A comparison of the Interest Cost account after each entry is posted will 
 show that the final results are the same. In the first case, the Interest Cost account 
 is debited with $50.00; in the second case, the Interest Cost account is credited 
 with $25.00 and debited with $75.00, showing a net debit balance of $50.00. 
 
 § 205. Deferred Charges to Operations refer to (a) the value of property 
 on hand at the close of the period which was purchased for use in the business 
 and which will be consumed by its use, and (b) operating cost paid in advance. _ 
 
 Deferred charges applicable to material may be illustrated as follows: during 
 the business year, ofifice stationery and other supplies for use in the office have 
 been purchased as needed, and their value debited to the Office Supplies account. 
 At the close of the year, the balance of the Office Supplies account will show the 
 net value of the supplies purchased, but it will not show the value of supplies con- 
 sumed and supplies on hand. Consequently, it is necessary to ascertain the value 
 by an inventory in the same manner as the value of merchandise in stock is ascer- 
 tained. The value of the office supplies is shown on the Balance Sheet as an asset 
 because it is something of value which will be used in the operations of the business 
 during the next period. 
 
 Deferred charges applicable to operating cost paid in advance may be illus- 
 trated as follows: July i, $100.00 is paid as premium for an insurance policy 
 issued for one year. At the close of the fiscal period, December 31, one-half the 
 value of this premium, or $50.00, remains as an asset to the business because the 
 policy does not expire until June 30 of the following year. This asset must be 
 shown on the Balance Sheet, otherwise the total assets and proprietorship will 
 not show the true facts. 
 
 The asset referred to as a deferred charge is recorded in an account, but the 
 amount recorded in the account shows the total cost and not the value of the
 
 212 
 
 ACCRUALS AND DEFERRED ITEMS 
 
 asset at the close of the fiscal period. In the case of insurance, the cost of the 
 premium is debited to the Insurance account at the time it is paid; hence the 
 balance of this account at the close of the fiscal period includes the cost of the 
 insurance which has expired and the cost of the insurance which is yet to expire. 
 For this reason the adjusting entry required to show the value of a deferred charge 
 is made by taking out of the account the value of the property or service which 
 has been used, thus leaving in the account the value of the property or service 
 yet to be consumed. Insurance and Office Supplies are two accounts that require 
 adjusting on account of deferred charges. 
 
 OFFICE SUPPLIES ACCOUNT 
 
 § 206. The Purpose of this Account is to show the cost of material pur- 
 chased for use in the of^ce which will be consumed by its use; this material includes 
 ofiice stationery, pens, ink, wastebaskets, etc. The value of this material on hand 
 at the close of a fiscal period is ascertained by a physical inventory at cost, the 
 same as the value of merchandise. 
 
 Debit the Office Supplies Account: 
 *\ I. For amounts paid for supplies 
 to be used in the ofiice. 
 
 Credit the Office Supplies Account: 
 1[ 2. (a) For any adjustment which 
 reduces the cost of ofBce sup- 
 plies as shown by the debit 
 side; (b) for the value of 
 of^ce supplies used — the diff- 
 erence between the balance of 
 this account and the inven- 
 tory of office supplies. 
 
 If 3. The Balatice of the Office Supplies Account, before the value of the sup- 
 plies used has been entered on the credit side, shows the net cost of ofiice supplies 
 purchased; the balance of this account after the value of the material used has 
 been entered, shows the value of ofiice supplies on hand at the close of the fiscal 
 period. This latter balance is one of the assets of the business and is shown as 
 such on the Balance Sheet (Illustration No. 92). 
 
 Advertising Material and Shipping Room Material are two other accounts of the same nature 
 as Office Supplies; the former contains a record of material purchased for advertising purposes, and 
 the latter, material for use in packing the merchandise sold. 
 
 § 207. Entry to Adjust the Office Supplies Account. After the value 
 of the ofiice supplies on hand at the close of the fiscal period has been ascertained 
 through an inventory, it is necessary to transfer to an operating account the cost 
 of the material used, which is the difference between the inventory and the bal- 
 ance of the Ofiice Supplies account. If the balance of the Ofiice Supplies account 
 is $1,200.00 and the inventory $287.50, the cost of the office supplies used is $912.50; 
 the entry required to transfer this to the Administrative Expense account will 
 be as in the illustration below. 
 
 ^/, /f: 
 
 
 
 
 ^ /■ 7- 
 
 .^r-^ 
 
 f / >• 
 
 .:!-o
 
 ACCRUALS AND DEFERRED ITEMS 
 
 213 
 
 INSURANCE ACCOUNT 
 § 208. The Purpose of this Account is to show a record of the amount 
 paid for insurance. Insurance is a protection afforded by insurance companies 
 against loss due to fire, water, theft, etc. This protection is secured by the pay- 
 ment of a small fee to a company organized for the purpose of issuing insurance, 
 the fee paid for the protection is usually referred to as the premium, and the 
 written contract of the company agreeing to afford the protection, as the policy. 
 The premium is paid in advance, usually for one year. The insured has the priv- 
 ilege of canceling the policy at any time, in which case he will receive a refund of 
 a part of the premium paid. Each insurance policy should be recorded in the 
 insurance policy record (§ 174). 
 
 Hi. 
 
 Debit the Insurance Account: 
 For all insurance cost, which is 
 the premium paid for insur- 
 ance. 
 
 Credit the Insurance Account: 
 H 2. (a) For any adjustments which 
 reduce the cost of insurance as 
 shown by the debit side; (b) 
 at the close of each fiscal peri- 
 od, for the insurance cost for 
 the period as shown by the 
 policy record. 
 
 H 3. The Balance of the Insurance Account, before the entry for expired 
 insurance has been made, shows the net cost of insurance, and, after the expired 
 insurance has been credited to the account, the value of the premiums on unex- 
 pired insurance. This latter balance of the Insurance account is one of the deferred 
 charges and is shown as such on the Balance Sheet (Illustration No. 92). 
 
 § 209. Entry to Adjust the Insurance Account. At the close of the 
 fiscal period, it is necessary to take out of the Insurance account the value of the 
 insurance expired as shown by the insurance policy record. The Insurance account 
 will be credited for the value of this expired insurance but the accounts debited 
 will depend on the nature of the property protected by the insurance. Insurance 
 cost on office equipment is usually regarded as an administrative expense; in- 
 surance cost on merchandise, store fixtures and delivery equipment, as a selling 
 expense; and insurance cost on buildings, as a building expense. For this reason 
 it is necessary to determine the value of the expired insurance applicable to each 
 kind of property before debiting the accounts which are to show this cost. Assum- 
 ing that the total cost of insurance is $450.00 and the value of the unexpired in- 
 surance is $150.00, the entry would require a credit of $300.00 to the Insurance 
 account and a debit of $300.00 to the operating accounts affected. If the expired 
 insurance on merchandise, store fixtures and delivery equipment is $240.00, on 
 office equipment $20.00, and on buildings $40.00, the entry will be as in the illus- 
 tration below. 
 
 <=^0/-^'0<i'^:^>^-i^-<2--7^' 
 
 ^/ / ^7- 
 
 
 
 tf^?Z,<S<?7-Z-«--7>.C-^<Si-?-Z-£5^i^l.^^ 
 
 J a o
 
 214 ACCRUALS AND DEFERRED ITEMS 
 
 When this entry is posted, the balance of the Insurance account will show the 
 value of the unexpired insurance as recorded in the insurance policy record, and 
 the operating cost due to the expiration of insurance premiums will be recorded 
 in the proper expense accounts. The balance of the Insurance account will be 
 shown on the Balance Sheet as one of the deferred charges to operations (Illus- 
 tration No. 92). 
 
 § 210. Deferred Credits to Income refer to income collected in advance, 
 all of which has not been earned at the close of the fiscal period. This may be 
 illustrated as follows: Martin Bros, own a building at 220 Main Street in which 
 their business is operated. They rent one floor to A. B. Smith for $100.00 per 
 month, payable in advance on the 15th of each month. The income from this rent 
 is credited to a Building Revenue account. At the close of the fiscal period, De- 
 cember 31, the Building Revenue account shows a credit of $100.00, rent for one 
 month in advance collected on December 15. However, only one-half of the rent has 
 been earned, the other $50.00 being applicable to the next period. Unless the 
 unearned rent is taken out of the Building Revenue account, this account will 
 show a profit of $50.00 more than has- been earned during the current fiscal period. 
 It is customary to record an item of this nature as a deferred credit to the income 
 account w^hich has been credited with the income. The caption of the account 
 required to record the value of the unearned income from the rent collected in 
 advance would be "Deferred Credit to Building Revenue." 
 
 DEFERRED CREDIT TO BUILDING REVENUE ACCOUNT 
 
 § 211. The Purpose of this Account is to show at the close of the fiscal 
 period the rent collected in advance. It is opened only at the close of the fiscal 
 period. 
 
 Debit the Deferred Credit to Building Credit the Deferred Credit to Building 
 
 Revenue Account: Revenue Account: 
 
 ^ I. After the ledger is closed, for the ^ 2. At the close of the fiscal period, 
 
 amount shown on the credit for that part of the rent col- 
 
 side, lected in advance which is 
 
 applicable to the next period. 
 
 ^ 3. The Balance of the Deferred Credit to Building Revenue Account shows 
 the amount of rent that is yet to be earned. It is regarded as a liability and is 
 shown as such on the Balance Sheet, being listed after the current and fixed lia- 
 bilities. 
 
 § 212. Entry to Open the Deferred Credit to Building Revenue Ac- 
 count. At the close of the fiscal period, it is necessary to record the amount of 
 rent collected but not yet earned by the business. This entry is referred to as one 
 of the adjusting entries (§ 46, *f[ 4) because its purpose is to record in an account 
 in the ledger the value of a liability which does not appear there. The general 
 journal entry for the rent collected in advance mentioned in § 210, will be as in 
 the illustration below. 
 
 cp^C^Z-^-'C^C-'TO'Z.'i^C-^''^ 
 
 J? / / f> 
 
 
 1! ' 
 
 ■ 

 
 EXERCISES 
 
 215 
 
 When this entry is posted, the $50.00 will appear on the credit side of the 
 Deferred Credit to Building Revenue account and on the debit side of the Build- 
 ing Revenue account; consequently, the ledger will show a liability of $50.00 and 
 a debit to an income account, of corresponding amount. 
 
 § 213. Entry to Close the Deferred Credit to Building Revenue Ac- 
 count. After the ledger is closed, it is necessary to transfer the balance of the 
 Deferred Credit to Building Revenue account to the Building Revenue account 
 in order that the latter account may show in the next period only the income from 
 rent applicable to that period. Applying this entry to the illustration in § 212, 
 the record in the general journal will be as in the illustration below. 
 
 ^ 
 
 7^A-^-y- J/ 
 
 ZfT- 
 
 \ 
 1 
 
 
 i 
 
 When this entry is posted, the Deferred Credit to Building Revenue account 
 will be in balance, and the amount of rent collected in advance, applicable to the 
 next period, will appear on the credit side of the Building Revenue account. 
 
 Exercise No. 78, Accruals and Deferred Items. 
 
 At the close of the fiscal period June 30, the accruals and deferred items to 
 be recorded on the books of J. H. Kilgour & Co. are as follows: 
 
 Interest accrued on notes receivable $ 68.95 
 
 Insurance: 
 
 Payments, per Insurance account: 
 
 On merchandise, store fixtures and delivery equipment 482.65 
 
 On office equipment 43-75 
 
 On building 92.50 
 
 Unexpired, per insurance policy record: 
 
 On merchandise, store fixtures and delivery equipment 96.60 
 
 On office equipment 11-50 
 
 On building 24.00 
 
 Office supplies: 
 
 Total purchased per Office Supplies account 527.40 
 
 On hand per inventory 192-95 
 
 Interest accrued on notes payable 25.60 
 
 1. Make the adjusting entries (a) to record the accrued assets and liabilities, 
 (b) to transfer the expired insurance to the proper operating accounts, and (c) to 
 transfer the value of the office supplies used to the proper operating account. 
 
 2. Make the post-closing entries to transfer the accrued assets and liabilities 
 to the proper operating accounts after the ledger is closed, under date of July i.
 
 2i6 QUESTIONS 
 
 Exercise No. 79, Accruals and Deferred Items. 
 
 At the close of the fiscal period, December 31, the accruals and deferred items 
 to be recorded on the books of Wenger & Hoag are as follows: 
 
 Commission due from others for services rendered $265 . 50 
 
 Insurance : 
 
 Payments, per Insurance account: 
 
 On merchandise, store fixtures, and delivery equipment. . 500.00 
 
 On office equipment 27 . 65 
 
 Unexpired, per insurance policy record: 
 
 On merchandise, store fixtures, and delivery equipment. . 235.55 
 
 On office equipment 9-45 
 
 Rent for month due but not paid 150.00 
 
 Wages unpaid : 
 
 Office employees 33-75 
 
 Employees in store 42 . 50 
 
 1. Make the adjusting entries (a) to record the accrued assets and liabilities, 
 and (b) to transfer the expired insurance to the proper operating accounts. 
 
 2. Make the post-closing entries to transfer the accrued assets and liabilities 
 to the proper operating accounts after the ledger is closed, under date of January i. 
 
 QUESTIONS 
 
 1. Why is it necessary to record accrued interest earned and accrued interest 
 
 cost at the close of the fiscal period? 
 
 2. How would magazine subscriptions collected in advance be recorded at the 
 
 close of the fiscal period by the bookkeeper for the company publishing the 
 magazine? 
 
 3. (a) If an account is kept with Advertising Material, what will the balance 
 
 of this account show after the adjusting entry for advertising material in 
 stock has been made at the close of the fiscal period? (b) How will the 
 advertising material used be shown on the Statement of Profit and Loss? 
 (c) How will the advertising material on hand be shown on the Balance 
 Sheet? 
 
 4. Why is it necessary to describe the nature of the property insured when 
 
 recording a policy in the insurance policy record? 
 
 5. If the value of office supplies in stock, $250.00, is not taken into consider- 
 
 ation when preparing the Balance Sheet and Statement of Profit and Loss 
 how will this affect the net income? 
 
 6. If $600.00 is paid for three months' rent in advance on December i, how 
 
 will the two months' prepaid rent be recorded at the close of the fiscal 
 period December 31? 
 
 7. What entry may be made for accrued interest earned after the ledger is 
 
 closed ? 
 
 8. (a) What is the purpose of the Accrued Interest Cost account? (b) W^hat is 
 
 the difference between this account and the Accrued Interest Earned 
 account? 
 
 9. Is there any difference between the merchandise in stock at the close of the 
 
 fiscal period and the office supplies and advertising material in stock, from 
 the viewpoint of one who is using this information as a basis for making 
 a loan to the business owning the property? 
 10. What does the balance of the Office Supplies account show (a) before the 
 inventory is recorded and (b) after the inventory is recorded?
 
 Chapter XXII 
 
 ADJUSTING ENTRIES AND REPORTS 
 
 The Purpose of this Chapter is to present in pictorial form the work re- 
 quired of the bookkeeper at the close of the fiscal period. It is a Model Set with 
 the books of original entry and accounts omitted. The principles involved have 
 been discussed and illustrated in the preceding chapters. 
 
 § 214. The Work Required at the close of the fiscal period is usually 
 completed in the following order: 
 
 1. Trial Balance at the end of the month which closes the fiscal period. 
 
 2. Preparation of the list of inventories, accruals and reserves. 
 
 3. Adjusting entries in the general journal for the inventories, accruals and 
 
 reserves, and the posting of these entries. 
 
 4. Trial Balance after the adjusting entries have been posted. 
 
 5. Preparation of the Balance Sheet. 
 
 6. Preparation of the Statement of Profit and Loss. 
 
 7. Recording and posting the closing entries. 
 
 8. Recording and posting the post-closing entries. 
 
 9. Post-closing Trial Balance. 
 
 If desired, the Trial Balance mentioned in paragraph i may be prepared on paper ruled with 
 eight money columns — two for the debits and credits in the Trial Balance; two for the debit and 
 credit adjustments; two for assets and liabilities; and two for income and costs. When this form 
 is provided, the journal entries (paragraph 3) can be posted to the Adjustment columns and the 
 assets, liabilities, costs and income extended into the other columns. When this plan is followed, the 
 Trial Balance mentioned in paragraph 4 may be omitted. This method of procedure is discussed 
 under the title "Working Sheet" in a subsequent chapter. 
 
 EXPLANATION OF ILLUSTRATIONS 
 
 § 215. The Trial Balance at the close of the fiscal period in Illustration 
 No. 88 shows the accounts in the ledger of C. W. Keeland & Co. on December 31, 
 1922. It is the same form as the Trial Balance taken at the close of each of the 
 preceding eleven months. This Trial Balance shows the same facts as the Trial 
 Balance in Illustration No. 5 and the other Trial Balances illustrated in previous 
 chapters; that is, all the open accounts in the ledger. The only difference between 
 this Trial Balance and the others illustrated in previous chapters is that the ledger 
 from which this Trial Balance was taken contains a greater number of accounts. 
 
 § 216. The List of Inventories, Accruals and Reserves in Illustration 
 No. 89 shows information which is not shown by accounts on the Trial Balance, 
 Illustration No. 88. The value of the merchandise in stock and the office supplies 
 on hand was ascertained by a physical inventory. The amount of the accrued 
 interest on notes receivable and notes payable was obtained from the interest- 
 bearing notes not due until the next fiscal period; these amounts can be verified 
 by reference to the notes receivable book. Illustration No. 74, and the notes payable 
 book, Illustration No. 75. The amount of the expired and unexpired insurance 
 was ascertained from the insurance policy record ; this can be verified by reference 
 to Illustration No. 76. The amount of accrued wages represents the wages due 
 employees in the selling department for three days, the fiscal period ending on 
 Wednesday and pay-day being on Saturday. The amount of accrued rent refers 
 to the rent of the office which is not due until the first of the following month. 
 The percentages for reserves set up on account of depreciation and loss on doubtful 
 accounts were supplied by the management; these conform to the percentages 
 permitted by the Collector of Internal Revenue in the preparation of the income 
 
 217
 
 2l8 
 
 ADJUSTING ENTRIES AND REPORTS 
 
 
 / kl-^jz,^^^^ 
 
 
 1 6' l<^2^^<^^^'-t;<?*^ 
 7 
 
 f 
 
 fc^-^t^ ^^'^.-t^^-ez^S-'C^ 
 
 ^-^^Xy: ^^i^t.^^e.-.^^t?':^^^^^^-.^^^^^?^ 
 
 /c/ 
 
 
 
 ^.-/-T-ZJ 
 
 /C 
 
 / y 0^^-i:^£^^^''?-T.^€^<>'Z^^i'd^^^^r^-e^ C^5t>fe-<2,^?2*^1^- ' 
 
 '7( 
 
 x: 
 
 
 ''^t? 
 
 / £> a / 
 
 ,3000 
 ^ a a o 
 
 
 ^/ 
 
 
 /f/f 
 
 >-^ 
 
 ^cT 
 
 
 ^// ^cj" 
 
 
 
 Illustration No. 88, Trial Balance at the Close of the Fiscal Period 
 
 tax return. All the information given in this list is necessary in order that a 
 Balance Sheet and Statement of Profit and Loss may be prepared which will 
 show the management the true value of the assets, liabilities, and proprietorship
 
 ADJUSTING ENTRIES AND REPORTS 
 
 219 
 
 
 ■f7- 
 
 
 
 3 >/ r/ ^ 
 
 / 1> o 
 / / 33 
 
 ¥^>3 
 
 :i'8'^f 
 
 1 
 
 7' 
 
 J/£>-2Si:--<^ -^r?<^<:K^-z-<:-«<>^^^^-s' -^o«z-':^<=T 
 
 3C 
 
 /F 
 
 Illustration No. 89, List of Inventories, Accruals and Reserves 
 of the business, and the net profit resulting from operating the business during 
 the fiscal period. 
 
 § 217. The Adjusting Entries required at the close of the fiscal period 
 in Illustration No. 90 were prepared from the list of inventories, accruals and 
 reserves (Illustration No. 89). These entries have been explained and illustrated 
 in preceding sections. The entry to record the value of the merchandise in stock 
 at the close of the fiscal period — in this case, the 1922 Inventory — may be made 
 in connection with closing the ledger or as an adjusting entry; the final results 
 are the same, the only difference being that, if the inventory is recorded before 
 the Balance Sheet and Statement of Profit and Loss are prepared, these reports 
 can be made from the Trial Balance taken after the adjusting entries are posted. 
 The entries made in connection with the deferred charges (Office Supplies and 
 Insurance) do not record the value of the office supplies in stock and the unex- 
 pired insurance, but transfer from the Office Supplies account and the Insurance 
 account the value of the office supplies which have been used and the amount of 
 the expired insurance. When preparing the list of inventories, accruals and re-
 
 220 
 
 ADJUSTING ENTRIES AND REPORTS 
 
 <:='Cy^^^£^<i.e.''7^'^^z^c<-^e'-y~ j3 / / >^ 7- ^ 
 
 
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 ^^:;z^^z-'ZWs5.^^^2^^>'y>^-e<jf^ ' 
 
 
 
 
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 0'^''::^^<:>'y^L-^^<f^z^-tL^d.^^^ ^<>C^^-^.-9-z.<^^^^ 
 
 
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 ^cTjO^- 
 
 
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 ^7 
 
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 ^^7; I 
 
 /^//^j>- 
 
 
 Illustration No. 90, Adjusting Entries for Inventories, Accruals and Reserves in '* 
 
 Illustration No. 89
 
 ADJUSTING ENTRIES AND REPORTS 
 
 221 
 
 serves, it is necessary to show the kind of property to which the expired insurance 
 premiums are applicable, in order that the adjusting entry for insurance can be 
 made without further reference to the insurance policy record. One combined 
 entry is made for the reserves; depreciation on store fixtures and delivery equip- 
 ment increases the selling expense, hence the debit to this account includes 
 both reserves. 
 
 ^.O'^-t- 
 
 ^ct^ ^Sh^l^^ 
 
 < ,s<J'.-€^C^^y7<^'Z^■^^^s-<^ J* / y ^ > 2- 
 
 
 
 
 /^.Is^%-<^^ (i^<^^5"-i<>^««>5^^-<i^e<^ 
 
 
 
 v^ 
 
 Illustration No. 91, Trial Balance after the Adjustin 
 
 No. 90 have been Posted 
 {Concluded on page 222) 
 
 g Entries in Illustration
 
 222 
 
 ADJUSTING ENTRIES AND REPORTS 
 
 _^y^y-^.:t^L^/3lii'J^:^t^^ J/, //>->- ((Z,--^..-t.<^A.c.J^!^ J 
 
 ^■^ 
 
 
 /f 
 
 
 c;.<_Z-^^^:^^«2t^-*<^^?'Z'^^ 
 
 
 
 \ -^J^fJi^J^^i 
 
 
 
 Entries in Illustration No. 
 
 Illustration No. 91, Trial Balance after the Adjusting 
 
 90 have been Posted — Concluded 
 NOTE. When the Working Sheet is used (§ 214), this Trial Balance is omitted, as the same 
 facts are shown by the assets, liabilities, costs and income columns. 
 
 § 218. The Final Trial Balance (Illustration No. 91) was made after the 
 adjusting entries in Illustration No. 90 were posted to the ledger from which the 
 Trial Balance (Illustration No. 88) was made. A comparison of the final Trial 
 Balance (Illustration No. 91) with the Trial Balance taken before the adjusting 
 entries were made (Illustration No. 88) will show the following changes: 
 
 The five reserve accounts each show an increased credit balance due to the 
 additional reserve set up because of the operations of the business during the past 
 year; the balance of the Office Supplies account has changed because the value 
 of the office supplies used has been transferred to the proper expense account; 
 the balance of the Insurance account has changed because the value of expired 
 insurance has been transferred to the proper expense accounts; the final Trial 
 Balance shows three additional liabilities, Accrued Wages, Accrued Rent, and 
 Accrued Interest Cost; the 1922 Inventory appears on the final Trial Balance, 
 and there is a credit to Purchases for the same amount as the 1922 inventory 
 (both sides of the Purchases account are shown because this information is needed 
 in connection with the preparation of the Statement of Profit and Loss) ; Selling 
 Expense shows an increased debit balance because of the unpaid wages, expired 
 insurance, depreciation, and loss on doubtful accounts; Loss on Doubtful Accounts 
 is a new account because of the reserve set up to take care of loss on doubtful ac- 
 counts; Administrative Expense and Building Expense each show an increased debit 
 balance because of the depreciation, expired insurance, office supplies used, and 
 unpaid rent; Interest Earned shows an increased credit balance because of the 
 accrued interest on notes receivable; Interest Cost shows an increased debit bal- 
 ance because of the accrued interest on notes payable. 
 
 The balance of each account on the final Trial Balance, Illustration No. 91, 
 is used in the preparation of the Balance Sheet or Statement of Profit and Loss, 
 except Purchases, both sides of which are needed in arriving at the net cost of the 
 merchandise sold; the balances of the proprietors' Capital accounts are not used 
 on either the Balance Sheet or Statement of Profit and Loss but are needed in 
 connection with the proof of these in Illustration No, 94. 
 
 § 219. The Balance Sheet in Illustration No. 92 was prepared from the 
 asset, liability, and reserve accounts on the Trial Balance, Illustration No. 91. 
 The information in this report is arranged in the following order: (i) current 
 assets, with the proper deduction for the anticipated loss on doubtful accounts as
 
 ADJUSTING ENTRIES AND REPORTS 
 
 223 
 
 
 
 7'JJ'S. a/ 
 
 ^:k^^^A^- 
 
 kSJ-T/ 
 
 
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 _v7 
 
 vjxr 
 
 /rs/^t? 
 
 i^ffT^ ^a o o 
 
 
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 Cr 
 
 ( ;*C!5Z<?^;^^<^--2^ C<^£<:''-2Z^2^^^:'^-5*Z-f/ / 
 
 
 '^.■.■€^0'-7'-7<.e^'?-z^^^.'tx.^'i^^L£c^^ 
 
 
 
 
 
 / a o 
 
 7'f7 
 
 ^3 
 
 s>- 
 
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 -7^^^ 
 
 '^'^^s'C (? 
 
 _^c^ 
 
 / r^u^j^f 
 
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 /r^^'^'T^ 
 
 Illustration No. 92, Balance Sheet, "Report" Form
 
 224 ADJUSTING ENTRIES AND REPORTS 
 
 represented by the Reserve for Doubtful Accounts account; (2) fixed assets, with 
 the proper reserves for depreciation; (3) deferred charges; (4) current liabilities; 
 (5) proprietorship, showing the proprietary interest of each partner. The form is 
 the same as the Balance Sheet for the model set described and illustrated in Chapter 
 VI, with the exception of additional accounts which have been explained in sub- 
 sequent chapters. Deferred charges are listed after fixed assets because their 
 value is applicable to the business only as a going concern, hence are the least 
 available of all the assets from the standpoint of those who might wish to extend 
 credit to the business. The proprietorship of each partner is not the same as that 
 shown by his capital account on the Trial Balance because his interest has been 
 increased through the operations of the business; a proof of the correctness of the 
 amount of this increase is shown in Illustration No. 94. As previously explained, 
 the purpose of the Balance Sheet is to show the owner of the business the assets, 
 liabilities, and his proprietorship in the business; it is a report and may be prepared 
 in one of two forms, as explained in Chapter VII. 
 
 § 220. The Statement of Profit and Loss in Illustration No. 93 was 
 prepared from the operating and non-operating income and the operating and 
 non-operating expense accounts in the Trial Balance, Illustration No. 91. The 
 information in this report is arranged in the following order: (i) gross sales (bal- 
 ance of»the Sales account); (2) net returns from sales (returns and allowances 
 deducted from the total sales); (3) net cost of merchandise purchased (1921 
 inventory plus debit side of the Purchases account plus balance of the Freight 
 In account, less the amount of the purchases returns and allowances) ; (4) net 
 cost of merchandise sold (net cost of merchandise purchased less the 1922 inventory, 
 which is the same as the credit side of the Purchases account) ; (5) gross profit on 
 sales (net returns from sales less net cost of merchandise sold) ; (6) operating cost 
 (total of the three expense accounts and the Loss on Doubtful Accounts account) ; 
 (7) net profit from operations (gross profit on sales less total operating cost) ; (8) 
 other income (Interest Earned and Purchases Discount) ; (9) gross income (net 
 profit from operations plus other income); (10) deductions from income (Interest 
 Cost and Sales Discount); (11) net income (gross income less deductions from 
 income); (12) distribution of the net income (that part of the profit which is to be 
 credited to each partner's Capital account and to his Personal account for with- 
 drawal). The purpose of the Statement of Profit and Loss is to show the owners 
 of the business the net profit resulting from the operations of the business during 
 the fiscal period and the various facts in connection with this net profit which 
 will be of assistance to them in the future operations of the business; it is a report 
 and may be prepared in one of two forms, as explained in Chapter VII. 
 
 § 221. The Proof in Illustration No. 94 shows that the proprietorship on 
 the Balance Sheet (Illustration No. 92) and the net profit on the Statement of Pro- 
 fit and Loss (Illustration No. 93) are correct. This proof is made for the conven- 
 ience of the bookkeeper before the reports are submitted to the management, but 
 need not be submitted as a part of the reports. The net profit on the Statement of 
 Profit and Loss, Illustration No. 93, is $4,394.64. The proprietary interest of each 
 partner at the beginning of the period is $5,000.00, as shown by the balance of 
 his Capital account on the final Trial Balance, Illustration No. 91. The proprie- 
 tary interest of each partner as shown by the Balance Sheet, Illustration No. 92, 
 is $7,197.32. Deducting the proprietorship at the beginning of the period from 
 the proprietorship at the end of the period shows the increase in proprietorship; 
 in the illustration it is $2,197.32 each, or $4,394.64, total. No facts set forth by 
 the Balance Sheet or Statement of Profit and Loss can be accepted as correct until 
 this proof has been made. 
 
 This proof is not necessary when the Working Sheet (§214) is prepared because the results 
 are proved when the difference between the assets and HabiHties columns is the same as the difference 
 between the income and costs columns.
 
 ADJUSTING ENTRIES AND REPORTS 
 
 225 
 
 
 '^cs<>7tAa<r^ 
 
 ■3//f7'>' 
 
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 7^^^f7 
 
 
 
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 -''^•'^-J^-cS?^ ^^t:^3!^^ ^J'^'^^-^^^^Z^^^ 
 
 
 
 
 3 7-/^/9 
 
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 /i^'^^JT^ 
 
 A^Jf^C^ 
 
 ^d^SfS'a 
 
 /rrvf 
 
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 y^fo3: 
 
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 Illustration No. 93, Statement of Profit and Loss, "Report" Form
 
 226 
 
 ADJUSTING ENTRIES AND REPORTS 
 
 f^ 
 
 
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 7/ 
 
 3->- 
 
 M^'^Aj^ 
 
 Zi.£2-_ 
 
 ^^f^C^ 
 
 ji>^Jjf^'4-iA 
 
 Illustration No. 94, Proof of Net Profit 
 
 § 222. The Closing Entries in Illustration No. 95 were prepared from the 
 Statement of Profit and Loss, Illustration No. 93. The purpose of these entries 
 is to close all operating and non-operating income and expense accounts and to 
 give each partner the proper credit in his Capital and Personal accounts for his 
 share of the profit for the period. The process of closing is the same as that ex- 
 plained in Chapter VIII with the exception of additional entries necessary because 
 of additional accounts. The first entry closes the Sales Returns and Sales Allow- 
 ances accounts into the Sales account; the second entry, the 1921 Inventory and 
 Freight In accounts into the Purchases account; and the third entry, the Pur- 
 chases Returns and Allowances account into the Purchases account; these three 
 entries were not needed in connection with closing the ledger as discussed in 
 Chapter VIII. The fourth entry closes the Purchases account into the Sales 
 account; the fifth, the Sales account into the Profit and Loss account; and the 
 sixth, the operating expense accounts into the Profit and Loss account; these 
 three entries are identical with the second, third and fourth entries discussed in 
 Chapter VI 1 1. The seventh entry closes the non-operating income accounts into 
 the Profit and Loss account, and the eighth, the non-operating expense accounts 
 into the Profit and Loss account ; these two entries were not shown in the illustra- 
 tion in Chapter VIII because there were no non -operating incomes and no non- 
 operating expenses. The ninth entry closes the Profit and Loss account into the 
 proprietors' Capital and Personal accounts; this corresponds to the fifth entry in 
 Chapter VIII, the only difference being in the distribution of the net profit. The 
 entry to place the value of the closing inventory — in this case, the 1922 Inventory — 
 on the ledger was made as an adjusting entry (Illustration No. 90) instead of as a 
 closing entry as in Chapter VIII (see note in § 57). A comparison of the discussion 
 at this time with that given in Chapter VIII is made that the student may see that 
 the method of closing is the same, the changes being due to the additional accounts 
 and not to a change in the method of procedure. After the closing journal entries 
 
 {Concluded on page 228.) 
 
 The journal entry method of closing the ledger, as shown in Illustration No. 95, is preferable 
 because it provides in a book of original entry a record of each entry in the ledger and thus facilitates 
 auditing. However, if desired, the closing entries may be made direct in the ledger; this plan is ex- 
 plained in Appendix B.
 
 ADJUSTING ENTRIES AND REPORTS 
 
 227 
 
 
 >VS^'. 
 
 
 ^ / 
 
 
 fj/y^S' 
 
 
 3 / 
 
 y/^rf7 
 
 ^ / 
 
 y^-r^f/r 
 
 /J 
 
 S/c. 
 
 
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 Illustration No. 95, Journal Entries to Close the Ledger — Continued
 
 228 
 
 ADJUSTING ENTRIES AND REPORTS 
 
 --^ 
 
 >0 
 // 
 // 
 
 tji«^^'Z^2^^5><t2«^^ C-^^-^^V^ 
 
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 Illustration No. 95, Journal Entries to Close the Ledger — Concluded. 
 
 {Continued from page 226.) 
 
 have been posted to the accounts in the ledger and those accounts which are in 
 balance ruled, the operating and non-operating income and expense accounts will 
 be in balance and the Capital and Personal accounts of each partner will show 
 his proprietary interest in the business. The Capital accounts of the partner should 
 be balanced and ruled in the same manner as explained in Chapter VTII. 
 
 § 223. The Post-Closing Entries in Illustration No. 96 are required to 
 close the Accrued Interest Earned and Accrued Interest Cost accounts into the 
 Interest Earned and Interest Cost accounts, as explained in §§ 196 and 204. The 
 Accrued Rent and Accrued Wages accounts are not closed because these obligations 
 will be paid early in the next fiscal period (§ 200) and in one amount. When the 
 above entries are posted the Accrued Interest Earned and Accrued Interest Cost 
 accounts will be in balance and the interest resulting from these accruals will be 
 properly recorded in the two accounts with interest. 
 
 c'^Ly^^^^'-c.-^^.'^'-^^-z-.'i^-^f^^?^ 
 
 -^/ /fT-'^ 
 
 
 
 ii^OCtfr^^ru*'- 
 
 ^ / 
 
 1^ 
 
 >\sy 
 
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 3 J 
 
 yp\3/ 
 
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 Illustration No. 96, Post-Closing Entries
 
 ADJUSTING ENTRIES AND REPORTS 
 
 229 
 
 § 224. The Post-Closing Trial Balance in Illustration No. 97 was pre- 
 pared from the ledger accounts after the entries in Illustrations Nos. 95 and 96 
 were posted. The purpose of this Trial Balance is to prove that the ledger is in 
 balance at the close of the fiscal period, thus enabling the bookkeeper to secure a 
 Trial Balance at the end of the first month in the next fiscal period. If the ledger 
 is out of balance at the beginning of the fiscal period because of errors in closing 
 or post-closing entries, it will remain out of balance until the error is discovered 
 and corrected. 
 
 
 
 -^/ /^»- 
 
 
 Hv' 
 
 
 
 /a 
 // 
 
 
 ^ajs 
 
 '^fa 
 
 >-oM 
 
 3 ao a 
 
 3 oao 
 
 
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 / ^ a. J i 
 
 a/ 
 
 'f 
 
 ^-i/ 
 
 3^7 
 
 ¥^ 
 
 >a\tAo 
 
 4oo\ 
 
 f 
 
 J~aa 
 
 
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 Illustration No. 97, Post-Closing Trial Balance
 
 230 EXERCISE AND QUESTIONS 
 
 Exercise No. 80. 
 
 The following list of accruals, deferred items, reserves, and merchandise in- 
 ventory, December 31, 1922, is applicable to the retail furniture business, Exercise 
 No. 71, pages 184-188. 
 
 (a) Merchandise in stock, $21,265.97. 
 
 (b) Interest accrued on notes receivable, $18.05. 
 
 (c) Interest accrued on notes payable, $1.56. Unpaid pay roll for one-half 
 
 week: office employees, $25.00; selling department, $75.00. De- 
 cember garage rent unpaid, $25.00. 
 
 (d) Office supplies on hand, $125.07. Unexpired insurance: on merchandise, 
 
 $111.98; on delivery equipment, $42.10; on building, $33.42. 
 
 (e) Reserves for Depreciation: Office Equipment, 5%; Delivery Equip- 
 
 ment, 10%; Building, 23^%. 
 
 (f) Reserve for Doubtful Accounts: 34% of sales (credit balance of Sales 
 
 account). 
 
 Follow instructions given below: 
 
 1. Make the adjusting journal entries. 
 
 2. Post to the ledger sheets used in Exercise No. 71, and take a Trial Balance. 
 
 3. Prepare a Balance Sheet and a Statement of Profit and Loss, both in 
 
 "report" form. (The profit is shared equally by the partners.) 
 
 4. Record in the general journal the entries necessary to close the ledger. 
 
 5. Make the post-closing entries, post them, and take a post-closing Trial 
 
 Balance. 
 
 QUESTIONS 
 
 1. Is it necessary for the bookkeeper or accountant to prepare the Balance 
 
 Sheet first? 
 
 2. Why is the Balance Sheet usually prepared first and the Statement of Profit 
 
 and Loss second? 
 
 3. What information does the management of the business obtain from (a) the 
 
 Balance Sheet and (b) the Statement of Profit and Loss? 
 
 4. Why is it necessary for the net profit as shown by the Statement of Profit 
 
 and Loss to be the same as the increase in capital as shown by the Balance 
 Sheet? 
 
 5. What is the distinction (a) between the adjusting entries and closing entries 
 
 and (b) between the closing entries and post-closing entries? 
 
 6. Is it necessary to close the ledger at the end of the fiscal period? Give reason 
 
 for answer. 
 
 7. If merchandise which cost $2,000.00 is inventoried at $1,500.00, what effect 
 
 will this have on the net profit? 
 
 8. Why is it customary when taking stock to use the cost price of merchandise 
 
 instead of the market price when the latter is greater than the former? 
 
 9. What effect would an error in closing the ledger have on the Trial Balances 
 
 in subsequent periods? 
 10. How is the amount of accrued interest earned and accrued interest cost 
 obtained?
 
 Chapter XXIII 
 
 PARTNERSHIP PROBLEMS 
 
 The Purpose of this Chapter is to develop the principles discussed in the 
 preceding chapters by means of problems requiring their application, and to illus- 
 trate the opening, current, adjusting, and closing entries peculiar to a business 
 conducted by partners; also to give additional practice in the preparation of the 
 Balance Sheet and Statement of Profit and Loss for a partnership business. Each 
 problem is treated as an exercise and numbered consecutively, following the pre- 
 ceding exercises. 
 
 Exercise No. 81, Opening Entries. 
 
 F. L. Burke, R. S. Cooke, and C. B. Summers form a partnership for the 
 purpose of transporting freight by truck. F. L. Burke and R. S. Cooke have been 
 operating independent lines but wish to consolidate; C. B. Summers is admitted 
 as a partner because of the additional cash capital needed for the operation of the 
 consolidated lines. 
 
 Mr. Burke invests the present assets of his business, consisting of the following: 
 three trucks, cost price $2,500.00 each; depreciation on trucks, $750.00; accounts 
 receivable, $1,251.50; reserve for doubtful accounts, $116.40; notes receivable, 
 $500.00; check on the First National Bank, $627.65. The new firm agrees to assume 
 the following liabilities: accounts payable, $327.60; a note for $1,000.00 payable 
 at the First National Bank; accrued interest on the note, $8.50. 
 
 Mr. Cooke invests the following assets: four trucks, cost price $1,650.00 each; 
 depreciation on trucks, $1,320.00; office equipment, $350.00; depreciation on 
 office equipment, $35.00; accounts receivable, $762.50; reserve for doubtful 
 accounts, $84.70; check on the City National Bank, $1,323.45. 
 
 Mr. Summers invests check on the Atlas National Bank, $7,500.00. 
 
 Prepare in journal form, under date of July i, the entries necessary to open 
 the books of the new partnership. Debit an account with Trucks with the present 
 value of the trucks invested. 
 
 Exercise No. 82, Opening Entries. 
 
 W. H. Rankin and Chas. O. Watkins form a partnership for the purpose of 
 engaging in the retail shoe business. Mr. Rankin invests his present stock of 
 goods, valued at $2,684.73; personal accounts due him, $1,274.28, less 2% for 
 bad debts; a note due him for $375.60; accrued interest on this, $3.76; office 
 equipment, cost value, $447.65; depreciation on the same, $44.77; store fixtures 
 $650.00; depreciation on the same, $65.00; cash in bank to his credit, $1,428.65; 
 he owes personal accounts, $2,176.48; and a note for $1,000.00. 
 
 Mr. Watkins invests cash, $2,000.00; a note in his favor, $1,500.00; and 
 accrued interest on this note, $27.65. 
 
 Prepare in journal form, under date of February i, the entries required to 
 record the investment of the partners. 
 
 231
 
 232 PARTNERSHIP PROBLEMS 
 
 Exercise No. 83, Opening Entries. 
 
 W. H. Armstrong and C. L. Whittle form a partnership for the purpose of 
 engaging in the retail hardware business. Mr. Armstrong invests cash in the 
 bank, $387.62; merchandise in stock, $2,438.26; personal accounts due him, 
 $972.40; reserve for bad debts, 2%; office equipment, cost value, $350.00; de- 
 preciation on the same, $35.00; store fixtures, $475.00; depreciation on the same, 
 $47.50; notes receivable, $675.27; accrued interest on the same, $36.20. The 
 partnership assumes personal accounts which he owes, $942.76; a note due the 
 First National Bank for $1,000.00; accrued interest on this, $20.00. Mr. Whittle 
 invests cash, $1,427.86; merchandise in stock, $1,360.48; personal accounts due 
 him, $843.65, less 2% for bad debts; delivery equipment, cost value, $850.00; 
 depreciation on the same, $85.00; notes receivable due him, $1,265.74; accrued 
 interest on the same, $82.75. The partnership assumes personal accounts which 
 he owes, $365.40; a note due the City National Bank, $500.00. 
 
 Prepare in journal form, under date of October i, the entries required to 
 record the investment of the partners. 
 
 Exercise No. 84, Transactions Affecting Partners' Capital Accounts. 
 
 1. Record direct in the capital accounts the following transactions relating 
 to the investments and withdrawals of L. B. Audigier, M. B. Grifhn and C. B. 
 Carter, in the real estate business: 
 
 Jan. I. Each partner invested $3,000.00; 28, L. B. Audigier withdrew 
 
 $500.00. 
 Feb. 6. M. B. Griffin invested $1,200.00; 24, C. B. Carter invested $1,500.00. 
 Mar. I. L.B. Audigier invested $2,500.00; 8, M. B. Griffin invested $1,500.00; 
 
 12, C. B. Carter withdrew $1,265.28; 16, M. B. Griffin invested 
 
 $1,582.75; 31, L. B. Audigier withdrew $827.40. 
 Apr. 15. The firm accepted real estate belonging to L. B. Audiger, valued 
 
 at $1,182.65; 22, M. B. Griffin withdrew $1,265.91. 
 July I. L. B. Audigier withdrew $500.00. 
 Aug. I. M. B. Griffin withdrew $1,342.86; 16, L. B. Audigier invested 
 
 $1,598.76; 12, M. B. Griffin invested $1,800.00. 
 Sept. I. C. B. Carter invested $2,500.00; 29, C. B. Carter withdrew $1,500.00. 
 Oct. 5. M. B. Griffin withdrew $850.00; 31, L. B. Audigier withdrew 
 
 $1,000.00. 
 Nov. 5. M. B. Griffin invested $1,200.00; 9, C. B. Carter invested $1,000.00; 
 
 22, L. B. Audigier invested $1,250.00. 
 Dec. I. C. B. Carter withdrew $250.00. 
 
 2. December 31, the net profit, as shown by the Statement of Profit and 
 Loss, was $4,500.00. Make the entry to transfer this to their capital accounts, 
 assuming that profits are to be shared equally. 
 
 3. January i of the following year, the business was sold for $24,000.00. 
 Show the division of this cash between the partners according to each partner's 
 net investment. 
 
 Exercise No. 85, Consolidation of Two Partnerships. 
 
 E. F. Penn and G. W. Penn are partners operating a retail grocery business 
 in one locality, and F. V. Knight and H. O. Powell are partners operating the same 
 line of business in another locality. It is agreed to form a partnership, consolidating
 
 PARTNERSHIP PROBLEMS 
 
 233 
 
 the two businesses. Each partner is to invest $5,000.00 and share equally in the 
 profits of the new business. The Trial Balance taken from the ledgers of the two 
 concerns after the books were closed April 30, 192. ., are as follows: 
 
 PENN BROS. Post-Closing Trial Balance, April 30, 192.. 
 
 Cash 
 
 Notes Receivable 
 
 Accounts Receivable 
 
 Reserve for Bad Debts 
 
 Merchandise Inventory 
 
 Accrued Interest Earned 
 
 Furniture and Fixtures 
 
 Reserve for Depreciation of Furniture and Fixtures. 
 
 Buildings 
 
 Reserve for Depreciation of Buildings 
 
 Land 
 
 Insurance 
 
 Notes Payable 
 
 Accounts Payable 
 
 Accrued Interest Cost 
 
 Accrued Wages 
 
 E. F. Penn, Capital. .' 
 
 E. F. Penn, Personal 
 
 G. W. Penn, Capital. . • 
 
 G. W. Penn, Personal 
 
 308 
 
 42 
 
 
 
 321 
 
 40 
 
 
 
 1,694 
 
 39 
 
 
 
 
 
 34 
 
 20 
 
 1.775 
 
 15 
 
 
 
 6 
 
 II 
 
 
 
 295 
 
 00 
 
 
 
 
 
 29 
 
 50 
 
 4,000 
 
 00 
 
 
 
 
 
 200 
 
 00 
 
 2,500 
 
 00 
 
 
 
 156 
 
 75 
 
 
 
 
 
 534 
 
 40 
 
 
 
 942 
 
 27 
 
 
 
 35 
 
 65 
 
 
 
 76 
 
 40 
 
 
 
 5,635 
 
 90 
 
 1,014 
 
 35 
 
 
 
 
 
 5,478 
 
 45 
 
 895 
 
 20 
 
 
 
 12,966 
 
 77 
 
 12,966 
 
 TL 
 
 KNIGHT & POWELL Post-Closing Trial Balance, April 30, 192.. 
 
 Cash 
 
 Accounts Receivable 
 
 Reserve for Doubtful Accounts 
 
 Inventory 
 
 Furniture an,d Fixtures 
 
 Reserve for Depreciation of Furniture and Fixtures. 
 
 Delivery Equipment 
 
 Reserve for Depreciation of Delivery Equipment . . . 
 
 Insurance 
 
 Office Supplies 
 
 Notes Payable 
 
 Accounts Payable 
 
 Accrued Interest Cost 
 
 Accrued Rent 
 
 F. V. Knight, Capital 
 
 F. V. Knight, Personal 
 
 H. O. Powell, Capital 
 
 H. O. Powell, Personal 
 
 (i) Prepare the journal entries to open the books of the new partnership. 
 Debit the fixed asset accounts for their net invested value. 
 
 (2) Prepare the journal entries to close the partners' personal accounts into 
 their capital accounts. 
 
 (3) Show in journal form the entries necessary to record the additional cash 
 investment of three of the partners and the withdrawal of cash from investment 
 by one partner, in order to make the net investment of each equal to $5,000.00, 
 the amount agreed upon. 
 
 2,995 
 
 95 
 
 
 
 3,748 
 
 16 
 
 
 
 
 
 75 
 
 29 
 
 4,500 
 
 00 
 
 
 
 325 
 
 00 
 
 
 
 
 
 48 
 
 75 
 
 1,850 
 
 00 
 
 
 
 
 
 37000 
 
 396 
 
 84 
 
 
 
 142 
 
 17 
 
 . 
 
 
 
 
 1,091 
 
 65 
 
 
 
 1,543 
 
 70 
 
 
 
 65 
 
 47 
 
 
 
 175 
 
 00 
 
 
 
 4,869 
 
 36 
 
 
 
 37 
 
 65 
 
 
 
 5,386 
 
 22 
 
 
 
 295 
 
 03 
 
 13,958 
 
 12 
 
 13,958 
 
 12 
 
 
 — 
 
 
 —
 
 234 
 
 PARTNERSHIP PROBLEMS 
 
 Exercise No. 86, Admission of a Partner. 
 
 D. P. Winters and L. S. French are partners operating a drug business under 
 the firm name of Winters & French. They decide to consohdate with S. M. Smiley 
 who is operating a drug store as an individual. The assets, liabilities, and pro- 
 prietorship of the partnership and of the individual are shown below: 
 WINTERS & FRENCH Post-Closing Trial Balance, June 30, 192 . 
 
 Cash 
 
 Inventory — Drugs 
 
 Inventory — Merchandise 
 
 Office Equipment 
 
 Reserve for Depreciation of Office Equipment 
 
 Store Fixtures 
 
 Reserve for Depreciation of Store Fixtures 
 
 Soda Fountain Equipment, 
 
 Reserve for Depreciation of Soda Fountain Equipment 
 
 Office Supplies 
 
 Soda Fountain Supplies 
 
 Insurance 
 
 Notes Payable 
 
 Accounts Payable 
 
 Accrued Interest Cost 
 
 Accrued Rent 
 
 D. P. Winters, Capital 
 
 L. Si. French, Capital 
 
 3,970 
 
 4-051 
 
 1,926 
 
 300 
 
 850 
 
 500 
 
 66 
 132 
 
 254 
 
 12,052 
 
 96 
 
 SMILEY'S PHARMACY Post-Closing Trial Balance, June 30, 192. 
 
 6,530 
 
 236 
 
 300 
 
 150 
 
 2,349 
 
 2,349 
 
 12,052 
 
 96 
 
 Cash 
 
 Notes Receivable 
 
 Accounts Receivable 
 
 Reserve for Bad Debts 
 
 Inventory — Drugs 
 
 Inventory — Merchandise 
 
 Accrued Interest Earned 
 
 Store Fixtures 
 
 Reserve for Depreciation of Store Fixtures 
 
 Soda Fountain Equipment 
 
 Reserve for Depreciation of Soda Fountain Equipment 
 
 Insurance 
 
 Notes Payable 
 
 Accounts Payable 
 
 Accrued Interest Cost 
 
 Accrued Wages 
 
 S. M. Smiley, Capital 
 
 7,424 
 
 256 
 
 1,942 
 
 601 
 
 434 
 
 24 
 
 269 
 
 150 
 
 132 
 
 11,234 
 
 91 
 
 46 
 
 26 
 
 950 
 1,296 
 
 3 
 
 22 
 
 8.882 
 
 11,234 
 
 91 
 
 (i) Prepare in journal form the entries necessary to open the books of the 
 new partnership. 
 
 (2) Post these entries and prepare a Trial Balance. 
 
 Exercise No. 87, Retirement of a Partner. 
 
 G. H. Graton, T. R. RolHns, and L. B. Bennett are operating a wholesale 
 grocery business as partners. Mr. Rollins wishes to retire. His capital account 
 at this time shows a debit of $1,862.55 and a credit of 116,981.50; his personal 
 account shows a debit of $2,652.40 and a credit of $2,000.00. He agrees to accept 
 in settlement for his interest in the business the following: cash, $5,843.50; a 
 note for $5,000.00 signed by the new firm of Graton & Bennett; a note for $2,000.00 
 held by the firm and signed by a customer (accrued interest, $56.50) ; an auto-
 
 PARTNERSHIP PROBLEMS 
 
 235 
 
 mobile owned by the firm, the cost of which was debited to the Delivery Equipment 
 account, $2,000.00 (depreciation, $400.00); merchandise from stock, $500.00. 
 
 Prepare, under date of August 10, in journal form the entries to close Mr. 
 Rollins' personal account and to record the agreement; debit the excess to a Loss 
 on Purchase of Partner's Interest account. 
 
 Exercise No. 88, Death of a Partner, 
 
 M. Abbott, T. Bronner, and F. Clayton were partners in a retail farm imple- 
 ments business, sharing profits equally. December 31 the books were closed. 
 March 15 of the following year Mr. Abbot died. March 17 C. Breese was appointed 
 administrator for Mr. Abbott and required a statement of the business as of March 
 15. The Trial Balance prepared at the close of business on that date was as follows: 
 
 ABBOTT, BRONNER & CLAYTON Trial Balance, March 15, 192.. 
 
 Cash 
 
 Notes Receivable 
 
 Accounts Receivable 
 
 Reserve for Doubtful Accounts 
 
 Furniture and Fixtures 
 
 Reserve for Depreciation of Furniture and Fixtures . 
 
 Insurance 
 
 Office Supplies 
 
 Advertising Material 
 
 Notes Payable 
 
 Accounts Payable 
 
 M. Abbott, Capital 
 
 M. Abbott, Personal 
 
 T. Bronner, Capital 
 
 F. Clayton, Capital 
 
 F. Clayton, Personal 
 
 Sales 
 
 Sales Returns and Allowances 
 
 Merchandise Inventory 
 
 Purchases 
 
 Freight In 
 
 Purchases Returns and Allowances 
 
 Selling Expense - 
 
 Administrative Expense 
 
 Interest Earned 
 
 Interest Cost 
 
 333 
 696 
 562 
 
 21 
 950 
 
 25 
 962 
 630 
 412 
 
 244 
 
 230 
 i346 
 431 
 
 775 
 
 .177 
 ,868 
 
 398 
 
 65,068 
 
 16 
 
 39 
 
 178 
 142 
 
 10,000 
 8,562 
 5,495 
 
 4-987 
 
 4.643 
 
 361 
 
 30,103 
 
 341 
 
 251 
 
 65,068 
 
 39 
 
 Merchandise Inventory, March 15, 192. ., $12,594.35. 
 
 Accrued interest on notes receivable, $87.95. 
 
 Accrued interest on notes payable, $136.62. 
 
 Unpaid Wages: selling department, $450.00; office, $350.00. 
 
 Unpaid Rent for the month of March, $150.00. 
 
 Insurance Expired, $637.84. One-half of expired insurance is on merchandise and one-half on 
 furniture and fixtures; of the expired insurance on furniture and fi.xtures, one-fourth is appli- 
 cable to administrative expense and three-fourths to selling expense. 
 
 Office supplies on hand per inventory, $125.05. 
 
 Advertising material on hand per inventory, $265.77. 
 
 Depreciation on Furniture and Fixtures, $9.90 (yearly depreciation, 5% of cost); of this, one-fourth 
 is applicable to administrative expense and three-fourths to selling expense. 
 
 Reserve for Doubtful Accounts, one-twelfth of 1% of net sales. 
 
 Prepare (i) the adjusting entries, (2) the Trial Balance from the ledger after 
 these entries are posted, (3) the Balance Sheet, (4) the Statement of Profit and 
 Loss, (5) the closing entries, (6) the post-closing entries, and (7) the post-closing 
 Trial Balance after these entries are posted. 
 
 April I the administrator accepted $6,000.00 cash in full settlement for Mr. 
 Abbott's interest in the business. Record this transaction in journal form.
 
 236 PARTNERSHIP PROBLEMS 
 
 Exercise No. 89, Trial Balance, Statements and Ledger Closing. 
 
 On December 31, 1922, the accounts in the ledger of T. B. Austin & Co. show 
 the following balances: 
 
 Cash $ 8,200 . 00 
 
 Notes Receivable i ,480 . 00 
 
 Accounts Receivable 10,800.00 
 
 Reserve for Doubtful Accounts 430.00 
 
 Furniture and Fixtures 800.00 
 
 Res. for Dep. of Furn. and Fix 200.00 
 
 Delivery Equipment 2,200.00 
 
 Res. for Dep. of Del. Equipment. . . .- 660.00 
 
 Buildings 3,000.00 
 
 Res. for Dep. of Buildings 300.00 
 
 Land 3,500.00 
 
 Insurance 290 . 00 
 
 Office Supplies 474 . 40 
 
 . Advertising Material 756.95 
 
 Notes Payable 5,000.00 
 
 Accounts Payable 11,000.00 
 
 T. B. Austin, Capital 16,800.00 
 
 A. R. Black, Capital 16,800.00 
 
 Sales 48,000.00 
 
 192 1 Inventory 3,300.00 
 
 Purchases 49,000 . 00 
 
 Freight and Drayage In 3,450.00 
 
 Buying Expense 960 . 00 
 
 Selling Expense 7,500 . 00 
 
 Delivery Expense 1,240.00 
 
 Administrative Expense 2,275.00 
 
 Interest on Notes Receivable 58.95 
 
 Discount on Purchases 664.00 
 
 Interest on Notes Payable 395- 00 
 
 Discount on Sales .- 291 .60 
 
 1. Prepare a Trial Balance from these account balances. 
 
 2. Make the adjusting entries for the following: 
 
 (a) 1922 inventory, $28,762.95. 
 
 (b) Accrued interest on notes receivable, $25.60. 
 
 (c) Accrued interest on notes payable, $31.80. 
 
 (d) Unpaid pay roll: office, $120.00; selling department, $160.00, 
 
 (e) Expired insurance: furniture and fixtures, $16.75; delivery equip- 
 
 ment, $24.50; buildings, $37.00; stock of merchandise, $60.95. 
 
 (f) Supplies used: office supplies, $395.45; advertising material, 
 
 $710.10. 
 
 (g) Reserves for depreciation: furniture and fixtures, 5%; delivery 
 
 equipment, 6%; buildings, 2%. 
 (h) Reserve for Doubtful Accounts: 1% of accounts receivable. 
 
 3. Prepare a Balance Sheet and Statement of Profit and Loss assuming that 
 
 the profit is shared equally by the partners. 
 
 4. Make the entries to close the ledger. 
 
 5. Make the necessary post-closing entries. 
 
 6. Prepare a post-closing Trial Balance. 
 
 Exercise No. 90, Changing from a Partnership to a Sole Proprietorship. 
 
 Ammon and Banbury are partners operating a motion picture theater. 
 Neither receives a salary, the profit being shared equally at the end of the year.
 
 PARTNERSHIP PROBLEMS 237 
 
 Ammon receives injuries in an automobile accident which necessitate his retir- 
 ing from active management. Banbury wishes to continue his connection with 
 the theater, but does not care to assume the risk of management on his own respon- 
 sibihty. It is agreed that Ammon shall buy Banbury's interest as shown in the 
 ledger, payable one-half cash and one-half note, and that he shall retain Banbury 
 as manager of the theater, giving him, in addition to a monthly salary of $150.00, 
 one fifth of the yearly profits. The partners' accounts appear in the ledger as 
 follows: Ammon, Capital, Cr., $13,050.00; Ammon, Personal, Dr., $550.00; 
 Banbury, Capital, Cr., $11,300.00; Banbury, Personal, Cr., $700.00. Statements 
 prepared December 31, show that the net profit for the year is $6,800.00. 
 
 I. Make the entries in journal form (a) to transfer the net profit to the part- 
 ner's capital accounts; (b) to close Banbury's personal account into his capital 
 account; (c) to record the note and cash given by Ammon in payment for Ban- 
 bury's interest. 
 
 , 2. Assuming that the net profit the first year after the new agreement goes 
 into effect is $7,000.00, (a) record in journal form the distribution of the net profit; 
 (b) compare the compensation received by each under the partnership agreement 
 and under the new agreement, stating whether it was more or less under the latter 
 than under the former. 
 
 Exercise No. 91, Accruals and Deferred Items. 
 
 At the close of the fiscal period April 10, the accruals and deferred items to 
 be recorded on the books of Binner & Johnson are as follows: 
 
 Interest accrued on notes receivable $275.60 
 
 Interest accrued on notes payable 218.65 
 
 Taxes accrued (Administrative Expense) 214.40 
 
 Wages unpaid : 
 
 Administrative division of the office 116.50 
 
 Purchasing division of the office 55-90 
 
 Selling division of the office 251 . 65 
 
 Sales clerks in store 310.00 
 
 Drivers of delivery trucks 125 . 60 
 
 Rent for month paid in advance April i 150.00 
 
 Insurance: 
 
 Payments, per Insurance account: 
 
 On merchandise 865 . 40 
 
 On delivery equipment 352 . 50 
 
 On building 250.00 
 
 Unexpired, per insurance policy record: 
 
 On merchandise 207 . 90 
 
 On delivery equipment 75-75 
 
 On building 107 . 50 
 
 Material : 
 
 Office supplies purchased per Office Supplies account 721 .65 
 
 Office supplies on hand per inventory 119.60 
 
 Advertising material purchased per Advertising Material acct. 625 . 50 
 
 Advertising material on hand per inventory 144. 50 
 
 Total stamps purchased per Stamps account 801 . 50 
 
 Stamps used in office 85 . 50 
 
 Stamps used in advertising department 261 .08 
 
 1. Make the adjusting entries (a) to record the accrued assets and liabilities, 
 _(b) to record the prepaid rent in the proper account, (c) to transfer the expired 
 insurance to the proper operating accounts, and (d) to transfer the value of material 
 used to the proper operating accounts. 
 
 2. Make the post-closing entries to transfer the accrued assets and liabilities 
 and the prepaid expense in (a) and (b) above, to the proper operating accounts, 
 under date of April 11.
 
 238 QUESTIONS 
 
 QUESTIONS 
 
 1. (a) What account is credited for that part of the profit which is to be with- 
 
 drawn by a partner? (b) What account is credited for that part which is 
 to be left in the business? 
 
 2. Robert Johnson invests $5,000.00 and withdraws $1,200.00; James Carrel 
 
 invests $4,000.00 and withdraws $800.00. The business is sold for $10,500.00 
 cash. How much of this cash will each partner receive, the profit and cash 
 to be divided in the same proportion as the net investment? 
 
 3. If amounts withdrawn by a partner as compensation for his services are 
 
 debited direct to his capital account, what effect will this have on (a) 
 the operating cost of the business and (b) on the net profit of the business? 
 
 4. If there are three partners in a business and one of them sells his interest in 
 
 the business to one of the other partners for cash, (a) what entry will be 
 required to record this sale? (b) If he sells to the other two partners and 
 payment is made from the assets of the partnership, what entry will be 
 made? 
 
 5. If there are three partners in a business and one of them (with the consent 
 
 of the others) sells his interest for part cash and part note to a person who 
 is not connected with the firm, what entry will be required to record this 
 transaction? 
 
 6. If a partnership business composed of two partners has been operated at a 
 
 loss of $4,000.00 during the fiscal period, and the two partners, who share 
 this loss equally, each invests $1,500.00 cash and has $500.00 debited to 
 his personal account to cover this loss, what entry will be made to record 
 the transaction? 
 
 7. If the profit resulting from the operations of a partnership business during a 
 
 fiscal period is $6,000.00 and the two partners agree to withdraw all of 
 this, one of them accepting a building and lot recorded on the books of the 
 partnership as "Real Estate, $2,750.00" as his share of the profit and the 
 other accepting $3,000.00 cash as his share, how will the transaction be 
 recorded ? 
 
 8. One of the partners is to receive five per cent of the total sales as his com- 
 
 pensation for services rendered the partnership, maintaining his own auto- 
 mobile for use in calling on customers. At the close of the business year 
 the total sales amount to $152,000.00, and his drawing account shows a 
 debit balance of $4,900.00 for amounts withdrawn on account of commission. 
 What entries will be required to record the commission and the check paid 
 him for the balance of his commission? 
 
 9. J. C. Strickler is one of the partners in a mercantile business. At the close 
 
 of the business year, his personal account shows a credit balance of $1,400.00 
 for amounts advanced to the partnership and for salary during the year. 
 He agrees to accept in settlement of this an automobile purchased by the 
 partnership at the beginning of the previous fiscal period for $1,850.00 
 as recorded in the Delivery Equipment account, and depreciated at the 
 rate of ten per cent for each fiscal period. What entries are necessary to 
 record this transaction? 
 10. T. B. Bridges and L. W. Peart are partners in a mercantile business. At 
 the close of the fiscal period Mr. Bridges' capital account shows a credit 
 balance of $6,752.80 and Mr. Peart's capital account, a credit balance of 
 $5,522.50. Mr. Peart pays Mr. Bridges $3,500.00 cash for one-half of his 
 interest in the business, thus giving Mr. Peart a three-fourths interest and 
 Mr. Bridges a one-fourth interest. What entry is necessary to record this 
 transaction?
 
 Chapter XXIV 
 
 CONSIGNMENTS 
 
 The Purpose of this Chapter is to explain the method of recording trans- 
 actions affecting merchandise received by the business or shipped by the business 
 on consignment, and to illustrate, through the practice set, some of the transactions 
 performed by a commission business. While the tendency in modern business is 
 to buy and sell, yet there are many cases in which it is to the advantage of all 
 parties concerned to make sales on consignment. 
 
 § 225. A Consignment is merchandise sent by the owner to another to 
 be sold for the owner. The owner of the merchandise sent as a consignment is 
 known as the consignor and the one to whom the merchandise is sent as the con- 
 signee. The consignment is at the risk of the consignor and belongs to him until 
 it is sold by the consignee. 
 
 The consignor consigns the merchandise to the consignee; the consignee sells the merchandise 
 and pays the consignor for it. As a rule, the report of sales for each consignment is made after all 
 merchandise in the consignment has been sold. The consignee may have in his possession more 
 than one consignment from the same consignor, but a separate record is kept of the sales of the mer- 
 chandise in each consignment. 
 
 § 226. The Relation of the Consignor and Consignee is that of prin- 
 cipal and agent. The agent must follow the instructions of the principal in regard 
 to the sale of the merchandise which belongs to the principal; in the absence of 
 any specific agreement in regard to the method of sale, the agent is supposed to 
 follow the trade custom of the business in which he is engaged. The agent should 
 keep the merchandise of his principal separate from his own merchandise and 
 must take the same care of it; otherwise, he will be responsible for any damage 
 that may occur through his negligence. 
 
 § 227. Compensation of Consignee. The consignee receives a fee for 
 the sale of merchandise on consignment; this fee is referred to as commission and 
 is based on an agreed percentage of the net sales. The commission is the consignee's 
 profit, that is, his income from the services rendered in connection with selling 
 consigned goods. A profit will accrue to the consignor if he receives from the 
 consignee a greater amount than the cost of merchandise plus the cost of sales. 
 
 § 228. Purpose of Consignments. Merchandise is consigned because 
 its nature is such that the consignee does not wish to purchase it or because the 
 consignor believes that it will be to his advantage to offer it for sale on consignment. 
 Live stock, cotton, fruit, vegetables, poultry and eggs are examples of the class 
 of merchandise sold on consignment. These examples illustrate the class of mer- 
 chandise that may be offered for sale on consignment, and are not given to convey 
 the idea that such merchandise is always sold in this manner. Trade customs and 
 market conditions govern, to a large extent, the marketing of all classes of mer- 
 chandise. 
 
 § 229. Business Forms and Accounts. The business forms required in 
 connection with a consignment consist of the "invoice of shipment" and the "ac- 
 count sales." The additional accounts necessary in connection with consignments 
 consist of Consignment Out, Consignment In, Commission, Storage, and Drayage. 
 
 § 230. The Invoice of Shipment is the business form used by the con- 
 signor on which to list the goods shipped to the consignee on consignment. It has the 
 same relation to a consignment as the sales invoice has to a sale, but differs in 
 
 239
 
 240 
 
 CONSIGNMENTS 
 
 that the title to the merchandise shipped on consignment remains in the shipper 
 while the title to merchandise sold passes to the purchaser. Illustration No. 98 
 shows one form of invoice of shipment. 
 
 Invoice of Shipment 
 
 Invoice 
 
 Illustration No. 98, Invoice of Shipment. 
 
 § 231. The Account Sales is the business form used by the consignee for 
 reporting to the consignor the sales and expenses in connection with the consign- 
 ment. The information shown in it consists of the date, name and address of the 
 
 Account Sales 
 
 riNrixxATi.Oino OUL 5 
 
 Below plea^ find account sales of '2- (^ /i> (l-'T^-t^ZJ^ft^^ /^'i^&^'/^-^f'—^.-^^ 
 
 19 
 
 Sold hy^^..i^^^?^,^^i^^'!y-7^ y V^^^^?^^?^??.^^gZ— Commission Merchant 
 Received (/-i-i-'i^^ ^^ 19 and sold for account of ^'Z-^-!S?-z>;?^-7<-K^/r.-r^-zxV'.-<^ . 
 
 DATE 
 
 CHARGES 
 
 Folio 
 
 AMOUNT 
 
 DATE 
 
 SALES 
 
 Folio 
 
 AMOUNT 
 
 a^j^ 
 
 ■y 
 
 Freiiht 
 
 ^:? 
 
 -vr 
 
 ^^ 
 
 ^ 
 
 >- 
 
 -^t} C^-r>^-aS/:£^ £^ J". >.^ 
 
 // 
 
 /^T- 
 
 .ro 
 
 JC'^7 
 
 ■ -r 
 
 
 (^^ 
 
 /a 
 
 
 'K 
 
 ,J^ „ „ AT^S- 1 
 
 // 
 
 Z^?- 
 
 ,ra 
 
 
 
 i 
 
 
 
 
 
 (? 
 
 / o (^ „ „ 3 -^-a 
 
 ^? 
 
 .4>o 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Advances 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 y-r 
 
 Storaae 
 
 0-; 
 
 /ty 
 
 
 
 
 
 
 
 
 
 
 Insurance 
 
 
 
 
 
 
 
 
 
 
 ,-r 
 
 
 f' 
 
 ^J 
 
 ^ 
 
 
 
 
 
 
 
 
 
 & 
 
 
 
 
 
 
 
 
 
 
 
 >/- 
 
 Net Proceeda 
 
 (fj 
 
 .r// 
 
 rr 
 
 
 
 
 
 
 
 
 
 
 
 <iA^S 
 
 
 
 
 
 
 Ca^J 
 
 - 
 
 
 
 
 Illustration No. 99, Account Sales.
 
 CONSIGNMENTS 241 
 
 consignee, name and address of the consignor, date tiie consignment was received, 
 the various charges in connection with the consignment, a description of each 
 sale from the consignment, the total sales, and the net amount due the consignor. 
 Where there are a number of consignments, the consignee may, by the use of 
 carbon paper, prepare the account sales as the debits and credits are posted. 
 Illustration No. 99 shows one form of account sales. 
 
 CONSIGNMENT OUT ACCOUNT 
 
 § 232. The Purpose of this Account is to sihow the consignor's record 
 of the transactions with the consignment. The title of the account should include 
 the term "consignment" and the name of the consignee, also "out" or "to" to 
 indicate the nature of the account; thus "Consignment Out, John Smith & Co." 
 or "Consignment to John Snith & Co." indicates that merchandise belonging to 
 the business for which the books are being kept has been shipped to John Smith 
 & Co. to be sold on consignment. 
 
 Debit Each Consignment Out Account: Credit Each Consignment Out Account: 
 
 ^ I. For transportation (a) prepaid II 2. For the net proceeds of the con- 
 
 on the consignment, and (b) signment as shown by the ac- 
 
 paid on merchandise belong- count sales. 
 
 ing to the consignment re- Should the consignee send cash 
 
 turned by the consignee. or accept a draft in part pay- 
 
 ment of the consignment, such 
 part payments are credited to the 
 consignment and deducted from 
 the net proceeds. 
 
 % 3. The Balance of Each Consignment Out Account shows the net returns 
 from the sales of merchandise belonging to the (Consignment; it is shown on the 
 Statement of Profit and Loss as a return from sales. 
 
 If desired, the balance of each Consignment Out account may be closed into one account with 
 Consignment Sales and the balance of this account shown on the Statement of Profit and Loss. 
 The purpose of consigning merchandise is to effect sales, hence all returns from these sales are an 
 addition to the sales of merchandise from stock; the amount of the consignment sales is shown 
 separate from sales out of stock so that the management may have this additional information. 
 
 § 233. Inventory of Consignments Out. Merchandise in the hands of 
 the consignee is one of the assets of the business the same as merchandise in stock. 
 No account sales from a consignee at the close of a fiscal period indicates to the 
 consignor that the merchandise is still in the possession of the consignee. The 
 value of this merchandise at cost price should be shown on the Balance Sheet as 
 an asset under the caption "Consignment Goods". The value of merchandise on 
 consignment at the close of the fiscal period does not aftect the consignment account 
 because this account was not debited with its value when it was shipped. 
 
 The debits (cost of shipping, etc.) to each Consignment Out account for which there has been 
 no report of sales should be shown on the Balance Sheet in the same manner as deferred charges; 
 the credits (part payment on account of goods consigned) to each Consignment Out account for 
 which there has been no report of sales, should be shown on the Balance Sheet as a liability. Amounts 
 paid for sending merchandise on consignment constitute a selling expense, but if no returns have 
 been received on the consignment at the close of the fiscal period, these should not be included as 
 a current expense, but should be carried over into the next period. Amounts received from the 
 consignee, and credited to a Consignment Out account, are liabilities at the close of the fiscal period, 
 because the value of merchandise consigned is shown in the Inventory account; unless these 
 amounts are shown as liabilities, the statement will not be correct, because the account with cash 
 or some other asset was debited at the time the credit was made. 
 *
 
 242 CONSIGNMENTS 
 
 CONSIGNMENT IN ACCOUNT 
 
 § 234. The Purpose of this Account is to show a record of the transac- 
 tions which the consignee has with the merchandise consigned to him for sale. The 
 title of the account should contain the term "consignment" and the name of the 
 consignor, also the word "in" or "from" to indicate the nature of the account; 
 thus "Consignment In, James Brown" or "Consignment from James Brown" indi- 
 cates that merchandise has been received on consignment from James Brown by 
 the business for which the books are kept. If desired, the consignments may 
 be numbered consecutively and this number, together with the term "consign- 
 ment" used as the title of the account.; this method is followed in Illustrations 
 Nos. 100-103. 
 
 Debit Each Consignment In Account: Credit Each Consignment In Account: 
 
 ^ I. For (a) amounts paid for freight, ^ 6. For the sales of merchandise 
 
 drayage and service costs; (b) belonging to the consignment, 
 
 cash or other assets given the either for cash or on account, 
 
 consignor on account of sales; 
 (c) merchandise belonging to 
 the consignment returned by 
 customers; and (d) commis- 
 sion, storage, insurance and 
 other costs. 
 
 If 7. The Balance of Each Consignment In Account shows an asset if the 
 debit side is the larger, or a liability if the credit side is the larger. A debit balance 
 indicates that the consignee has paid more for handling the goods than he has 
 received from their sale ; a credit balance indicates that the consignee has received 
 more for the sale of the goods than the charges against the same. The balance 
 of each Consignment In account is shown as a current asset or a current liability 
 on the Balance Sheet prepared fdr the consignee. 
 
 If desired, the various consignment in accounts may be kept in a separate ledger and a con- 
 trolling account with Consignments In or Consignment Ledger maintained in the general ledger. 
 With this plan, the controlling account is debited and credited with totals only, special columns 
 being provided for amounts posted to the various consignment in accounts in the consignment 
 ledger. 
 
 § 235. Inventory of Consignments In. If, at the close of the fiscal period 
 there is in stock merchandise which belongs to consignments from others, the value 
 of this merchandise is not shown as an asset on the Balance Sheet of the consignee 
 because it does not belong to him. The interest of the consignee in merchandise 
 consigned to him is shown on the Balance Sheet by the various Consignment In 
 accounts. 
 
 COMMISSION ACCOUNT 
 
 § 236. The Purpose of this Account is to show the net amount received 
 as commission for selling merchandise on consignment. 
 
 Debit the Commission Account: Credit the Commission Account: 
 
 ^ I. For any adjustments which re- T[ 2. For amounts deducted as com- 
 
 duce the amount of income mission from the proceeds of 
 
 from commission as shown by consignments at the time the 
 
 the credit to this account. account sales is rendered. 
 
 ^ 3. The Balance of the Commission Account shows the net returns from 
 commission ; it is shown as an operating or non-operating income on the Statement 
 of Profit and Loss depending on the nature of the business.
 
 CONSIGNMENTS 
 
 243 
 
 J^-^>i>/y / /f 
 
 L.F| /^ame of Account and Explanation- 
 
 Gpnpral 
 Dp 
 
 ConsLeddep 
 Dr. 
 
 
 General 
 Cr 
 
 \ 
 
 V • I, 
 
 / a o o 
 
 r '^ J J ^ 
 
 r '¥ j-'a 
 
 3 rC >-v 
 
 / o 
 
 
 7-^7 
 
 > >3 ;>! 
 
 /J- 
 
 rj^ 
 
 ^>j> 
 
 / s\ - 
 
 ¥ r o tA 
 
 r r 
 
 Illustration No. 100, General Journal. 
 
 EXPLANATION. Two debit columns are provided, one for accounts in the consignment 
 ledger and the other for accounts in the general ledger; only one credit column is necessary as the 
 accounts in the consignment ledger are seldom credited from the general journal. Each amount 
 entered in the "Consignment Ledger, Dr." column is posted to the debit of an account in the con- 
 signment ledger; the total of this column is posted to the debit of the Consignment Ledger account 
 in the general ledger at the end of the month. 
 
 *The break indicates a number of entries omitted.
 
 244 
 
 CONSIGNMENTS 
 
 
 (/afoJ'Jf-Z'^^g-.fj) | uug-^g-c£'.? r 
 
 Illustration No. loi, Receipts Side of Cash Book. 
 
 EXPLANATION. The ruling is similar to that in Illustration No. 29, except that two 
 special columns are provided, one for cash sales of merchandise belonging to consignments and the 
 other for cash sales of merchandise from stock. Each amount entered in the "Consignment Ledger, 
 Cr." column is posted to the credit of an account in the consignment ledger; the total of this column 
 is posted to the credit of the Consignment Ledger account in the general ledger at the end of the 
 month. 
 
 STORAGE ACCOUNT 
 
 § 237. The Purpose of this Account is to record the storage charges on 
 consignments. Storage refers to the charges made by the consignee for the space 
 occupied by the merchandise belonging to the consignor. This storage charge is 
 based on the rent cost to the consignee. 
 
 Debit the Storage Account: 
 I, For allowances which reduce the 
 income from storage as shown 
 by the credit to this account. 
 
 Credit the Storage Account: 
 ^ 2. For the amount deducted as 
 storage from the sales of each 
 consignment at the time the 
 account sales is rendered. 
 
 If 3. The Balance of the Storage Account shows the income from storage. It 
 is shown as one of the non-operating incomes on the Statement of Profit and Loss. 
 If desired, the credit to the Storage account may be shown on the Statement of 
 Profit and Loss as a deduction from the cost of rent. 
 
 *The break indicates a number of entries omitted.
 
 CONSIGNMENTS 
 
 245 
 
 ^%'i-^// 
 
 ^'^.-t*':>-y^-tf<>t--^*/ 
 
 Datp 
 
 Li- 
 
 Account DpbitecL 
 
 Explanation 
 
 "General 
 
 Cons. Ledger 
 Dr. 
 
 PurcJiases 
 Dr. 
 
 
 (.~C'-y<-d'C'a^?'V-7-yLg.'?^ ^o.-^ 
 
 
 yC 
 
 
 
 ^ a o 
 
 
 
 
 rs- 
 
 
 ^^ide^^^^.'-rz^&p^^i.e.'^i^d^ \Pt'^^1<) .,d.tt^^et.<^ 
 
 Illustration No. 102, Payments Side of Cash Book. 
 
 EXPLANATION. The ruling is similar to that in Illustration No. 30, except that two special 
 columns are provided, one for accounts in the consignment ledger and the other for cash purchases 
 of merchandise. Each amount entered in the "Consignment Ledger, Dr." column is posted to the 
 debit of an account in the consignment ledger; the total of this column is posted to the debit of the 
 Consignment Ledger account in the general ledger at the end of the month. 
 
 DRAYAGE ACCOUNT 
 
 § 238. Drayage refers to the cost of hauling the merchandise belonging to 
 the consignor, either from the station to the warehouse or from the warehouse to 
 the customers. The amount charged the consignor is approximately the same as 
 the cost to the consignee. The debits and credits to this account are the same as 
 those to the Storage account, because their nature is the same. The balance, which 
 will be a credit, may be shown on the Statement of Profit and Loss as a non-oper- 
 ating income or as a deduction from the total cost of drayage. 
 
 COMMISSION SET 
 
 This is a practice set without vouchers consisting of the transactions for two 
 months, performed by Thompson & Strong, partners engaged in the commission 
 business. The transactions are separate from the text and are included with the 
 books of account necessary to record them. The purpose of this set is to provide 
 practice in recording transactions peculiar to a commission business. 
 
 *The break indicates a number of entries omitted.
 
 246 
 
 QUESTIONS ON CONSIGNMENTS 
 
 ^^- L.F I /fame of Account and Explanation 
 
 ]Cons 
 I .No. 
 
 
 Cons.Led.rfer 
 Cr. 
 
 Sales 
 Cr. 
 
 Accts Rec. 
 Dr. 
 
 J X r-\ r o 
 
 
 -i- r r o 
 
 
 
 ^y o ^ > a 
 
 >■ ^ ^j 
 
 
 
 
 
 — L^<:f-^'Z^^^'<-^>9-Z'frz.e^7T-^S^^e^''^'^''y~ 
 
 ■ f fS\'?'- ^\ 
 
 ■>- r £ ./ 
 
 ^ 
 
 ♦f r ./- <« 
 
 Illustration No. 103, Sales Journal. 
 
 EXPLANATION. This sales journal is similar to Illustration No. 19, except that a special 
 column is provided for sales of merchandise belonging to consignments. Each amount entered in 
 the "Consignment Ledger, Cr." column is posted to an account in the consignment ledger; the 
 total of this column is posted to the credit of the Consignment Ledger account in the general ledger 
 at the end of the month. 
 
 QUESTIONS 
 
 What entry is made for the value of merchandise received from the owner 
 
 to be sold for him? 
 What is the difference between merchandise purchased by the business and 
 
 merchandise received by it on consignment, in so far as title is concerned? 
 Why is it advisable for the consignee to keep consigned goods separate from 
 
 goods owned by him? 
 What is the difference between a consignment inward and a consignment 
 
 outward? 
 How does the consignor secure a profit on the merchandise on consignment? 
 
 the consignee? 
 How is a Trial Balance made from the consignment ledger when there is 
 
 an account in the general ledger with Consignment Ledger? 
 How is the value of merchandise belonging to a consignment in shown on 
 
 the Balance Sheet? 
 How is the value of merchandise belonging to a consignment out shown 
 
 on the Balance Sheet? 
 9. What is the purpose of (a) the Storage account, and (b) the Drayage account? 
 10. How are the balances of the Storage and Drayage accounts shown on the 
 
 Statement of Profit and Loss?
 
 Part Three — Corporation 
 
 Chapter XXV 
 
 § 239. Introduction. The purpose of the discussion in this and succeeding 
 chapters is to familiarize the student with the apphcation of the principles of 
 accounting to a business operated as a corporation ; also to give additional practice 
 in recording transactions, preparing reports and closing the ledger. Two practice 
 sets applicable to a corporation business, separate from the text, accompany this 
 division. The accounting principles involved in connection with recording these 
 transactions are applicable to a business owned and operated by a sole proprietor 
 or partnership, as well as a corporation, with the exception of those which affect 
 accounts peculiar to a corporation. 
 
 § 240. A Corporation is defined by the Supreme Court of the United States 
 as "an association of individuals united for some common purpose and permitted 
 by the law to use a common name, and to change its members without dissolution 
 of the association." This means that the corporation is an artificial person created 
 by law for the purpose of operating a specific business. When brought into exist- 
 ence by law, the corporation has the same privileges accorded any citizen governed 
 by the same law and engaged in a business of like nature. The contracts executed 
 by the corporation are under the corporate name, and in its legal relation it is 
 known only by this name, the same as an individual is known by his name. 
 
 John Smith, a citizen of Ohio, owns and operates an automobile business in Cleveland, Ohio, 
 under the name of the Central Garage. The Citizens Motor Car Company, a corporation under 
 the laws of Ohio, operates an automobile business in the same city, under the name of "The Citizens 
 Motor Car Company." If John Smith fails to pay a debt incurred by him, and the one to whom 
 it is due seeks settlement through the courts, the summons to appear in court will be addressed to 
 John Smith and not the Central Garage, because he is the individual who is responsible. If The 
 Citizens Motor Car Company fails to pay an account, and the one to whom the debt is due 
 seeks settlement through the courts, the summons to appear in court will be addressed to The Cit- 
 izens Motor Car Company because this is the legal title of the corporation. John Smith and The 
 Citizens Motor Car Company each have equal rights under the law, in so far as legal rights relate 
 to the automobile business. However, John Smith could, if he desired, add to his automobile business 
 any other line of merchandise, but The Citizens Motor Car Co. could not do this unless the right 
 granted it by the State included other lines of merchandise, because it was created for a specific 
 purpose and cannot engage in any other line outside of that authorized by the law which created it. 
 
 § 241. The Purpose of a Corporation is (a) to provide capital for the 
 operation of a business enterprise, (b) to distribute the risk of investors, and (c) 
 to centralize control. The corporate form of proprietorship permits the investor 
 with a small amount of money to invest in a business enterprise which may pay 
 him a profit on the investment, but which may not require any part of his time in 
 connection with its operation. Where one has money to invest, it is preferable to 
 invest small amounts in different enterprises rather than the entire amount in one 
 enterprise; this is especially true where the investor does not expect to take an 
 
 247
 
 248 PROPRIETORSHIP IN A CORPORATION 
 
 active interest in the operations of the businesses in which he invests. Distribu- 
 tion of the investment may result in a profit on a part or all of them; investment 
 in one enterprise will result in either a profit or a loss. 
 
 Arthur Maj's has invented a device for automatically removing water from the windshield of an 
 automobile while it is raining. He is advised by those experienced in the automobile business that 
 this should prove to be a salable article, but he does not have sufficient capital to provide for its 
 manufacture. By combining his capital and that of a number of others who reaHze the merits of 
 the invention, the necessary capital may be provided. The corporate form of proprietorship 
 would be preferable, because it is possible that those who wish to invest small amounts in this enter- 
 prise would not care to participate in the management of the business. 
 
 § 242. Comparison of the Corporation and the Partnership. A cor- 
 poration differs from a partnership in the manner of organization, method of 
 conducting the business, responsibility of investors, and the manner of dissolution. 
 Both are formed for the same purpose — the combination of capital for the promotion 
 of a business enterprise. The partnership is formed by contract; the corporation 
 is created by the authority of the law of the state in which it is organized. The 
 affairs of the partnership are usually conducted by the partners; the affairs of the 
 corporation are in charge of officials who are elected by those who have invested 
 capital in the corporation. Each partner in a partnership is individually responsible 
 for all the debts contracted through the operation of the business; the investor in 
 a corporation is not responsible for all of the obligations of the corporation, because 
 these debts are contracted in the name of the corporation and must be collected 
 out of the assets of the corporation. (The responsibility of the investor in a cor- 
 poration is limited by the law which authorized the corporation.) A partnership 
 continues during the time specified in the contract, unless dissolved by a decree of 
 court, by agreement, by the death of a partner, the withdrawal of a partner or the 
 disability of a partner; the corporation continues during the time authorized, 
 and is not affected by the death, legal disability, or withdrawal of any one of those 
 who have invested capital in it. Since the right to continue as a corporation may 
 be renewed an indefinite number of times, it is sometimes said, "a corporation 
 never dies." A partner in a partnership may sell his interest in the partnership 
 only with the consent of the other partners; each investor in a corporation may 
 sell his interest at will, without consulting the other members. 
 
 Arthur Mays would have considerable trouble in securing the necessary capital to promote 
 the manufacture and sale of his invention if each investor were responsible for all of the debts which 
 might be contracted in connection with the operation of this business. However, if each investor 
 knew that he would not lose any more than the amount invested, provided the business did not 
 prove to be profitable, he might be willing to take a chance and invest a small amount. Arthur Mays 
 might hesitate to ask a friend to invest in his enterprise if he knew that his friend might be required 
 to pay obligations which the business could not pay, but if he knew that his friend took no chance 
 other than the loss of the amount invested, he would not hesitate to seek an investment from him, 
 
 § 243. Proprietorship in a Corporation. When one individual owns and 
 operates a business, he has full control of the same, and the proprietorship is vested 
 in him. When two or more partners own and operate a business, the proprietor- 
 ship is vested in the partnership, each partner possessing the right to act for the 
 other partner or partners; as the proprietorship is vested in the partnership, neither 
 partner has the right to withdraw or dispose of his interest without the consent of 
 the others. When a business is operated as a corporation, the proprietorship 
 is vested in the corporation because it is an artificial person created by law for 
 the purpose of operating a specific business. Each investor in the corporation has 
 certain legal rights in connection with its operations which he may transfer by sale 
 or gift without consulting any other investor. The value of the proprietary interest 
 of a partner in the business is fixed by the Articles of Copartnership; the value of 
 each unit of proprietorship in a corporation is fixed by the state law granting 
 corporate authority to the corporation.
 
 CAPITAL AND CAPITAL STOCK 249 
 
 The proprietorship in a corporation is usually divided into units of equal 
 value; the value of each unit is usually $100.00, but may be $1.00, $10.00, $50.00, 
 or any other amount permitted by law. Each unit is usually referred to as a "share" 
 or "a share of stock" in the corporation. Each investor may own one or more of 
 these shares; thus, if the value of each unit is $100.00, and a stockholder purchases 
 three units, then his proprietary interest or investment is $300.00. 
 
 Arthur Mays decides that it will require $25,000.00 capital to promote the manufacture and 
 sale of his patent. He decides to make the value of each unit or share $50.00, so it will not be nec- 
 essary for those who are interested to invest a large amount unless they prefer to do so. This 
 means that the proprietorship of the corporation will be divided into five hundred shares, and that 
 these shares may be owned by five hundred different persons, each holding one share, or by a lesser 
 number of individuals, provided more than one share is owned by one or more investors. 
 
 § 244. Capital and Capital Stock. The capital (proprietorship) of a 
 corporation is the assets minus the liabilities; that is, the net amount remain- 
 ing after all the debts have been paid. Capital stock is the maximum amount 
 which the investors in the corporation are authorized to invest. If at the beginning 
 of the corporation the full amount of capital stock is subscribed and paid for at 
 its par value, the capital and capital stock of the corporation will be the same at 
 that time; however, it will not remain the same because the net assets of the corpor- 
 ation will either increase or decrease through the operations of the business. Each 
 investor (stockholder) has the same interest in the net capital as he has in the out- 
 standing capital stock; one who owns one- thousandth of the capital stock of the 
 corporation also owns the right to one-thousandth of the capital of the corporation. 
 
 If Arthur Mays receives $25,000.00 cash from the investors in the corporation which is to 
 promote the manufacture and sale of his patent, the capital and capital stock of the corporation at 
 the beginning is $25,000.00. If at the end of the first year, the assets of the corporation are $40,000.00 
 and the liabilities are $10,000.00, the capital or proprietary interest at that time is $30,000.00. 
 
 § 245. The Method of Organizing a Corporation is prescribed by the 
 law of the state in which it is organized. On page 250 is given the procedure for 
 organizing a corporation in New York (at the left), and Illinois (at the right); 
 the method in each of the other states is practically the same, except the par value 
 of stock, the minimum number of stockholders at the beginning, and the amount 
 of investment required before the certificate of incorporation is granted. 
 
 § 246. The Charter of a corporation is a certificate signed by the incor- 
 porators and approved by the proper state officials; it is the written authority 
 under which the corporation does business. Illustration No. 104 shows the form 
 of a charter. When the charter is granted, the corporation comes into existence; 
 and remains in existence until the expiration of the time for which the charter 
 is granted or until dissolved by legal procedure. 
 
 § 247. When the Charter has been Granted, the corporation is ready 
 to begin business. The first business to be performed is to sell the stock, that is, 
 secure cash or other property from those who are to invest in the corporation. The 
 purpose of the corporation is to provide capital for a business enterprise, and this 
 capital is secured through the sale of its stock to those who Wish to invest. 
 Some states require that a part of the capital stock be subscribed for before the 
 charter is issued; in these states, it is customary to have those who wish to 
 invest in the corporation subscribe in writing for the number of shares to be 
 purchased. Where a part of the capital is not to be paid in until after the corpora- 
 tion is formed, these written promises for the subscription to stock may be secured 
 after the charter is granted. When the necessary capital has been provided through 
 the sale of stock, the corporation is ready to begin its business activities.
 
 250 
 
 ORGANIZING A CORPORATION 
 
 Illinois 
 
 "A corporation may be formed for any 
 lawful purpose (except banking, insurance, 
 real estate brokerage, operation of railroads, 
 and loaning money) whenever three or more 
 persons, citizens of the United States, at least 
 one of whom shall be a citizen of Illinois, shall 
 sign, seal, and acknowledge a statement of 
 incorporation setting forth: 
 
 1. Names and post office addresses of the 
 incorporators. 
 
 2. Name of the proposed incorporation. 
 
 3. A clear and definite statement of the 
 object or objects for which it is formed. 
 
 4. The period of duration. 
 
 5. Location of the principal office in this 
 State, giving town or city, street and number, 
 if any. 
 
 6. Number of shares into which the capital 
 stock is to be divided, whether all or part of 
 same shall have par value, and if so, the par 
 value thereof, which shall not be less than 
 $5.00 nor more than $100.00 a share; whether 
 ail or part of the same shall have no par value; 
 and if there is to be more than one class of 
 stock created, a description of different classes, 
 number of shares of each, and relative rights, 
 interests and preferences each class shall rep- 
 resent. 
 
 7. Names and addresses (give street and 
 number) of the original subscribers to the cap- 
 ital stock and amount subscribed by each. 
 
 8. Total amount of authorized capital 
 stock. 
 
 9. Amount of such stock it is proposed to 
 issue at once, which shall not be less than 
 $1,000.00. 
 
 10. The payment of at least one-half of the 
 capital stock having a par value and of not 
 less than $5.00 per share for each share of cap- 
 ital stock having no par value, which it is 
 proposed to issue at once, with a description of 
 the nature and value of the property, if any, 
 paid for such capital stock. 
 
 11. Number, names, and post office ad- 
 dresses of directors by street and number, at 
 least one of whom shall be a resident of this 
 State, and the term for which elected." 
 
 Procedure for the Organization of a Corporation in New York and Illinois 
 
 § 248. A Stockholder in a corporation is a person who owns one or more 
 shares of stock in the corporation. He may have come into possession of this 
 stock through purchase from the corporation itself, or through purchase or gift from 
 another stockholder; in either case his ownership is evidenced by a written state- 
 ment known as a certificate of stock, Illustration No. 107, and by the proper 
 record of this certificate on the books of the corporation. 
 
 New York 
 
 "Except as provided in section 2a of this 
 chapter, three or more persons may become a 
 stock corporation for any lawful business pur- 
 pose or purposes, by making, signing, acknowl- 
 edging, and filing a certificate which wall 
 contain: 
 
 1. The name of the proposed corporation. 
 
 2. The purpose or purposes for which it is 
 to be formed. 
 
 3. The amount of capital stock, and if any 
 portion be preferred stock the preferences 
 thereof. 
 
 4. The number of shares of which the cap- 
 ital stock shall consist, the value of which shall 
 not be less than five nor more than one hundred 
 dollars and the amount of capital not less than 
 five hundred dollars, with which the said cor- 
 poration will begin business. [By amendment 
 of the original law, stock may now be issued 
 which has no par value.] 
 
 5. The city, village, or town in which its 
 principal business office is to be located. If it 
 is to be located in the city of New York, the 
 borough there in which it is to be located. 
 
 6. Its contemplated duration. This may 
 be made perpetual. 
 
 7. The number of its directors, not less 
 than three. 
 
 8. The names and post office addresses of 
 the directors for the first year. 
 
 9. The names and post office addresses of 
 the subscribers to the certificate of incorpora- 
 tion and the number of shares in the corpora- 
 tion subscribed by each." 
 
 The certificate must be signed by the 
 three or more persons who make application 
 for the charter and their signatures acknowl- 
 edged by a Notary Public or other designated 
 official. 
 
 Robert C. Brown subscribes and pays for four shares of stock in the corporation organized by 
 Arthur Mays for the purpose of promoting the sale of his patent, the windshield cleaner. Mr. Brown 
 will receive, as evidence of the cash paid, a written statement in the form of a certificate of stock, 
 showing the name of the corporation, the number of shares he has purchased, and the par value of 
 each. This is property which belongs to Robert C. Brown and which he can dispose of at will.
 
 CHARTER OF INCORPORATION 251 
 
 Charter of Incorporation 
 
 Be it known that J. C. Wilson, J. W. Jones, R. L. Wood, E. E. Miller, and W. S. Shields, all 
 more than twenty-one years old, are hereby constituted a body politic, and corporated by the name and 
 style of the Union Printing and Publishing Company, with a capital stock of Fifty {$50,000.00) Thou- 
 sand Dollars. 
 
 The general powers of said corporation are: 
 
 1. To sue and be sued by the corporate name. 
 
 2. To have and use a common seal, which it may alter at pleasure; if 710 common seal, then the 
 signing of the name of the corporation by any duly authorized officer shall be legal and binding. 
 
 J. To purchase and hold, or receive by gift, any addition to the personal property owned by said 
 corporation, any real estate necessary for the transaction of the corporate business, and also to purchase 
 and accept any real estate in payment or part payment of any debt due to the corporation, and sell realty 
 for corporation purposes. 
 
 4. To establish by-laws and make all rules and regulations, not inconsistent with the laws and 
 constitutions, deemed expedient for the management of corporate affairs. 
 
 5. To appoint such subordinate officers and agejits, in addition to the President, Secretary, and 
 Treasurer, as the business of the corporation may require. 
 
 6. To designate the name of the office, and fix the compensation of the officers. 
 
 7. To borroiv money and issue notes or bonds upon the face of the corporate property, and also to 
 execute a mortgage or mortgages as further security for the repayment of money thus borrozved. 
 
 The following provisions and restrictions are coupled with said grant of powers: 
 
 1. A failure to elect officers at the proper time does not dissolve the corporation, but those in 
 office hold witil election, or appointment and qualification of their successors. 
 
 2. The term of all offices may be fixed by the by-laws of the corporation; the same, however, not 
 to exceed two years. 
 
 J. The corporation may, by by-laws, make regulations concerning the subscription for, or transfer 
 of stock; fix upon the amount of capital to be invested in the enterprise; the division of the same into 
 shares; the time required for the payment thereof by the subscribers to the stock; the amount to be called 
 in at one time. The right of action should exist in a corporation to sue a defaulting stockholder for the 
 failure to pay for stock subscribed to, when called upon to do so. 
 
 4. The corporation shall have power to purchase type, presses, paper, etc., for the purpose of 
 printing newspapers, books, pamphlets, etc., and in general, to execute all orders for printing books, 
 and the execution of all orders for job work usually undertaken and performed in first-class printing and 
 publishing associations. 
 
 5. The Board of Directors shall consist of five or more members at the option of the corporation, 
 to be elected either in person or by proxy by the majority of the votes cast, each share representing one 
 vote. 
 
 6. A majority of the Board of Directors shall constitute a quorum, and shall fill all vacancies 
 until next election. The first Board of Directors shall consist of five or more incorporators who shall 
 apply for, and obtain the charter. 
 
 7. The books of the corporation shall show the original and subsequent stockholders, their re- 
 spective interests, the amount which has been paid on the shares subscribed, the transfer of stock, and other 
 transactions in which it is presumed the stockholders or creditors may have an interest. 
 
 8. By no implication or construction shall the corporation be deemed to possess any powers, except 
 those hereby expressly given or necessarily implied from the nature of the business for which the charter 
 is applied. 
 
 We, the undersigned, apply in the State of Tennessee, by virtue of the law of the land, for a charter 
 of incorporation for the purpose of, and with the powers declared in the foregoing instrument. 
 Witness our hand, August 16, IQ22. 
 
 Illustration No. 104, Charter of Incorporation (Tennessee). 
 
 EXPLANATION. It will be observed that the par value of each share is to be fixed by the 
 Board of Directors, and is not stated in the charter; also that the number of incorporators is five 
 instead of three, as required in New York and Illinois. 
 
 § 249. Classification of Stock. Those who make application for the charter 
 designate the rights and privileges of the stockholders in the corporation. If some 
 of the stock carries with it rights and privileges not granted to the other stock, it 
 will be necessary to indicate this in the certificate of stock issued to each stock- 
 holder. There are usually two kinds of stock issued, common and preferred. 
 
 The discussion of common and preferred stock given in §§ 250 and 251 is for the information 
 of the bookkeeper in recording the transactions in connection with the transfer of corporate stock. 
 The legal distinction between these two classes of stock may be ascertained from a study of corpo- 
 ration law and the laws of the various states authorizing the organization of corporations. 
 
 § 250. Common Stock. Common stock is that issued to stockholders 
 who are to participate in the management of the business, and to share in the
 
 252 CLASSIFICATION OF STOCK 
 
 profits which may result from its operations without financial preference. The 
 term "common" as used in connection with the stock in a corporation is not to 
 be interpreted as meaning that this stock has less value than other stock issued by 
 the corporation. It is used only to distinguish between the stock which has no 
 financial preference and that which has financial preference. 
 
 § 251. Preferred Stock. Preferred stock is that issued to stockholders 
 who wish to have the amount of the income from their investment in the 
 corporation stated, and who do not care to take an active part in the manage- 
 ment of the corporation. This statement is not to be interpreted as meaning that 
 the preferred stockholders do not have the privilege of taking an active part in the 
 management of the business, as this is often permitted through the authority 
 given in the charter. Preferred stock always specifies a fixed rate of dividend. If 
 this dividend is payable out of the profits of each year, the preferred stock is "non- 
 cumulative;" if the dividend is to be paid out of future profits, when the profits 
 of each year are not sufficient to pay the rate, it is "cumulative." 
 
 § 252. No Par Value Stock refers to stock issued without value in those 
 states which authorize corporations to issue no par value stock. The laws in these 
 states set a minimum (nominal) value at which no par value stock may be issued; 
 thus, in Illinois at least $io.oo must be collected for each share of no par value 
 stock before the corporation is authorized to issue the stock. The market value 
 of each share of no par value stock is determined by dividing the proprietorship 
 (net assets) of the corporation by the total number of shares issued. 
 
 The purpose of issuing stock with no par value is to encourage those who wish to invest in 
 corporation stock to ascertain the real value of the stock before purchasing it, rather than to base 
 the purchase price on the par value as stated in the certificate. The value of a certificate of stock 
 which states that the holder is entitled to ten shares of stock in the corporation, par value $ioo.oo 
 per share, may or may not be $1,000.00; yet the buyer might be induced to pay $1,000.00 for it 
 because of this statement. If the statement in the certificate were to the effect that the holder was 
 entitled to ten shares of stock in the corporation, without any value placed on the stock, the pur- 
 chaser could ascertain the value only from a knowledge of the number of shares which the corpora- 
 tion had issued and the value of the net assets of the corporation. 
 
 § 253. Unissued Stock is that stock which is authorized in the charter 
 but has not been issued to stockholders; it has no monetary value because it has 
 not been issued. Under no condition should unissued capital stock be recorded 
 as an asset, or confused with treasury stock. It is customary to record the unissued 
 capital stock on the books of the corporation so that each stockholder may know 
 from the report submitted to him by the accounting department, the par value 
 of the stock which the corporation has the authority to issue, but which has not 
 yet been issued. 
 
 § 254. Treasury Stock is capital stock which has been fully paid up and 
 issued, but, through purchase or gift, comes back into the possession of the cor- 
 poration. A corporation has the right to purchase its own stock unless the state 
 law under which it was organized forbids it. As a rule, corporations are not per- 
 mitted to buy their own stock because this would defeat the purpose of the cor- 
 poration, which is to distribute the ownership of the stock among many. Unissued 
 capital stock must not be confused with treasury stock; the former represents 
 stock which has not been issued, and the latter, stock which has been issued, 
 but later acquired by the corporation through purchase or donation. 
 
 Stock purchased may be illustrated as follows: a corporation wishes to have each of its em- 
 ployees own one or more shares of its stock. To encourage this, it agrees to buy back the stock held 
 by an employee should he leave the employ of the corporation. Stock is issued to an employee and 
 recorded in the same manner as stock issued and sold to another. Should the employee sever his 
 connection with the corporation, his stock would be purchased by the corporation and held in the 
 treasury until sold again. 
 
 Stock donated to a corporation may be illustrated as follows: the stockholders of a corporation 
 engaged in the manufacture of automobiles plan to bring out a new model; however, they wish to 
 have it thoroughly tried out before offering it on the market. The common stockholders decide to 
 donate to the corporation a designated number of shares of their stock to be sold in order to provide 
 funds for developing the new car. This stock, when received by the corporation, will be recorded 
 as treasury stock and held as such until it is sold.
 
 SURPLUS 253 
 
 § 255. Value of Stock. Stock in a corporation may have four different 
 values, as follows: 
 
 (i) The par value is the amount stated in the certificate; no par value stock 
 does not have a par value. 
 
 (2) The market ^■alue is the price at which the stock is quoted on a Stock 
 Exchange, or at which it can be sold; stock quoted at ".79" is worth 
 $79.00 for each share. 
 
 (3) The book value of stock is the par value plus the surplus or the par 
 value minus the deficit. If the capital stock is one hundred thousand 
 dollars and the surplus ten thousand dollars, each hundred dollar share 
 of stock has a book value of one hundred and ten dollars; if there is no 
 surplus, but a deficit of ten thousand dollars, the book value is ninety 
 dollars per share. 
 
 (4) The real value is the amount that would be received for the stock if the 
 assets of the corporation were liquidated; the real value and the book 
 value would be the same if the assets were sold for the value recorded 
 on the books of the corporation. 
 
 § 256. A Dividend is that part of the profit of the corporation distributed 
 to the stockholders. The Board of Directors determines the amount of profit to 
 be distributed as dividend, and the amount to be retained as surplus. The divi- 
 dend is usually a certain per cent of the par value of the stock; a dividend of 6% 
 means that each stockholder who owns $100.00 par value of stock in the corpo- 
 ration will receive $6.00 dividend. 
 
 § 257. An Assessment is the reverse of a dividend; that is, the stockholder is 
 required to pay to the corporation a certain per cent of the par value of the stock 
 he holds instead of receiving from the corporation a certain per cent of the par 
 value of his stock. Assessments are necessary when the working capital of the 
 corporation has been impaired through the operations of the business, and it is 
 necessary to procure additional working capital in order to continue the operation 
 of the business. Each stockholder must pay the assessment levied by the Board 
 of Directors unless the stock he holds is non-assessable; the stockholder who holds 
 stock subject to assessment a^nd refuses to pay, becomes a debtor to the corporation, 
 and the amount can be collected in the same manner as any other debt. 
 
 § 258. The Surplus of a corporation is that part of the profit which has 
 not been distributed to stockholders in dividends. This surplus is one of the lia- 
 bilities of the corporation to the stockholders. The proprietorship of the corpora- 
 tion is the outstanding capital stock plus the surplus. 
 
 § 259. Bonds. A bond is a long-time note arranged in a special form. Bonds 
 are usually issued in denominations of $100.00, $500.00, and $1000.00, and usually 
 secured by a mortgage on real estate or personal property owned by the corpora- 
 tion. Each bond is composed of two sections: one, the bond itself, which is the 
 written promise of the corporation to pay the amount mentioned; and the other, 
 the interest coupons, that is, the written promises of the corporation to pay 
 annually or semi-annually a certain amount of interest. A bond of $1,000.00 
 payable in twenty years, with interest payable semi-annually at 6%, would have 
 forty coupons, each coupon being a written promise or obligation of the 
 corporation executing the bond to pay $30.00. On the due date of each coupon, 
 the holder of the bond detaches it from the bond, and presents it to the trustee
 
 254 SINKING FUND 
 
 (usually a bank or trust company) for collection. When the bond referred to is 
 due, at the end of twenty years, all of the coupons will have been removed. Bonds 
 are issued by both public and private corporations; that is, a city, a county or a 
 state may borrow money by issuing bonds in the same way as an incorporated 
 railroad or other business enterprise. 
 
 § 260. Sinking Fund refers to assets owned by the corporation, but usually 
 in the hands of a trustee who represents the bondholders. When a mortgage is 
 given to secure the bondholders, this usually specifies the amount of cash or other 
 assets to be placed in the hands of the trustee each year, so that he may have 
 available, at the maturity of the mortgage, funds with which to pay the bonds 
 it secures. The mortgage usually specifies the nature of the securities to be pur- 
 chased by the trustee with the cash received from the corporation. 
 
 § 261. Sinking Fund Reserve refers to a yearly reserve set up against 
 current profits in anticipation of the payment of bonds at maturity; the amount 
 of this yearly reserve is usually based on the number of years the bonds have to 
 run — one-tenth of the amount if they mature in ten years, one twentieth if they 
 mature in twenty years, one fiftieth if they mature in fifty years. After the net 
 profit for each year is closed into the Surplus account, that part of the profit to 
 be set aside as reserve is taken out of the Surplus account and credited to the 
 Sinking Fund Reserve account. At the maturity of the bonds, the Sinking Fund 
 Reserve Fund account will have a credit equal to the par value of the bonds and 
 is transferred to the Surplus account. 
 
 A sinking fund differs from a sinking fund reserve in that, in the former, the 
 cash is given to the trustee and invested by him in securities according to the terms 
 of the mortgage, while in the latter, a part of the profit is credited to the reserve 
 account and the cash remains as working capital for the corporation. The investor 
 in a bond should be assured that his investment is well secured and that his interest 
 is safeguarded throughout the life of the bonds. 
 
 § 262. Method of Conducting the Business of a Corporation. The 
 
 affairs of a partnership are conducted by the partners or managers selected b}^ 
 them. The affairs of a corporation are directed by the officers elected by the Board 
 of Directors. The members of the Board of Directors are elected by the stock- 
 holders, each stockholder, whose stock permits him to vote, being entitled to one 
 vote for each share of stock which he owns. After the organization of the cor- 
 poration is completed, the stockholders meet and elect a Board of Directors who 
 are responsible to them for the management of the affairs of the corporation. 
 The Board of Directors elect from their number ofificers who are responsible to 
 them for the detailed operations of the business, usually President, Secretary and 
 Treasurer, whose duties are fixed by the Board of Directors. Stockholders meet 
 annually to elect a Board of Directors; this Board usually elects the officers at 
 the same time. One stockholder might control the entire operations of the cor- 
 poration if he owned more than fifty per cent of the stock, because he could elect 
 the Board of Directors, and through his control of the majority of the stock, elect 
 the officers. The law under which a corporation is formed usually prohibits one 
 stockholder from owning all the stock, but there is no law which prohibits a stock- 
 holder from purchasing the majority of the stock. 
 
 § 263. Income Tax for a Corporation. Each corporation is required to 
 pay a Federal Income Tax on its net income the same as an individual. The amount 
 of the tax is specified in the law which requires its payment. This tax is levied on 
 the net income, which is defined as "gross income less the deductions allowed." 
 For the purpose of applying the federal income tax, corporations are divided into
 
 INCOME TAX FOR A CORPORATION 255 
 
 two classes, corporations and personal service corporations. The latter title is 
 used to distinguish between the smaller corporations in which each stockholder 
 takes an active interest in the business, and the larger corporations where the 
 stockholder purchases stock as an investment and takes no active interest in the 
 business. 
 
 Quoting from the Revenue Act of 1921 : 
 
 "The term 'personal service corporation' means a corporation whose income 
 is to be ascribed primarily to the activities of the principal owners or stockholders 
 who are themselves regularly engaged in the active conduct of the affairs of the 
 corporation and in which capital (whether invested or borrowed) is not a material 
 income-producing factor; but does not include any foreign corporation, nor any 
 corporation 50 per centum or more of whose gross income consists (i) of 
 gains, profits, or income derived from trading as a principal, or (2) of gains, profits, 
 commissions, or other income, derived from a government contract or contracts 
 made between April 6, 1917, and November 11, 1918, both dates inclusive." 
 
 The tax of a personal service corporation is more of the nature of the tax 
 imposed on a partnership as the taxes are paid by the individual stockholders 
 and not by the corporation. 
 
 § 264. Bookkeeping for a Corporation. The nature of the work required 
 to record the transactions performed by a corporation does not differ from that 
 required to record the same transactions performed by a partnership. The only 
 difference between keeping books for a corporation and for a partnership, is the 
 addition of accounts required to record the capital invested in the corporation and 
 addition of accounts required to record the capital invested in the corporation 
 and the profits resulting from its operations. These accounts are discussed in 
 Chapter XXVI. 
 
 QUESTIONS 
 
 1. Give three reasons why you would prefer having money invested in a cor- 
 
 poration instead of in a partnership. 
 
 2. In what respect does a corporation differ from an individual? 
 
 3. What are the requirements for forming a corporation in your home state? 
 
 4. When would common stock be more valuable than preferred stock? 
 
 5. What are the four values that may be attached to stock? Explain each. 
 
 6. What is the difference between par value and no par value stock? Explain 
 
 the reason for each. 
 
 7. Why does stock sell (a) for more than its par \alue; (b) for less than its par 
 
 value? 
 
 8. W'hy should a corporation be willing to pay more than the book value for the 
 
 assets of a going business which it purchases? 
 
 9. Would the sales on account in a retail business operated by a corporation be 
 
 recorded in a different manner than they would in a business of the same 
 nature owned and operated by partners? 
 10. What authority does a stockholder in a corporation have in connection with 
 the operations of the business of the corporation?
 
 Chapter XXVI 
 
 ACCOUNTS PECULIAR TO A CORPORATION 
 
 The Purpose of this Chapter is to explain the accounts which are pecuHar 
 to a corporation ; these include the accounts necessary to record the proprietorship 
 of the corporation and the transactions which occur only in the operations of a 
 business conducted by a corporation. The accounts discussed are Capital Stock, 
 Unissued Capital Stock, Subscribers to Capital Stock, Subscriptions to Capital 
 Stock, Treasury Stock, Donated Treasury Stock, Surplus, Dividend, Organization 
 Expense, Bonds Payable, and Goodwill. 
 
 CAPITAL STOCK ACCOUNT 
 § 265. The Purpose of this Account is to show the par value of the capital 
 stock authorized by the charter, or the par value of the capital stock issued and 
 not canceled. There are two methods of keeping the Capital Stock account: with 
 one method, the Capital Stock account is credited with the amount of the capital 
 stock authorized by the charter at the time it is granted; with the other method, 
 the Capital Stock account is credited only with that part of the capital stock issued. 
 
 Debit the Capital Stock Account: Credit the Capital Stock Account: 
 
 ^ I. For the par value of stock with- *\ 2. For (a) the par value of capital 
 drawn by amendment to the stock authorized by the char- 
 charter; or when the corpora- ter or by amendment thereto, 
 tion is dissolved, for the par or (b) the par value of capital 
 value of capital stock as shown stock at the time the stock 
 on the credit side. is issued. 
 
 ^ 3. The Balance of the Capital Stock Account will show (a) the par value of the 
 authorized capital stock of the corporation when credited with the full authorized 
 capital stock at the time of organization; or (b) the par value of the capital stock 
 issued and outstanding when credited with the stock as issued. The par value of 
 the authorized capital stock and the par value of the capital stock issued are shown 
 on the Balance Sheet. 
 
 UNISSUED CAPITAL STOCK ACCOUNT 
 § 266. The Purpose of this Account is to show the par value of the un- 
 issued capital stock; that is, the stock authorized by the charter but not sold and 
 issued. This account is not needed when the capital stock is all issued at the time 
 of organization, nor when the Capital Stock account is used to show the par value 
 of stock issued. 
 
 Debit this Account: Credit this Account: 
 
 T[ I. For the par value of the cap- 1[ 2. For the par value of the cap- 
 
 ital stock authorized by the ital stock issued when the 
 
 charter when this amount is amount of the authorized cap- 
 
 credited to the Capital Stock ital stock is recorded on the 
 
 account at the time of organ- debit side of this account, 
 
 ization. 
 ^ 3. The Balance of the Unissued Capital Stock Account shows the par value 
 of unissued capital stock. It has no value until sold, hence is shown on the Balance 
 Sheet as a deduction from the authorized capital stock. 
 
 256
 
 ACCOUNTS PECULIAR TO A CORPORATION 257 
 
 SUBSCRIBERS TO CAPITAL STOCK ACCOUNT 
 
 § 267. The Purpose of this Account is to show the amount due from those 
 to whom the capital stock has been sold on the deferred payment plan. This 
 account is not needed when the subscribers pay for their stock at the time iL. is 
 purchased. 
 
 Debit the Siibscrihers to Capital Credit the Subscribers to Capital 
 
 Stock Account: Stock Account: 
 
 \ I. For the par value of capital ^ 2. For cash or other assets re- 
 stock subscribed but not paid ceived from subscribers to 
 for. apply on stock subscribed. 
 
 ^[3. The Balance of the Subscribers to Capital Stock Account shows the amount 
 owed by subscribers for capital stock purchased but not paid for. It is shown on 
 the Balance Sheet as a current asset unless the payments are extended over a long 
 period, in which case it is shown as a separate item below the current assets and 
 above the fixed assets. 
 
 SUBSCRIPTIONS TO CAPITAL STOCK ACCOUNT 
 
 § 268. The Purpose of this Account is to show the par value of stock 
 subscribed but not issued because it has not been paid for. This account is not 
 needed when the subscribers pay for their stock at the time it is purchased. 
 
 Debit the Subscriptions to Capital Credit the Subscriptions to Capital 
 
 Stock Account: ' Stock Account: 
 
 1[ I. For the par value of stock ^ 2. For the par value of capital 
 issued to subscribers. stock subscribed. 
 
 ^ 3. The Balance of the Subscriptions to Capital Stock Account shows the par 
 value of capital stock subscribed but not issued because the subscribers have 
 not paid their subscriptions. It is shown on the Balance Sheet as an addition to 
 the capital stock outstanding, or, if no stock has been issued, as the only item 
 of proprietorship. 
 
 TREASURY STOCK ACCOUNT 
 
 § 269. The Purpose of this Account is to show the par value of treasury 
 stock owned by the corporation. This stock has no connection with unissued 
 capital stock, and the facts recorded in this account apply only to the stock of the 
 corporation which has been fully paid up and issued but has come back into the 
 possession of the corporation through purchase or donation (§ 254). 
 
 Debit the Treasury Stock Account: Credit the Treasury Stock Account: 
 
 1[ I. For the par value of the capital If 2. For the par value of treasury 
 
 stock of the corporation pur- stock sold, 
 chased by or donated to it. 
 
 H 3. The Balance of the Treasury Stock Account shows the par value of the 
 treasury stock owned by the corporation. It is shown on the Balance Sheet as a 
 deduction from the balance of the Capital Stock account. 
 
 TREASURY STOCK DONATED ACCOUNT 
 
 § 270. The Purpose of this Account is to show the par value of stock do- 
 nated to the corporation, and after it is sold, the capitaF resulting from its sale. 
 When the donation is made, the Treasury Stock account is debited, and the Treas- 
 ury Stock Donated account is credited with the par value. When the stock is sold,
 
 258 ACCOUNTS PECULIAR TO A CORPORATION 
 
 Cash or the account which shows the value of the asset received for it, is debited, 
 and the Treasury Stock account is credited; if sold at a discount or premium, 
 the difference between the par value of the stock and the amount received is debited 
 or credited to the Treasury Stock Donated account. Cash or other assets which 
 come into the possession of the corporation through donation increase the capital 
 of the corporation and it is necessary to record this increase. 
 
 Debit the Treasury Stock Donated Credit the Treasury Stock Donated 
 
 Account: Account: 
 
 Tf I. For the discount on donated ^ 2. For the par value of stock 
 
 stock. donated to the corporation 
 
 by the stockholders. 
 \ 3. For the premium on donated 
 stock. 
 
 ^ 4. The Balance of the Treasury Stock Donated Account, before the donated 
 stock is sold, shows the par value of donated stock, and after it is sold, shows the 
 capital resulting from the donation. It may remain in this account, or be trans- 
 ferred to an account with Capital Surplus. The balance of the Treasury Stock 
 Donated account should not be closed into the Surplus account because it is not 
 profit to be withdrawn, but capital supplied for a definite purpose. It is shown 
 on the Balance Sheet as a part of the capital of the corporation in connection 
 with the Capital Stock and Surplus accounts. 
 
 SURPLUS ACCOUNT 
 
 § 271. The Purpose of this Account is to show the undivided profits: 
 that is, that part of the profit which has not been distributed to stockholders. 
 The par value of the capital stock, issued and outstanding, plus the balance of 
 the Surplus account is the proprietorship of the corporation and should be the same 
 as the difference between the assets and liabilities. 
 
 Debit the Surplus Account: Credit the Surplus Account: 
 
 T[ I. At the close of each fiscal % 4. At the close of each fiscal 
 
 period,' for the net loss if period, for the net profit 
 
 the operations of the business if the operations of the busi- 
 
 have resulted in a loss. ness have resulted in a profit. 
 
 ^ 2. For that part of the profit ^ 5. For any adjustments during 
 
 which is to be paid as a the period which increase the 
 
 dividend to the stockholders profits for a preceding period.* 
 
 or set aside for a specific 
 
 purpose. 
 ^ 3. For any adjustments during 
 
 the period which diminish 
 
 the profits for a preceding 
 
 period.* 
 
 ^ 6. The Balance of the Surplus Account shows the undivided profits result- 
 ing from the operations of the business. It is shown on the Balance Sheet as a 
 part of the capital of the corporation, being listed in connection with the capital 
 stock, but as a separate amount; if the business has been operated at a loss greater 
 than the balance of the Surplus account, this excess is recorded in a Deficit account. 
 
 *The amounts involved in this debit and credit are usually small and result from errors which 
 reduce or increase the income of a previous fiscal period. It is the better practice to record such 
 items in an account with "Adjustment of Errors in Previous Periods," and at the close of the fiscal 
 period, transfer from the Surplus account an amount sufficient to close the adjustment account. 
 This plan avoids recording small amounts in the Surplus account and simplifies auditing.
 
 ACCOUNTS PECULIAR TO A CORPORATION 259 
 
 DIVIDEND PAYABLE ACCOUNT 
 
 § 272. The Purpose of this Account is to show the amount set aside by 
 the board of directors for distribution as a dividend among the stockholders. 
 Dividends are not declared on treasury stock nor on unissued stock. A separate 
 account may be opened with each dividend, if desired, in which case the first one 
 is designated as "Dividend No. i," the second, as "Dividend No. 2," etc. 
 
 Debit the Dividend Payable Account: Credit the Dividend Payable Account: 
 
 \ I. For part or all of the dividend *\ 2. For that part of the profit 
 
 paid. which is set aside by the 
 
 board of directors as a divi- 
 dend to the stockholders. 
 
 % 3. The Balance of the Dividend Payable Account shows the amount of the 
 dividend declared, but not paid to stockholders. As a rule, the account will be in 
 balance because dividend checks will be issued to the stockholders as soon as the 
 dividend is authorized. However, in case the address of a stockholder is not known, 
 or if for some reason the check has not been issued, the account will not be in 
 balance and the amount of the balance will be a liability. If such a liability exists 
 at the close of a fiscal period, it is shown on the Balance Sheet as a current liability. 
 
 ORGANIZATION EXPENSE ACCOUNT 
 
 § 273. The Purpose of this Account is to show the cost of organizing the 
 corporation, which includes legal fees, commission on the sale of stock, salaries 
 of stock salesmen, office rent, and other expenses incurred before the corporation 
 is ready to begin the operations for which it is organized. At the time the corpo- 
 ration is ready to begin business, the balance of this account may be regarded 
 as a permanent asset or as a charge against Surplus to be distributed over a number 
 of consecutive fiscal periods. 
 
 Debit the Organization Expense Credit the Organization Expense 
 
 Account: Account: 
 
 ^ I. For all expenses incurred in ^ 2. For that part of the organiza- 
 
 the organization of the cor- tion expense written off at the 
 
 poration. close of each fiscal period. 
 
 (Surplus account is debited.) 
 ^ 4. The Balance of the Organization Expense Account, if no part of the 
 organization expense is written off at the close of each fiscal period, shows the 
 asset resulting from the expenditures in connection with the organization of the 
 corporation; if a part is written off each fiscal year, the balance will show the 
 amount remaining as an asset. Organization expense is shown as a separate item 
 on the asset side of the Balance Sheet. 
 
 The Commissioner of Internal Revenue has ruled that organization expense is not an operating 
 cost deductible from the income of the corporation; hence, if any part is written off at the close of 
 each fiscal period, it is necessary to debit it to the Surplus account. When organization expense 
 is written off over a number of fiscal periods, the amount to be written off each year and the number 
 of fiscal periods covered by the process are determined by the Board of Directors or management 
 of the corporation. 
 
 BONDS PAYABLE ACCOUNT 
 
 § 274. The Purpose of this Account is to show the amount of the indebted- 
 ness resulting from bonds issued by the corporation. These bonds are usually 
 secured by a mortgage on real estate or personal property (§ 259). 
 
 Debit the Bonds Payable Account: Credit the Bonds Payable Account: 
 
 \ I. For the face value of bonds ^f 2. For the face value of bonds 
 
 paid by the corporation. issued by the corporation.
 
 260 ACCOUNTS PECULIAR TO A CORPORATION 
 
 ^ 3. The Balance of the Bonds Payable Account shows the face value of the 
 bonds owed by the corporation. It is shown on the Balance Sheet as a fixed lia- 
 bility. 
 
 When bonds are sold at less than par, the discount is debited to a Discount on Bonds account; 
 when they are sold at more than par, the premium is credited to a Premium on Bonds account. 
 In either case, the account which shows the difference between the par value and the seUing price 
 will appear on the Statement of Profit and Loss as an non-operating income or loss. 
 
 GOODWILL ACCOUNT 
 § 275. The Purpose of this Account is to show the value of goodwill 
 purchased by the corporation. "Goodwill" refers to the difference between the 
 purchase price and the book value of the net assets of a going concern; it is recorded 
 as goodwill only on the books of the buyer. Goodwill is of the same nature as 
 organization expense, and may be regarded as a permanent asset or may be 
 written off over a number of consecutive fiscal periods. 
 
 Debit the Goodwill Account: Credit the Goodwill Account: 
 
 ^ I. For the value of the good- H 2. For that part of the goodwill 
 
 will purchased at the time written off at the close of each 
 
 a going business is taken over. fiscal period. (Surplus ac- 
 
 count is debited.) 
 
 H 3. The Balance of the Goodwill Account, if no part of the goodwill is written 
 off at the close of each fiscal period, shows the cost value of the goodwill purchased 
 by the corporation; if a part is written off each fiscal year, the balance will show 
 the value of the goodwill at the conclusion of the business year. Goodwill is shown 
 as a separate item on the asset side of the Balance Sheet. 
 
 Goodwill may be illustrated as follows: C. A. Popp owns and operates a retail shoe store. 
 He wishes to retire from active management, and A. J. Downey, D. F. Ford, Robert McDowell, 
 and _C._W. Smith, four of the clerks, decide to incorporate the business and take over the larger part 
 of his interest. The Balance Sheet prepared at this time shows the net assets of the business to 
 be worth $92,500.00, but the incorporators agree to give Mr. Popp $100,000.00 for the business. 
 The $7,500.00 paid Mr. Popp in excess of the actual value of the assets will be recorded on the 
 books of the corporation in the Goodwill account. 
 
 QUESTIONS 
 
 1. What accounts are needed in connection with the investment in a corporation? 
 
 2. What accounts will be debited and credited in the opening entries of a cor- 
 
 poration in which the capital stock is $60,000.00 (a) if all stock is subscribed 
 and paid for in cash, and (b) if only $50,000.00 is subscribed and paid for? 
 
 3. What are the two methods of recording capital stock? Explain each. 
 
 4. If you were keeping books for a corporation and the stockholders donated 
 
 common stock having a par value of $10,000.00, what accounts would you 
 debit and credit? 
 
 5. If the common stock donated in question No. 4 were sold for $8,500.00 cash, 
 
 what accounts would you debit and credit? 
 
 6. What accounts would be debited and credited if a corporation with a capital 
 
 stock of $100,000.00 sells on the installment plan only $75,000.00 of the 
 stock at the beginning? 
 
 7. Why does the law usually forbid a corporation from purchasing its own stock 
 
 and retaining ownership of it for an indefinite period? 
 
 8. What is the difference between the capital and capital stock of a corporation? 
 
 Give an example. 
 
 9. W^hy is the net profit or loss resulting from the operations of a corporation 
 
 during a fiscal period, transferred to the Surplus account and not to the 
 Capital Stock account? 
 10. If the amount shown by the Goodwill account is $10,000.00 and it is desired 
 to close this out over a period of five years, what entry will be required at 
 the close of each year?
 
 Chapter XXVII 
 
 BOOKS OF ACCOUNT PECULIAR TO A CORPORATION 
 
 The Purpose of this Chapter is to explain and illustrate the books of ac- 
 count required to record the transactions completed during the organization of 
 a corporation and those performed by the officers in connection with the corporate 
 affairs. The books needed to record the transactions completed in the regular 
 operations of a business owned and operated by a corporation are the same as 
 those needed to record such transactions for a like business owned and operated 
 by an individual or by partners. The books of account required to record trans- 
 actions affecting the corporate affairs consist of the subscription book, subscribers' 
 journal, subscribers' ledger, stock certificate book, stockholders' journal, stock- 
 holders' ledger, stock transfer book, and minute book. 
 
 § 276. Subscription Book. The state 
 corporations usually requires that a certain per 
 
 SUBSCRIPTION LIST 
 
 We, the undersigned, hereby subscribe for the number of 
 
 shares of stock in the corporation known as. . 
 
 J. A. Whitney & Co. set ODOosite our names 
 
 
 ame upon demand. 
 
 
 
 Date 
 
 No. of 
 Shares 
 
 Par Value 
 
 Signature 
 
 h 
 
 7- 
 
 /SO 
 
 /-s-o 
 
 ^ /S, (POO. 
 2l0 00 
 
 (? (2. j)c^^ 
 
 
 
 n 
 
 /,7 oo 
 
 0< cy yP'Tx-'Y-^t-y 
 
 
 
 sc 
 
 S, C c 
 
 cL -J-- ^Xajju/ 
 
 
 
 s 
 
 S'oo 
 
 /^.vT /^^^=--'^-'^^^— -" 
 
 
 
 / 
 
 /.ooo 
 
 
 
 
 7 
 
 V- 
 
 ^ 00 
 >o o 
 
 ',4 OD 
 
 
 
 
 \5 
 
 \,5 0. 
 
 X. ^ -cQ-c^-^ 
 
 III. No. 105, Page of Subscription Book. 
 
 261 
 
 law governing the organization of 
 cent of the capital be paid in when 
 application is made for the 
 charter. It is necessary, there- 
 fore, for the organizers to secure 
 subscriptions to the capital stock 
 and payment for part or all of 
 the stock subscribed. These 
 subscriptions are usually ob- 
 tained by having the proposed 
 stockholders sign a subscription 
 list, ruled similar to Illustration 
 No. 105. The subscription book 
 is made up by binding the sub- 
 scription lists; these lists are 
 usually punched to fit a binder. 
 The information given in the 
 subscription book provides a 
 basis for recording the trans- 
 actions with the subscribers. 
 The signature of a proposed 
 stockholder to the subscription 
 list binds him to pay for the 
 number of shares mentioned in 
 connection with his subscription ; 
 hence, the subscription list is the 
 contract between the corpora- 
 tion and the subscriber. For 
 this reason, the subscription 
 list or the subscription book 
 should be kept in a safe place 
 until the subscriptions have 
 been paid in full and the stock 
 issued as per contract.
 
 262 
 
 SUBSCRIBERS' JOURNAL 
 
 § 277. The Subscribers' Journal contains a record of the subscriptions 
 for stock; the information for each entry is obtained from the subscriptions as 
 shown on the subscription Hsts which compose the subscription book. The ruHng 
 should be so arranged that the subscription of a subscriber may be recorded on 
 one horizontal line. Space should be provided for the date, name of the subscriber, 
 his address, number of shares subscribed, par value of the same, and amount columns 
 for common and preferred stock. Each subscriber is debited in the subscribers' 
 journal with the par value of the stock he has purchased; at the end of the month, 
 the Subscribers to Capital Stock account in the general ledger is debited and the 
 Subscriptions to Capital Stock account credited for the total subscriptions. 
 
 Illustration No. io6 shows the rulingjn skeleton form for a subscribers' journal. 
 If transactions of this nature are not numerous, the entries may be made in the 
 general journal, in which case Subscribers to Capital Stock account will be debited 
 and Subscriptions to Capital Stock account credited for the par value of the sub- 
 scriptions recorded in each entry. 
 
 Date 
 
 Name 
 
 Address 
 
 No. 
 Shares 
 
 Par 
 Value 
 
 Common 
 
 Preferred 
 
 Illustration No. io6. Ruling for a Subscribers' Journal. 
 
 § 278. The Subscribers' Ledger contains accounts with those subscribers 
 who purchase stock on the deferred payment or installment plan; when a sub- 
 scriber pays cash for his stock at the time he subscribes for it, no account is needed 
 with him in the subscribers' ledger. The usual ledger ruling is sufficient to record 
 the facts as all the information needed is the debit to a subscriber's account for 
 stock subscribed by him, and the credit to his account for cash received as part 
 payment of the same. Since each debit to accounts in this ledger is included in 
 the total debit to the Subscribers to Capital Stock account in the general ledger, 
 the accounts in the subscribers' ledger are controlled by this account. 
 
 § 279. The Stock Certificate Book is a bound or loose-leaf book contain- 
 ing stock certificates, each certificate attached to a stub with space for recording 
 the information written in the certificate. When a subscriber pays for his stock, 
 he is entitled to a certificate showing his interest in the corporation; this interest 
 is indicated by the number of shares and the par value of each. Illustration No. 
 107 shows a stock certificate filled out ready for delivery to the purchaser, and the 
 attached stub with the necessary information in regard to the certificate. When 
 this certificate is removed from the stub and given to the purchaser, he will retain 
 it as evidence of his interest in the corporation. The information on this stub 
 
 Ctrllficalt S^a. Z/' 
 
 f„ -^g^^^^e/ f/^J Shorts 
 
 hsaed to 
 
 g^-^ '-^, 
 
 Vale '-'^t^^ 
 
 liinsferred from 
 
 Cerlff^cate 
 
 No. Original 
 Shates 
 
 // 
 
 Titctimd Cc'lifkale SKo. / ,7 
 
 for ^^^4>:>-^ Shir, 
 
 this ^A/ _rfjv o/-.^^a!2_ /9_ 
 
 ^a^r>-zij!^ cc^^^y,^,,,^.^^ 
 
 '^*^4*^ r*^'^g^g ^^. * 'X^^^^a ' ~K ' ' '^*^'^'?^''rg^ 
 
 -***i**?^"tf***^'i 
 
 SHARES $100.00 EACH 
 
 I ^e.Z^ &l;aif a ^^ 
 
 I SlliB (EprttfiPB That ^ ^^ g T^W;?^-^ C v^ ^^V^'^^gg;^^ 
 
 i is the owner n f ^^^g^- 
 
 .Shares of tlie Capital Stock of % 
 
 I 3(. A. 1il|itnpg $c (En. j 
 
 ^ transferable only on the Books of the Corporation in person or by cAiiorney on surrender of this Certificate. ^ 
 
 3n Bilnf BO fflhf fff . "r rfu'y joMonscJ officers of this Corporation hJbe hereanto subicribed their 
 
 f the Corcantr Seal lo l>e hereto affixed a/- 
 
 :^^^2^^L.day of-Jr 
 
 d^^_ A.'D.t9 _ 
 
 Steretary. 
 
 Illustration No. 107, Stock Certificate Attached to Stub. 
 
 ja < * ~ - jtf^fc l t
 
 STOCKHOLDERS' JOURNAL 
 
 263 
 
 9oT oalur rrrrinrik - 
 
 —hertby sell, tramfcr attd 
 
 iiicJ and hereby author 
 
 I make the txcessary trammer upon the Books 1^ the Corpor 
 
 ^and afid seat tht. 
 
 fa) 
 
 Witnessed by 
 
 (10) 
 
 will be transferred, either direct or through the stockholders' journal, to an ac- 
 count with him in the stockholders' ledger. The stockholder who pays for his 
 
 subscription on the deferred payment or install- 
 ment plan receives a receipt for each payment; 
 these receipts are surrendered when the subscrip- 
 tion is paid in full and the certificate of stock 
 issued. 
 
 EXPLANATION. The illustration at the left 
 shows the printed form on the back of the certificate, to 
 be used by the owner for instructions in regard to transfer 
 of title when the stock is sold. Should James O. Whitman 
 sell five shares to Ernest L. Musselman on October 23, the 
 spaces would be filled out as follows: i, "I"; 2, "Ernest L. 
 Musselman"; 3, "Five (5)"; 4, "J. S. Martin" or some 
 other officer of the corporation authorized to make transfer; 
 5, "my"; 6, "23d"; 7, "October"; 8,theyear; 9, "James 
 O. Whitman"; 10, the signature of a disinterested person 
 who would sign as witness. 
 
 Illustration No. 108, Form on Back of Stock Certificate. 
 § 280. The Stockholders' Journal contains a record of the stock certificates 
 issued; it is sometimes referred to as a corporation journal. The information for 
 the transactions recorded in this journal is obtained from the stubs of the stock 
 certificates issued. The ruling should be such that all the information in regard 
 to each certificate may be recorded on one horizontal line. The purpose of this 
 journal is to provide a posting medium for the accounts in the stockholders' ledger. 
 If the information in the stockholders' ledger is obtained direct from the stock 
 certificate stub, the stockholders' journal is not needed. 
 
 § 281. The Stockholders' Ledger contains an account with each stock- 
 holder. The information recorded in each account shows the number of shares 
 owned by the stockholder, the par value of the stock, and the class of stock, that 
 is, whether common or preferred. The Capital Stock account in the general 
 ledger is a controlling account for the accounts in the stockholders' ledger. The 
 information recorded in the account with a stockholder is posted direct from the 
 stock certificate stub, or from the stockholders' journal. Illustration No. 109 
 shows an account with a stockholder in the stockholders' ledger. 
 
 (,>'€Z^^^^^^L..£..<i^ (^ JiK^ 
 
 Date 
 
 Cer. 
 
 ■No. of 
 Shares 
 issued 
 
 No of 
 Shares 
 trans. 
 
 To "Whom Transferred and other Exjianations 
 
 Debit 
 
 Credit 
 
 
 
 
 /^ 
 
 ^ 
 
 
 i/O 
 
 / 
 
 
 / ilo 
 
 
 
 / J^O 
 
 
 / iCo 
 
 
 / 
 
 ■^ 
 
 .y 
 
 
 
 
 
 / L' 
 
 
 Illustration No. 109, Stockholders' Ledger. 
 
 § 282. The Stock Transfer Journal contains a record of the transactions 
 with stockholders which relate to the transfer of stock in a corporation owned 
 by them; the information is obtained from the stub of the stock certificate. If 
 the information given on the stub of the certificate is posted direct to the account 
 with the^stockholder in the stockholders' ledger, the stock transfer journal is not
 
 264 
 
 MINUTE BOOK 
 
 necessary. In several states the law requires that the corporation maintain a stock 
 transfer book; Illustration No. no shows the form usually used. 
 
 When a stockholder wishes to withdraw his investment in a corporation, he seeks a buyer for 
 his stock and sells his stock to him. The corporation has nothing to do with this transaction 
 except to transfer the ownership of the stock by closing the account in the stockholders' ledger 
 with the former stockholder, and opening an account with the new stockholder. The information 
 in regard to the transaction is given the corporation by the transfer of the certificate ; space is provided 
 on the back of the certificate for a record of this transfer. When a certificate is issued to the new 
 stockholder, the former certificate will be surrendered to the corporation, and attached to the 
 stub from which it was detached or filed for future reference. If a stockholder sells only a part of 
 his stock, the old certificate is surrendered, and two new certificates issued, one to each stockholder 
 for the number of shares he owns. 
 
 Date 
 
 Serial No. of 
 Canceled 
 Certificate 
 
 No. of 
 Shares 
 
 By Whom 
 Surrendered 
 
 To Whom 
 Issued 
 
 Serial No. 
 
 of New 
 Certificate 
 
 No. of 
 
 Shares 
 
 No. and Face Value of 
 Stamps 
 
 Val. 
 
 $1 
 
 Etc. 
 
 Illustration No. no, One Form of Ruling for a Stock Transfer Book. 
 
 § 283. Minute Book. The affairs of a corporation are controlled by the 
 stockholders because they are the owners of the business. The stockholders elect 
 from their number a board of directors which, in turn, elects officers to take care 
 of the details of the operations of the business. All business transacted by the 
 stockholders and by the board of directors is recorded in the minute book by the 
 secretary of the corporation. No special ruling is required for the information 
 recorded in the minute book, but the minutes of each meeting should be in con- 
 secutive order for ready reference. 
 
 3- 
 
 5- 
 6. 
 
 10. 
 
 QUESTIONS 
 
 What is the difference between a subscriber and a stockholder? 
 
 (a) What evidence does a stockholder have that he has an interest in the 
 capital of the corporation? (b) What evidence does a partner have that 
 he has an interest in the capital of a partnership? 
 
 (a) How will a stockholder determine the value of his investment in a cor- 
 poration, as evidenced by the certificate of stock which he holds? (b) How 
 will a partner ascertain the value of his interest in a partnership? 
 
 (a) What is the purpose of the subscription list? (b) In what way is the 
 subscription list connected with the subscription book? 
 
 What is the connection between the subscribers' journal and the subscribers' 
 ledger? 
 
 W^hat account in the general ledger controls the accounts in the subscribers' 
 ledger? 
 
 (a) What is the connection between the stock certificate and the stub? (b) 
 How may canceled certificates be filed? (c) Why would a stockholder 
 wish to have his certificate canceled? 
 
 (a) What is the connection between the stockholders' journal and the stock- 
 holders' ledger? (b) What account in the general ledger controls the ac- 
 counts in the stockholders' ledger? 
 
 If a stockholder who owns ten shares of stock sells five shares to one who is 
 not a stockholder in the corporation, what is the method of procedure to 
 show the transaction properly recorded on the books of the corporation? 
 
 Why should the president, or presiding officer, and the secretary both sign 
 the minutes of each meeting of the board of directors as recorded in the 
 minute book?
 
 Chapter XXVIII 
 
 OPENING ENTRIES FOR A CORPORATION 
 
 The Purpose of this Chapter is to explain the opening entries for a corpor- 
 ation. The method of selHng the capital stock of the corporation determines the 
 journal entries necessary to record the investment; these entries are discussed in 
 this chapter under the following titles: (i) authorized capital stock sold for cash 
 or cash and other assets; (2) part of authorized capital stock sold for cash or cash 
 and other assets; (3) part or all of the authorized capital stock sold for the purpose 
 of continuing the operations of a going business; and (4) stock sold on the install- 
 ment plan. 
 
 § 284. Authorized Capital Stock Sold at Time of Organization. When 
 all stock is sold at the time the corporation is organized, Cash or Cash and some 
 other asset accounts are debited and the Capital Stock account credited for the 
 amount of the capital stock which the corporation is authorized to issue; if the 
 value of the assets received is not equivalent to the par value of the stock issued, 
 the difference is debited to an account with Discount on Capital Stock or credited 
 to a Premium on Capital Stock account. 
 
 If the charter granted the Central Plumbing Company authorizes the issuing 
 of $50,000.00 common stock and all of this is sold for cash, the entry in journal 
 form will be as follows: 
 
 Cash 
 
 Capital Stock 
 Cash received for authorized capital stock issued. 
 
 50,000 
 
 50,000 00 
 
 When this entry is posted, the authorized capital stock will appear on the credit side of the 
 Capital Stock account. The fact that no unissued capital stock is recorded in the ledger indicates 
 to each stockholder that the $50,000.00 is the full amount of stock which the corporation is author- 
 ized to issue. 
 
 If the charter of the Central Plumbing Company authorizes the incorporators 
 to issue $25,000.00 common stock and $25,000.00 preferred stock and cash has 
 been received in payment for all the stock, the entry in journal form will be as 
 follows : 
 
 Cash 
 
 Capital Stock, Common 
 
 Capital Stock, Preferred 
 Cash received for authorized capital stock issued. 
 
 50,000 
 
 25,000 
 25,000 
 
 When this entry is posted, the ledger will show the same facts as when the entry first illustrated 
 was posted, e.xcept each class of authorized capital stock will be recorded in a separate account. 
 
 If, at the time the Central Plumbing Company was organized, it was agreed 
 to issue $5,000.00 of stock to a subscriber in exchange for land which he owns and 
 cash was received for the remainder of the capital stock, the entry in journal form 
 will be as follows: 
 
 Cash 
 Land 
 
 Capital Stock 
 Cash and land received for authorized capital stock 
 issued. 
 
 45.000:00 
 5,000 00 
 
 50,000 
 
 When this entry is posted, the ledger will show the same facts as when the first entry was 
 posted, except the assets received will be shown in two accounts, one with Cash and the other with 
 
 265
 
 266 
 
 OPENING ENTRIES FOR A CORPORATION 
 
 Land. If the same conditions existed and the stock were equally divided between the common and 
 preferred as in the second entry, the entry would be the same as the above, except that there would 
 be two credits to show the two classes of stock. 
 
 § 285. Part of Authorized Capital Stock Sold at Time of Organization. 
 
 When only a part of the authorized capital stock is sold at the time the corpor- 
 ation is organized, the authorized capital stock should be recorded; otherwise its 
 value will not be shown in the ledger and the stockholders will have no means of 
 knowing the par value of the capital stock which the corporation can issue, with- 
 out referring to the charter. This is usually recorded by an entry in which the 
 Unissued Capital Stock account is debited and the Capital Stock account credited 
 for the par value of the capital stock which the corporation is authorized to issue. 
 If the charter authorizes the issuing of both common and preferred stock, the par 
 value of each will be shown in a separate Capital Stock account and the par value 
 of the authorized capital stock will also be debited to separate Unissued Capital 
 Stock accounts. When the authorized capital stock is recorded in the ledger, the 
 stockholders will know the authorized capital stock and the par value of that which 
 is not issued, without referring to the charter. 
 
 If the Citizens' Motor Car Company is organized with the authority to issue 
 $100,000.00 common stock and only $75,000.00 is sold for cash at the time of organ- 
 ization, the entries to record the authorized capital stock and the stock sold will 
 appear in journal form as follows: 
 
 Unissued Capital Stock 
 
 Capital Stock 
 Authorized capital stock of Citizens' Motor Car Co. 
 
 Cash 
 
 Unissued Capital Stock 
 Cash received for 750 shares of stock issued. 
 
 When these entries are posted, the par value of the authorized capital stock and of the stock 
 issued will be recorded in the ledger. Each stockholder will know from the Balance Sheet that the 
 corporation has the authority to sell and issue additional stock to the value of $25,000.00. 
 
 If the incorporators of the Citizens' Motor Car Company are authorized to 
 issue both common and preferred stock in equal amounts and $75,000.00 cash is 
 received for $40,000.00 preferred and $35,000.00 common stock at the time of 
 organization, the entries in journal form will appear as follows: 
 
 100,000 
 
 00 
 
 100,000 
 
 75,000 
 
 00 
 
 75,000 
 
 Unissued Capital Stock, Common 
 Unissued Capital Stock, Preferred 
 
 Capital Stock, Common 
 
 Capital Stock, Preferred 
 Authorized capital stock of Citizens' Motor Car Co. 
 
 Cash 
 
 Unissued Capital Stock, Common 
 Unissued Capital Stock, Preferred 
 
 Cash received for 350 shares of common and 400 
 
 shares of preferred stock issued. 
 
 50,000 
 50,000 
 
 75,000 
 
 50,000 
 50,000 
 
 35-000 
 40,000 
 
 When these entries are posted, the ledger will show $50,000.00 common stock authorized and 
 $35,000.00 issued, and $50,000.00 preferred stock authorized and $40,000.00 issued. 
 
 If, at the time of the organization of the Citizens' Motor Car Company, it 
 is agreed to issue $5,000.00 of common stock and $5,000.00 of preferred stock
 
 OPENING ENTRIES FOR A CORPORATION 
 
 267 
 
 to one of the subscribers for land which he owns and cash is received for $30,000.00 
 common stock and $35,000.00 preferred stock, the entries in journal form will 
 appear as follows: 
 
 Unissued Capital Stock, Common 
 Unissued Capital Stock, Preferred 
 
 Capital Stock, Common 
 
 Capital Stock, Preferred 
 Authorized capital stock of Citizens' Motor Car Co. 
 
 Cash 
 Land 
 
 Unissued Capital Stock, Common 
 
 Unissued Capital Stock, Preferred 
 Cash and land received for 350 shares of common and 
 400 shares of preferred stock issued. 
 
 50,000 
 50,000 
 
 65,000 
 10,000 
 
 50,000 
 50,000 
 
 35.000 
 40,000 
 
 When these entries are posted, the ledger will show the same facts as in the two preceding 
 entries, except that $10,000.00 of the assets received will be recorded in the Land account and 
 §65,000.00 in the Cash account. 
 
 § 286. Corporation Organized to Continue a Going Business. A going 
 business is one which is in operation. A corporation organized to continue such a. 
 business will purchase the assets and assume the liabilities of the business. It is 
 customary to close the accounts in the ledger of a going business before making the 
 opening entries for the corporation. The entries required are usually raade in the 
 following order: (i) to close the accounts in the ledger of the concern which is being 
 taken over by the corporation; (2) to record the authorized capital stock of the 
 corporation; (3) to record the assets received in payment for the stock issued; 
 and (4) to record the liabilities assumed by the corporation. 
 
 The entries required in connection with the purchase of a going business by a 
 corporation are illustrated in connection with the following: J. A. Smith owns 
 and operates a retail shoe business, but wishes to retire from active management. 
 R. W. Wiley, C. U. Moon, J. H. Patterson, and P. A. Carlson, four of his employees, 
 decide to purchase the business from Mr. Smith and continue its operation as a 
 corporation; Mr. Smith agrees to accept stock in the corporation for his interest 
 in the business. Each of the other four incorporators agrees to purchase one hundred 
 shares at par. The necessary capital is subscribed, application made for a charter, 
 and the charter granted on January i, 192. .. Stock is issued to Mr. Smith for 
 his interest and, on receipt of cash in payment, to the other four incorporators. 
 The capital stock of the corporation is $50,000.00 consisting of one thousand 
 shares, par value $50.00 each; the name of the corporation is the People's Shoe 
 Company. The post-closing Trial Balance of the business owned and operated by 
 J. A. Smith, on December 31 is as follows: 
 
 J. A. SMITH 
 Post-closing Trial Balance, December 31. 192. 
 
 Cash 
 
 Accounts Receivable. . 
 
 Reserve for Doubtful Accounts 
 
 Office Equipment 
 
 Reserve for Dep. of Office Equipment 
 
 Store Fixtures 
 
 Reserve for Dep. of Store Fixtures. . . 
 
 Notes Payable 
 
 Accounts Payable 
 
 J. A. Smith, Capital 
 
 Mdse. Inventory, December 31, 192. . 
 
 13,500.00 
 1,750.00 
 
 250.00 
 
 1,500.00 
 
 7,602.50 
 24,602 . 50 
 
 27 50 
 
 25.00 
 
 300 . 00 
 
 3,300.00 
 
 12,450.00 
 
 8,500.00 
 
 24,602.50
 
 268 
 
 OPENING ENTRIES FOR A CORPORATION 
 
 The entries in journal form to close the accounts on the ledger of J. A. Smith 
 will appear as follows: 
 
 People's Shoe Company 
 
 Cash 
 
 Accounts Receivable 
 
 Office Equipment 
 
 Store Fixtures 
 
 Mdse. Inventory, Dec. 31 
 To record the sale of the assets of the business to the 
 People's Shoe Company. 
 
 Reserve for Doubtful Accounts 
 Res. for Dep. of Office Equipment.' 
 Res. for Dep. of Store Fixtures 
 Notes Payable 
 Accounts Payable 
 
 People's Shoe Company 
 To record the transfer of the reserves and liabilities of 
 the business to the People's Shoe Company. 
 
 Stock, People's Shoe Company 
 
 People's Shoe Company 
 To record the receipt of capital stock from the People's 
 Shoe Company in payment of amount due from them. 
 
 J. A. Smith, Capital 
 
 Stock, People's Shoe Company 8,500 
 
 To record the acceptance by J. A. Smith of 170 shares 
 of the stock of the People's Shoe Company in payment 
 for his interest in the business. 
 When these entries are posted, each of the asset accounts will be closed by an entry on the 
 credit side, and each of the liability and reserve accounts and the proprietorship account, by an 
 entry on the debit side. The books of J. A. Smith are thus completely closed. 
 
 The entries in journal form to open the books will appear as follows: 
 
 24,602 
 
 27 
 
 25 
 
 300 
 
 3.300 
 
 12,450 
 
 8,500 
 
 8,500 
 
 50 
 
 13,500 
 
 1,750 
 
 250 
 
 1,500 
 
 7,602 
 
 16,102 
 
 8,500 
 
 50 
 
 Unissued Capital Stock 
 
 Capital Stock 
 To record the authorized capital stock of the People's 
 Shoe Company. 
 
 Cash 
 
 Accounts Receivable 
 Office Equipment 
 Store Fixtures 
 Mdse. Inventory, Jan. i 
 J. A. Smith, Vendor 
 To record the purchase of the assets of J. A. Smith. 
 
 J. A. Smith, Vendor 
 
 Reserve for Doubtful Accounts 
 
 Res. for Dep. of Office Equipment 
 
 Res. for Dep. of Store Fixtures 
 
 Notes Payable 
 
 Accounts Payable 
 To record the reserves taken over and the liabilities 
 assumed from J. A. Smith. 
 
 J. A. Smith, Vendor 
 
 Unissued Capital Stock 
 To record the issue of 170 shares of stock to J. A. Smith 
 in payment for his business. 
 
 Cash 
 
 Unissued Capital Stock 
 To record the issue of 400 shares of stock upon receipt 
 of cash in payment, to R. W. Wiley, C. U. Moon, J. H. 
 Patterson, and P. A. Carlson, each 100 shares. 
 
 50,000 
 
 13,500 
 
 1,750 
 
 250 
 
 1,500 
 
 7,602 
 
 16,102 
 
 8,500 
 
 50 
 
 50,000 
 
 24,602 
 
 27 
 
 25 
 
 300 
 
 3,300 
 
 12,450 
 
 8,500 
 
 50
 
 OPENING ENTRIES FOR A CORPORATION 
 
 269 
 
 When these entries are posted, the authorized capital stock will be recorded on the books of 
 the corporation as a credit to the Capital Stock account; the unissued capital stock will be shown 
 by the debit balance of the Unissued Capital Stock account; the assets, liabilities, and reserves 
 taken over from J. A. Smith will be recorded in the proper accounts; and the account with J. A. 
 Smith, Vendor, which shows in summary form the assets purchased, the liabilities assumed, the 
 reserves taken over, and the stock issued in payment for the net assets, will be in balance. The 
 books of the corporation are now ready for the recording of current transactions. 
 
 § 287. Capital Stock Sold on the Installment Plan. When all the 
 capital is not needed at the time the corporation is formed, it is customary to 
 allow the subscribers to pay for the stock subscribed, in installments. This plan 
 is especially applicable to corporations organized for the purpose of manufacturing 
 a product which will require the construction of a new factory. Much time will 
 elapse between the organization of the corpor ition and the completion of the fac- 
 tory, and the installments can be made payable so as to be available as needed. 
 The deferred payment plan will permit many to subscribe for the stock who other- 
 wise would be prohibited from doing so because they might not have sufficient 
 cash to pay for one or more shares. 
 
 If the Central Tire Company, a corporation organized for the purpose of 
 manufacturing automobile tires, with a capital stock of $250,000.00, par value 
 $100.00 per share, sells $200,000.00 of its stock for cash and $20,000.00 to sub- 
 scribers who agree to pay one fourth of the subscription in cash and the balance 
 in three equal installments, the opening entries in journal form would be as follows: 
 
 Unissued Capital Stock 
 
 Capital Stock 
 To record the authorized capital stock. 
 
 Cash 
 
 Unissued Capital Stock 
 To record the sale and issue of stock for cash. 
 
 Subscribers to Capital Stock 
 
 Subscriptions to Capital Stock 
 To record subscriptions to capital stock. 
 
 Cash 
 
 Subscribers to Capital Stock 
 To record cash received from subscribers in payment 
 for the first installment of 25 per cent. 
 
 250,000 
 
 200,000 
 
 20,000 
 
 5,000 
 
 250,000 
 
 200,000 
 
 20,000 
 
 5,000 
 
 00 
 
 When these entries are posted, the authorized capital stock will be shown in the Capital Stock 
 account, the unissued stock in the Unissued Capital Stock account, the balance due from sub- 
 scribers in the Subscribers to Capital Stock account, the liability of the corporation to issue stock 
 to subscribers in exchange for their promise to pay for the stock will be shown by the Subscriptions 
 to Capital Stock account, and the cash received in payment for the cash sale of stock and for the 
 first installment on stock subscribed will be recorded. 
 
 When cash is received from a subscriber for all of his subscription, he is entitled 
 to a certificate of stock; when cash has been received from all the subscribers in 
 payment for their subscriptions, certificates of stock will have been issued for all 
 of the capital stock sold. Since each subscriber will want a certificate at the time he 
 pays his subscription in full, and it is hardly possible that all will pay at the same 
 time, it is customary to take the value of the stock issued to each subscriber out 
 of the Subscriptions to Capital Stock account and transfer it to the Unissued 
 Capital Stock account when the certificate of stock is issued. This transfer is made 
 by debiting the Subscriptions to Capital Stock account and crediting the Unissued 
 Capital Stock account. 
 
 If John Smith, who has subscribed for ten shares of the Central Tire Company's 
 stock, has paid the last installment on his subscription and a certificate of stock 
 has been issued, the entries in journal form will be as shown at the top of page 270.
 
 270 
 
 EXERCISES IN OPENING ENTRIES 
 
 250 
 
 00 
 
 250 
 
 1,000 
 
 00 
 
 1,000 
 
 Cash 
 
 Subscribers to Capital Stock 
 To record cash received from John Smith in payment 
 for the last installment for stock subscribed. 
 
 Subscriptions to Capital Stock 
 
 Unissued Capital Stock 
 Issued a certificate for ten shares of stock to John 
 Smith. 
 
 When these entries are posted, the Subscribers to Capital Stock account will show a debit 
 balance of $250.00 less, the Unissued Capital Stock account, a debit balance of $1,000.00 less, and 
 the Subscriptions to Capital Stock account, a credit balance of $1,000.00 less. As the subscriptions 
 are paid in full and the stock issued, the entries are made in the same form as the entries above; 
 when all the subscriptions have been paid and the stock issued, the Subscribers to Capital Stock 
 account and the Subscriptions to Capital Stock account will be in balance, the Capital Stock ac- 
 count will show the par value of the stock authorized, and the Unissued Capital Stock account will 
 show the unissued stock, the difference between the last two accounts being the par value of the 
 stock issued and outstanding. 
 
 If a Balance Sheet is prepared before all the subscribers have paid their sub- 
 scriptions in full, the capital accounts will be shown thereon as in the illustration 
 below, assuming that the surplus is $13,500.00: 
 
 PROPRIETORSHIP: 
 
 Authorized Capital Stock 250,000.00 
 
 Less Unissued Capital Stock 47,000.00 
 
 Capital Stock Issued and Out- 
 standing 203,000 .00 
 
 Subscriptions to Capital Stock 17,000 .00 
 
 Surplus 
 
 Total Proprietorship . 
 
 220,000 
 13,500 
 
 233.500 
 
 In the above illustration, $200,000.00 of the authorized capital stock of $250,000,00 has been 
 sold for cash and issued. Of the remaining $50,000.00 of stock, $20,000.00 has been subscribed, 
 and $5,000.00, the first installment of 25 per cent, has been received from subscribers to apply on 
 their subscriptions; in addition, $2,250.00 has been received from some of the subscribers who 
 subscribed for thirty shares and paid in $750.00, the first installment, and stock amounting to 
 $3,000.00 has been issued to them. The remaining subscribers owe $12,750.00 on stock which has 
 not yet been issued; this amount, which does not appear among the proprietorship accounts, is 
 shown on the asset side of the Balance Sheet as a current asset. The unissued stock is $47,000.00, 
 of which $17,000.00 has been subscribed. When the subscribers pay the $12,750.00 due on their 
 subscriptions, and the total stock subscribed by them ($17,000.00) has been issued, the Subscribers 
 to Capital Stock account and the Subscriptions to Capital Stock account will be in balance, the 
 Unissued Capital Stock account will show the unissued stock ($30,000.00), and the Capital Stock 
 account, the authorized capital stock of the corporation. 
 
 Exercise No. 92, Opening Entry. 
 
 A charter was granted the Acme Manufacturing Co. on January i, 192.., 
 with an authorized capital stock of $500,000.00, consisting of 5,000 shares, par 
 value $100.00 per share. Cash has been received for all the stock at its par value. 
 
 Make, in journal form, the entries necessary to record the capital stock and 
 the issue of stock to subscribers. 
 
 Exercise No. 93, Opening Entry. 
 
 H. O. Warren and C. W. Warren are partners in a manufacturing business 
 under the name of Warren Bros. They decide to incorporate the business, 
 and J. J. Bowser, D. D. Marks, and A. L. Miller have signed the application for 
 a charter with them. The corporation is to have an authorized capital stock of 
 $500,000.00 of which $400,000.00 is to be common stock, and $100,000.00 preferred
 
 EXERCISES IN OPENING ENTRIES 
 
 271 
 
 stock (par value, $100.00 per share). The corporation is to take over the assets 
 and assume the liabihties of Warren Bros, at book value, and to issue to H. O. 
 Warren and C. W. W^arren each 850 shares of common stock, and 250 shares of 
 preferred stock in payment for their business. Bowser contributes manufacturing 
 supplies valued at $75,000.00, and receives payment in common stock at par. 
 Marks subscribes for $50,000.00 of common stock and pays cash at par. Miller 
 subscribes for $50,000.00 of preferred stock, for which he pays cash at par. 
 
 The Balance Sheet of W'arren Bros, on December 5, 192. ., the date on which 
 the charter is granted, is as follows: 
 
 WARREN BROS. 
 Balance Sheet, December 5, 192 
 
 Cash 
 
 Accounts Receiva 
 
 Inventory 
 
 Office Equipment 
 
 Delivery Equipme 
 
 Machinery 
 
 Buildings 
 
 Land 
 
 Assets 
 
 ble 
 
 nt 
 
 $ 8,500.00 
 41,500.00 
 60,000.00 
 14,000.00 
 18,500.00 
 
 102,500.00 
 45,000.00 
 30,000.00 
 
 Liabilities 
 
 Accounts Payable 
 Notes Payable 
 Mortgages Payable 
 
 Total Liabilities 
 
 Proprietorship 
 
 H. 0. Warren 
 C. W. Warren 
 
 Total Proprietorship 
 Total Liabilities and Prop. 
 
 $25,500.00 
 45,000.00 
 49,500.00 
 
 $120,000.00 
 
 $100,000.00 
 
 
 $320,000.00 
 
 
 
 $200,000.00 
 
 Total Assets 
 
 $320,000.00 
 
 
 
 
 (i) Make the entries in journal form to close the books of Warren Bros. 
 (2) Make the entries in journal form to open the books of the corporation. 
 
 Exercise No. 94, Opening Entry. 
 
 Albert C. Bacon, who has been conducting a retail grocery store, decides to 
 incorporate and operate under the firm name of The Cash Grocerv Company. 
 H. M. Barnes, E. M. Ward, C. A. Peters, A. S. Weller, and A. E. Harmon join 
 with him in the application for the charter. The corporation is to have an author- 
 ized capital stock of $10,000.00, consisting of 1,000 shares, par value $10.00. 
 Barnes subscribes for 100 shares. Ward for 75 shares, Peters for 25 shares, Weller 
 for 50 shares and Harmon for 100 shares, payment to be made when the charter 
 has been granted. Bacon is to receive $6,000.00 for his interest in the business, 
 payable $1,000.00 cash, and the balance in stock at par. 
 
 On January i, 192. ., when the charter is granted, the Balance Sheet made 
 from Bacon's ledger appears as follows: 
 
 A. C. BACON 
 Balance Sheet, January 1, 192 
 
 Assets 
 Cash 
 
 Notes Receivable 
 Accounts Receivable 
 Mdse. Inventory 
 Furniture and Fixtures 
 
 Total Assets 
 
 ^i ,735 -50 
 
 215.46 
 
 1,946.58 
 
 6,135-50 
 
 690.00 
 
 Liabilities 
 
 Notes Payable $2,245.55 
 
 Accounts Payable 2,977.49 
 
 Total Liabilities $5,223.04 
 Proprietorship 
 
 A. C. Bacon 5,500.00 
 
 $10,723.04 j Total Liabilities and Prop. 
 
 $10,723 .04 
 
 (i) Make the entries in journal form to close the books of A. C. Bacon. 
 
 (2) Make the entries in journal form to open the books of the corporation.
 
 272 QUESTIONS 
 
 QUESTIONS 
 
 1. Why should the authorized capital stock be shown on the Balance Sheet? 
 
 2. How should this be recorded when only a part of the authorized capital has 
 
 been sold and issued? 
 
 3. What account shows the investment in a corporation before the subscriptions 
 
 by subscribers have been paid in full, and the stock issued to them? 
 
 4. If the authorized capital stock is $100,000.00, and $90,000.00 has been sub- 
 
 scribed, of which $45,000.00 has been paid and stock issued, and $45,000.00 
 only half paid for, what accounts in the ledger will show these facts? 
 
 5. If the stockholders vote to reduce, the capital stock of the corporation, how 
 
 will this reduction be effected? 
 
 6. When more than the book value is paid for assets purchased by a corpora- 
 
 tion at the beginning, what account shows the difference between the 
 purchase price and the book value of these assets? 
 
 7. If the corporation offers one share of common stock, par value $100.00, free 
 
 with each share of preferred stock, par value $100.00, purchased and paid 
 for in cash, how will the sale of 100 shares of preferred stock be recorded, 
 assuming that cash is received for the stock at the time it is sold? 
 
 8. Why would a corporation give common stock free with preferred stock pur- 
 
 chased ? 
 
 9. If a corporation (authorized capital stock issued, $200,000.00) secures an 
 
 amendment to its charter permitting it to double the capital stock, and it 
 is decided to sell three-fourths of this new issue, what entry will be required 
 to record this stock, provided it is sold one-half cash, balance payable 
 within 90 days? If the new issue were equally divided between preferred 
 and common stock, what effect would this have on the entry? 
 10. In what respect does the opening entry for a corporation resemble the opening 
 entry for a business operated by an individual or by partners?
 
 Chapter XXIX 
 
 CONSTRUCTION AND INTERPRETATION OF SPECIFIC 
 
 ACCOUNTS 
 
 The Purpose of this Chapter is to explain accounts with selling cost, branch 
 store, agents, controlling accounts, and notes receivable discounted. Some of these 
 accounts have been discussed in previous chapters, but the information is repeated 
 briefly in this chapter for the benefit of the student who is working this division in- 
 dependently of those which precede it. 
 
 § 288. Selling Expense refers to the cost of selling the merchandise or 
 service in which the business deals. As explained in Chapter XVI, all the cost of 
 selling may be recorded in one account or the transactions affecting selling cost 
 may be analyzed at the time they occur and recorded in separate accounts. Selling 
 cost may be divided into (a) advertising, (b) salaries in the selling department, 
 (c) salaries and expenses of traveling salesmen, (d) warehouse expense, and (e) 
 delivery expense. 
 
 If desired, selling expenses may be classified so as to apply to departments, each of which is 
 in charge of and indi\idually responsible for the operations of that particular department; this 
 plan is desirable when the operations of the business are extensive and the management must depend 
 on reports in order to exercise the proper control. 
 
 The classification of the accounts discussed in this chapter applies more to the nature of the 
 expenses than to the departments, the purpose being to show the student that selling expenses are 
 of different natures and that the accounts set up to record these should be grouped so as to show the 
 total cost of each. The management of a business should know the selling cost applicable to adver- 
 tising, salaries of clerks in the store, expenses of salesmen on the road, cost of maintaining the ship- 
 ping room or warehouse, cost of delivering goods sold, etc. 
 
 § 289. Advertising Cost refers to the expense incurred in connection with 
 advertising in newspapers and magazines, circulars, catalogs, novelties, etc. Two 
 accounts should be kept to show these expenses: one with Advertising Expense 
 and the other with Advertising Material. 
 
 ADVERTISING EXPENSE ACCOUNT 
 
 § 290. The Purpose of this Account is to show the cost of advertising. 
 This includes (a) salaries, (b) newspaper and magazine space, and (c) catalogs, 
 circulars, and advertising nov^elties distributed; the entry for the last cost is 
 made at the close of the fiscal period after the value of the material on hand has 
 been ascertained by an inventory. 
 
 Debit the Advertising Expense Account: Credit the Advertising Expense Account: 
 ^ I. For the cost of advertising \ 3. For any adjustment which re- 
 service, duces the advertising cost as 
 II 2. At the close of the fiscal period, shown by the debit side of 
 for the cost of advertising ma- this account, 
 terial used during the period. 
 
 ^ 4. The Balance of the Advertising Expense Account shows the net cost of 
 advertising; it is shown on the Statement of Profit and Loss as one of the selling 
 expenses. 
 
 * 273
 
 274 SELLING EXPENSE ACCOUNTS 
 
 ADVERTISING MATERIAL ACCOUNT 
 
 § 291. The Purpose of this Account is to show the cost of material pur- 
 chased for use in advertising; this includes catalogs, circulars, stationery for the 
 advertising department, advertising novelties, etc. The nature of the account is 
 the same as that of Office Supplies. 
 
 Debit the Advertising Material Account: Credit the Advertising Material Account: 
 
 T[ I. For the cost of advertising \ 2. At the close of the fiscal period, 
 
 material purchased. for the cost of advertising 
 
 material used. 
 
 1[ 3. The Balance oj the Advertising Material Account during the fiscal period 
 shows the net cost of advertising material purchased; the balance of this account 
 after the value of the material used has been entered at the close of the fiscal 
 period, shows the value of advertising material on hand. This latter balance is 
 shown on the Balance Sheet (Illustration No. 130) as a deferred charge. 
 
 SALARIES IN SELLING DEPARTMENT ACCOUNT 
 
 § 292. The Purpose of this Account is to show the amount paid to em- 
 ployees (except traveling salesmen) in the selling department. In a mercantile 
 business this includes the salaries of clerks who are engaged in selling merchandise 
 and of those who supervise the work of these clerks. 
 
 Debit the Salaries in Selling Credit the Salaries in Selling 
 Department Account: Department Account: 
 ^ I. For the salaries of all sales ^ 2. For any adjustments which re- 
 clerks except those on the duce the cost of salaries in 
 road. the selling department. 
 
 ^ 3. The Balance of the Salaries in Selling Department Account shows the 
 amount paid clerks and salesmen ; it is shown on the Statement of Profit and Loss 
 (Illustration No. 131) as one of the selling costs. 
 
 TILWELING EXPENSE ACCOUNT 
 
 § 293. The Purpose of this Account is to show the cost of selling mer- 
 chandise through traveling salesmen; this includes salaries, transportation, hotel 
 accommodation, and other authorized expenditures. Salaries include not only the 
 amount assigned each salesman as his drawing account, but also commission paid 
 to him in excess of his drawing account. 
 
 Debit the Traveling Expense Account: Credit the Traveling Expense Account: 
 \ I. For the salaries of traveling ^ 3. For any adjustments which re- 
 salesmen, duce the cost shown by the 
 *\ 2. For all amounts paid as expenses debit side, 
 for salesmen on the road, as 
 reported by each salesman. 
 
 Tl 4. The Balance of the Traveling Expense Account shows the cost of selling 
 merchandise through traveling salesmen; it is shown as one of the selling costs 
 on the Statement of Profit and Loss (Illustration No. 131.) 
 
 NOTE. An account is kept with each traveling salesman; this is debited with the cash 
 advanced to him and credited with his expenses as reported weekly or monthly.
 
 SELLING EXPENSE ACCOUNTS 275 
 
 § 294. Warehouse Expense refers to the cost of preparing merchandise 
 for dehvery after it is sold, and includes wages of employees in the warehouse or 
 shipping room and material used in packing the merchandise. Warehouse expense 
 is one of the operating costs resulting from the sale of merchandise and is shown 
 on the Statement of Profit and Loss, either as a selling expense or as a separate 
 expense item. When a record of the sales by departments is maintained, the total 
 warehouse expense is distributed to the departments in the same proportion as the 
 sales for the department are to the total sales. 
 
 Since material is needed in connection with the shipment of merchandise sold, two accounts 
 are necessary to show the cost of maintaining the warehouse, one with warehouse material and 
 the other with warehouse expense; where a separate warehouse is not maintained for receiving 
 and shipping, the title "Shipping Room" may be substituted for "Warehouse." 
 
 If it is desired to show all costs in connection with the purchase of merchandise separate 
 from the cost of selling or costs which result from selling, and the warehouse is used for receiving 
 goods purchased and packing goods sold, it will be necessary to transfer a part of the warehouse 
 expense to the proper account in the "cost of purchases" group at the end of each month or fiscal 
 period. The amount transferred will depend on the volume of the purchases and sales or the aver- 
 age cost incident to each, based on the nature of the work required in receiving and shipping goods. 
 
 WAREHOUSE MATERIAL ACCOUNT 
 § 295. The Purpose of this Account is to show the cost of cases, wrapping 
 paper, twine, nails, and other supplies purchased for use in packing merchandise 
 after it has been sold. The nature of this account is the same as that of Adver- 
 tising Material, and the debits and credits are the same except that they are ap- 
 plicable to material purchased for use in the warehouse. The balance, after the 
 adjusting entry for the value of the material used during the period has been made 
 at the close of the fiscal period, will show the value of the material on hand; this 
 is shown as a deferred charge on the Balance Sheet (Illustration No. 130). 
 
 WAREHOUSE EXPENSE ACCOUNT 
 § 296. The Purpose of this Account is to show the cost of maintaining 
 the warehouse or shipping room; this includes rent, wages of employees and cost 
 of material used during the period ; the entry for the latter cost is made at the close 
 of the fiscal period after the value of the material has been ascertained through 
 an inventory. 
 
 Debit the Warehouse Expense Account: Credit the Warehouse Expense Account: 
 
 \ I. For the wages of employees and ^ 3. For any adjustments which re- 
 
 other expenses in connection duce the cost shown by the 
 
 with maintaining the ware- debit side, 
 
 house at the time the expense 
 is incurred. 
 \ 2. For the value of warehouse ma- 
 terial consumed during the 
 period, at the close of the fis- 
 cal period. 
 
 ^ 4. The Balance of the Warehouse Expense Account shows the cost of main- 
 taining the warehouse; it is shown on the Statement of Profit and Loss either 
 in the selling group (Illustration No. 131) or as a separate item. 
 
 § 297. Delivery Expense is the cost of delivering merchandise after it has 
 been sold, to both local and out-of-town customers. Delivery cost includes the 
 wages of chauffeurs and drivers, gasoline and oil for automobiles, feed for horses, 
 the cost of maintaining the delivery equipment (such as taxes, license, repairs, 
 depreciation, and insurance), prepaid freight, express, or parcel post where the 
 contract is to deliver the goods, and any other expenses in connection with making 
 delivery after sale. The cost of delivery is usually recorded in two accounts: one 
 with Delivery Expense and the other with Freight Out.
 
 276 SELLING EXPENSE ACCOUNTS 
 
 DELIVERY EXPENSE ACCOUNT 
 § 298. The Purpose of this Account is to show the cost of delivering 
 merchandise to local customers and to the freight depot for out-of-town customers, 
 whether the business owns its own delivery equipment or has its merchandise 
 delivered by contract. 
 Debit the Delivery Expense Account: Credit the Delivery Expense Account: 
 
 \ I. For amounts paid for delivery ^ 3. For adjustments which decrease 
 
 of merchandise sold. the delivery cost as shown 
 
 \ 2. For the cost of maintaining a by the debit side of this 
 
 delivery department, which account, 
 
 includes (a) wages, gasoline, 
 and feed, (b) repairs, insur- 
 ance,- taxes, and depreciation 
 on delivery equipment. 
 ^ 4. The Balance of the Delivery Expense Account shows the cost of delivering 
 merchandise; it is shown as one of the selling expenses on the Statement of Profit 
 and Loss (Illustration No. 131). 
 
 "Free on board" (abbreviated "f. o. b.") is a term frequently used in connection with the 
 sale and shipment of merchandise. If the seller is to deliver the merchandise to the buyer, he in- 
 dicates this by stating in his quotation of price "f. o. b. your freight station;" if the seller is not to 
 deliver the merchandise to the buyer, this is indicated by stating in the quotation "f. o. b. our freight 
 station." The meaning of the first expression is that the seller prepays the freight to the freight 
 station at which the buyer will receive it, or that he allows the buyer to pay the freight and deduct 
 the amount from the invoice. The meaning of the second expression is that the seller agrees to 
 deliver the merchandise to the freight station of the railroad which is to transport it, and the buyer 
 will pay the freight when the transportation company delivers it, or that he (the seller) will prepay 
 the freight and add the amount to the invoice rendered the buyer. 
 
 FREIGHT OUT ACCOUNT 
 
 § 299. The Purpose of this Account is to show the delivery cost of mer- 
 chandise sold f. o. b. the freight station of a customer; this includes the freight 
 paid by the seller or the freight paid by the customer and deducted by him from 
 the amount of the sales invoice. The term "freight" includes transportation cost 
 whether the merchandise is shipped by railroad, steamship, express, or parcel 
 post. The term "out" or "in" is written after "freight" to indicate whether the 
 charge is applicable to merchandise sold or merchandise bought. If it is applicable 
 to merchandise bought (Freight In), the balance of the account is a purchase 
 cost; if it is applicable to merchandise sold (Freight Out), it is a selling cost. 
 Debit the Freight Out Account: Credit the Freight Out Account: 
 
 ^ I. For the transportation cost of 1[ 2. For any adjustments which re- 
 merchandise sold f. o. b. the duce the delivery cost result- 
 customer's freight station, and ing from paying freight on 
 transportation cost of mer- merchandise sold as shown by 
 chandise returned by a cus- the debit side, 
 tomer. 
 
 H 3. The Balance of the Freight Out Account shows the transportation cost of 
 merchandise sold f. o, b. the customer's freight station. It is shown as one of the 
 selling expenses on the Statement of Profit and Loss (Illustration No. 131). 
 
 NOTE. If desired, the Freight Out account may be credited with the transportation cost 
 on the merchandise sold f. o. b. the customer's freight station at the time the sale is recorded and 
 debited with the transportation cost when it is paid. This plan is desirable when a delivered price 
 is made on all or the greater part of the merchandise sold, because the selling price includes trans- 
 portation and, if this is not separated from the sales price, the balance of the Sales account will not 
 show the true sales. When this plan is followed, the Freight Out account will be in balance 
 after all freight bills have been paid; if not in balance, it will show the amount of transportation 
 which is unpaid.
 
 ACCOUNTING FOR AGENCIES 277 
 
 § 300. Agencies. An agent is one who acts in a legal capacity for another, 
 either in the performance of a contract or the sale of merchandise. With reference 
 to the sale of merchandise, there are two classes of agents: one who carries in stock 
 at all times merchandise belonging to a principal, and the other, one who carries 
 in stock merchandise belonging to various principals; the latter class includes the 
 consignee in a commission business where merchandise is received from various 
 owners and sold on their account and risk. When the agent represents a principal 
 from year to year and carries his goods in stock for sale at a price fixed by the 
 principal and on a commission basis, it is necessary for the agent to keep an ac- 
 count with each principal, also to report to the principal according to the terms 
 of the agreement and remit for the merchandise sold. The commission merchant 
 usually sells all the goods before sending an account sales; the agent makes period- 
 ical reports of merchandise sold without waiting for all the goods to be sold. 
 
 The rule of agency does not apply where the business has the exclusive sale of merchandise 
 of a certain variety but pays for it. Thus, if a druggist has the exclusive sale of a certain kind of 
 medicine, but buys and pays for this medicine the same as other merchandise, he is not an agent 
 and his record of the transactions with the manufacturer of the medicine will be the same as that 
 with any other trade creditor. 
 
 AGENT'S ACCOUNT WITH PRINCIPAL 
 
 § 301. The Purpose of this Account is to show a record of all the trans- 
 actions which the agent has in connection with merchandise belonging to the 
 principal. The account is of the same nature as the Consignment In account 
 except that the agent makes reports periodically according to agreement and 
 continues to sell the same merchandise for the same principal from year to year. 
 
 The Agent Debits the Principal: The Agent Credits the Principal: 
 
 ^ I. For the transportation cost paid H 4. For the value of merchandise 
 
 by the agent. received from the principal, 
 
 T[ 2. For cash (or other assets) given as per invoice rendered; the 
 
 the principal in payment for Purchases account is debited, 
 
 the amount due him for his 
 merchandise sold. 
 
 ^ 3. For the agent's commission on 
 sales of merchandise belong- 
 ing to the principal. 
 
 % 5. The Balance of the Agent's Account with the Principal shows the amount 
 due the principal from the agent; it is not all a liability of the agent because he 
 is required to pay only for the merchandise sold. At the close of a fiscal period, 
 the value of the merchandise in stock belonging to the principal should be removed 
 from the ledger by an entry in which this account is debited and Purchases credited; 
 after the ledger is closed, the amount is recorded in the ledger again by an entry 
 in which Purchases is debited and this account credited. 
 
 NOTE. It will be advisable for the agent to maintain a going inventory of the merchandise 
 which he has in stock belonging to the principal. A card ruled for purchases and sales should be pro- 
 vided for each class of merchandise; the information in regard to purchases is obtained from the 
 invoices rendered by the principal, and that in regard to sales, from the sales invoices rendered by 
 the agent to his customers. When a report is to be prepared for the principal, a physical inventory 
 is taken and the record on the card compared with this. 
 
 PRINCIPAL'S ACCOUNT WITH AGENT 
 
 § 302. The Purpose of this Account is to show the transactions which' 
 the principal has with his agent, in order that he may verify the reports of the
 
 278 BRANCH STORE ACCOUNTING 
 
 agent. The debits and credits below are applicable when the agent carries in 
 stock merchandise of the principal and reports the sales of this merchandise at 
 specified times as per agreement. 
 
 The Principal Debits the Agent: The Principal Credits the Agent: 
 
 ^ I. For the value of merchandise ^ 2. For cash (or other assets) re- 
 
 shipped to the agent as per ceived from the agent on ac- 
 
 sales invoice rendered; the count of sales, for transporta- 
 
 Sales account is credited. tion and other costs paid by 
 
 him, and for his commission 
 
 on sales. 
 
 ^ 3. The Balance of the Principal' s Account with the Agent shows the amount 
 due from the agent for merchandise in his possession; it is not all an asset because 
 the agent is required to pay only for the merchandise he has sold. 
 
 It is necessary for the principal to adjust the account with the agent at the close of the fiscal 
 period because the merchandise in the hands of the agent has not been sold to the agent. The 
 method of adjustment is to debit Sales and credit the agent for the balance of the account. This 
 takes out of the Sales account the value of the merchandise credited to it, which has not been sold, 
 and removes the agent's account from the ledger. The value of the merchandise in the hands of 
 the agent is shown at cost on the Balance Sheet of the principal; the value of this merchandise is 
 not shown on the Balance Sheet of the agent because he has not purchased it. 
 
 § 303. The Account which the agent keeps with the principal and the 
 account which the principal keeps with the agent should agree at the time the 
 periodical report is submitted by the agent. The adjustments necessary for the 
 principal or agent to make at the close of a fiscal period do not affect the account, 
 hence either can make these adjustments without notifying the other. 
 
 § 304. Branch Store Accounting. A branch store, as the name indicates, 
 is a store operated at a place different from the main store, either in the same city 
 or in another city. Branches are maintained by wholesale establishments for the 
 retail distribution of certain classes of merchandise and to enable the main store 
 to keep In closer touch with the trade in the community which it serves. There 
 are many other reasons for the establishment of branch stores, but these two will 
 serve the purpose in the present discussion. 
 
 When a branch store Is established, it is necessary for the general office (usually 
 located at the main store) to keep in touch with the activities of the branch through 
 its records. There are two methods In general use: 
 
 1, No accounting records are kept by the branch store except memoranda 
 of the various transactions completed. The books of original entry and the ledger 
 for recording the branch store transactions are maintained at the general 
 office. When this plan Is followed, all business forms and vouchers which represent 
 transactions completed by the branch store are forwarded to the main store for 
 recording. As stated at the beginning, the branch store retains memoranda 
 of the transactions for auditing purposes. 
 
 2. The'branch store maintains a complete accounting system, including books 
 of original entry and a ledger or ledgers. When this plan Is followed, the branch 
 store records all transactions which it completes and maintains in the general 
 ledger an account with the general office or main store, which takes the place 
 of the proprietorship accounts. On the ledger of the main store or general 
 office, there will be a similar controlling account for each branch. Monthly reports 
 are submitted by the branch so that the controlling account on the main store 
 ledger may be audited. The title of the controlling account for the branch store 
 in the general ledger of the main store may be "Branch Store," or any name applied
 
 BRANCH STORE ACCOUNTS 279 
 
 to the branch store, such as "Store No. 10," "Southside Branch," "Milwaukee 
 Branch," "Springfield Branch," or the name under which the branch store is 
 operated if the name is different from that of the main store. 
 
 The purpose of the discussion here is not to give an elaborate explanation of branch store 
 accounting, but to show the student some of the methods used. The subject of accounting in its 
 various phases can not be mastered in an elementary course, and the student should understand 
 that there is much more to learn about the subject than is given in an elementary accounting text. 
 
 BRANCH STORE ACCOUNT 
 
 § 305. The Purpose of this Account is to show a record of all transactions 
 with the branch store which it controls. This account is kept under the second 
 plan discussed in § 304. 
 
 Debit the Branch Store Account: Credit the Branch Store Account: 
 
 1[ I. For the net assets on hand at the ^6. For cash received from the 
 
 branch store at the begin- branch store for the sales made 
 
 ning of the fiscal period. by it. 
 
 1[ 2. For merchandise sold to the ^7. For the net. assets on hand at the 
 
 branch by the main store. branch store at the close of 
 
 ^ 3. For merchandise purchased for of the fiscal period. 
 
 the branch by the main store. 
 \ 4. For salaries and wages paid to 
 
 employees of the branch store 
 
 by the main store. 
 ^ 5. For other expenses paid for the 
 
 branch by the main store. 
 
 ^ 8. *The Balance of the Branch Store Account, after the adjustments have 
 been made for the inventories at the close of the fiscal period, will show the profit 
 or loss resulting from the operations of the branch store; if the debit side is the 
 larger, a loss, or if the credit side is the larger, a profit. The balance will be shown 
 in the trading section on the Statement of Profit and Loss (Illustration No. 131) 
 of the main store. The Statement of Profit and Loss submitted by the manage- 
 ment of the branch store will support the entry on the Statement of Profit and 
 Loss of the main store. 
 
 BRANCH STORE INVENTORY ACCOUNT 
 
 § 306. The Purpose of this Account is to show the value of the assets on 
 hand at the branch store at the close of the fiscal period; these assets include all 
 property on the books of the branch store. If desired, the current assets, fixed 
 assets, and deferred charges may be recorded in separate accounts. The manager 
 of the branch store will prepare a Balance Sheet from his books and this will be 
 used as a schedule to support the item "Branch Store Inventory" on the Balance 
 Sheet (Illustration No. 130) of the main store. After the ledger is closed, the 
 inventory or inventories of the branch store assets may be transferred to the Branch 
 Store account (Illustration No. 134), or this transfer may be made at the close 
 of the fiscal period. 
 
 *If desired, If 7 may be omitted and H 6 changed to read "For all sales made by the branch 
 store." If these changes are made and the Branch Store account is debited with the net profit or 
 credited with the net loss as shown by the Statement of Profit and Loss prepared by the manager 
 of the branch store, the balance of this account will show the net value of the assets belonging to 
 the branch store at the close of the fiscal period and will be shown as a current asset on the Balance 
 Sheet of the main store prepared at that time.
 
 28o CONTROLLING ACCOUNTS 
 
 § 307. A Controlling Account is one which represents in total the facts 
 shown in detail in a number of other accounts (§ i6o). Controlling accounts are 
 used more frequently with accounts receivable and accounts payable because 
 usually a great number of accounts are required to record the transactions with 
 customers and creditors. The controlling account is kept in the general ledger and 
 the accounts which it controls, in a subsidiary ledger. The title of the controlling 
 account in the general ledger for accounts with customers is Accounts Receivable, 
 and for accounts with creditors, Accounts Payable. 
 
 § 308. The Accounts Receivable Account in the general ledger contains 
 in total the same debits and credits which appear in detail in the various accounts 
 with customers in a subsidiary ledger. Each customer is debited in the subsidiary 
 ledger with the amount of his purchase as recorded in the sales journal, and the 
 Accounts Receivable account is debited at the end of the month with the total of 
 this journal. Each customer is credited in the subsidiary ledger with cash received 
 from him as recorded on the receipts side of the cash book, and the total of the 
 cash received from customers is posted at the end of the month to the credit of 
 the Accounts Receivable account in the general ledger; credits to customers which 
 include cash and discount should be entered in special columns in the cash book. 
 Each customer is credited, in a special column in the general journal, with notes, 
 drafts, and assets other than cash accepted to apply on account, and the 
 total of such credits is posted at the end of the month to the credit of the Accounts 
 Receivable account in the general ledger. Each customer is credited in his ac- 
 count in a subsidiary ledger with the amount of each allowance for damaged 
 goods or goods returned as recorded in the sales returns journal, and the total of 
 this journal is posted at the end of the month to the credit of the Accounts Re- 
 ceivable account in the general ledger. 
 
 The balance of the controlling account with Accounts Receivable in the gen- 
 eral ledger should be the same as the total of all the balances due from customers 
 in a subsidiary ledger. After the Trial Balance from the general ledger has been 
 proved, the balances in the subsidiary ledger should be listed and the total proved 
 with the balance of the Accounts Receivable account. 
 
 § 309. The Accounts Payable Account in the general ledger contains in 
 total the same debits and credits which appear in detail in the various accounts 
 with creditors in a subsidiary ledger. Each creditor is credited in the subsidiary 
 ledger with the amount of the purchase from him as recorded in the purchases 
 journal, and the Accounts Payable account is credited at the end of the month with 
 the total of this journal. Each creditor is debited in the subsidiary ledger with 
 cash paid to him as recorded on the payments side of the cash book, and the total 
 of the cash paid creditors is posted at the end of the month to the debit of the 
 Accounts Payable account in the general ledger; debits to creditors which include 
 cash and discount should be entered in special columns in the cash book. Each 
 creditor is debited, in a special column in the general journal, with notes, drafts, 
 and assets other than cash given him to apply on account, and the total 
 of such credits is posted at the end of the month to the debit of the Accounts 
 Payable account in the general ledger. Each creditor is debited in his account 
 in a subsidiary ledger with the amount of each allowance for damaged goods or 
 goods returned to him as recorded in the purchases returns journal, and the total 
 of this journal is posted at the end of the month to the debit of the Accounts 
 Payable account in the general ledger. 
 
 The balance of the controlling account with Accounts Payable in the general 
 ledger should be the same as the total of all the balances due creditors in a sub- 
 sidiary ledger. After the Trial Balance from the general ledger has been proved, 
 the balances in the subsidiary ledger should be listed and the total proved with 
 the balance of the Accounts Payable account.
 
 EXERCISES 281 
 
 NOTES RECEIVABLE DISCOUNTED ACCOUNT 
 
 § 310. The Purpose of this Account is to show the balance of unpaid 
 notes receivable which have been discounted. When a note receivable is discounted, 
 the holder guarantees payment at maturity by his endorsement; this creates a 
 "contingent" liability. Contingent liabilities should be recorded in the ledger 
 and shown on the Balance Sheet. 
 
 Debit this Account: Credit this Account: 
 
 ^ I. For the face of each discounted ^ 2. For the face of each note receiv- 
 
 note receivable when it has able discounted; this entry is 
 
 been paid by the maker; no made at the time the note 
 
 notice of protest at matur- is discounted, 
 ity indicates payment. 
 
 ^ 3. The Balance of the Notes Receivable Discounted Account shows the amount 
 of unpaid notes which have been discounted; it is shown as a contingent liability 
 on the Balance Sheet or as a deduction from the Notes Receivable account (Illus- 
 tration No. 130). 
 
 Wlien a note or accepted draft is received, its value is recorded in the Notes Receivable account 
 and should remain there until collected or protested. When a note receivable is discounted, Cash 
 is debited and the Notes Receivable Discounted account credited. No notice of protest *at maturity 
 indicates collection; hence the amount of the note receivable should be taken out of the Notes 
 Receivable account. This requires an entry in the general journal in which Notes Receivable Dis- 
 counted is debited and Notes Receivable credited. 
 
 Should a note which has been discounted be protested, the one who discounted it will be required 
 to issue his check to the holder for the face of the note, interest if any, and protest fees; this check is 
 recorded as a debit to the Protested Notes Receivable account. At the same time the lace of the note 
 receivable should be taken out of the Notes Receivable account by an entry in the general journal 
 in which Notes Receivable Discounted is debited and Notes Receivable credited. 
 
 Exercise No. 95, Sale of Branch Store 
 
 The Allyn Trading Company, a corporation, is operating a branch store in 
 another city. Robert Montgomery, the manager of the branch store, wishes to 
 purchase it, and it is agreed that if he can form a corporation to take over the assets 
 of the branch store, the Allyn Trading Company will accept stock in the new cor- 
 poration as part payment. The inventory of the branch store shows the net assets 
 to be $22,550.00. 
 
 Mr. Montgomery applies for and secures a charter for the Montgomery Mer- 
 cantile Company with a capital stock of $25,000.00. The Allyn Trading Company 
 agrees to accept this amount for the branch store, to be paid as follows: cash, 
 $5,000.00; stock in the Montgomery Mercantile Company, $5,000.00; three notes 
 for $5,000.00 each, with interest at six per cent from date, due in six, twelve, and 
 eighteen months respectively. 
 
 Make in journal form the entries necessary to record this transaction on the books of the 
 Allyn Trading Company under date of December i, 192. ., assuming that the branch store accounts 
 appear on the books of the Allyn Trading Company as Branch Store Inventory, Dr., $13,651.75; 
 Branch Store Purchases, Dr., $15,409.11; and Branch Store Sales, Cr., $19,571.50. 
 
 Exercise No. 96, Constructing Selling Expense Accounts 
 
 Open accounts on a sheet of ledger paper with Advertising Expense, Ad- 
 vertising Material, Salaries in the Selling Department, Traveling Expense, Ware- 
 house Material, Warehouse Expense, Delivery Expense, and Freight Out, and 
 record at least three transactions in each account; indicate the nature of each 
 item in the explanation column of the account in which it is recorded.
 
 282 EXERCISES 
 
 Exercise No. 97, Note Receivable Discounted. 
 
 Show, in journal form, the entries necessary to record a note receivable (a) 
 when received from a customer to apply on account; (b) when discounted at the 
 bank; (c) when the discounted note is paid by the maker; (e) when the discounted 
 note is not paid but is renewed; (f) when the discounted note is protested. 
 
 Exercise No. 98, Agent and Principal. 
 
 The following transactions were completed by the Southern School Book 
 Depository, agent for the Davis Publishing Company: 
 
 Jan. I. Received from the Davis Publishing Company 500 Davis law texts 
 at $1.00. 
 10. Sold the College Book Store, City, 100 law texts at $1.00. 
 15. Paid insurance on the stock of law texts, $12.50. 
 
 25. Received from the Davis Publishing Company 500 law texts at $1.00. 
 
 26. Sold the Central High School, City, 200 law texts at $1.00. 
 
 27. Paid $25.50 freight and drayage on the books received on the 25th. 
 Feb. 10.' Sold Smith Bros., Kent, 150 law texts at $1.00. Paid express, $1.00. 
 
 25. Sold the Lincoln High School, Lincoln, 100 law texts at $1.00. 
 
 Mar. 5. Sold the Central Business College, City, 200 law texts at $1.00. 
 
 10. Received from the Davis Publishing Company 500 law texts at $1.00. 
 
 11. Paid freight and drayage on law texts received March 10, $27.65. 
 
 20. Received from the Lincoln High School five law texts which were 
 delivered in a damaged condition ; paid express 40c. Returned these 
 to the Davis Publishing Company, paying express 50c. 
 
 31. Rendered Davis Publishing Company a report, and sent check for the 
 balance due; commission, 123/^% of net sales. 
 
 1. Record in journal form the above transactions, post and make the report 
 of the bookkeeper of the Southern School Book Depository. 
 
 2. Record the same transactions as they would be recorded by the book- 
 keeper of the Davis Publishing Company. 
 
 QUESTIONS 
 
 1. Why is it advisable for a merchant who does a considerable volume of business 
 
 to classify the selling expense through special accounts? 
 
 2. (a) What is the difference between Freight In and Freight Out? (b) How is 
 
 each shown on the Statement of Profit and Loss? 
 
 3. Explain why it is advisable for a manufacturer who makes a delivered sale 
 
 price, to credit Freight Out with the amount of the freight at the time the 
 sale is made, and debit the Freight Out account when the freight is paid. 
 
 4. Explain the two methods for recording transactions with a branch store. 
 
 5. Who is an agent? 
 
 6. Who is a principal? 
 
 7. What is the purpose of the agent's account with the principal? the prin- 
 
 cipal's account with the agent? 
 
 8. Will all the debits on the agent's account with the principal appear as credits 
 
 on the principal's account with the agent? 
 
 9. Why is a liability incurred when a note receivable is discounted? 
 
 10. How is the liability incurred in question 9 shown on the Balance Sheet?
 
 Chapter XXX 
 
 SPECIAL RULING IN BOOKS OF ACCOUNT 
 
 The Purpose of this Chapter is to explain the use and advantage of special 
 columns in books of original entry through illustrations showing transactions 
 recorded in them. A printed statement of the transactions recorded in the illus- 
 trations is given that the student may check the transactions with the entries. 
 The method of posting from the special columns in each book of original entry is 
 explained by requiring the student to post from the illustrations. 
 
 §311. Business Transactions are recorded in books of original entry and 
 posted as they occur and in the order of their occurrence. When a number of trans- 
 actions affect the same account, much time can be saved by providing a special 
 column in each book of original entry which contains a record of transactions 
 affecting the account. In a mercantile business, the usual books of original entry 
 are (a) purchases journal, (b) returned purchases journal, (c) sales journal, (d) 
 returned sales journal, (e) cash book, or separate cash receipts and cash payments 
 journals, (f) notes receivable journal, (g) notes payable journal, and (h) general 
 journal. In addition to these books of original entry a number of auxiliary books 
 may be needed; these include the petty cash book, check book, and pay roll book. 
 
 § 312. Petty Cash Fund refers to the fund provided for payments of small 
 amounts when all cash received is deposited in the bank, and all payments are made 
 by check. The cash needed for this fund is secured by check; the money re- 
 ceived when the check is cashed is kept in the safe and used for paying obligations 
 where the amount is small, usually less than $i.oo. The bookkeeper requires a 
 receipt for each payment from the petty cash fund. The Petty Cash Fund account 
 is debited for the amount of the check at the time it is issued. Expenditures from 
 the petty cash fund are recorded in the petty cash book. When the fund is ex- 
 hausted, a check is issued to renew it. This check is debited to the accounts affected 
 by the expenditures as shown by the petty cash book. The Petty Cash Fund ac- 
 count in the general ledger will show the amount of the petty cash fund; this may 
 be $20.00, $50.00 or $100.00, depending on the desires of the management. 
 
 § 313. The Petty Cash Book is an auxiliary book wjiich contains a record 
 of expenditures from the petty cash fund. W'hen these expenditures affect a num- 
 ber of expense accounts, special columns should be provided for each account 
 in the same manner as special columns are provided on the payments side of the 
 cash book. The petty cash book should be ruled when the petty cash fund is 
 exhausted. The amount of the check to renew the fund should be sufficient to 
 bring it up to the balance of the Petty Cash Fund account in the general ledger, 
 which is the amount decided upon as the petty cash fund. At the close of the 
 fiscal period, the petty cash book should be balanced, the amount of the fund on 
 hand carried down below the ruling, and the expenditures debited to the proper 
 operating accounts in the general journal, otherwise these expenditures would 
 not be shown on the reports. Illustration No. 119 shows a petty cash book with 
 seven amount columns; the use of these columns is explained by the headings. 
 
 283
 
 284 
 
 SPECIAL-COLUMN PURCHASES JOURNAL 
 
 TRt^SACTIONS recorded in the ILLUSTRATIONS 
 
 § 314. The Books of Account shown in Illustrations Nos. 111-120, con- 
 tain a record of the transactions performed by the Arnold Drug Store during the 
 month of December. The use of the special columns in each illustration can be 
 better understood by comparing each entry with the transaction. 
 
 December 2 
 
 Paid rent for the month, $75.00, by our check No. 63. 
 
 Sold Miller & Barr, Canton, per sales invoice No. 77, drugs, $102.74, sundries, 
 $54.16; terms, 2% trade acceptance, 30 days. Received in payment of this in- 
 voice, less 2% discount, their 30-day trade acceptance payable at the Citizens' 
 Bank of Canton. 
 
 Received from Williams Pharmacy in payment for sales invoice No. 60, a 
 60-day note, $287.11, dated November 15, signed by J. B. Macklin, payable at 
 the City National Bank, with interest at 6% from date; allowed them credit for 
 the accrued interest on the note. 
 
 Gave Tanner & Co. our 15-day note for $217.25, payable at the City National 
 Bank, dated November 30, with interest at 6% from date, in payment for pur- 
 chases invoice No. 15. 
 
 Paid $4.00 from the petty cash fund for stamps to be used in the ofhce. 
 
 Accepted John D. Park & Son's 60-day trade acceptance for $557.75, payable 
 at the City National Bank, in payment for purchases invoice No. 20 less 3% dis- 
 count as per terms. 
 
 a/_2^^£'-C&'^7<!'-2..^1^-£..'±^ 
 
 /f. 
 
 4^ 
 
 ^7 
 
 Account Credited 
 
 
 
 Q-'t'C-e^ 
 
 „ -3/ ^y,y 
 
 2-/14 
 3y 
 
 2-/rH 
 
 ^f4^J 
 
 Co 
 
 Ll^ 
 
 
 Sandries—Pur. 
 
 X03 
 
 Vol 3 o 
 
 / QlAiJ'O 
 
 aC 
 
 Illustration No. iii. Purchases Journal. 
 
 EXPLANATION. The method of recording is the same as in other purchases journals 
 illustrated in preceding chapters, except that a record is kept of the merchandise purchased for two 
 separate departments, as indicated by the printed headings at the top of the amount columns. At 
 the end of the month, the Accounts Payable account is credited for the total of the first column, 
 the Drugs Purchases account debited for the total of the second column, and the Sundries Pur- 
 chases account debited for the total of the third column. 
 
 December 4 
 
 Bought from Park, Davidson & Co., Chicago, per purchases invoice No. 23, 
 dated December 2, drugs, $250.00, sundries, $200.00; terms 2/10, n/30.
 
 RETURNED PURCHASES JOURNAL 
 December 6 
 
 285 
 
 Paid from the petty cash fund 95c for gasoHne for truck and $1.05 for adver- 
 tisement in the Herald. 
 
 Sold Armstrong Drug Co., 560 Race St., City, per sales invoice No. 78, drugs, 
 $84.75, sundries, $29.22; terms, 3/10, n/60. 
 
 Bought from the Special Chemical Co., Chicago, per purchases invoice No. 24, 
 dated December 4, drugs, $694.38; terms, 3/10, n/30. 
 
 Cash sales to date: drugs, $22.50; sundries, $6.75. 
 
 c>c2^iyC.'e.'-<>'yT^'^u--dA^ 
 
 /^^- 
 
 Account Debited 
 
 Drugs Pur. Rel. Rnndriett Pur. Rel. 
 
 / o 
 2-/ 
 
 
 ^\0 , "^-A^^t-'C'-tZ.-a-t) — 
 
 
 / / 
 
 32- 
 
 XJ 
 
 Z^ 
 
 w 
 
 
 JJ^ 
 
 «''^'~~ . 
 ^^i /^ 
 
 Zj2 
 
 ^ 
 
 Illustration No. 112, Returned Purchases Journal. 
 
 EXPLANATION. This journal contains a record of merchandise returned to creditors; 
 the same number of amount columns is provided as in the purchases journal. At the end of the 
 month, the Accounts Payable account is debited for the total of the first column, the Drugs Pur- 
 chases Returns account credited for the total of the second column, and the Sundries Purchases 
 Returns account credited for the total of the third column. 
 
 December 7 
 
 Gave Armstrong Drug Co. our credit memorandum No. 4, for sundries sold 
 them on the 6th and returned, $1.25. 
 
 Proved cash (balance, $3,357-92), and posted. All cash on hand is deposited 
 in the bank each time cash is proved. 
 
 December 9 
 
 Received credit memorandum No. 56 from Park, Davidson & Co. for sundries 
 purchased on the 4th and returned, $2.20. 
 
 Received a check from Brand & Wing for $109.96 in payment for their past- 
 due account, and 56c interest on the same. 
 
 Received $11.25 from Grant & Watkins in full for sales invoice No. 76 less 
 3% discount as per terms. 
 
 December 10 
 
 Sold St. Cloud Sanatorium, St. Cloud Heights, per sales invoice No. 79, drugs, 
 $159.60, sundries, $84.60, f. o. b. our freight station; terms, 3/10, n /60. 
 
 Paid $20.90, express on the shipment to the St. Cloud Sanatorium, by our 
 check No. 64. 
 
 Received a check from L. M. Kirk for $65.15 in payment for his 60-day note 
 dated October 11, and 65c interest, due today. 
 
 Paid $1.75 from the petty cash fund for repairs on truck. 
 
 Gave the Goodyear Rubber Co., our 30-day note for $167.25 payable at the 
 City National Bank, in full of account, and 6% interest on the note in advance. 
 
 Received credit memorandum No. 18 from Special Chemical Co. for drugs 
 purchased on the 6th and returned, $4.25.
 
 286 
 
 SPECIAL-COLUMN SALES JOURNAL 
 
 /<?2- 
 
 Account Debited 
 
 Dr. 
 
 2- 
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 2-3 
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 ^ a^^i'i.-c-ff-7'L.y 
 
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 7 
 
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 77 
 
 to 
 
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 77 
 
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 3-sj-r 
 
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 Illustration No. 113, Sales Journal. 
 
 EXPLANATION. The method of recording is the same as in other sales journals illustrated 
 in preceding chapters, except that a record is kept of the merchandise sold by two separate depart- 
 ments, as indicated by the printed headings at the top of the amount columns. At the end of the 
 month, the Accounts Receivable account is debited for the total of the first column, the Drugs 
 Sales account is credited for the total of the second column, and the Sundries Sales account is 
 credited for the total of the third column. 
 
 December 11 
 
 Sold Martin & Martin, 1471 Elm St., City, per sales invoice No. 80, drugs, 
 $100.10, sundries, $294.40; terms, 3/10, n/60. 
 
 December 12 
 
 Paid $2.50 from the petty cash fund for repairs on warehouse steps. 
 
 Gave Park, Davidson & Co., our check No. 65 for $438.84 in payment for 
 purchases invoice No. 23, less credit for sundries returned on the 9th and discount 
 as per terms. 
 
 December 13 
 
 Bought from Artrip & Leeds, 24 Fremont St., City, per purchases invoice 
 No. 25, dated December 12, drugs, $11.21, sundries, $203.00; terms, 5/10, n/6o. 
 
 Gave Martin & Martin our credit memorandum No. 5 for drugs sold them 
 on the nth and returned, $4.50. 
 
 Cash sales to date: drugs, $28.19; sundries, $18.30. 
 
 December 14 
 
 Bought from Tanner & Co., Kansas City, per purchases invoice No. 26, dated 
 December 11, sundries, $69.44, f- o. b. Kansas City; terms, 15 days. 
 
 Paid $6.31, freight on purchase from Tanner & Co. received today, by our 
 check No. 66. 
 
 Paid 15c from the petty cash fund to reimburse Mr. Arnold for carfare he had 
 paid on a buying trip in the West End. 
 
 Gave Special Chemical Co. our check No. 67 for $669.43 in payment for pur- 
 chases invoice No. 24, less credit for drugs returned on the loth and discount as 
 per terms. 
 
 Withdrew from the bank by our check No. 68, $140.00 for pay roll as follows: 
 warehouse employee, $10.00; delivery truck driver, $30.00; selling department 
 employees, $60.00; office employees, $40.00. 
 
 Proved cash (balance, $2,315.29) and posted.
 
 RETURNED SALES JOURNAL 
 
 287 
 
 £?o2e-c<£-'?-7'z— T!^-<i-'i-^ 
 
 /fZ- 
 
 7 
 
 /3 
 
 Account Credited 
 
 
 
 
 1/ 
 
 Dru2s Sales Rcl 
 
 Sundries Sales Rcl. 
 
 IJL 
 
 ^ 
 
 Illustration No. 114, Returned Sales Journal. 
 
 EXPLANATION. This journal contains a record of merchandise returned by customers; 
 the same number of amount columns is provided as in the sales journal. At the end of the month, 
 the Accounts Receivable account is credited for the total of the first column, the Drugs Sales Re- 
 turns account is debited for the total of the second column, and the Sundries Sales Returns account 
 debited for the total of the third column. 
 
 December 16 
 
 Bought from Independent Drug Co., West End, City, per purchases invoice 
 No. 27, dated December 15, drugs, $623.50; terms, 30 days. 
 
 Paid $3.50 from the petty cash fund for express on purchase received today; 
 the terms of sale did not include delivery. 
 
 Received credit memorandum No. 11 from Artrip & Leeds for merchandise 
 purchased on the 13th and returned: drugs, $6.95; sundries, $10.00. 
 
 Borrowed $1,000.00 from the City National Bank on our three months' note 
 dated today; received credit in the pass book for the face of the note less 6% 
 interest. 
 
 Gave the City National Bank check No. 69 for $217.79 in payment for note 
 and interest due on the 15th. 
 
 Received $109.34 from Armstrong Drug Co. in full for sales invoice No. 78, 
 less credit for sundries returned on the 7th and discount as per terms. 
 
 Received notice from Tanner & Co. that they had debited our account with 
 $10.00, amount of error in purchases invoice No. 26. 
 
 December 17 
 
 Sold Horsley Bros., Lancaster, per sales invoice No. 81, sundries, $31.28; 
 terms, 2% trade acceptance 30 days. 
 
 L. A. Arnold, S. J. Moore, A. Y. Barnes, R. W. Lawson, and C. J. Barber 
 made application to the Secretary of State to incorporate the drug business of L. A. 
 Arnold with a capital stock of $60,000.00, consisting of six hundred shares common 
 stock, par value $100.00 per share. L. A. Arnold agreed to purchase two hundred 
 shares and each of the other incorporators, twenty-five shares. 
 
 No entry is required in the books of account until the charter has been granted. 
 
 December 18 
 
 Received a 30-day note from J. M. McDougal for $250.00, dated December 
 
 16, payable at the Second National Bank, in full of account; gave him credit for 
 the face of the note less 6% interest in advance. 
 
 Bought from P. W. Drackett & Sons Co., Spring Grove Ave., City, per pur- 
 chases invoice No. 28, dated December 17, drugs, $141.60; terms, 3/10, n/30. 
 
 Paid $3.75 from the petty cash fund for Christmas decorations for window. 
 Received from Horsley Bros, their 30-day trade acceptance, dated December 
 
 17, payable at the Lancaster National Bank, in payment for sales invoice No. 81 
 less discount as per terms.
 
 SPECIAL-COLUMN CASH BOOK 
 
 ^^£2;^^^^^^^^^ 
 
 /'7Z- 
 
 Jale 
 
 L.F 
 
 Account Credited- 
 
 Explanation, 
 
 Accts Rec Cp 
 
 /leLAiivt SDiscDr 
 
 Druds 
 
 Daii.lc 
 Dr. 
 
 f 
 f 
 
 /(, 
 
 i-o 
 Xo 
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 ^7 
 
 3/ 
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 /W^-St^^^T^Z^-T-Z^-C^— 
 
 
 Vo^iu'^^i-c.^^e-'z^-aJ^-Ce^ 
 
 
 
 
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 Illustration No. 115, Receipts Side of Cash Book. 
 
 EXPLANATION. This illustration shows a record of cash received. The printed headings 
 explain the use of the special columns. All cash received is deposited, and all cash payments made 
 by check. An account is kept with the bank in the general ledger; at the end of each month it is 
 debited with the total deposits and credited with the total checks issued during the month. 
 
 December 19 
 
 Sold Williams Pharmacy, 8240 Cedar St., City, per sales invoice No. 82, 
 drugs, $68.27, sundries, $74.50; terms, 3/10, n/6o. 
 
 December 20 
 
 Received a check for $257.77 from St. Cloud Sanatorium in full for sales in- 
 voice No. 79, including freight, less discount as per terms. 
 Cash sales to date: drugs, $43.40; sundries, $33.75. 
 
 December 21 
 
 Received credit memorandum No. 32 from P. W. Drackett & Sons Co. for 
 drugs purchased on the i8th and returned, $2.90. 
 
 Gave Horsley Bros, our credit memorandum No. 6 for sundries sold them on 
 the 17th and returned, $1.00. 
 
 Proved cash (balance, $3,526.76) and posted. 
 
 December 23 
 
 Sales as follows: Independent Hospital, Third and Locust, City, per sales 
 invoice No. 83, drugs, $122.44, sundries, $77.46; terms, 3/10, n/6o. Haef' er's 
 Pharmacy, Hunt and Broadway, City, per sales invoice No. 84, drugs, $101.23, 
 sundries, $173.10; terms, 3/10, n /60. 
 
 Gave the Special Chemical Co. our 30-day note for $275.00, payable at the 
 City National Bank, with interest at 6% from date, in payment for purchases 
 invoice No. 22.
 
 SPECIAL-COLUMN CASH BOOK 
 
 289 
 
 .-^ 
 
 ^ ^;z..<i^-;4.— </^-'^;>'?<7'2-,£-^?^-^Zis/ 
 
 Date 
 
 LF 
 
 Account Debited^ 
 
 Acct? Tay. Dr- 
 
 AptAmt P Disc Ct 
 
 GettfraL 
 
 Day Exp 
 Dr 
 
 AdvlXxp 
 Dr, 
 
 Varelxp. 
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 Illustration No. 116, Payments Side of Cash Book. 
 
 EXPLANATION. This illustration shows a record of cash paid, all payments being made 
 by check. The printed headings explain the use of the special columns. The posting at the end of 
 the month is the same as from the payments side of any cash book, except that the bank is credited 
 with the total payments instead of the account with Cash. 
 
 December 23 
 
 Received $378.30 from Martin & Martin in full for sales invoice No. 80, less 
 credit for drugs returned on the 13th and discount as per terms. 
 
 Gave Artrip & Leeds our check No. 70 for $187.40 in payment for purchases 
 invoice No. 25, less credit for drugs and sundries returned on the i6th and dis- 
 count as per terms. 
 
 December 26 
 
 Bought from Park, Davidson & Co., Chicago, per purchases invoice No. 29, 
 dated December 23, drugs, $60.40, sundries, $309.60; terms, 2/10, n/30. 
 
 Gave Tanner & Co. our check No. 71 for $79.44 in payment for purchases 
 invoice No. 26, plus error of the i6th. 
 
 Sales as follows: Smith & Schott, 205 E. Pearl St., City, per sales invoice No. 
 85, drugs, $98.98, sundries, $36.42; terms, 3/10, n/6o. Miller & Barr, Canton, 
 per sales invoice No. 86, drugs, $10.87, sundries, $24.71; terms, 2% trade accept- 
 ance, 30 days. 
 
 Paid $1.00 from the petty cash fund for electric bulbs to be used in the office. 
 
 Sold the Ford delivery truck to Sears, Ward & Co. for $750.00. Received in 
 payment their check for $244.22, and a 60-day note for $503.76, signed by John 
 R. Bates, dated November 26, with interest at 6% from date; allowed them credit 
 for the accrued interest on the note. 
 
 December 27 
 
 Boughtfrom John D. Park & Son, Erie, per purchases invoice No. 30, dated 
 
 December 26, sundries, $263.46; terms, 3% trade acceptance, 60 days. 
 
 *
 
 290 
 
 NOTES RECEIVABLE AND PAYABLE JOURNALS 
 
 Notes Receivable 
 
 Dale 
 Rec-il 
 
 FROM WHOM RECEIVED 
 
 (Pcnaul Account Credited) 
 
 Fice of Paper 
 Nolei Rec. Dr. 
 
 INTEREST EARNED 
 
 MAKER (Note) DRAWEE (Drift) 
 
 .^^.; 
 
 ??7..ii£A-^ r'lGT^i^yL^t^ 
 
 
 /^3 
 
 Jo 
 So 3 
 
 / (.ZS Zf 
 
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 3o 
 
 ^To^ yl 
 
 '^a^ 21 
 
 
 
 Illustration No. 117, Left Page of Notes Receivable Journal. 
 
 EXPLANATION. This illustration shows a record of notes and accepted drafts received by 
 the business. Theamount columns indicate that it is used as a book of original entry, hence the notes 
 are not recorded in the general journal. The printed heading at the top of each amount column 
 indicates the account affected. 
 
 Notes Payable ^ 
 
 IN WHOSE FAVOR 
 
 tPcnoBi] Accsont DcbtlW) 
 
 Fic'e of Paper 
 Nole> Paj. Cr. 
 
 INTEREST COST 
 
 Accls. Pajr. 
 Dr. 
 
 Gcn'l U(igei 
 
 MAKER (Note) DRAWEE (Draft) 
 
 <,cho.. 
 
 
 
 2-/7 Z. 
 SSyj. 
 
 /i>yx. 
 /00c 
 
 
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 SSyy 
 
 V2/^ 
 
 frj' 
 
 c'rj . 
 
 L^f^. (i^^i-^z-^^-t^^ 
 
 Illustration No. 118, Left Page of Notes Payable Journal. 
 
 EXPLANATION. This illustration shows a record of notes issued and drafts accepted by the 
 business. The amount columns indicate that it is used as a book of original entry, hence the notes 
 are not recorded in the general journal. The printed heading at the top of each amount column in- 
 dicates the account affected. 
 
 Sold Court House Pharmacy, 988 Walnut St., City, per sales invoice No. 87, 
 drugs, $334.29, sundries, $78.68; terms, 3/10, n/60. 
 
 Gave P. W. Drackett & Sons Co. our check No. 72 for $134.54 in payment 
 for purchases invoice No. 28, less credit for drugs returned on the 21st and discount 
 as per terms. 
 
 Cash sales to date : drugs, $71.35; sundries, $24.15. 
 
 December 28 
 
 Gave the Court House Pharmacy our credit memorandum No. 7 for mer- 
 chandise sold them on the 27th and returned: drugs, $3.50; sundries, $1.50. 
 Issued check No. 73 for $18.65 to renew the petty cash fund. 
 Proved cash (balance, $3,824.75), and posted. 
 
 December 30 
 
 Sales as follows: Market Prescription Pharmacy, 2013 Main St., City, per 
 sales invoice No. 88, drugs, $202.77; terms, 3/io, n/60. Model Pharmacy, 604 
 Smith St., City, per sales invoice No. 89, drugs, $135.60; sundries, $99.05; terms, 
 3/10, n/60. 
 
 Received from St. Cloud Sanatorium a 60-day note for $400.00, signed by 
 B. C. Waters, Proprietor, dated January i, to apply on account; gave them credit 
 for the face of the note less 6% interest in advance. 
 
 December 31 
 
 Received a check for $153.76 from Miller & Barr in payment for trade ac- 
 ceptance dated December 2.
 
 PETTY CASH BOOK 
 
 291 
 
 Notes Receivable 
 
 DATE OF PAPER 
 
 
 A. 
 
 i';" 
 
 WIIFRF. PAYABLE 
 
 S^^,z,c.a^Uz^7^ayZ:;&k^ 2."/. ^^. 
 
 Illustration No. 117, Right Page of Notes Receivable Journal. 
 
 EXPLANATION. At the end of the month the Notes Receivable account is debited for the 
 total notes received, and the Accounts Receivable account credited for the total credits allowed 
 customers on account of these notes; Interest Earned is debited or credited for the difference 
 between these totals. 
 
 Notes Payable 
 
 DATE OF PAPER I Tim 
 Year I Month & Day R°r 
 
 WHERE PAYABLE 
 
 
 ?l!V. Jo 
 
 3u- zj 
 
 
 'Q><^^^//<S^,^C^i^y^tZ,^--^^ZZ^9t^ 
 
 3f.7:^. 
 
 c-:i. 
 
 Illustration No. 118, Right Page of Notes Payable Journal. 
 
 EXPLANATION. At the end of the month the Notes Payable account is credited for the total 
 notes issued, and the Accounts Payable account debited for the total credits allowed the business 
 on account of these notes; Interest Cost is debited or credited for the difference between these 
 totals. 
 
 ' 1& ^2.<^^=^^-*Z^ 
 
 Date 
 
 Xxplanatioru 
 
 BeceipLf 
 
 Buying 
 IxppRse 
 
 Advt. 
 Zxpense 
 
 Warehouse 
 Expense 
 
 Delivery 
 Expense 
 
 Adm.v. 
 Ejcpense 
 
 gundry Accoiin-ts 
 
 iMame jAmount/ 
 
 e>Lh>cy. 
 
 uJzo. 
 
 3o 
 
 3o 
 
 2- 
 
 c 
 
 /o 
 
 /2- 
 
 
 i7^ 
 
 
 
 
 
 7^" 
 
 ;^^^^*-7^€^fc:^-„2fe^ 
 
 Illustration No. 119, Petty Cash Book. 
 
 EXPLANATION. This illustration shows a record of cash payments from the petty cash 
 fund. The headings at the top of the amount columns indicate the accounts affected : these columns 
 are the same as on the payments side of the cash book, except that a column for Salaries in the 
 Selling Department is not needed in the petty cash book. The total of each column may be trans- 
 ferred to the cash book at the end of the month, or at the time the petty cash fund is renewed.
 
 292 
 
 SPECIAL-COLUMN GENERAL JOURNAL 
 
 2-,/f2- 
 
 LF 
 
 
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 <-<ir^i,-^^ o^n-^z^^v-i'C^^.^a 
 
 2-a J/cT^'-yi^U^Tf^A.-M^y^^'i^p-TrL^ 
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 GeneraL Lpd^er 
 
 Dr 
 
 Q'a.-Z^-^ <='^y-z..-d<>e?-i.C'-9-t^^ 
 
 2. /o cCc.J-t>cf-c-t^>z-^C'-''J^-firi^^i^ t 
 
 
 Cr 
 
 ^AA 
 
 ^>rir 
 
 ■j- 
 
 Accts Hec LPd^pr 
 
 Accts Vay ledger 
 
 Illustration No. 120, General Journal. 
 
 EXPLANATION. The printed headings explain the use of the special columns. Columns 
 may be provided for recording returned purchases and returned sales if these transactions do not 
 occur with sufficient frequency to require a returned purchases journal and a returned sales journal. 
 The equality of the debits and credits recorded in the columns should be proved at the conclusion 
 of each page before forwarding the totals. 
 
 December 31 
 
 Sold Martin & Martin, 1471 Elm St., City, per sales invoice No. 90, drugs, 
 $204.09, sundries, $299.02; terms, 3/10, n/6o. 
 
 Withdrew from the bank by our check No. 74, $125.00 for pay roll as follows: 
 warehouse employee, $10.00; delivery truck driver, one week, $15.00; selling 
 department employees, $60.00; office employees, $40.00. 
 
 Paid for advertising service, $125.00, by our check No. 75. 
 
 Gave Mr. Arnold a check for $150.00, salary for the month, distributed as 
 follows: Buying Expense, Salaries in Selling Department, and Administrative 
 Expense, each one-third. 
 
 Cash sales to date: drugs, $44.20; sundries, $20.20. 
 
 Proved cash (balance, $3,642.91) and posted.
 
 EXERCISE 
 
 293 
 
 Exercise No. 99, Recording Transactions. 
 
 The purpose of this exercise is (a) to familiarize the student with the special 
 columns shown in the illustrations by having him check the transactions recorded 
 in them, (b) to provide practice in posting from these special ruled books of original 
 entry, and (c) to provide practice in recording transactions in books of account 
 with special ruling similar to the illustrations. The work required should be com- 
 pleted in the following order: 
 
 1. Check the transactions for December with the illustrations. 
 
 2. Open (on ledger paper) the accounts given in the list below. Arrange in 
 the order given, and allow the number of lines indicated by the number in paren- 
 thesis after the name of each account. The amount given after the name of the 
 account indicates the balance on the November 30 Trial Balance of the Arnold Drug 
 Store. 
 
 General Ledger 
 
 City National Bank (7), Dr., 13,403.67. 
 
 Petty Cash Fund (4), Dr., $20.00. 
 
 Notes Receivable (5), Dr., $64.50. 
 
 Accounts Receivable (8), Dr., $1,057.67. 
 
 Reserve for Doubtful Accounts (4). 
 
 Accrued Interest Earned (4). 
 
 Subscribers to Capital Stock (4). 
 
 Office Equipment (5), Dr., $750.00. 
 
 Reserve for Dep. of Office Equipment (4). 
 
 Store Fixtures (4), Dr., $1,803.22. 
 
 Reserve for Depreciation of Store Fixtures (4). 
 
 Delivery Equipment (4), Dr., $1,750.00. 
 
 Reserve for Dep. of Delivery Equipment (4). 
 
 Goodwill (4). 
 
 Prepaid Interest Cost (4). 
 
 Office Supplies (4). 
 
 Advertising Material (4). 
 
 Delivery Truck Supplies (4). 
 
 Organization Expense (4). 
 
 Notes Payable (4). 
 
 Accounts Payable (8), Cr., $1,233.66. 
 
 Accrued Interest Cost (4). 
 
 Accrued Warehouse Rent (4). 
 
 Accrued Advertising Expense (4). 
 
 Deferred Credit to Interest Earned (4). 
 
 L. A. Arnold, Capital (7), Cr., $15,000.00. 
 
 Capital Stock (4). 
 
 Unissued Capital Stock (4). 
 
 Subscriptions to Capital Stock (4). 
 Drugs — Sales (7), Cr., $20,652.90. 
 Drugs — Sales Returns (6), Dr., $67.42. 
 Drugs — Inventory, Jan. i (4), Dr., $5,437.98. 
 Drugs — Inventory, December 31 (4). 
 Drugs — Purchases (6), Dr., $17,901.10. 
 Drugs — Freight In (6), Dr., $46.15. 
 Drugs — Purchases Returns (6), Cr., $45.65. 
 Sundries — Sales (7), Cr., $15,868.03. 
 Sundries — Sales Returns (6), Dr., $37.50. 
 Sundries — Inventory, Jan. i (4), Dr., $3,987 .62 
 Sundries — Inventory, December 31 (4). 
 Sundries — Purchases (7), Dr., $10,298.80. 
 Sundries — Freight In (6), Dr., $102.40. 
 Sundries — Purchases Returns (6), Cr., $89.22. 
 Buying Expense (6), Dr., $529.06. 
 Selling Expense (4). 
 
 Advertising Expense (8), Dr., $1,114.98. 
 Warehouse Expense (7), Dr., $294.10. 
 Delivery Expense (8), Dr., $374.84. 
 Salaries in Selling Dept. (6), Dr., $1,707.75. 
 Loss on Doubtful Accounts (4). 
 Administrative Expense (8), Dr., $2,149.63. 
 Purchases Discount (7), Cr., $632.47. 
 Interest Earned (10), Cr., $32.90. 
 Sales Discount (8), Dr., $436.35. 
 Interest Cost (9), Dr., $220.09. 
 Profit and Loss (25). 
 
 Accounts Receivable Ledger 
 
 Armstrong Drug Co. (6). 
 Brand & Wing (4), Dr., $109.40. 
 Court House Pharmacy (4). 
 Grant & Watkins (5), Dr., $11.60 
 Haefner's Pharmacy (4). 
 Horsley Bros. (6). 
 Independent Hospital (4) 
 
 J. M. McDougal (4), Dr., $248.75. 
 Market Prescription Pharmacy (8). 
 Martin & Martin (6). 
 Miller & Barr (5). 
 Model Pharmacv (4). 
 Smith & Schott'(4). 
 
 St. Cloud Sanatorium (5), Dr., $400.00. 
 Williams Pharmacy (5), Dr., $287.92. 
 
 Accounts Payable Ledger 
 
 Artrip & Leeds (6). 
 P. W. Drackett & Sons Co. (6). 
 Goodyear Rubber Co. (4), Cr., $166.41. 
 Independent Drug Co. (4). 
 
 Park, Davidson & Co. (6). 
 John D. Park & Son (5), Cr., $575.00. 
 Special Chemical Co. (7), Cr., $275.00. 
 Tanner & Co. (6), Cr., $217.25.
 
 294 EXERCISE 
 
 3. Post the entries in the illustrations including the totals of the special 
 columns, and take a Trial Balance from the general ledger, the accounts payable 
 ledger and the accounts receivable ledger. 
 
 4. Prepare journal entries for the following: 
 
 (a) Drugs in stock, December 31, $7,315.82; sundries in stock, December 31, $1,238.54. 
 
 (b) Interest accrued on notes receivable, $5.14. 
 
 (c) Interest accrued on notes payable, 37c; warehouse rent for December unpaid, $50.00; ad- 
 
 vertising service for two months unpaid, $35.00. 
 
 (d) Interest on notes payable paid in advance, $12.75; office supplies on hand, $127.60; advertis- 
 
 ing material on hand, $139.44; gasoline and other supplies for delivery truck on hand, $42.1 1. 
 
 (e) Interest on notes receivable collected in advance, $4.63. 
 
 (f) Reserves: Ofifice Equipment, 3%; Store Fixtures, 3%; Delivery Equipment, 5%; Doubt- 
 
 ful Accounts, 1% of Accounts Receivable. 
 
 5. Post these (a-f) entries to the accounts on the ledger sheets and take a 
 second Trial Balance. 
 
 6. Prepare a Balance Sheet and Statement of Profit and Loss from the Trial 
 Balance taken after the adjusting entries have been posted. 
 
 7. Make the closing journal entries, post these, rule all accounts that balance, 
 and take a post-closing Trial Balance. This should show the following: 
 
 City National Bank, Dr., $3,642.91; Petty Cash Fund, Dr., $20.00; Notes Receivable, Dr., 
 $1,471.52; Accounts Receivable, Dr., $2,139.48; Reserve for Doubtful Accounts, Cr., $21.39; 
 Office Equipment, Dr., $750.00; Reserve for Depreciation of Office Equipment, Cr., $22.50; Store 
 Fixtures, Dr., $1,803.22; Reserve for Depreciation of Store Fixtures, Cr., $54.10; Delivery Equip- 
 ment, Dr., $1,000.00; Reserve for Depreciation of Delivery Equipment, Cr., $50.00; Notes Pa^'- 
 able, Cr., $2,000.00; Accounts Payable, Cr., $1,256.96; Accrued Warehouse Rent, Cr., $50.00; 
 L. A. Arnold, Capital, Cr., $16,213.58; Drugs — Inventory, December 31, Dr., $7,315.82; Sundries 
 — Inventory, December 31, Dr., $1,238.54; Advertising Expense, Dr., $139.44, Cr., $35.00; 
 Delivery Expense, Dr., $42.11; Administrative E.xpense, Dr., $127.60; Interest Earned, Dr., $5.14, 
 Cr., $4.63; Interest Cost, Dr., $12.75, Cr., 37c. 
 
 8. Record the transactions given below in books of original entry (loose 
 sheets of paper) ruled similar to the illustrations in this chapter. The January 
 transactions will be posted to the same ledger sheets used for posting the December 
 transactions. 
 
 MEMORANDA OF TRANSACTIONS FOR JANUARY 
 
 January 2 
 
 At a meeting of the subscribers to the capital stock of the Arnold Drug Com- 
 pany, it was agreed to pay L. A. Arnold $18,000.00 for his interest in the business 
 he has been operating, and to assume all liabilities of the business. L. A. Arnold 
 agreed to accept 180 shares of stock in payment for his interest and to pay by check 
 one half of his subscription for 200 additional shares, the remainder to be paid 
 within thirty days. The other subscribers agreed to pay cash for one half of the 
 stock subscribed and the balance within thirty days. L. A. Arnold, S. J. Moore, 
 A. Y. Barnes, and R. W. Lawson were elected as the board of directors. 
 
 At a meeting of the board of directors, L. A. Arnold was elected president and 
 S. J. Moore, secretary-treasurer. Checks in payment for one-half of the stock 
 subscribed were received as follows: L. A. Arnold, $10,000.00; S. J. Moore, 
 A. Y. Barnes, R. W. Lawson, and C. J. Barber, each $1,250.00. A certificate of 
 stock for the 180 shares of stock accepted by Mr. Arnold in payment for his in- 
 terest in the business has been issued. 
 
 Below the two journal entries required to record the authorized capital stock and the sub- 
 scriptions, make a third journal entry to record the stock issued to L. A. Arnold in payment for his 
 interest in the business and the goodwill; in this entry, debit L. A. Arnold Capital and Goodwill 
 and credit Unissued Capital Stock. Enter the checks in the cash book. You will not be required 
 to write the certificate of stock.
 
 QUESTIONS 295 
 
 January 3 
 
 Paid M. F. Duff, attorney, $250,00 for legal service in connection with or- 
 ganizing the corporation and securing the charter. 
 
 Debit Organization Expense. 
 
 Prove cash (balance, $18,392.91) and post the entries in the cash book and general journal to 
 the same ledger used in December. 
 
 QUESTIONS 
 
 1. What is the difference between a book of original entry and an auxiliary 
 
 book? 
 
 2. What is the purpose of special columns in books of original entry? 
 
 3. What is the purpose of separate sales accounts? 
 
 4. Why is it necessary to provide special columns in the purchases journal and 
 
 sales journal when separate sales and purchases accounts are maintained? 
 
 5. Why is the total of the Sales Discount column on the receipts side of the 
 
 cash book, and the total of the Purchases Discount column on the pay- 
 ments side of the cash book, not used in proving cash? 
 
 6. To what accounts in the general ledger is the total of the Sales Discount 
 
 column on the receipts side of the cash book posted? Why? 
 
 7. What effect will it have on the Trial Balance if the bookkeeper makes an 
 
 error of $1.00 in adding the Purchases Discount column on the payments 
 side of the cash book? Give reason for your answer. 
 
 8. What is the advantage of the notes receivable and notes payable journals? 
 
 9. If no Interest Earned column is provided in the notes receivable journal, 
 
 what entry will be required if a customer does not receive credit for the 
 full amount of the note because of the interest involved? 
 10. (a) Why does the bookkeeper reconcile his bank account with the statement 
 rendered by the bank? (b) Describe, in detail, the method of making this 
 reconciliation.
 
 Chapter XXXI 
 
 GENERAL INFORMATION 
 
 The Purpose of this Chapter is to explain trade acceptances and the ac- 
 counting procedure in connection therewith, collateral security, power of attorney, 
 journal voucher, exhibits, schedules, analytical statements, method of numbering 
 accounts, and basis for depreciation. The student of bookkeeping needs this 
 information if he is to complete successfully the work required of him as a book- 
 keeper. As a business man, he will need this information so that he may interpret 
 the reports submitted to him by the bookkeeping department. 
 
 § 315. A Trade Acceptance as defined by the Federal Resers^e Board is 
 "a bill of exchange (time draft) drawn by the seller on the purchaser of goods sold, 
 and accepted by such purchaser." As explained in §94, it is assumed that this 
 acceptance is made on the date of purchase, or within a few days thereafter. The 
 principal difference between the time draft and the trade acceptance is that the 
 former is drawn and accepted at the expiration of the time of credit, with the 
 purpose of giving additional time, while the latter is drawn and accepted at the 
 time of the sale, or within a few days thereafter. The trade acceptance originated 
 in Great Britain and the countries of Continental Europe w^here practically every 
 commercial transaction is financed by means of a time draft. Its successful applica- 
 tion in these countries has brought about a demand for its use in the United States, 
 and this is being advocated by many leading business organizations. 
 
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 Cincinnati, Ohio, 
 
 Pay to the order of Ourselves 
 
 A-'2ar^^..3'::^^^t:f^2j^:^^ Dollars, ($ / ^^2"!^ ) 
 
 The obligation of the acceptor hereof arises out of the jfurcbLe of goods from the drawer. The drawee may accept 
 this bill payable at any bank, banker or trust company in the United States which he may designate. 
 
 J. A. Whitney & Co. 
 
 Illustration No. 121, Trade Acceptance. 
 
 § 316. The Purpose of a Trade Acceptance is (a) to provide a better 
 evidence of the debt resulting from the sale of merchandise on account than the 
 open book account; (b) to provide commercial paper that may be discounted by 
 the seller; (c) to encourage prompt payment on the part of the purchaser. 
 
 ^ I. Open Book Account. The open book account is the seller's record of 
 his transactions with the buyer. It is the result of a business habit which has 
 many disadvantages. It forces the seller to carry the financial burden of the buyer, 
 and ties up the seller's invested or borrowed capital for an indefinite period. As 
 
 296
 
 GENERAL INFORMATION 297 
 
 an asset, the open book account is neither quick nor sure. At best, book accounts 
 are seldom available for a loan of more than 50% of their value. The book account 
 being the seller's record of his transactions with the buyer, in case of dispute 
 the burden of evidence is on the seller. As sales are often completed over the 
 counter or telephone, it is sometimes difficult to prove the amount of the account. 
 If each sale on account is closed by a trade acceptance, all of these disadvantages, 
 and many more not enumerated, are eliminated and there is a clear understand- 
 ing between the seller and the buyer as to the amount of the indebtedness, and 
 the date of maturity. 
 
 ^2. A Better Class of Collateral Security. Borrowed capital is usually ob- 
 tained by discounting notes properly executed by the business, or by discounting 
 notes received from customers. The National Banking law very wisely limits the 
 amount of the loans to be made to any one business by national banks, and prac- 
 tically all of the state banking laws now conform to the national law. This means 
 that the business is limited as to the amount of money it can borrow on its own 
 paper. Notes given the business by customers are usually for an extension of time, 
 hence are not the best class of commercial paper, as a business with a high credit 
 rating seldom has occasion to issue notes for maturing obligations. Since it is 
 necessary for the business to become surety on notes discounted by it, the borrow- 
 ing limit regulated by the banking laws affects the discounting of notes. The 
 Federal Reserve Act creating Reserve banks has made the trade acceptance a 
 preferred class of commercial paper which may be discounted to an unlimited 
 extent by the business, and in no way affect the borrowing capacity in regard to 
 its own or others' notes discounted. Reserve banks are permitted to go into the 
 market and buy trade acceptances direct if member banks do not purchase and 
 rediscount them. Being a preferred class of security, the trade acceptance gives 
 the business a greater borrowing capacity and a smaller discount rate because 
 the better the security, the less the interest charge. 
 
 ^ 3. Prompt Payment. One of the principal objections to the open book 
 account is the ease with which the buyer can secure an extension of time. The 
 seller is under obligation to the buyer as a customer and may be forced to extend 
 the time of payment even though his better judgment would direct otherwise. 
 The same also applies to the discount period where sales are made subject to a 
 special discount for prompt payment. Many buyers will take advantage of the 
 seller by allowing extra time to expire before sending remittance with the hope 
 that the volume of business given the seller and the fear of losing a good customer 
 will cause him to allow the discount even though the time has expired. If each 
 sale on account is closed by a trade acceptance, these and many other annoying 
 features will be removed, because the acceptances may be collected through the 
 bank should they not be discounted. The average individual has a high regard 
 for his credit rating with the bank and, as a rule, will pay an obligation maturing 
 at the bank quicker than he will an open account. 
 
 § 317. Accounting Procedure. When a sale is made, terms "trade ac- 
 ceptance," the seller records it in the sales journal in the same manner as a sale on 
 account. A trade • acceptance for the amount of the sale accompanies the sales 
 invoice with a .request for its acceptance on delivery. The buyer records the 
 purchase in the purchases journal and the accepted trade acceptance in the same 
 manner as an accepted draft or a note payable. When the seller receives the trade 
 acceptance accepted by the buyer, it is recorded in the same manner as an accepted 
 draft or a note receivable. 
 
 An accepted trade acceptance is the same as an accepted draft or a note. Trade acceptances 
 received and issued by the business may be recorded in the Notes Receivable and in the Notes Payable 
 accounts, or they may be recorded in a Trade Acceptances Receivable and a Trade Acceptances Pay- 
 able account; the latter is considered the better practice.
 
 298 GENERAL INFORMATION 
 
 § 318. A Power of Attorney is written evidence of authority granted an 
 individual to act as agent for another. One who acts as agent without a power 
 of attorney may be held personally responsible for the contracts which he makes 
 for his principal. Illustration No. 122 shows one form of power of attorney. 
 
 Know All Men By These Presents, That I, James C. Wilson, of the city of 
 Boston, county of Suffolk, and state of Massachusetts, have made, constituted, and ap- 
 pointed, and by these presents do make, constitute and appoint Miss Margaret A. Davidson 
 of the aforesaid city, county, and state, my true and lawful attorney, to act for me and in 
 my name, place and stead, in the following transactions in connection with my business 
 as retail clothing merchant. 
 
 1. To draw checks against my account in the Merchants National Bank. 
 
 2. To endorse checks, drafts, notes, or bills of exchange which may require my 
 endorsement for deposit as cash or for collection in the said bank. 
 
 3. To accept drafts or bills of exchange which may be drawn on me by those from 
 whom I have purchased merchandise. 
 
 I hereby ratify and confirm all that the said attorney may lawfully do or cause to he 
 done by virtue of this power of attorney. 
 
 In Witness Whereof, I have hereunto set my hand and seal this twenty-fifth 
 day of May, in the year of our Lord one thousand nine hundred and twenty-three. 
 
 {Signed) JAMES C. WILSON. [Seal] 
 Signed, sealed and delivered 
 in the presence of 
 Paul Whitelaw. [Seal] 
 
 Illustration No. 122, Power of Attorney. 
 
 EXPLANATION. This contract authorizes Miss Margaret A. Davidson to sign certain 
 contracts for James C. Wilson. It is necessary for Mr. Wilson to notify the bank that Miss Davidson 
 is authorized to sign checks, and to file with it the form of signature to be used by her. 
 
 § 319. Collateral Security. When money is loaned, the lender usually 
 requires the borrower to give some evidence aside from his promise that he will 
 pay the money at the time specified. This evidence is usually given in the form 
 of security, which may be personal or collateral. Personal security is effected by 
 the signature of the one who wishes to guarantee the obligation. Collateral security 
 
 450.00 nx-riNNATi oHin J«Jie 21 
 
 CINCINNATI, OHIO.. 
 
 Thirty days After Date, for value received, the undersigned promise lo pay to the order of 
 
 THE FIFTH-THIRD NATIONAL BANK.CINCIN NATI.Q . 
 
 Four Hundred Fifty and no/lGO 
 
 at The Fifth-Third National Bank of Cincinnati, in current funds, with interest at eight per cent, after maturity, having deposited herewith as collateral security for 
 the payment of this and any other liability or liabilities of the undersigned to the holder or holders hereof, due or to become due, or which may hereafter be contracted 
 or existing, the following property, viz.: 
 
 Five shares City National BanK stock. 
 
 Certificate No. 88 - Par value, $100.06 
 
 The markei value of which isS. v.V.V. J.V V,. with further right in the holder or hoId^^^B hereof to call on tho undcrtiffned for additional Bccurity should there be a decline in eai 
 to respond, this obligatioo shall be deemed to be due and payable at once without demand or notice. The undervisned hereby give to the holder or holders hereof a lien (or 1 
 aforesaid upon all ot tho property or securities at any time eivn unto or left in or coming into the possession of said Bank by the undersifmed. 
 
 The underaigned alflo give to the holder or holders hereof (uU power and authority to sell or colleet at the eipenae of the undoraigned all or any part or portion thereof, at any plac*. either io the City of 
 Cincinnati. Ohio, or elaewhere, at Public or Private Sale, at ihe opiion of said holder or holders on the non-performance of the above promise and at any time thereafter, and «^thout adTortiain* the same or 
 otherwise giving to the undersized any notice. In case of Pubho Sale, said holder or holders tnay purchase without being linble to account for more than the net proceeds of such sale. 
 
 Ills further agreed that the provisions of this note shall also apply to any new or additional collateral; that if the undersigned shall become insolvent or make a general aasignment for thebeDefuof 
 creditors, or Me a voluntary petition in bankruptcy, or if a petition in bnakruptcy shall bo filed against the underaigned, or a receiver shall be appointed of the property or assets, or any thereof, of tba 
 undersigned, then this note'^shnll forthwith be due and payable, and that do delay oo the part of the holder or holders hereof in esercising any rights hereunder shall operate aa a waiver of said rigbu. 
 
 The maker and endorser severally waive preaentmeot, demand for payment, protest, notice of protest, and not 
 
 Watson Bros . & Co . 
 
 _ _ ... 505 Madison Ave . ,^^ _ ^ 
 
 p. O Address p^^ ^ 2/^: 
 
 (L-1) 
 
 Illustration No. 123, Collateral Note. 
 
 EXPLANATION. This note is the same form as the usual promissory note, except that 
 space is provided for a description of the collateral security. The security attached to this note is 
 five shares of City National Bank stock. This stock is not shown in the illustration, since the student 
 is familiar with the form of a certificate of stock, through the preceding discussion.
 
 GENERAL INFORMATION 299 
 
 is effected by placing the title to personal or real property, as guaranty for the 
 payment of the obligation. The title to chattels and real estate is placed as col- 
 lateral security by the use of a written document referred to as a "mortgage." 
 The title to personal property other than chattels. is placed as collateral security 
 by the use of a collateral note; this class of personal property usually consists of 
 written contracts such as stocks and bonds. Illustration No. 123 shows one form 
 of collateral note. The security is attached to the note; if the collateral note is 
 not paid at maturity, the holder sells the collateral and deducts from the proceeds 
 of the sale, the amount of the indebtedness mentioned in the note. 
 
 §320. A Journal Voucher is the written authority for an entry in the general 
 journal which is not supported by a business paper received in the usual course of 
 business. Journal vouchers are used to support transfer entries and entries which 
 affect the accounting records in different departments. Each journal voucher is 
 sdgned by the person who is authorized to issue it. Illustration No. 124 shows one 
 form of a journal voucher. 
 
 The J. A. Whitney Company, Inc. 
 
 Journal Voucher No.jLL 
 Journal PAGE_i_ Datf -^"^^ ^^y 1Q2 
 
 DEBIT: Delivery Equipment 
 
 500 
 
 00 
 
 CREDIT: Unissued Capital Stock 
 
 500 
 
 00 
 
 REMARKS: Fi'i'^ shares of stock (par value $100.00) issued in payment for a used Reo truck 
 for use in the delivery department. 
 
 APPROVAL: 
 
 J. S. Martin /. A. Whitney 
 
 SECRETARY PRESIDENT 
 
 Illustration No. 124, Journal Voucher. 
 
 EXPLANATION. This journal voucher was issued by the president of the corporation, 
 and authorizes the issue of five shares of capital stock in exchange for a delivery truck. Without 
 this journal voucher, the stockholders of the corporation might question the correctness of the entry. 
 
 § 321. An Exhibit, as applied to accounting, is a statement of material 
 facts with reference to the financial condition of the business, presented in sum- 
 marized form. The exhibits submitted to the board of directors usually consist of 
 the Balance Sheet, Statement of Profit and Loss, and Analysis of the Surplus 
 account. Exhibits are usually designated by letter, the Balance Sheet being 
 Exhibit A, Statement of Profit and Loss, Exhibit B, and Analysis of the Surplus 
 account. Exhibit C. 
 
 Exhibits should be brief and be condensed so as to provide a comprehensive 
 view of the financial condition of the business. Details in regard to the facts set 
 forth in each exhibit are given in schedules or analytical statements which accom- 
 pany it.
 
 300 
 
 GENERAL INFORMATION 
 
 § 322. A Schedule is a detailed list showing the items which compose a 
 total on the Balance Sheet or Statement of Profit and Loss, as a list of notes re- 
 ceivable, accounts receivable, merchandise in stock, etc. Schedules are usually 
 numbered, and the number indicated on the Balance Sheet and Statement of Profit 
 and Loss, as illustrated in Chapter XXXII. 
 
 § 323. An Analytical Statement is a detailed analysis of the balance of 
 an account on the Statement of Profit and Loss, as a list of the various expenditures 
 which relate to the selling expenses, buying expenses, administrative expenses, 
 etc. Each analytical statement is usually numbered, and the number indicated 
 on the Statement of Profit and Loss. . 
 
 § 324. Numbering Accounts. In a business of material size, many ac- 
 counts will be required to show the results of the transactions performed in the 
 operations of the business. Reference to these accounts may be facilitated by 
 giving each account a number according to its classification. The use of numbers 
 to designate accounts can best be understood by a careful study of Illustration 
 No. 125, in which the arrangement is based on the division of the accounts into 
 three groups: (i) property accounts, (2) proprietorship accounts, and (3) revenue 
 accounts. 
 
 I. PROPERTY ACCOUNTS 
 
 II. Asset Accounts 
 
 III. Current Assets 
 mi. Cash 
 
 1 1 12. Notes Receivable 
 
 1 1 102. Notes Receivable Discounted* 
 
 1 1 13. Accounts Receivable 
 
 1 1 103. Reserve for Doubtful Accounts 
 
 1 1 14. Merchandise Inventory 
 
 1 1 15. Accrued Interest Earned 
 
 112. Fixed Assets 
 
 1 121. Office Equipment 
 
 11201. Reserve for Dep. of OfKice Equipment 
 
 1122. Store Fixtures 
 
 1 1202. Reserve for Dep. of Store Fixtures 
 
 1123. Delivery Equipment 
 
 1 1203. Reserve for Dep. of Delivery Equip. 
 
 1 124. Building 
 
 1 1204. Reserve for Depreciation of Building 
 
 1 125. Land 
 
 113. Intangible A ssets 
 
 1 131. Goodwill 
 
 1 132. Patents 
 
 114. Deferred Charges to Operation 
 
 1 141. Unexpired Insurance 
 
 1 142. Prepaid Advertising 
 
 1 143. Office Supplies 
 
 1 144. Organization Expense • 
 
 12. Liability Accounts 
 
 121. Current Liabilities 
 
 121 1. Notes Payable 
 
 12 12. Accounts Payable 
 
 1213. Accrued Interest Cost 
 
 12 14. Accrued Wages 
 
 122. Fixed Liabilities 
 
 1 22 1. Mortgages Payable 
 
 1222. Bonds Payable 
 
 2. PROPRIETORSHIP ACCOUNTS 
 
 21. Capital Stock 
 
 201. Unissued Capital Stock 
 
 202. Treasury Stock 
 
 22. Surplus 
 
 23. Reserve for Sinking Fund 
 
 3. REVENUE ACCOUNTS 
 31. Income Accounts 
 
 311. Operating Income 
 
 3111. 
 
 31101 
 
 31102 
 
 312. 
 
 3121. 
 
 3122. 
 
 Sales 
 . Sales Returns 
 . Sales Allowances 
 Non-operating Income 
 Interest Earned 
 Purchases Discount 
 
 32. Expense Accounts 
 
 321. Operating Expense 
 
 321 1. Cost of Sales 
 
 321 1 1. Purchases 
 
 321101. Purchases Returns 
 
 32 1 102. Purchases Allowances 
 
 32112. Freight In 
 
 3212. Buying Expense 
 
 3213. Selling Expense 
 
 32131. Advertising 
 
 32132. Warehouse Expense 
 
 32133. Delivery Expense 
 
 32134. Freight Out 
 
 32135. Loss on Doubtful Accounls 
 
 32136. Sundry Selling Expenses 
 
 3214. Administrative Expense 
 
 32 141. Building Expense 
 
 32142. Sundry Administrative Expenses 
 
 322. Non-operating Expense 
 
 3221. Interest Cost 
 
 3222. Sales Discount 
 
 "Zero preceding last digit indicates its opposite tendency. 
 
 Illustration No. 125, Numbering Accounts,
 
 GENERAL INFORMATION 301 
 
 § 325. Depreciation. Depreciation refers to the decrease in the value of 
 fixed assets due to their use in the operations of the business and to the lapse of 
 time (§ 127). Depreciation is not applicable to those assets which will be consumed 
 in a short time, such as office supplies, advertising material, shipping room material, 
 etc. ; it is applicable only to fixed assets purchased for use in the business, which 
 will decrease in value because of their use but which usually have some value no 
 matter how long they may be used. It is necessary to record this decrease in 
 value because it is one of the operating costs of the business. If not recorded from 
 year to year, the Balance Sheet and Statement of Profit and Loss prepared at the 
 end of each year will not show the true facts. 
 
 There are several methods for calculating depreciation, but the two most 
 generally used are the "straight line" method and the "declining balance" method. 
 With the straight line method, the asset is given a scrap value at the expiration 
 of a designated number of years, and it is depreciated in equal amounts for each 
 of these years between the time of purchase and the time it is to be scrapped. Thus 
 if it is assumed that a typewriter which costs $100.00 will have a scrap (exchange) 
 value of $25.00 at the end of five years, the depreciation for each year is $15.00; 
 $100.00 cost, minus $25.00 exchange value, equals $75.00 depreciation; $75.00 
 divided by 5, the number of years, equals $15.00, depreciation each year; $15.00 
 depreciation on an investment of $100.00 is equivalent to a depreciation of 15%. 
 
 With the declining balance method, the depreciation is calculated on the value 
 of the fixed asset at the end of each year. If it is assumed that the typewriter 
 which cost $100.00 will be of service for five years, the depreciation for the first 
 year would be ^ of $100.00, or $20.00; the depreciation for the second year would 
 be I of $80.00, or $16.00; the depreciation for the third year would be ^ of $64.00, 
 or $12.80, the depreciation for the fourth year would be i of $51.20, or $10.24; the 
 depreciation for the fifth year would be i of $40.96, or $8.19; the scrap value at the 
 end of five years being $32.77. 
 
 Depreciation should be shown on the Balance Sheet and on the Statement of 
 Profit and Loss. It is shown on the Balance Sheet as a deduction from the cost 
 value of the assets; it is shown on the Statement of Profit and Loss through the 
 increase in the operating expense accounts affected by the use of the fixed assets. 
 The depreciation shown on the Balance Sheet and' Statement of Profit and Loss 
 is the result of its being recorded in the general journal and posted to the accounts 
 in the ledger. 
 
 It is not practical to show the exact amount of the depreciation on each fixed 
 asset no matter which method may be used. The reason for this is that it is not 
 within the human mind to fix an exact future value on property which is to be 
 used in the business, and to determine in advance the amount of the depreciation 
 that will occur from year to year through the use of the property. The purpose 
 of recording depreciation is to take out of the profit of each year the estimated 
 decrease in the value of the fixed assets through their use in the operations of the 
 business. The facts gained for recording depreciation are based on estimation 
 only. While they may not be exact, yet they will enable the management to know 
 the approximate value of fixed assets, in case this information is needed in the 
 adjustment of fire loss. It also makes possible the distribution of losses which are 
 constantly occurring but the amount of which will not be known until it is necessary 
 to replace the fixed assets. 
 
 § 326. Turnover refers to the number of times the capital invested in a 
 given class of merchandise will be reinvested in the same class of goods because 
 of sales in excess of original inventory value. The butcher will turn over the fresh 
 meat which he buys and sells more rapidly than the piano merchant will turn 
 over the pianos which he buys and sells. A turnover of ten times applicable to a 
 certain class of merchandise, means that the merchant buys and sells this class 
 of merchandise ten times each year.
 
 302 EXERCISES 
 
 The method of determining turnover is explained and illustrated in Commercial 
 Arithmetic, hence it is not necessary to discuss it in detail here. The method 
 most popular with merchants is to divide the cost of the goods sold during the 
 year by the average inventory (at cost) fOr the year. Applying this rule to the 
 Statement of Profit and Loss in Illustration No. 131, the turnover would be 3.25; 
 this is arrived at as follows: beginning inventory, $14,606.05; closing inventory, 
 $31,261.78; cost of goods sold, $74,626.50. $14, 6o6.05+$3i, 261. 78 = $45,867.83. 
 $45,867.83-^-2 =$22,933,915, average inventory at cost for year. $74,626. 50-T- 
 $22,933,915=3.25, turnover. 
 
 Exercise No. 100, Trade Acceptance 
 
 May 19 the Fillmore Music Company of Denver, Colorado, placed an order 
 with the John Church Company of Cincinnati, Ohio, for five hundred songbooks 
 No. 387. May 25 these books were shipped by express and billed. at 62c per copy; 
 terms, 3% trade acceptance at sixty days. May 28 the Fillmore Music Company 
 received the invoice and entered it in its purchases journal, holding the trade ac- 
 ceptance until the merchandise was delivered. May 31 the music books were 
 received, and the trade acceptance accepted and mailed to the John Church Com- 
 pany. June 3 the John Church Company received the trade acceptance and 
 instructed the bookkeeper to record it. 
 
 Record in journal form the entry made by the John Church Company when 
 the order was filled, the entry made by the Fillmore Music Company when the 
 invoice was received, the entry made by the Fillmore Music Company when the 
 trade acceptance was accepted, and the entry made by the John Church Company 
 when the trade acceptance was received, assuming that each concern keeps accounts 
 with Trade Acceptances Receivable and Trade Acceptances Payable. 
 
 Exercise No. 101, Journal Vouchers 
 
 The following transactions were recorded by the bookkeeper for the R. H. 
 Donnelly Corporation and supported by journal vouchers: 
 
 Oct. 27. Mays Bros. & Minot, a customer, report merchandise received in bad 
 condition, and the salesman in their territory requests that they be 
 allowed credit for $62.50. 
 
 30. At the close of the fiscal period, the sales manager requests that $216.50 
 debited to the Delivery Expense account, which shows a sales cost, 
 be debited to the Freight In account because this amount applies 
 to the cost of hauling merchandise purchased from the station to the 
 warehouse by the delivery equipment. 
 
 Nov. 9. The attorney for the corporation reports that the account with Jeffries 
 & Son, which is long past due, is uncollectible, and the credit manager 
 instructs that its balance, $61.85, be closed into the Reserve for 
 Uncollectible Accounts account. 
 
 18. The president authorizes the sale of ten shares of common stock (par 
 value, $100.00) to Y. S. Undenv'ood at $95.00 per share and the 
 acceptance in payment of this his sixty-day note for this amount, 
 dated today, with interest at 6% from date. 
 
 Make each of the above entries in journal form and prepare the journal voucher 
 (Illustration No. 124) which would support it; select your own names for the officers 
 authorizing the issue of the journal vouchers and indicate the title of each.
 
 QUESTIONS 
 
 303 
 
 Jan. 2, 1919 
 Dec. 31, 1919 
 
 Nov. 
 Dec. 
 
 6, 1920 
 31, 1920 
 
 Exercise No. 102, Depreciation 
 
 Make, in journal form, the entries for the following transactions relating to 
 a Packard truck purchased by the Haggard Drug Company; post the entries 
 affecting the Delivery Equipment and Reserve accounts. 
 
 Purchased for $3,500.00 cash a Packard truck to be used in deliv- 
 ering merchandise. 
 
 Recorded an estimated depreciation on the truck of 123^2% of 
 cost. 
 
 Paid $60.00 for a new tire to replace a worn tire on the truck. 
 
 Recorded an estimated depreciation on the truck of 12}^% of 
 cost. 
 
 Paid $197.60 for storage and repairs on truck. 
 
 Recorded an estimated depreciation on the truck of 12}/^% of 
 cost. 
 
 The truck was badly damaged in a collision with a street car. 
 Brought suit against the street car company for $1,500.00 
 damages. 
 
 Paid $1,054.65 for repairs on the damaged truck. 
 
 Debit Loss on Damaged Truck. 
 
 Collected $1,000.00 damages from the street car company; the 
 street car company paid the costs of the suit. 
 
 Dec. 31, 1922. Recorded an estimated depreciation on the truck of 123^% of 
 cost. 
 
 Feb. I, 1923. Gave the old truck and our check for $2,750.00 in full payment 
 for a new truck, cost price $3,750.00. 
 
 Debit Adjustment of Errors in Previous Periods account for the difference between the re- 
 serve for depreciation and the amount allowed on the old truck. This account is debited because, 
 if the reserve for depreciation set up during the four previous years had been sufficient, the profit 
 for each of these years would have been correspondingly less, hence the Surplus account (§ 271, 1[ 3), 
 which shows the accumulated profits, would have been less. 
 
 April 13, 1921 
 Dec. 31, 1921 
 
 Mar. 17, 1922 
 
 May 8, 1922. 
 July 7, 1922. 
 
 10. 
 
 ' QUESTIONS 
 
 (a) What are the advantages of a trade acceptance? (b) the disadvantages? 
 Can you explain by example the three classes of security usually given 
 
 as guarantee for the payment of obligations? 
 When merchandise is sold on account, what guarantee does the merchant 
 
 have that he will collect the amount of the sale when it is due? 
 (a) When should a bookkeeper require a power of attorney? (b) When is a 
 
 power of attorney not essential to the work of a bookkeeper? 
 (a) What is the purpose of a journal voucher? (b) Why should a journal 
 
 voucher be filed? 
 (a) What is the connection between an exhibit, a schedule, and an analytical 
 
 statement? (b) How is each used in connection with the preparation of 
 
 reports? 
 What is the advantage of numbering accounts, and using numbers in addition 
 
 to the titles of the accounts? 
 What is depreciation? 
 What is the difference between the straight line and the declining balance 
 
 method of determining the amount of the depreciation? 
 What is turnover?
 
 Chapter XXXII 
 
 WORKING SHEET, ADJUSTING ENTRIES AND REPORTS 
 
 The Purpose of this Chapter is to explain by means of illustrations the 
 work required of the bookkeeper or accountant at the close of a fiscal period. The 
 illustrations provide a model set with the books of original entry and accounts 
 omitted. The illustrations are prepared from the general ledger of a business 
 owned and operated by a corporation, but are applicable to a business owned and 
 operated by an individual or by partners, the only exception being the method 
 of showing the proprietorship. 
 
 § 327. The Working Sheet is a ruled form used by the bookkeeper or 
 accountant in the preparation of the Balance Sheet and Statement of Profit and 
 Loss. It contains space ruled for the names of the accounts in the ledger, and 
 eight or more amount columns for the Trial Balance, adjustments. Balance Sheet, 
 and Statement of Profit and Loss. The purpose of the Working Sheet is to ascertain 
 the net profit before preparing the Balance Sheet and Statement of Profit and 
 Loss. The Working Sheet is prepared from the Trial Balance taken at the end of 
 the fiscal period and the entries for the inventories, accruals, and reserves. 
 
 The Working Sheet and its use in connection with the work required at the 
 close of a fiscal period are best explained by illustrations. The illustrations which 
 follow consist of (a) the Trial Balance taken at the close of the fiscal period, (b) 
 a list of inventories, accruals, and reserves, (c) the adjusting entries for these in 
 journal form, (d) the Working Sheet, (e) the Balance Sheet, (f) the Statement of 
 Profit and Loss, (g) the closing entries in two forms, (h) the post-closing entries, 
 and (i) the post-closing Trial Balance. 
 
 § 328. Preparation of the Working Sheet. The Working Sheet is com- 
 pleted by (a) copying the Trial Balance in the first two columns, (b) posting the 
 adjusting entries from the journal to the adjustment columns on a line with the 
 accounts alTected, (c) extending the balances on the Trial Balance and the amounts 
 in the adjustment columns into the asset, liability, cost, and income columns, and 
 (d) proving the results. If all the merchandise purchased had been sold and there 
 were no accruals or reserves, the Working Sheet would be prepared by extending 
 the balances on the Trial Balance into the proper columns at the right; inven- 
 tories, accruals and reserves affect the accounts on the Trial Balance according 
 to their nature, and such items must be considered when extending the balances. 
 
 § 329. Copying the Trial Balance. The Working Sheet should be provided 
 with a sufficient number of horizontal lines for all the accounts in the general ledger 
 and additional lines for new accounts made necessary through posting the adjusting 
 entries. After the Trial Balance has been copied in the first two columns at the 
 left, the results should be audited and both columns added to detect errors in 
 copying. 
 
 304
 
 TRIAL BALANCE AT CLOSE OF PERIOD 
 
 305 
 
 J. A. WHITNTY & CO. 
 TRIAL BALANCE. DECEMBER 31. 192 
 
 T 
 
 Merchants National Bank 
 
 10496 
 
 30 
 
 
 
 2 
 
 Petty Cash 
 
 50 
 
 00 
 
 
 
 3 
 
 Notes Receivable 
 
 3338 
 
 99 
 
 
 
 4 
 
 Notes Heceivable Discounted 
 
 
 
 350 
 
 CO 
 
 5 
 
 Accounts Receivable 
 
 10997 
 
 99 
 
 
 
 6 
 
 Reserve for Doubtful Accounts Receivable 
 
 
 
 112 
 
 86 
 
 7 
 
 Subscribers to Capital Stock 
 
 750 
 
 00 
 
 
 
 g 
 
 Cherry Street Property 
 
 2250 
 
 00 
 
 
 
 9 
 
 Office Equipment 
 
 500 
 
 00 
 
 
 
 10 
 
 Reserve for Depreciation of Office Equip. 
 
 
 
 27 
 
 25 
 
 11 
 
 Store Fixtures 
 
 350 
 
 00 
 
 
 
 12 
 
 Reserve for Depreciation of Store Fixtures 
 
 
 
 17 
 
 75 
 
 13 
 
 Delivery Equipment 
 
 2018 
 
 00 
 
 
 
 14 
 
 Reserve for Denreciation of Delivery Equip. 
 
 
 
 lie 
 
 72 
 
 15 
 
 Building 
 
 3000 
 
 00 
 
 
 
 16 
 
 Reserve for Depreciation of Building 
 
 
 
 300 
 
 00 
 
 17 
 
 Land 
 
 1500 
 
 00 
 
 
 
 18 
 
 Goodwill 
 
 5063 
 
 43 
 
 
 
 19 
 
 Office Supplies 
 
 246 
 
 28 
 
 
 
 20 
 
 Advertising Material 
 
 610 
 
 05 
 
 
 
 21 
 
 Warehouse Material 
 
 523 
 
 16 
 
 
 
 22 
 
 Insurance 
 
 219 
 
 Co 
 
 
 
 23 
 
 Notes Payable 
 
 
 
 6014 
 
 28 
 
 24 
 
 Accounts Payable 
 
 
 
 19953 
 
 02 
 
 25 
 
 Capital Stock 
 
 
 
 50000 
 
 00 
 
 26 
 
 Unissued Capital Stock 
 
 10000 
 
 00 
 
 
 
 27 
 
 Subscriptions to Capital Stock 
 
 
 
 1000 
 
 00 
 
 28 
 
 Treasury Stock 
 
 500 
 
 00 
 
 
 
 29 
 
 Surplus 
 
 
 
 6805 
 
 86 
 
 30 
 
 Sales 
 
 
 
 108961 
 
 52 
 
 31 
 
 Sales Returns 
 
 301 
 
 21 
 
 
 
 32 
 
 Salos Allowances 
 
 120 
 
 11 
 
 
 
 33 
 
 1922 Inventory 
 
 14506 
 
 05 
 
 
 
 34 
 
 Purchases 
 
 85837 
 
 52 
 
 
 
 35 
 
 Freight In 
 
 5614 
 
 03 
 
 
 
 36 
 
 Purchases Returns and Allowances 
 
 
 
 169 
 
 32 
 
 37 
 
 Branch Store 
 
 10920 
 
 79 
 
 3373 
 
 52 
 
 38 
 
 Selling Expense 
 
 3887 
 
 13 
 
 
 
 39 
 
 Salaries in Selling Department 
 
 5567 
 
 39 
 
 
 
 40 
 
 Advertising Expense 
 
 3292 
 
 56 
 
 
 
 41 
 
 Traveling Expense 
 
 7480 
 
 6b 
 
 
 
 42 
 
 Warehouse Expense 
 
 2393 
 
 45 
 
 
 
 43 
 
 Delivery Expense 
 
 2152 
 
 40 
 
 
 
 44 
 
 Freight Out 
 
 43 
 
 85 
 
 
 
 45 
 
 Administrative Expense 
 
 2143 
 
 15 
 
 
 
 46 
 
 Building Expense 
 
 1075 
 
 00 
 
 
 
 47 
 
 Interest Earned 
 
 
 
 So 
 
 80 
 
 48 
 
 Purchases Discount 
 
 
 
 568 
 
 09 
 
 49 
 
 Cherry Street Property Revenue 
 
 
 
 197 
 
 50 
 
 50 
 
 Profit on Sale of Stock 
 
 
 
 85 
 
 00 
 
 51 
 
 Interest Cost 
 
 138 
 
 48 
 
 
 
 52 
 
 Sales Discount 
 
 166 
 
 47 
 
 
 
 
 198154 
 
 49 
 
 198154 
 
 49 
 
 
 
 
 
 
 Illustration No. 126, Trial Balance at Close of Fiscal Period. 
 
 EXPLANATION. This Trial Balance was prepared from the ledger of J. A. Whitney & 
 Co., an incorporated concern, at the close of a business year. The account with Cherry St. Property 
 shows the value of real estate purchased from a customer to effect the settlement of his account 
 without legal proceedings; it is carried on the ledger of the corporation as an asset to be sold, and 
 not as one to be used in the business.
 
 3o6 
 
 LIST OF ADJUSTMENTS 
 
 § 330. Entries in the Adjustment Columns. The adjustment columns 
 are provided because each inventory, accrual or reserve affects two accounts, one 
 or both of which may be in the ledger. The journal entries for these inventories, 
 accruals, and reserves are posted to the adjustment columns on the Working Sheet 
 in the same manner as they will be posted to the accounts in the ledger after the 
 net profit for the period has been ascertained through the Working Sheet. 
 
 The posting of the entries in Illustration No. 128 to the adjustment columns 
 of the Working Sheet in Illustration No. 129 can best be understood by comparing 
 the two illustrations and tracing the posting. The first journal entry is to record 
 the merchandise inventory at the close of the period. This is posted to the credit 
 adjustment column on a line with Purchases, and to the debit adjustment column 
 on a line with 1923 Inventory. (The year "1923" is used to distinguish the new 
 inventory from the old inventory which is designated as "1922.") The second 
 entry is to record the branch store inventory, and is posted in the same manner 
 except that the amounts are entered in the debit and credit adjustment columns on 
 a line with the accounts affected. It will be observed that in both cases new 
 accounts are necessary for the debit entries because the purpose of each entry is 
 to record an asset which does not appear in the ledger. The other entries are 
 posted in the same manner; the numbers at the left in Illustration No. 128 
 indicate the lines on the Working Sheet on which the amounts are entered. 
 
 When more than one entry affects the debit or credit of an account on the Trial Balance, it 
 is necessary to interline the amounts in the adjustment columns as in the illustration. 
 
 J'. A. WHITNEY S: CO. 
 IKVENTORIES. ACCRUALS AND RESERVES, DECSIffiSR 31, 192 
 
 
 Merchaniise Inventory, Deceniber 31, 1923 
 
 
 
 31261 
 
 78 
 
 
 Branch Store Inventory, Decemtier 31. 1923 
 
 
 
 9127 
 
 55 
 
 
 Accruals: 
 
 
 
 
 
 
 Interest on notes and accounts receivable 
 
 14 
 
 93 
 
 
 
 
 December rent on Cherry Street property 
 
 27 
 
 50 
 
 42 
 
 43 
 
 
 Interest on notes payable 
 
 69 
 
 45 
 
 
 
 
 December rent on warehouse 
 
 150 
 
 00 
 
 
 
 
 Branch Store payroll for five days 
 
 135 
 
 42 
 
 
 
 
 Expenses of traveling salesman to the 31st 
 
 87 
 
 65 
 
 
 
 
 Sarage service for December 
 
 122 
 
 50 
 
 
 
 
 Taxes on Cherry Street property 
 
 67 
 
 50 
 
 532 
 
 52 
 
 
 Deferred Charges to Operation: 
 
 
 
 
 
 
 Office supplies on hand 
 
 82 
 
 65 
 
 
 
 
 Advertising material on hand 
 
 119 
 
 65 
 
 
 
 
 Warehouse material on hand 
 
 63 
 
 75 
 
 266 
 
 05 
 
 
 Insurance Unexpired: 
 
 
 
 
 
 
 Total p:t;emiums paid 
 
 219 
 
 05 
 
 
 
 
 Ext) irat ions: 
 
 
 
 
 
 
 'Office Equipment 4.05 
 
 
 
 
 
 
 Store Fixtures 3.12 
 
 
 
 
 
 
 Delivery Equipment ' 17.33 
 
 
 
 
 
 
 Merchandise 60.36 
 
 
 
 
 
 
 Building 24.38 
 
 
 
 
 
 
 Cherry Street Property 18.56 
 
 127 
 
 80 
 
 91 
 
 25 
 
 
 Reserves: 
 
 
 
 
 
 
 Office Equicment. Z% 
 
 15 
 
 00 
 
 
 
 
 Store Fixtures. 3?^ 
 
 10 
 
 50 
 
 
 
 
 Delivery Equipment, 4^^ 
 
 80 
 
 72 
 
 
 
 
 Building. 5^ 
 
 150 
 
 00 
 
 256 
 
 22 
 
 
 Doubtful Accounts Receivable: 
 
 
 
 
 
 
 One tenth of Vfo of ITet Sales 
 
 
 
 108 
 
 56 
 
 Illustration No. 127, Inventories, Accruals and Reserves. 
 
 EXPLANATION. The value of the merchandise on hand at the main store and the value 
 of the assets on hand at the branch store are each ascertained by a physical inventory. The amount 
 of each accrual, deferred charge and reserve is ascertained by the bookkeeper from his records
 
 ADJUSTING ENTRIES 
 
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 ^3o8 
 
 EXTENSIONS ON WORKING SHEET 
 
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 Illustration No. 128, Adjusting Entries (Concluded). 
 
 EXPLANATION. These entries were prepared from the Hst of inventories, accruals and 
 reserves in Illustration No. 127. The year is given in connection with the two inventories to dis- 
 tinguish these from the 1922 inventories which are recorded in the ledger. The Cherry St. Property 
 Revenue account is credited for the rent which has not yet been collected, because this account 
 shows the income from the property; this account is debited with the accrued taxes because the 
 cost of these taxes reduces the income from rent. The entries to record the deferred charges, which 
 include materials in stock and unexpired insurance, transfer the cost of materials used and insurance 
 expired to the proper operating accounts so that the balance of each account which is to show a 
 deferred charge will be the value of the asset. 
 
 § 331. Extensions on the Working Sheet. Each account on the Trial 
 Balance shows an asset, a liability, a cost or an income, hence the balance will 
 be extended in one of the four columns at the right of the adjustment columns. 
 A careful study of the extensions on the Working Sheet, Illustration No. 129, will 
 show the method of arriving at the amount to be entered in the asset, liability, 
 cost or income columns. It will be observed that each amount in the debit adjust- 
 ment column is added to the debit side of the account it affects, and each amount 
 in the credit column is added to the credit side of the account it affects. 
 
 § 332. Results of the Extensions. After all the adjusted balances have 
 been extended into the four columns at the right, all the columns on the Working 
 Sheet including the Trial Balance are added, and the totals entered in small pencil 
 figures as in Illustration No. 129. The totals of the debit and credit columns on 
 the Trial Balance will be equal because equal debits and credits have been recorded 
 in the ledger, and a Trial Balance is a list of the open accounts in the ledger. The 
 totals of the debit and credit adjustment columns will be equal because these two 
 
 {Concluded on page, j 10)
 
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 Illustration No. 129, Working Sheet (Continued).
 
 310 
 
 PURPOSE OF WORKING SHEET 
 
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 Illustration No. 129, Working Sheet (Concluded). 
 
 EXPLANATION. This Working Sheet was prepared from the Trial Balance, Illustration 
 No. 126, and the adjusting entries, Illustration No. 128. The student should check each amount 
 in the Adjustments columns with the journal entries in the illustration in the same manner as check- 
 ing the posting from a book of original entry to the ledger. When this is completed, he should 
 check the extensions in the Balance Sheet and Profit and Loss columns. Where two or more 
 amounts are entered opposite the name of an account, the total of these amounts is used in making 
 the extension. Pencil check marks should be placed at the right of each amount on the Working 
 Sheet as the check.ing is completed, in order that the student may know that he has completed 
 all the work required in connection with the preparation of the Working Sheet. The years "1922" 
 and "1923" are used to distinguish between the "old" and "new" inventories (§ 330). 
 
 {Continued from page 308) 
 columns are the result of posting journal entries in which debits and credits are 
 equal. The totals of the asset and liability columns will not be equal unless the 
 business has been operated without a profit or loss. The difference between the 
 total of the asset column and the total of the liability column (with the capital 
 accounts as liabilities) will be the net profit or net loss; if the assets are greater 
 than the liabilities, the business has been operated at a profit, and if the liabilities 
 are greater than the assets, the business has been operated at a loss. The totals 
 of the cost and income columns will not be equal unless the business has been 
 operated without a profit or a loss; if the total of the cost column is the greater, 
 the business has been operated at a loss, and if the total of the income column 
 is the greater, it has been operated at a profit. The difference between the total 
 of the asset column and the total of the liability column will be the same as the 
 difference between the total of the cost column and the total of the income column 
 because the net assets will have increased the same amount as the net profit, or 
 the net assets will have decreased the same amount as the" net loss. 
 
 The purpose of the Working Sheet is to ascertain the net profit or net loss 
 resulting from operating the business during a fiscal period; this purpose is ac- 
 complished when the difference between the assets and liabilities is the same as 
 the difference between the cost and income. When the results do not prove, it is 
 necessary to audit the work to ascertain the error or errors. It is necessary for the 
 one making the extensions to distinguish between an asset and a cost, and a lia- 
 bility and an income, because an error resulting from a liability extended as an 
 income, or a cost extended as an asset will not be detected through a comparison 
 of the net profit shown by the difference between the assets and liabilities, and 
 the difference between the cost and income.
 
 BALANCE SHEET 
 
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 312 
 
 STATEMENT OF PROFIT AND LOSS 
 
 Exhibit B 
 J. A.. T.'HITNEY & CO. 
 STATSlffiNT OP PROFIT AND LOSS FOH PERIOD ENDING DECEIffiER 31. 192 
 
 Returns from Sales: 
 
 Gross Sales 
 Deduct Sales Returns 
 " Sales Allowances 
 
 Net returns from merchandise sold 
 
 Cost of Merchandise Sold: 
 
 192£ Inventory 
 Add Purchases 
 " Preie-ht In 
 
 Deduct Purchases Ret\irn3 and Allowances 
 
 Net cost of merchandise purchased 
 Deduct 1923 Inventory 
 
 Net cost of merchandise sold 
 
 Gross Profit on Sales 
 
 Branch Store: 
 
 Net Profit per Schedule 5 
 
 Gross Profit from Operations 
 
 Operating Expenses: 
 
 Selling Expenses: 
 Selling Expense 
 
 Salaries in Selling Department 
 Advertising Expense 
 Traveling Expense 
 Warehouse Expense 
 Delivery Expense 
 Freight Out 
 Loss on Doubtful Accou-Tits Rec . 
 
 Administrative Expenses: 
 Administrative Expense 
 Building Expense 
 
 Total Operating Expenses 
 
 Net Profit from Operations 
 
 Other Income: 
 
 Interest Earned 
 
 Purchases Discount 
 
 Cherry Street Property Revenue 
 
 Profit on S^le of Stock 
 
 Total Other Income 
 
 Gross Income 
 
 Deductions from Income: 
 
 Interest Cost 
 Sales Discount 
 
 Total Deductions from Income 
 
 Net Income Carried to Surplus 
 
 14606.05 
 
 85837.52 
 
 5614.03 
 
 3961.11 
 5567.39 
 3783.96 
 7568.30 
 3002.86 
 2372.95 
 43,85 
 108.56 
 
 2325.83 
 1249.38 
 
 301 
 120 
 
 106057 
 169 
 
 105888 
 31261 
 
 26408 
 
 3575 
 
 101 
 
 568 
 
 138 
 
 85 
 
 207 
 
 166 
 
 21 
 
 108981 
 421 
 
 108560 
 
 ■74 626 
 
 33933 
 
 1444 
 
 35578 
 
 29994 
 
 :394 
 
 893 
 
 6288 
 
 374 
 
 ?13 
 
 52 
 32 
 
 20 
 
 50 
 
 70 
 
 96 
 
 66 
 
 19 
 
 47 
 
 76 
 
 23 
 
 40 
 
 83 
 
 Illustration No. 131, Statement of Profit and Loss for a Corporation. 
 EXPLANATION. This Statement of Profit and Loss was prepared from the cost and in- 
 come columns on the Working Sheet, Illustration No. 129.
 
 CLOSING ENTRIES 
 
 313 
 
 CLOSING ENTRIES 
 
 The closing entries are prepared from the Statement of Profit and Loss. The 
 purpose is to close all cost and income accounts and to transfer the net profit or 
 loss to the Surplus account. These entries may be made in one of two forms. 
 With one form, the profit on sales is closed into the Profit and Loss account 
 through the Sales account and with the other, the costs afifecting the sales and 
 the returns from sales are closed into one division of the Profit and Loss account 
 
 a/y^Jt^lU'-yyt--0~CAy 
 
 LJ?/, /f^ 
 
 
 ^ / 
 
 
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 JIO Z2,0 
 
 •3/ 
 
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 ^O 
 
 JO 
 
 f <^ 
 
 
 
 / / 
 
 
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 y^ Cz6 
 
 3 
 
 3 fJJ-/ o 
 
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 Illustration No. 132, Closing Entries with Profit on Sales Closed Through 
 the Sales Account (Continued). 
 
 These entries were prepared from the Statement of Profit and Loss in Illustration No. 131. 
 The method of closing is the same as that explained in preceding chapters. The gross profit on 
 sales is closed into the Profit and Loss account through the Sales account. When these entries are 
 posted, the accounts which appear on the Statement of Profit and Loss will be in balance.
 
 314 
 
 CLOSING ENTRIES 
 
 
 ^/ 
 
 a.'ixi'C-u-^Xd 
 
 
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 -y^-yC^&e^^Ley^^tJije^ ■'^i-i^^CyC di.-yt^ ;:^>-±^ i 
 
 
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 Illustration No. 132, Closing Entries with Profit on Sales Closed Through the 
 
 Sales Account (Concluded). 
 
 and the operating and non-operating costs and non-operating income are closed 
 into another division of this account. Illustration No. 132, on pages 313 and 314 
 shows the entries necessary to close all cost and income accounts through one 
 division of the Profit and Loss account; these entries are the same as those dis- 
 cussed in preceding chapters. Illustration No. 133 shows the Profit and Loss 
 account resulting from posting these entries. Illustration No. 134 shows the 
 necessary post-closing entries. Illustration No. 135, on pages 316 and 317, shows 
 the form of entries when two divisions of the Profit and Loss account are to be 
 used, and Illustration No. 136 shows the Profit and Loss account with the two 
 divisions resulting from posting these entries. A comparison of the two methods 
 will show that the final results are the same. However, the Profit and Loss account
 
 POST-CLOSING ENTRIES 
 
 315 
 
 with the two divisions shows information which cannot be obtained readily from 
 the account when only one division is used. Thus if a comparison between sales 
 and returned sales, sales allowances, purchases, or freight cost is desired, the 
 information can be obtained from the Profit and Loss account with the two divi- 
 sions without referring to the various ledger accounts. 
 
 —"fS^^^'O-C^^ ei^'-yt^ ^:^^-d^d~/ 
 
 
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 Illustration No. 133, Profit and Loss Account. 
 
 EXPLANATION. This account shows the Profit and Loss account after the entries in 
 Illustration No. 132 have been posted. 
 
 '=<y^^k.<,t.'^y>-^^i>'&yLy ,J /, /f^ 
 
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 Illustration No. 134, Post-closing Entries. 
 EXPLANATION. The purpose of these entries is to close the 1923 Branch Store Inventory 
 account and those accounts with accruals which will not be canceled by payment at an early date.
 
 3i6 
 
 CLOSING ENTRIES 
 
 <:pCt:^<-^^^''yo-d^.Ay ^ /, /<?^ 
 
 
 
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 Illustration No. 135, Closing Entries Through Division of the Profit and 
 Loss Account (Continued).
 
 PROFIT AND LOSS ACCOUNT 
 
 317 
 
 
 C^fi'jiJ 
 
 20, 
 /< 
 
 3fj 
 
 Illustration No. 135, Closing Entries Through Division of the Profit and 
 Loss Account (Concluded). 
 
 EXPLANATION. These entries were prepared from the Statement of Profit and Loss, 
 Illustration No. 131; compare with Illustrations Nos. 132, 133 and 136. 
 
 <^-<L^ 
 
 
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 Illustration No. 136, Profit and Loss Account. 
 
 EXPLANATION. This illustration shows the Profit and Loss account after the entries 
 affecting it in Illustration No. 135 have been posted. Compare with Illustration No. 133 which shows 
 the same facts with the profit on .sales closed through the Sales account.
 
 318 
 
 POST-CLOSING TRIAL BALANCE 
 
 J. A. WHITNEY & CO. 
 POST-CLOSING TRIAL BAIANCE, DECELQER. 31, 192 
 
 1 
 2 
 3 
 
 4 
 5 
 6 
 56 
 7 
 8 
 9 
 10 
 11 
 IE 
 13 
 14 
 15 
 16 
 17 
 18 
 19 
 20 
 21 
 22 
 £3 
 24 
 58 
 59 
 60 
 61 
 62 
 25 
 26 
 27 
 28 
 £9 
 53 
 37 
 47 
 51 
 
 Merchants National Bank 
 
 Petty Cash 
 
 Notes Receivable • 
 
 Notes Receivable Discounted 
 
 AccoTirits Receivable 
 
 Reserve for Lo-ubtful Accounts Receivable 
 
 Accrued Rent on Cherry Street Property 
 
 Subscribers to Capital Stock 
 
 Cherry Street Property 
 
 Office Equipment 
 
 Reserve for Depreciation of Office Equip. 
 
 Store Fixtures 
 
 Reserve for Depreciation of Store Fixtures 
 
 Delivery Equipment 
 
 Reserve for Depreciation of Delivery Equip. 
 
 Building 
 
 Reserve for Depreciation of Building 
 
 Land 
 
 Goodwill 
 
 Office Supplies 
 
 Advertising Material 
 
 Warehouse Material 
 
 Insiirance 
 
 Notes Payable 
 
 Accounts Payable 
 
 Accrued V.'arehouse Rent 
 
 Accrued Wages — Branch Store 
 
 Accrued Traveling Expense 
 
 Accrued Garag-e Expense 
 
 Accrued Taxes — Cherry Street Property 
 
 Capital Stock 
 
 Unissued Capital Stock 
 
 Subscriptions to Capital Stock 
 
 Treasury Stock 
 
 Surplus 
 
 1923 Inventory 
 
 Branch Store 
 
 Interest Earned 
 
 Interest Cost 
 
 10496 
 
 50 
 
 , 3338 
 
 10997 
 
 27 
 
 750 
 
 2250 
 
 500 
 
 350 
 
 2018 
 
 3000 
 
 1500 
 
 5063 
 
 82 
 
 119 
 
 63 
 
 91 
 
 10000 
 
 500 
 
 51261 
 
 9127 
 
 14 
 
 91603 
 
 87 
 
 350 
 221 
 
 4£ 
 
 £8 
 
 191 
 
 450 
 
 6014 
 
 19953 
 
 150 
 
 135 
 
 87 
 
 122 
 
 ' 67 
 
 50000 
 
 1000 
 
 12720 
 
 69 
 
 91603 
 
 00 
 42 
 
 25 
 
 44 
 00 
 
 28 
 
 02 
 00 
 42 
 65 
 50 
 50 
 00 
 
 00 
 
 69 
 
 45 
 
 87 
 
 Illustration No. 137, Post-closing Trial Balance. 
 
 EXPLANATION. This Trial Balance is taken from the ledger after all closing and post- 
 closing entries have been made and posted, to prove that the ledger is in balance. The amounts 
 will be the same as the entries in the asset and liability columns on the Working Sheet, and also the 
 accounts on the Balance Sheet. 
 
 I. 
 
 2. 
 
 QUESTIONS ON THE WORKING SHEET 
 
 When and why is the Working Sheet prepared? 
 
 From what source is the information in the preparation of the Working 
 Sheet obtained? 
 
 How is the information in connection with the inventories, accruals, and 
 reserves obtained? 
 
 Why is the amount of each inventory, accrual and reserve entered in both 
 the debit and credit adjustment columns on the Working Sheet? 
 
 Why are the amounts in the credit adjustment column added to credit bal- 
 ances on the Trial Balance? 
 
 Why are entries in the debit adjustment column added to debit balances on 
 the Trial Balance?
 
 QUESTIONS 319 
 
 7. Why is it necessary for the one making the extensions on the Working Sheet 
 
 to know whether an account on the Trial Balance shows an asset or a 
 cost, a liability or an income? 
 
 8. Why is the difference between the asset and liability columns the net profit 
 
 or loss resulting from the operations of the business? 
 
 9. Why is the difference between the cost and income columns the net profit 
 
 or loss from the operations of the business during the year? 
 10. Why is the difference between the asset and liability columns the same as 
 the difference between the income and cost columns? 
 
 QUESTIONS ON THE FINANCIAL REPORTS 
 
 1. What is the purpose of the adjusting entries? 
 
 2. Why are the adjusting entries made and posted before the Balance Sheet and 
 
 Statement of Profit and Loss are prepared? 
 
 3. Why does the difference between the assets and liabilities on the Balance 
 
 Sheet show the proprietorship of the business? 
 
 4. Can the Balance Sheet be prepared from the Balance Sheet columns on the 
 
 Working Sheet without reference to the accounts in the ledger? 
 
 5. Why is the difference between the income and operating cost shown on the 
 
 Statement of Profit and Loss the net profit for the year? 
 
 6. Can the Statement of Profit and Loss be prepared from the income and cost 
 
 columns on the Working Sheet? 
 
 7. What is the source of the information needed in making the journal entries 
 
 to close the ledger? 
 
 8. What is the result of posting the closing entries? 
 
 9. What is the purpose of the post-closing entries? 
 
 10. What is the purpose of the post-closing Trial Balance?
 
 Chapter XXXIII 
 
 MANUFACTURING ACCOUNTS 
 
 The Purpose of this Chapter is to explain the accounts needed to record 
 transactions which occur in connection with the manufacturing of merchandise. 
 The discussion does not relate to any particular method of cost accounting but to 
 the fundamental accounts required wh^n a business manufactures a part or all 
 of the merchandise which it sells. 
 
 § 333. Manufacturing. The merchant buys the merchandise which he 
 sells, hence can easily ascertain the cost price of the same through the invoices and 
 freight bills. The manufacturer does not sell the merchandise which he buys in 
 the same form in which he buys it, but in a changed form. Because of these changes, 
 it is necessary for him to record facts in addition to those needed by the merchant. 
 
 Where the operations of a manufacturing business are extensive, a cost ac- 
 counting system is necessary in order to ascertain the cost of each unit or each 
 article manufactured. Where the operations are limited to a small factory or 
 department, the cost of manufacturing may be ascertained through three accounts: 
 Materials, Labor, and Manufacturing Expense. 
 
 Fixed assets other than those used in a mercantile business may be needed in connection with 
 the manufacturing of merchandise, but the nature of the account with each fixed asset is the same 
 as that with office equipment. It is quite evident that the insurance and depreciation on fixed 
 assets purchased for use in the manufacturing department will increase the cost of manufacture and 
 that this increase will be shown through the Manufacturing Expense account (§ 336); hence, no 
 special discussion is necessary for the fixed asset accounts. 
 
 MATERIALS ACCOUNT 
 § 334. The Purpose of this Account is to show the cost of the materials 
 purchased for use in the manufacture of the goods that are to be produced by the 
 factory. The nature of the manufacturing process and the product resulting 
 therefrom, will determine the nature of the raw material purchased. A manu- 
 facturer of safes might purchase the necessary castings from a foundry or he might 
 purchase the iron ore and make the castings in his own foundry; a printer might 
 buy the cases for the books which he manufactures or he might manufacture them 
 on his own case-making machines. The Materials account shows a record of all 
 costs of material purchased for use in the factory which will eventually become a 
 part of the manufactured article. 
 
 Debit the Materials Account: Credit the Materials Account: 
 
 % I. For the cost of material pur- *\ 2. For any adjustments which re- 
 chased, which includes the duce the cost of material 
 invoice and transportation purchased as shown by the 
 cost. debit side. 
 
 ^ 3. The Balance of the Materials Account at the close of the fiscal period 
 shows the cost of material purchased during the period. It is shown on the State- 
 ment of Profit and Loss (§ 340) as one of the costs of goods manufactured. 
 
 If a separate record is kept of the material in the storeroom and the material in process of 
 manufacture, it is necessary to maintain a Materials in Process account. This Materials in Process 
 account is debited with the cost of material taken out of the storeroom and transferred to the factory, 
 and the Materials account is credited for the same amount. At the close of the fiscal period the 
 balance of the Materials in Process account is transferred to the Manufacturing account (§347)- 
 
 320
 
 MANUFACTURING ACCOUNTS 321 
 
 LABOR ACCOUNT 
 
 § 335. The Purpose of this Account is to show the cost of direct labor 
 in the manufacturing department. Labor is divided into two classes: (a) that 
 performed by employees who are engaged in the manufacture of the product sold, 
 usually referred to as "direct" labor; (b) that performed by employees whose 
 work is not applied direct to the product manufactured, usually referred to as 
 "indirect" labor. 
 
 Debit the Labor Account: Credit the Labor Account: 
 
 ^ I. For the direct labor cost as % 2. For any adjustments which re- 
 
 shown by the pay roll. duce the direct labor cost. 
 
 ^ 3. The Balance of the Labor Account at the close of the fiscal period shows 
 the direct labor cost for the period. It is one of the costs of the goods manufactured 
 and is shown as such on the Statement of Profit and Loss (§ 340). 
 
 MANUFACTURING EXPENSE ACCOUNT 
 § 336. The Purpose of this Account is to show the cost of the various 
 expenses incurred in the factory which can not be debited to the Materials or 
 Labor accounts. These costs include factory expenses (rent, heat, light, etc.), 
 indirect labor (superintendent's and foremen's salaries, wages of elevator operators, 
 janitors, etc.), insurance and depreciation on fixed assets used in the manufacturing 
 department, etc. The manufacturing expenses are so varied that it is sometimes 
 advisable to group them in several classes and record transactions affecting 
 each class in a separate account. 
 
 Debit this Account: Credit this Account: 
 
 ^ I. For all expenses in the factory ^ 2. For any adjustments which re- 
 
 which are not applicable to duce the debit to this ac- 
 
 materials or direct labor cost. count. 
 
 II 3. The Balance of the Manufacturing Expense Account at the close of the 
 fiscal period shows the manufacturing expenses for the period. This is one of the 
 costs of the goods manufactured and is shown as such on the Statement of Profit 
 and Loss (§ 340). 
 
 § 337. Method of Ascertaining Cost of Goods Manufactured and 
 Sold. At the close of the first fiscal period, the cost of material purchased during 
 the period is shown by the Materials account, labor cost by the Labor account, 
 and manufacturing expense by the Manufacturing Expense account. The 
 total of these three costs will equal the cost of goods manufactured during the 
 year, except the goods which are in process of manufacture at the close of the 
 fiscal period; it is not practical to finish all jobs which are in process of manu- 
 facture at the close of the fiscal period. 
 
 To ascertain the cost of the goods manufactured, it is necessary to take an 
 inventory of the goods which are in process of manufacture because this value 
 must be deducted from the total cost of manufacturing for the period. The in- 
 ventory of goods in process includes the cost of the material, labor, and manu- 
 facturing expense applicable to these goods. The difference between the total 
 cost of materials, labor, and manufacturing expense during the period, less the 
 cost of these items in the goods in process, is the cost of the goods manufactured 
 during the period (finished goods). 
 
 The value of goods manufactured but not sold is ascertained by an inventory, 
 and the amount deducted from the cost of all the goods manufactured to ascertain 
 the cost of the goods sold, in the same manner as the merchandise inventory at 
 the close of the period is deducted from the total purchases cost to ascertain the 
 cost of goods sold in a trading business.
 
 322 MANUFACTURING ACCOUNTS 
 
 MANUFACTURING ACCOUNT 
 
 § 338. The Purpose of this Account is to show the combined materials, 
 labor, and manufacturing expense applicable to the cost of merchandise manufactured 
 in the factory during the fiscal period. It is a summary account used in closing 
 the ledger and is not debited or credited with any transactions that occur during 
 the period. 
 
 Debit the Manufacturing Account: Credit the Manufacturing Account: 
 
 ^ I. For the inventory of goods in ^ 3. For the inventory of goods in 
 
 process at the beginning of process at the close of the 
 
 the fiscal period. . fiscal period. 
 
 ^ 2. For the balances of the Materials, 
 
 Labor, and Manufacturing 
 
 Expense accounts. 
 
 ^ 4. The Balance of the Manufacturing Account shows the cost of goods 
 manufactured during the fiscal period. It is a summary account used in closing the 
 ledger and does not appear on the Statement of Profit and Loss. 
 
 The unit cost of the articles manufactured may be ascertained by dividing the number of 
 units manufactured into the total cost of manufacture. It is customary to make monthly tests of 
 the unit cost, as the cost may vary during the year to such an extent that the profit on sales will 
 be affected, unless the sale price is based on the changed cost price. The best method of ascertaining 
 the unit cost of the articles manufactured is through a complete cost system; the method of ascer- 
 taining the unit cost through such a system is thoroughly explained in the chapters relating to cost 
 accounting. The purpose of the discussion of the accounts in connection with manufacturing at 
 this time is to show the student a method which is practical, when the volume of goods manufactured 
 does not justify the expense of an elaborate cost system. 
 
 TRADING ACCOUNT 
 
 § 339. The Purpose of this Account is to show the gross profit on sales 
 of merchandise. In a business which manufactures a part or all of the goods 
 sold, this account will show the facts set forth by the Statement of Profit and Loss 
 beginning with the balance of the Manufacturing account (cost of goods manu- 
 factured) ; in a business which buys all the merchandise which it sells, it will show 
 the facts beginning with the purchase of merchandise. The Manufacturing account 
 and the Trading account are usually opened in the ledger as sections of the Profit 
 and Loss account so that all the facts which appear on the Statement of Profit 
 and Loss may be shown in one account. The Trading account is a summary ac- 
 count used in closing the ledger and does not appear on the Statement of Profit 
 and Loss. 
 
 Debit the Trading Account: Credit the Trading Account: 
 
 ^ I. For the balance of the Pur- 1[ 4. For the balance of the Sales 
 
 chases or the Manufactur- account. 
 
 ing account. H 5. For the balances of the Pur- 
 
 ^ 2. For the balances of the Sales chases Returns and Purchases 
 
 Returns and Sales Allowances Allowances accounts. 
 
 accounts. H 6. For the merchandise inventory 
 
 ^ 3. For the merchandise inventory or the inventory of finished 
 
 or the inventory of finished goods at the close of the fiscal 
 
 goods at the beginning of period. 
 
 the fiscal period. 
 
 ^ 7. The Balance of the Trading Account shows the gross profit or loss on 
 sales, and is transferred to the Profit and Loss account in the same manner as the 
 Sales account is closed into the Profit and Loss account. If the Trading account 
 is a section of the Profit and Loss account, the Profit and Loss account is ruled and 
 the balance carried down, as in Illustration No. 136.
 
 MANUFACTURING PROCESS 
 
 323 
 
 § 340. The Manufacturing Process, as explained in connection with the 
 Materials, Labor, and Manufacturing Expense accounts, is illustrated by the 
 transactions and entries which follow: 
 
 December 31, 1922, the Candy Kitchen had in stock manufactured candy, 
 $1,645.87, candy in process of manufacture, $1,637.52, and materials in stock, 
 $3,560.42. During the year, purchases of sugar, flavoring, and other material used 
 in manufacturing candy amounted to$ii,642.87; thelabor cost, $5,261.40; and the 
 manufacturing expense, $4,137.18. The sales of candy during the year amounted 
 to $21,000.00. At the close of the year, December 31, 1923, the inventory of man- 
 ufactured candy was $3,009.50, the inventory of candy in process, $1,542.91, and 
 the inventory of materials, $4,859.77. 
 
 One entry in journal form to record the materials cost, one to record the labor 
 cost, and one to record the manufacturing cost, assuming that cash was paid, 
 would appear as follows: 
 
 Materials 
 
 Cash 
 
 Labor 
 
 Cash 
 
 Manufacturing Expense 
 
 Cash 
 
 11,642 
 
 87 
 
 1 1 ,642 
 
 5.261 
 
 40 
 
 5.261 
 
 4.137 
 
 18 
 
 4,137 
 
 The manufacturing section of the Statement of Profit and Loss prepared from 
 the three accounts and the inventories at the beginning and close of the period, 
 would appear as follows: 
 
 CANDY KITCHEN 
 Statement of Profit and Loss, December 31, 1923. 
 
 Manufacturing Section 
 
 Inventory of Materials, Dec. 31, 1922 
 
 Add Materials purchased during period 
 
 Total Materials Cost 
 
 Deduct Inventory of Materials, Dec. 31, 1923. 
 
 Materials Placed in Process during period 
 
 Labor Placed in Process during period 
 
 Mfg. Expense Placed in Process during period. 
 
 Total Materials, Labor, and Mfg. Expense Placed in Process. 
 
 Add: 
 
 Inventory of Goods in Process, December 31, 1922 
 
 Deduct: 
 
 Inventory of Goods in Process, December 31, 1923 
 
 Cost of Goods Manufactured 
 
 3.560.42 
 11,642.87 
 
 15,203.29 
 4.859-77 
 
 10,343.52 
 5,261.40 
 4,137.18 
 
 19,742.10 
 1,637-52 
 
 21,379.62 
 1,542-91 
 
 19,836.71 
 
 The trading section of the same Statement of Profit and Loss would appear as 
 follows : 
 
 Trading Section 
 
 Sales 
 
 Cost of Goods Sold : 
 
 1922 Inventory of Finished Goods 1,645 .87 
 
 Cost of Goods Manufactured (per Mfg. Section) 19,836.71 
 
 Less 1923 Inventory of Finished Goods. 
 
 Net Cost of Goods Sold 
 
 Gross Profit on Sales 
 
 21,482.58 
 3,009.50 
 
 21,000.00 
 
 18,473.08 
 
 2,526.92
 
 324 
 
 MANUFACTURING PROCESS 
 
 The entry to dose the 1922 inventory accounts with materials and materials 
 in process and the balances of the Materials, Labor and Manufacturing Expense 
 accounts into the Manufacturing account will appear in journal form as follows: 
 
 Manufacturing 
 
 1922 Inventory of Materials 
 
 Materials 
 
 Labor 
 
 Manufacturing Expense 
 
 1922 Inventory of Materials in Process. 
 
 26,239 
 
 39 
 
 3,560 
 11,642 
 5,261 
 4.137 
 1.637 
 
 The entry to place the 1923 inventories of materials and materials in process 
 of manufacture in the ledger would appear in journal form as follows: 
 
 1923 Inventory of Materials 
 
 1923 Inventory of Materials in Process. 
 Manufacturing 
 
 4.859 
 1,542 
 
 6,402 
 
 68 
 
 The balance of the Manufacturing account, which shows the cost of the goods 
 manufactured during the year, may be closed directly into the Profit and Loss ac- 
 count or closed through the Trading account. The following entry applies to the 
 latter method: 
 
 Trading 
 
 Manufacturing. 
 
 19.836 
 
 71 
 
 19,836 
 
 71 
 
 The entry to close the 1922 Inventory of Finished Goods account into the 
 Trading account will be as follows: 
 
 Trading 
 
 1922 Inventory of Finished Goods. 
 
 1.645 
 
 87 
 
 1,645 
 
 87 
 
 The entries to close the Sales account into the Trading account and to place 
 the 1923 Inventory of Finished Goods in the ledger may be combined as follows: 
 
 Sales 
 
 1923 Inventory of Finished Goods. 
 Trading 
 
 2 1, 000 j 00 
 3,00950 
 
 24,009 
 
 50 
 
 The balance of the Trading account, which shows the gross profit on sales, 
 is closed into the Profit and Loss account by the following entry: 
 
 Trading 
 
 Profit and Loss. 
 
 2,52692 
 
 2,526 
 
 92 
 
 The operating and non-operating incomes and expenses would be closed into 
 Profit and Loss as explained and illustrated in previous chapters. The balance 
 of the Profit and Loss account, which shows the net income, is then closed into 
 the Surplus account, and any appropriation for dividends or for any other special 
 purpose is taken out of Surplus by an entry debiting Surplus and crediting the 
 account which is to show the amount of the appropriation.
 
 EXERCISES 
 
 325 
 
 Exercise No. 104, Purchase of the Stock of One Corporation by Another. 
 
 The Johnson Candy Co. is incorporated with a capital stock of $250,000.00 
 (2,500 shares), all common, $200,000.00 of which is subscribed and paid for. October 
 5 the stockholders of the Day Candy Company agree to sell their stock (par value, 
 $100.00) to the Johnson Candy Company at $90.00 per share, and to accept in 
 payment an equal number of shares in the Johnson Candy Company, paying the 
 Johnson Candy Company cash for the difference. A Balance Sheet prepared from 
 the books of the Day Candy Company is as follows: 
 
 DAY CANDY COMPANY 
 Balance Sheet, October 10, 192.. 
 
 Assets 
 Current Assets: 
 
 Cash 
 
 Notes Receivable 
 
 Accounts Receivable 15375 oo 
 
 Less Reserve for Bad Debts i68 . lo 
 
 Inventories, October lo, 192. . : 
 
 Boxed Candy in Stock 
 
 Bulk Candy in Stock 
 
 Raw Material in Stock 
 
 Boxes in Stock 
 
 Barrels, etc., in Stock 
 
 Fixed Assets: 
 
 Land 
 
 Plant and Equipment 24600 .00 
 
 Less Reserve for Depreciation 6150.00 
 
 Delivery Equipment 2650 .00 
 
 Less Reserve for Depreciatioh 530 .00 
 
 Office Equipment 500 . 00 
 
 Less Reserve for Depreciation 50 .00 
 
 Deferred Charges to Operation: 
 
 Factory Supplies on Hand 
 
 Office Supplies on Hand 
 
 Prepaid Insurance 
 
 Total Assets and Deferred Charges 
 
 Liabilities and Proprietorship 
 Current Liabilities: 
 
 Notes Payable 
 
 Accounts Payable 
 
 Fixed Liabilities: 
 
 Mortgage Payable, 5% 
 
 Proprietorship: 
 
 Capital Stock Issued and Outstanding 
 
 Surplus 
 
 Total Liabilities and Proprietorship 
 
 6000 
 2450 
 
 15206 
 
 4752 
 
 3041 
 
 10933 
 
 349 
 
 237 
 
 15000 
 
 18450 
 
 2120 
 
 450 
 
 345 
 10^ 
 396 
 
 12000 
 6144 
 
 5000c 
 1692 
 
 90 
 
 42971 
 
 36020 
 
 845 
 
 79837 
 
 18144 
 
 51692 
 
 7983: 
 
 65 
 
 59 
 
 The stockholders of the Day Candy Company and the number of shares held 
 by each are as follows: 
 
 Kenton Grocery Co., 250 shares; Benjamin A. Dawson, 30 shares; M. F. Carr, 10 shares; 
 S. G. Boone, 35 shares; Judson Gilbert, 20 shares; D. X. Bloom, 15 shares; E. H. Baldridge, 50 
 shares; H. T. Asbury, 25 shares; Robert Janson, 15 shares; H. A. DeCamp, 50 shares. 
 
 October 10, the Johnson Candy Company issues a certificate of stock to each 
 stockholder of the Day Candy Company for the number of shares of -the Day 
 Candy Company stock which he holds; cash is received from each for the difference
 
 326 EXERCISES 
 
 between $90.00 per share and $100.00 per share. Judson Gilbert, who holds twenty 
 shares of the Day Candy Company stock, was not present at the meeting when 
 the consolidation was effected and refused to exchange his stock. A compromise 
 was effected by the Johnson Candy Company's paying him $1,850.00 on his sur- 
 render of the certificate calling for twenty shares of the Day Candy Company 
 stock. 
 
 1, Make the entries to close the books of the Day Candy Company. 
 
 2. Make the entries on the books of the Johnson Candy Company to record 
 (a) the purchase of the stock of the Day Candy Company, and (b) the assets re- 
 ceived from the Day Candy Company and the liabilities assumed. 
 
 Exercise No. 104, Manufacturing. 
 
 The following transactions were completed by the Roberts Clothing Company, 
 manufacturers of men's clothing, during the month of July, 192- • : 
 I. Purchased from the Globe Clothing Co., Chicago, cloth per invoice of May 28, 
 $1,652.75. 
 
 5. Paid for required machinery, $18.75. 
 
 6. Payroll for the week, $1,627.75, $500.00 for superintendent and foremen, and 
 
 the balance for employees. 
 
 10. Purchased from the Maryland Manufacturing Company, City, cloth, buttons 
 and thread per invoice of this date, $1,252.50. 
 
 13. Payroll for the week, $1,765.30, $500.00 for superintendent and foremen, and 
 the balance for employees. 
 
 15. Paid freight on the clothing purchased from the Globe Clothing Co., $96.50. 
 
 18. Paid for repairs on machinery, $36.75. 
 
 20. Payroll for the week, $1,639.27, $500.00 for superintendent and foremen, and 
 the balance for employees. 
 
 24. Purchased from the Seaman Manufacturing Company, City, cloth and buttons 
 per invoice of this date, $1,448.57. 
 
 27. Payroll for the week, $1,601.07, $500.00 for superintendent and foremen, and 
 the balance for employees. 
 
 30. Sales to customers on account during the month, $8,562.50. Prepare a manu- 
 facturing statement showing the cost of merchandise manufactured and 
 sold. All goods manufactured have been sold to customers. The value 
 of goods in process at the beginning of the month was $2,742.65, and at the 
 close of the month, $3,117.65. 
 Record these transactions in journal form, post to the accounts, make the 
 
 adjusting entries for the goods in process, post, and prepare a manufacturing 
 
 statement. 
 
 QUESTIONS 
 
 1. Distinguish between a merchant and a manufacturer. 
 
 2. What information in connection with purchases does a manufacturer need 
 
 that the merchant does not need? 
 
 3. Name some of the materials which a manufacturer of automobiles would 
 
 need to buy. 
 
 4. Name some of the finished products in connection with the manufacturing 
 
 of automobiles which the manufacturer might buy. 
 
 5. What is manufacturing expense? 
 
 6. How does manufacturing expense differ from selling expense? 
 
 7. What are the three principal costs which enter into the manufacture of 
 
 merchandise? 
 
 8. Would the manufacturer have a Sales account in his ledger? a Purchases 
 
 account? 
 
 9. Wh^t facts does the Manufacturing account show? the Trading account? 
 10. When are the Manufacturing and Trading accounts opened? closed? How?
 
 Chapter XXXIV 
 
 COMPARATIVE REPORTS 
 
 The Purpose of this Chapter is to explain and illustrate the Comparative 
 Balance Sheet and the Comparative Statement of Profit and Loss. When properly- 
 analyzed, much valuable information can be obtained from reports which show 
 the condition of the business at the conclusion of two or more consecutive fiscal 
 periods. These reports will be of assistance to the management in planning future 
 operations of the business. 
 
 § 341. A Comparative Balance Sheet shows the assets, liabilities, and 
 proprietorship for two or more consecutive fiscal periods. The information on the 
 report is arranged in the same manner as the Balance Sheet prepared at the con- 
 clusion of a fiscal period, except that two or more columns are provided for showing 
 the amounts involved. Illustration No. 138 shows a Comparative Balance Sheet 
 prepared from the asset, liability, and proprietorship accounts of the American 
 Mercantile Co., a corporation, at the conclusion of the fiscal periods ending Decem- 
 ber 31, 1921, and December 31, 1922. 
 
 § 342. Analysis of a Comparative Balance Sheet. An analysis of 
 Illustration No. 138 shows the following facts: The cash balance has decreased, 
 and the notes receivable and accounts receivable have increased. While the total 
 current assets have increased, yet the decrease in the cash balance and increase in 
 accounts receivable indicate that collections for 1922 have not been so good as for 1921. 
 The fixed assets show an increase because of the additional investment in land. 
 The total current liabilities have increased $5,000.00 due to an increase in the 
 accounts payable and notes payable to creditors. The increase in proprietorship 
 is shown by the increase in the Surplus account. Much valuable information 
 can be gained from a Comparative Balance Sheet both by the owner of the busi- 
 ness and those outside of the business who are interested in it. 
 
 § 343. A Comparative Statement of Profit and Loss shows the income 
 and cost resulting from the operations of a business for two or more consecutive 
 periods. The information is arranged in the same manner as on the Statement 
 of Profit and Loss at the conclusion of a fiscal period except two or more columns 
 are provided for the amounts involved. Illustration No. 139 shows a Comparative 
 Statement of Profit and Loss prepared from the cost and income accounts on the 
 ledger of the American Mercantile Co. for the fiscal periods ending December 31, 
 1921, and December 31, 1922. 
 
 § 344. Analysis of a Comparative Statement of Profit and Loss. 
 
 An analysis of Illustration No. 139 shows the following: The sales in 1922 show 
 an increase of more than $34,000.00, the cost of merchandise an increase of more 
 than $20,000.00, and the cost of operating the business an increase of more than 
 $10,000.00. This indicates that a greater profit has been made on the volume of 
 
 {Concluded on page 32Q) 
 327
 
 328 
 
 COMPARATIVE REPORTS 
 
 THE AMERICAN MERCANTILE COMPANY 
 Comparative Balance Sheet for Two Years Ending December 31, 1922 
 
 Assets 
 
 Dec. 3 
 
 I, 1921 
 
 Dec. 31 
 
 . 1922 
 
 Increase 
 
 or 
 Decrease 
 
 Current Assets: 
 Cash 
 
 Notes Receivable 
 Accounts Receivable 
 
 Less Reserve for D'btful Accts 
 
 4000^ 00 
 40.00 
 
 44573-20 
 1650.00 
 
 3960.00 
 
 14079.60 
 19.40 
 
 7000 . 00 
 110.00 
 
 38706.10 
 4300 . 00 
 
 6890.00 
 
 18990.40 
 85.00 
 
 5867 .10 
 2650.00 
 
 2930.00 
 
 Merchandise Inventory 
 Accrued Interest Earned 
 
 1250.00 
 62.50 
 
 1250.00 
 125.00 
 
 4910.80 
 65.60 
 
 Total Current Assets 
 
 64282.20 
 
 68971.50 
 
 4689.30 
 
 Fixed Assets: 
 
 Office Equipment 
 
 Less Reserve for Depreciation 
 
 1187.50 
 
 1850.00 
 
 4050 . 00 
 
 9750.00 
 5000 . 00 
 
 1125.00 
 
 1 700 . 00 
 
 3600.00 
 
 9500.00 
 15000.00 
 
 62 .50 
 
 Store Fixtures 
 
 Less Reserve for Depreciation 
 
 2000.00 
 150.00 
 
 2000 . 00 
 300 . 00 
 
 150 . 00 
 
 Delivery Equipment 
 
 Less Reserve for Depreciation 
 
 4500.00 
 450.00 
 
 4500.00 
 900 . 00 
 
 450 .00 
 
 Building 
 
 Less Reserve for Depreciation 
 
 10000.00 
 250.00 
 
 10000.00 
 500.00 
 
 250 .00 
 
 Land 
 
 
 
 10000.00 
 
 Total Fixed Assets 
 Goodwill 
 
 21837.50 
 15000.00 
 
 30925.00 
 
 1 5000 . 00 
 
 9087.50 
 
 Total Assets 
 Deferred Charges per Schedule 
 
 101119.70 
 
 454 -30 
 
 114896.50 
 
 1314-50 
 
 13776.80 
 860.20 
 
 Total Assets and Deferred Charges 
 
 101574.OC 
 
 116211 .00 
 
 14637.00 
 
 Liabilities and Proprietorship 
 
 Current Liabilities: 
 Notes Payable — Bank 
 Notes Payable — Creditors 
 Accounts Payable 
 Accrued Wages 
 Accrued Interest Cost 
 
 5000 . 00 
 
 2000.00 
 
 38000.00 
 
 495.00 
 
 155-00 
 
 45650.00 
 55924 -oc 
 
 2500.0c 
 
 47600.00 
 
 568 . oc 
 
 54.00 
 
 50722.00 
 
 65489.00 
 
 5000 .00 
 500 . 00 
 
 9600 . 00 
 
 73.00 
 
 loi .00 
 
 Total Current Liabilities 
 Proprietorship: 
 Capital Stock 
 Surplus 
 
 50000.00 
 5924.00 
 
 50000 . oc 
 
 15489.00 
 
 5072.00 
 9565.00 
 
 Total Proprietorship 
 
 
 
 9565.00 
 
 Total Liabilities and Proprietorship 
 
 101.S740C 
 
 1162TI .oc 
 
 14637.00 
 
 Illustration No. 138, Comparative Balance Sheet. 
 
 EXPLANATION. The names of the accounts and the figures in the first two amount columns 
 are applicable to the Balance Sheet for 1921, and the names of the accounts and the figures in the 
 second two amount columns, to the Balance Sheet for 1922. The increase or decrease is shown in 
 the last column at the right, decreases being printed in italic. If desired, an additional column 
 may be provided at the right in which to record the percentage of increase or decrease as explained 
 in § 349 and Illustration No. 145.
 
 COMPARATIVE REPORTS 
 
 329 
 
 THE AMERICAN MERCANTILE COMPANY 
 Comparative Statement of Profit and Loss for Two Years Ending December 31, 1922 
 
 
 Dec. 31 
 
 . 1921 
 
 Dec. 3 
 
 [, 1922 
 
 Increase 
 
 or 
 Decrease 
 
 Returns from Sales: 
 Gross Sales 
 Less Sales Returns and Allowances 
 
 16910.80 
 63981 .30 
 10663.50 
 
 110000.00 
 3600.00 
 
 14079.60 
 89246.40 
 14874.40 
 
 145000.00 
 4000 . 00 
 
 35000.00 
 400 . 00 
 
 Net Returns from Sales 
 Cost of Goods Sold: 
 
 Inventory at beginning of year 
 
 Purchases 
 
 Freight and Drayage In 
 
 106400.00 
 77476. 00 
 
 1 4 1 000 . 00 
 99210.00 
 
 34600 . 00 
 
 2831 .20 
 
 25265.10 
 
 4210.90 
 
 Total Purchases Cost 
 
 Less Inventory at end of year 
 
 91555-60 
 14079.60 
 
 118200.40 
 18990.40 
 
 26644 • 80 
 4910.80 
 
 Net Cost of Goods Sold 
 
 3850.00 
 7700.00 
 4400 . 00 
 6600 . 00 
 
 6525.00 
 
 13050.00 
 
 8700.00 
 
 4350.00 
 
 21734.00 
 
 Gross Profit on Sales 
 Operating Expenses: 
 Buying Expense 
 Selling Expense 
 Delivery Expense 
 Administrative Expense 
 
 28924.00 
 22550.00 
 
 41790.00 
 32625.00 
 
 12866.00 
 
 2675.00 
 5350.00 
 4300 . 00 
 
 22 jo . 00 
 
 Total Operating Expenses 
 
 250.00 
 500 . 00 
 
 650.00 
 850.00 
 
 10075.00 
 
 Net Profit from Operation 
 Other Income: 
 Interest Earned 
 Purchases Discount 
 
 6374.00 
 750.00 
 
 9165.00 
 1500.00 
 
 2791 .00 
 
 400.00 
 350.00 
 
 Total Other Income 
 
 500.00 
 700 . 00 
 
 100.00 
 1000.00 
 
 750.00 
 
 Gross Income 
 Deductions from Income: 
 Interest Cost 
 Sales Discount 
 
 7124. oc 
 I 200.0c 
 
 10665.00 
 1100.00 
 
 3541-00 
 
 400.00 
 300 . 00 
 
 Total Deductions from Income 
 
 
 
 100 .00 
 
 Net Income Carried to Surplus 
 
 5924 . 00 
 
 9565 . 00 
 
 3641 .00 
 
 Illustration No. 139, Comparative Statement of Profit and Loss 
 
 EXPLANATION. The names of the accounts and the figures in the first two amount columns 
 are applicable to the Statement of Profit and Loss for'1921, andthe names of the accounts and the 
 figures in the second two amount columns, to the Statement of Profit and Loss for 1922. The in- 
 crease or decrease is shown in the last column at the right, decreases being printed in italic. If 
 desired, an additional column may be provided at the right in which to record the percentage of 
 increase or decrease as explained in §349 and Illustration No. 145. 
 
 (Continued from page 32/) 
 sales because the increase in the costs is not so great as the increase in the income. 
 The purchases during 1922 show an increase of more than $25,000.00, but this is 
 to be expected on account of the increase in sales. The inventory at the close of 
 1922 shows an increase over that at the close of 192 1, but this is to be expected 
 because of the increase in purchases. The net profit on sales shows an increase 
 of more than $12,000.00. The operating income for 1922 shows an increase of 
 almost $3,000.00 and the non-operating income an increase of $750.00. The
 
 330 
 
 GRAPHS 
 
 operating expense for 1922 shows an increase of more than $10,000.00, but the 
 non-operating expense shows a decrease of $100.00. The net profit for 1922 shows 
 an increase of more than $3,500.00, but this is not in proportion to the increase 
 in sales, hence indicates that the operating cost has increased out of proportion 
 to the increase in sales. 
 
 § 345. A Graph or graphical chart is a pictorial presentation of comparative 
 facts. There are three forms of graphs in general use, (a) the bar graph, (b) the 
 curved graph, and (c) the circular graph. Each of these forms may be used in 
 presenting facts shown on the reports prepared from bookkeeping records. The 
 facts usually set forth in graphic form are (a) comparison of sales for two or more 
 periods, (b) comparison of selling expense for two or more periods, (c) comparison 
 
 {Concluded on page 331) 
 
 10 20 30 40 50 60 70 80 90 100 110 I20 130 140 150 160 170 180 190 
 
 T TTTTl 1 1 1 1 M M 1 1 1 1 1 1 1 1 1 1 1 1 M 1 M 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 m " i 
 
 
 
 
 
 
 
 
 
 ■■■■■■ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Illustration No. 140, Horizontal Bar Graph. 
 
 EXPLANATION. This shows a comparison of the sales for the two years in Illustration 
 No. 139. The unit in each bar is based on $10,000.00. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ^^^ ,. . . ^^^ B^^V 
 
 ^^H ^^^m ^^H' 
 
 
 
 
 ugm ^^^. ^^^ ^^^ ^^B — 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ^^H ^^^ ^^^ ^^^m -^^^ ^^H 
 
 
 
 
 
 ^^M ^^™ ^^^ ^^^ ^^■- ■ ^^B 
 
 
 
 
 
 ^^H ^^^ ^^^ ^^^ ^^^ ^^H 
 
 
 
 
 
 Illustration No. 141, Vertical Bar Graph. 
 
 EXPLANATION. The figures used in this graph are given in the second paragraph of 
 §346. The unit in each bar is based on $10,000.00.
 
 BAR GRAPH 
 
 331 
 
 of sales and selling expense for one or more periods, (d) comparison of purchases 
 with purchases expense for one or more periods, (e) comparison of purchases with 
 sales for one or more periods, (f) comparison of current assets for two or more 
 periods, (g) comparison of fixed assets for two or more periods, and (h) comparison 
 of current liabilities for two or more periods; any other facts shown on the reports 
 submitted by the bookkeeper to the manager of a business can be presented in 
 pictorial form. 
 
 § 346. A Bar Graph is used to compare totals for two or more periods. 
 Thus, if it is desired to show in pictorial form by a bar graph the sales for the two 
 years in the comparative Statement of Profit and Loss in Illustration No. 139, 
 the bars would be arranged as in Illustration No. 140. 
 
 If the comparison of sales is for six periods, the sales for the first year being 
 $50,000.00, for the second, $60,000.00, for the third, $80,000.00, for the fourth, 
 $65,000.00, for the fifth, $75,000.00, and for the sixth, $85,000.00, the facts pre- 
 sented in bar graph form would appear as in Illustration No. 141. 
 
 If desired, the bars in the bar graph may be made to show a comparison of 
 more than one group of figures. Thus, if it is desired to show net sales, cost of sales, 
 selling expense and administrative expense on the same bar graph for the two 
 periods in Illustration No. 139, the graph would appear as in Illustration No. 142. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ^^H 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ^^B 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ^^^^H ^^^^H 
 
 ^^^^H ^^^^H 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ^^^ ^^^ 
 
 -^^H ^^^U ^^^ 
 
 
 ^^^ ^^H 
 
 ^^H -^^^ ^^^ 
 
 
 ^^^ ^^H i. ' 
 
 pW-v-ta L ^^^ ^^^ ^^^ 
 
 
 ^^^m ^^^m 
 
 
 l-_ - -. 
 
 ^^m ^^m 
 
 ■I:.- , i^^Ki i^^Hi-.-^^K-- - 
 
 
 ^■..^H^ 1 
 
 ^H '^^^H - -^^^m ~^^^^-- 
 
 
 ^^ M-y^jyi ^^m ^^h ^^h -t'Vfl^'rf'f 
 
 
 — !■— "-■— H 
 
 
 
 
 t 
 
 1 ^^ ^Hl 
 
 
 Illustration No. 142, Vertical Bar Graph. 
 
 EXPLANATION. The first four bars show the sales, cost of sales, selling expense (including 
 delivery expense), and administrative expense for 1921, and the second four bars the same facts 
 for 1922 (Illustration No. 139). Each bar is divided into ten units of $10,000.00 each, and each 
 unit is subdivided into $2,000.00 units. For convenience, it is customary to base the comparison 
 on even hundreds or thousands of dollars.
 
 332 
 
 CURVED GRAPH 
 
 § 347. A Curved Graph is used to present a comparison of figures over a 
 number of periods. Assuming that the monthly sales and selling expense for 
 the years 192 1 and 1922 are as shown at the top of page 333, a curved graph setting 
 forth the facts would appear as in Illustration No. 143. 
 
 JAN. FED MAR. APR. MAY JUNE JULY AUG SEP OCT. NOV DEC. 
 
 
 
 
 
 
 
 
 
 
 
 
 1\ 
 
 ■ 
 
 -P ' ^^ 
 
 
 7 S 
 
 
 ^^ \ 
 
 
 _ _ __ 7 N :+!, 
 
 
 t % ^' 
 
 IS 
 
 7 \ ^^ 
 
 J ^^ 
 
 t \^^ 
 
 L S^ 
 
 7 IT 
 
 lonnn J. S_ 
 
 41 t ^ 
 
 
 \ Zrjl 
 
 7 V -,^ 
 
 ^.^ -.2 
 
 ' \ J 
 
 S^ -Z 
 
 7 zr \ ^ 
 
 ^^^z 
 
 
 __ _sz 
 
 lipoo ~ 7 i^ \ _r 
 
 
 Z '\- % t 
 
 
 ^z 14^ 5 ^^ 
 
 
 Z ^ ^1 
 
 
 \rtnnn —i. '^\-2. -i ^ _ 13 _ 
 
 
 
 
 ' » ' J 
 
 
 
 , \ 
 
 ~L * ' ' 
 
 
 
 , 
 
 
 -^ ^- ^7r 
 
 "* "i > 
 
 ' 1 <•' \ 
 
 !^ ' :: 
 
 -y \ f ^ 
 
 V ' » 
 
 ' '1 ' '^J 
 
 flonn - ^. * . - ... 
 
 ('. .. \' . > .. . .n.> 
 
 
 
 k_ ' 
 
 
 \ 
 
 
 /r^' J.~ 3" 
 
 C' j\ i '■■ c* 
 
 7nnn J^t. CZ f 
 
 az^*^ u2I3I_s- 
 
 
 
 
 
 
 
 
 
 f^nnn 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Aonn 
 
 
 X; C- L L^'^VL 
 
 /" C~ V j'"^ ^'A/ I"' j'"' 
 
 t^AlAllZltv 
 
 ^^ i-^^^^-j-^ '^i.rz; 
 
 
 
 ^ ^ ^ 
 
 
 
 __ __ _ --,ZS^_ _ _ 
 
 
 zr ^. 
 
 5 
 
 -^ - ^Z ^s ^^ 
 
 5. y'\ 
 
 ^ \ 7 ^N> ^^"^ 7 
 
 "■- y'' \ -.' 
 
 ^ ^ ^ 
 
 
 ^^ *^ 
 
 
 ,^^ ^" it 
 
 " ""^ ^\ 
 
 ,<= ^ ± ^^-^ 
 
 / ». 7 ^ 
 
 ^'' V _^.^ 
 
 "^1.^ r \ 
 
 -s"^ "l. ^^ 
 
 1000 -*CAW - - --,' -- -- ^' 
 
 ^, ,' 
 
 
 ^ -T 
 
 
 
 
 
 
 
 
 
 Illustration No. 143, Curved Graph. 
 
 EXPLANATION. The curves at the top show a comparison of sales for the two years, 
 and the curves at the bottom show a comparison of the selling expense for the two years. The 
 figures used are given at the top of page 333. The graph is divided into fifteen units, of $1,000.00 
 each, each unit being subdivided into five units of $200.00 each.
 
 CIRCULAR GRAPH 
 
 333 
 
 January. . . 
 February. , 
 
 March 
 
 April 
 
 May 
 
 June 
 
 July 
 
 August . . . , 
 September 
 October. . . 
 November 
 December. 
 
 Sales 
 
 1921 
 
 $ 9,000.00 
 7,400.00 
 
 11,000.00 
 9,000.00 
 
 10,000.00 
 8,000.00 
 9,000.00 
 
 10,000.00 
 8,000.00 
 9,000.00 
 8,000.00 
 8,000.00 
 
 1922 
 
 510,000.00 
 11,000.00 
 13,000.00 
 12,000.00 
 10,000.00 
 12,000.00 
 11,000.00 
 12,000.00 
 12,000.00 
 14,000.00 
 12,400.00 
 13,000.00 
 
 Selling Expense 
 
 1921 
 
 1922 
 
 $ 1,000.00 
 
 
 $3,000.00 
 
 500.00 
 
 
 3,500.00 
 
 2,000.00 
 
 
 2,400.00 
 
 1,500.00 
 
 
 2,000.00 
 
 1,000.00 
 
 
 2,600.00 
 
 2,500.00 
 
 
 1,200.00 
 
 3,000.00 
 
 
 1,700.00 
 
 1,400.00 
 
 
 2,200.00 
 
 900.00 
 
 
 3,200.00 
 
 1,400.00 
 
 
 2,400.00 
 
 1,700.00 
 
 
 2,400.00 
 
 2,600.00 
 
 
 2,800.00 
 
 § 348. A Circular Graph is used to present figures where a comparison is 
 based on $1.00 or 100%. Thus, when a merchant receives $1.00 for merchandise 
 sold, he knows that this dollar must cover the cost of the merchandise, the selling 
 cost, the administrative cost, and his profit, and that each cost and return is a certain 
 per cent of the total sales. The facts relative to sales, cost of sales, cost of buying, 
 cost of selling, cost of delivering, cost of administration, and profit for the two 
 fiscal periods in Illustration No. 139, when presented in circular graph form, will 
 appear as in the illustration below. 
 
 1921 
 
 1922 
 
 Costs and Profit in Eack One? Dollar Salo 
 
 Illustration No. 144, Circular Graph. 
 
 EXPLANATION. Each of the above circles represents a sale of $1.00. That part of the dol- 
 lar which was spent to purchase the merchandise sold is shown by the shaded area, and the oper- 
 ating expenses paid to effect this sale and the profit remaining after all costs applicable to this sale 
 have been paid are indicated by the unshaded portion. This information will be valuable to the 
 management in fixing the selling price of merchandise for the year 1923. The figures were obtained 
 from the comparative Statement of Profit and Loss, Illustration No. 139; the same facts for 1922 
 expressed as percentages are shown in the Statement of Profit and Loss, Illustration No. 145.
 
 334 
 
 PERCENTAGES 
 
 § 349. Percentages are used to present a comparison of figures and are 
 sometimes even more comprehensive than the graphs or the figures themselves. 
 All bookkeeping facts presented in percentage form should be based on net sales. 
 One reason for this is that each dollar received represents certain costs and 
 profit, hence the same base should be used for calculating the percentage of each. 
 There are many other reasons, but since these are given in connection with the 
 study of percentage, it is not deemed necessary to repeat them here. 
 
 When percentages are used to emphasize facts on a Balance Sheet or State- 
 ment of Profit and Loss, they are usually shown in a separate column on the re- 
 ports. Illustration No. 145 shows the 1922 Statement of Profit and Loss in the 
 Comparative Statement, Illustration No. 139, with the percentages based on net 
 sales entered in the column provided for them. 
 
 THE AMERICAN MERCANTILE COMPANY 
 Statement of Profit and Loss for Year Ending December 31, 1922 
 
 Returns from Sales: 
 
 Gross Sales 
 
 Less Sales Returns and Allowances 
 
 Net Returns from Sales . 
 Cost of Goods Sold: 
 
 Inventory, January I, 1922 
 
 Purchases 
 
 Freight and Drayage In. . . 
 
 Total Purchases Cost 
 
 Less Inventory, December 31, 1922 
 
 Net Cost of Goods Sold 
 
 Gross Profit on Sales 
 OPER.A.TING Expenses: 
 
 Buying Expense 
 
 Selling Expense 
 
 Delivery Expense 
 
 Administrative Expense . . 
 
 Total Operating Expenses 
 
 Net Profit from Operations. 
 Other Income: 
 
 Interest Earned 
 
 Purchases Discount 
 
 Total Other Income 
 
 Gross Income 
 
 Deductions from Income: 
 
 Interest Cost 
 
 Sales Discount 
 
 Total Deductions from Income . . 
 Net Income Carried to Surplus 
 
 
 
 % of 
 Net Sales 
 
 
 145000.00 
 4000 . 00 
 
 103 
 3 
 
 141000.00 
 
 100 
 
 14079.60 
 89246 . 40 
 
 14874.40 
 
 
 10 
 
 63 
 10 
 
 118200.40 
 18990.40 
 
 
 83 
 13 
 
 
 99210.00 
 
 70 
 
 41790.00 
 
 30 
 
 6525.00 
 
 13050.00 
 
 8700.00 
 
 4350.00 
 
 32625.00 
 
 5 
 9 
 6 
 
 3 
 
 
 * 
 23 
 
 
 9165. 00 
 
 7 
 
 650 . 00 
 850.00 
 
 1500.00 
 
 0.4 
 0.6 
 
 
 I 
 
 10665.00 
 
 8 
 
 100.00 
 
 
 0.1 
 
 1000.00 
 
 1100.00 
 
 0.7 
 
 
 0.8 
 
 9565.00 
 
 7 
 
 Illustration No, 145, Statement of Profit and Loss with Percentages. 
 
 EXPLANATION. Net sales are taken as a base and $100.00 units used in the calculations. 
 A comparison of these percentages with the circular graph in Illustration No. 144 will help the 
 student to understand the percentages better. It will be observed that each $1.00 sale consists 
 of 100 units, a certain number of these units being applicable to the various costs and the profit.
 
 EXERCISE 335 
 
 Exercise No. 105, Comparative Reports, Graphs and Percentages. 
 
 The Trial Balance of the American Mercantile Company, taken at the close 
 of the fiscal period, December 31, 1923, shows the following account balances: 
 Cash, Dr., $29,819.10; Notes Receivable, Dr., $3,800.00; Accounts Receivable, 
 Dr., $36,800.00; Reserve for Doubtful Accounts Receivable, Cr., $110.00; Office 
 Equipment, Dr., $1,750.00; Reserve for Depreciation of Office Equipment, Cr., 
 $125.00; Store Fixtures, Dr., $4,000.00; Reserve for Depreciation of Store Fixtures, 
 Cr., $300.00; Delivery Equipment, Dr., $4,500.00; Reserve for Depreciation of 
 Delivery Equipment, Cr., $900.00; Buildings, Dr., $25,000.00; Reserve for De- 
 preciation of Buildings, Cr., $500.00; Land, Dr., $15,000.00; Goodwill, Dr., 
 $15,000.00; Notes Payable — Bank, Cr., $5,000.00; Notes Payable — Creditors, 
 Cr., $1,500.00; Accounts Payable, Cr., $54,650.00; Mortgage Payable, Cr., 
 $10,000.00; Capital Stock, Cr., $50,000.00; Surplus, Cr., $15,489.00; Sales, Cr., 
 "$207,000.00; Sales Returns and Allowances, Dr., $3,500.00; 1922 Inventory, Dr., 
 $18,990.40; Purchases, Dr., $140,000.00; Freight and Drayage In, Dr., $13,000.00; 
 Buying Expense, Dr., $5,000.00; Selling Expense, Dr., $15,864.50; Delivery Ex- 
 pense, Dr., $9,100.00; Administrative Expense, Dr., $4,350.00; Interest Earned, 
 Cr., $750.00; Purchases Discount, Cr., $1,000.00; Interest Cost, Dr., $600.00; 
 Sales Discount, Dr., $1,150.00; Donations, Dr., $100.00. 
 
 The following adjustments are to be made: 
 
 (a) Merchandise Inventory, December 31, 1923, $15,754.90. 
 
 (b) Interest accrued on notes receivable, $70.00. 
 
 (c) Interest accrued on notes payable, $60.00. Unpaid wages: Buying Ex- 
 
 pense, $125.00; Selling Expense, $375.00; Delivery Expense, $75.00; 
 Administrative Expense, $200.00. 
 
 (d) Office supplies on hand, $125.00; advertising supplies on hand, $300.00. 
 
 (Debit one account with Deferred Charges to Operation, and credit the 
 expense accounts for these inventories.) 
 
 (e) Reserves: Office Equipment, 5%; Store Fixtures, 7K%; Delivery 
 
 Equipment, 10%; Buildings, 2^%; Doubtful Accounts Receivable, 
 one half of 1% of Accounts Receivable. 
 The student is required to prepare the following: 
 
 1. Adjusting entries for the inventories, accruals, and reserves. 
 
 2. A Working Sheet under date of December 31, 1923. 
 
 3. A comparative Balance Sheet and a comparative Statement of Profit and 
 Loss for 1922 and 1923. The necessary facts are shown on the Working Sheet and 
 the 1922 reports in Illustrations Nos. 138 and 139. 
 
 4. Journal entries to close the ledger, December 31, 1923. 
 
 5. Post-closing entries under date of January i, 1924. 
 
 6. A bar graph, similar in form to Illustration No. 142, showing a com- 
 parison of net sales and selling expense for the years 1922 and 1923. 
 
 7. A Statement of Profit and Loss showing the percentages based on net 
 sales as 100%; drop fractional parts of $100.00, using even hundreds of dollars, 
 in calculating the percentages. 
 
 8. A circular graph, similar in form to Illustration No. 144, showing the 
 proportionate part of a dollar applicable to the cost of the merchandise sold and 
 the various operating expenses; the Statement of Profit and Loss required in 
 No. 7 may be used as a basis in preparing this graph. 
 
 QUESTIONS ON ILLUSTRATIONS NOS. 138 AND 139- 
 
 1. What is the increase in sales for 1922? 
 
 2. What is the increase in the selling expense for 1922? 
 
 3. Is the increase in sales in proportion to the increase in the selling expense? 
 
 4. What is the increase in cost of sales for 1922?
 
 336 QUESTIONS 
 
 5. (a) Can you assign a reason for the decrease in administrative expense? (b) 
 
 For the increase in deHvery expense? 
 
 6. Is the increase in current assets in proportion to the increase in sales? 
 
 7. Is the increase in current HabiHties in proportion to the increase in purchases? 
 
 8. Is the increase in proprietorship the same as the increase in net income? 
 
 9. If a part of the income had been withdrawn in cash, what effect would this 
 
 have on the current liabilities and proprietorship? 
 10. If you owned ten shares of stock in the American Mercantile Co., for which 
 you had paid par, would you regard this as a good investment based on 
 the facts shown by the two reports? 
 
 QUESTIONS ON GRAPHS 
 
 1. Which form of graph would be more satisfactory for setting forth in pictorial 
 
 form a comparison of sales for three consecutive years? 
 
 2. Explain the connection between the circular graph and the percentages. 
 
 3. Why are net sales used as a base for ascertaining the percentage of the costs 
 
 to the sales? 
 
 4. Would the percentage of buying expense be based on total purchases or the 
 
 net purchases or net sales? Give reason for answer. 
 
 5. Why is buying expense not included with the purchase cost of merchandise? 
 
 6. What effect would it have on the percentage if the cost of merchandise sold 
 
 is used as a basis? 
 
 7. Could a comparison of sales, cost of sales, cost of selling, and administrative 
 
 cost be shown on one bar graph? Explain. 
 
 8. When comparing percentages for two or more periods, would all the per- 
 
 centages be based on the sales for one period, or the sales for each period? 
 Explain, 
 
 9. Of what advantage to the owner of the business is a circular graph showing 
 
 the various costs which enter into each dollar of sales he receives? 
 10. Of what advantage to the owner of a business is a curved graph setting forth 
 a comparison of the sales by months during two or more years?
 
 Chapter XXXV 
 
 CORPORATION PROBLEMS 
 
 The Purpose of this Chapter is to give the student an opportunity to apply 
 the principles discussed in the preceding chapters through the recording of trans- 
 actions affecting the organization, operations, and dissolution of corporations. 
 If the student understands the principles governing corporation accounting, he 
 will have no trouble in making the required entries to open the corporation books, 
 to close a set of corporation books, or to record those transactions affecting the 
 proprietorship of the corporation. 
 
 Exercise No. 106, Opening Entries. 
 
 May I, 1923, a charter was granted to C. W. Addison, J. B. Chaney, E. O. 
 Dana, L. B. Simrall, and E. D. Townsend for the purpose of operating a canning 
 factory. C. W. Addison and J. B. Chaney own land, buildings, and machinery 
 which have been used for this purpose in the past, but the operations have been 
 discontinued. The charter granted provides for a capital stock of $100,000.00, 
 half of which is common and half preferred, par value $100.00 per share. 
 
 C. W. Addison and J. B. Chaney each subscribe for one hundred shares of 
 common and one hundred shares of preferred stock with the understanding that 
 one half of the subscription of each is to be paid by the corporation's accepting the 
 land, buildings, and machinery owned by them; each is to pay cash for the other 
 half of his subscription. E. O. Dana, L. B. Simrall, and E. D. Townsend each 
 subscribe for fifty shares of common stock, one half of which is to be paid for in 
 cash and the balance in two equal installments payable in 90 and 120 days. 
 
 J. W. Wolfe subscribes for one hundred shares of preferred stock with the 
 privilege of deducting a discount of three per cent for cash. D. V. Beatty sub- 
 scribes for twenty-five shares of common and seventy-five shares of preferred 
 stock; he is to pay cash for the common and the corporation is to accept machinery 
 valued at $3,500.00 and his note for $4,000.00 in payment for the preferred. E. 
 Mannix and J. R. Armleder each subscribe for twenty-five shares of preferred 
 stock to be paid for in cash. H. Pearson, W. L. Garber, and K. Ferger each sub- 
 scribe for ten shares of preferred and fifteen shares of common stock, agreeing to 
 pay cash for the preferred and cash for one third of the common, balance of the 
 common to be paid for in two equal installments payable in sixty and ninety days. 
 
 1. Prepare in journal form the entries required to record the authorized 
 capital stock and the subscriptions. 
 
 2. Make in journal form the entries necessary to record the cash and other 
 property received in payment for stock as per agreement at the time the corpora- 
 tion was organized, assuming that stock was issued when fully paid. 
 
 3. Prepare in journal form the entries when the deferred payments are made, 
 it being assumed that D. V. Beatty pays one-half of his note and interest at ma- 
 turity and renews the other half with an interest-bearing note due in ninety days. 
 
 Exercise No. 107, Entry for Stock Sold. 
 
 W. G. Darling subscribed for ten shares of the capital stock of the Boyd Manu- 
 facturing Co. at $100.00 per share. He paid cash $250.00 and gave his sixty-day 
 note for the balance, attaching the certificate of stock as collateral security. He 
 died before paying the note. His estate was insolvent and the corporation settled 
 with the administrator by refunding one-half the amount Mr. Darling had paid. 
 
 Prepare in journal form (a) the entry when the stock was sold to Mr. Darling, 
 and (b) the entry when settlement was made with the administrator. 
 
 * 337
 
 338 
 
 EXERCISES 
 
 Exercise No. 108, Opening Entries. 
 
 F. L. Burke, R. S. Cooke, and C. B. Summers, partners in a mercantile busi- 
 ness, wish to incorporate at the close of business June 30, 192.. The Balance 
 Sheet prepared from their books at that time shows the following facts: 
 
 BURKE, COOKE & SUMMERS 
 Balance Sheet, June 30, 192.. 
 
 A ssets 
 Current Assets: 
 
 Cash 
 
 Notes Receivable 
 
 Accounts Receivable 12,014.00 
 
 Less Reserve for Bad Debts 248 .60 
 
 Accrued Interest Earned 
 
 Merchandise Inventory, June 30 
 
 Fixed Assets: 
 
 Office Equipment 350 . 00 
 
 Less Reserve for Depreciation 52 • 50 
 
 Store Fixtures 400 .00 
 
 Less Reserve for Depreciation 16 .00 
 
 Delivery Equipment 4,100.00 
 
 Less Reserve for Depreciation 480 .00 
 
 Deferred Charges to Operation: 
 
 Office Supplies on hand 
 
 Prepaid Insurance 
 
 Total Assets and Deferred Charges 
 
 Liabilities and Proprietorship 
 Current Liabilities: 
 
 Notes Payable 
 
 Accounts Payable 
 
 Accrued Interest Cost 
 
 Proprietorship: 
 
 F. L. Burke, Capital 
 
 R. S. Cooke, Capital 
 
 C. B. Summers, Capital 
 
 Total Liabilities and Proprietorship 
 
 6,011 
 1,000 
 
 11,765 
 
 9 
 
 2,500 
 
 297 
 
 384 
 3,620 
 
 500 
 
 1.327 
 
 15 
 
 8,037 
 7,956 
 7,860 
 
 21,286 
 
 4,301 
 
 108 
 
 25,697 
 
 1,842 
 
 23,854 
 
 25,697 
 
 60 
 
 50 
 
 90 
 
 60 
 
 40 
 
 The three partners sign application for a charter of incorporation with a 
 capital stock of $50,000.00, consisting of one thousand shares at $50.00 a share. 
 F. L. Burke subscribes for 250 shares; R. S. Cooke, 200 shares; C. B. Summers, 
 200 shares; R. H. Porter, 100 shares; J. G. Winkler, 50 shares; W. G. Brownfield, 
 50 shares; J. C. Walters, 50 shares; the remaining 100 shares will be sold later. 
 
 Each partner is to receive 180 shares for his interest in the business and pays 
 cash for the balance of his subscription. The corporation accepts from R. H. 
 Porter two trucks which he has been using in a similar business operated by him- 
 self, valued at $4,000.00; he pays cash for the balance of his subscription. All 
 other subscribers pay cash for their subscriptions. 
 
 The difference between the par value of the stock accepted by the partners 
 in payment for their interest in the business and the proprietorship of the three 
 partners, is to be regarded as goodwill. 
 
 Prepare in journal form the entries (a) to close the partnership books, and 
 (b) to open the corporation books.
 
 CORPORATION PROBLEMS 339 
 
 Exercise No. 109, Transactions witli a Delinquent Subscriber. 
 
 Record the following transactions in journal form: 
 May 5. C. W. Green subscribed for fifteen shares of Peoples Telephone Co. 
 stock at $50.00 per share, payable within ten days. 
 9. Received from C. W. Green $100.00 on account of stock subscription. 
 25. Brought suit against C. W. Green for $650.00, balance due on stock 
 subscription. 
 June 5. Court rendered a judgment against C. W. Green for $687.96, covering 
 the amount of his indebtedness, $650.00, court costs, $26.40, and 
 interest on his account, $11.56.' Gave the court a check for $26.40 
 in payment for costs. 
 
 20. Received from the court a chetk for $687.96, amount of the judgment 
 
 rendered against C. W. Green. 
 Issued fifteen shares of stock to C. W. Green. 
 
 21. Gave A. Y. Burris, attorney, a check for $33.08, five per cent collection 
 
 fee for collecting the account against C. W. Green. 
 
 Exercise No. 110, Donated Stock. 
 
 January i, 1923, the Mercantile Trading Company, a corporation with a 
 capital stock of $500,000.00, of which $250,000.00 is common and $250,000.00 
 preferred, finds that it can not pay maturing obligations and that it will be necessary 
 to make an assignment unless cash can be secured. All the common and preferred 
 stock has been sold, hence additional capital can not be secured through the sale 
 of stock without the legal formalities of having the capital stock increased, which 
 would require more time than is available. A meeting of the stockholders is called 
 to decide the future policy of the corporation. At this meeting it is agreed that 
 each stockholder will donate to the corporation approximately one fifth of the 
 common stock which he owns; this stock is to be sold for cash. It is decided that 
 it will be better for the stockholders to sacrifice a part of their holdings in order 
 to tide the business over its present financial embarrassment than to take the 
 chance of losing more heavily through the creditors asking for a receiver to take 
 charge of the affairs of the business. 
 
 Jan. 5. $50,000.00 of the common stock was received from the stockholders as 
 per agreement of the ist; this stock was donated to the corporation. 
 
 6. Transferred $10,000.00 of this common stock to the First National Bank 
 
 to apply as part payment on a note for $10,000.00 due today; the 
 bank accepts the stock at .90. 
 
 7. Received $26,500.00 cash in payment for 300 shares (par value, $100.00) 
 
 of the donated common stock. 
 
 8. Paid Anderson Bros. $4,250.75, balance due them, with 30 shares of 
 
 donated common stock at .85 and check for the balance. 
 
 1. Record in journal form the foregoing transactions and post to ledger 
 accounts, allowing five lines for each account. 
 
 2. Assuming that the net proprietorship of the corporation at the close of 
 the next business year is $605,000.75, indicate the form in which this would be 
 shown on the Balance Sheet. 
 
 Exercise No. Ill, Organization of and Opening Entries for a Corporation. 
 
 The Roberts Printing Co. is incorporated in the state of New York. The 
 incorporators are A. L. Roberts, H. B. Boyles, V. W. Boyles, T. E. Robbins, and 
 A. J. Smith. The corporation has an authorized capital stock of $250,000.00, 
 par value $100.00 per share. Subscriptions for this stock are as follows: A. L. 
 Roberts, $75,000.00; H. B. Boyles, $35,000.00; V. W. Boyles, $35,000.00; T. E. 
 Robbins, $10,000.00; A. J. Smith, $12,500.00; S. P. Benham, $5,000.00; L. M.
 
 340 
 
 CORPORATION PROBLEMS 
 
 Wiley, $2,500.00; and M. J. Coleman, $25,000.00. It is decided to hold $50,000.00 
 of the capital stock for future use. All subscriptions are paid in cash. 
 
 A. L. Roberts, the promoter of the corporation, obtained the subscriptions 
 and attended to the details of the incorporation. The corporation is to engage 
 in the printing and publishing business in the city of Albany, New York. 
 
 1. Show in outline form each step involved, from the time Mr. Roberts 
 conceived the organization of this business until the corporation is ready to begin 
 business operations. 
 
 2. Prepare the charter, taking into consideration the conditions required in 
 the New York law and the form of charter in Chapter XXV, 
 
 3. Show in journal form the opening entries. 
 
 Exercise No. 112, Changing a Partnership to a Corporation. ' . 
 
 Smiley, Winters & French, partners, agree to incorporate at the close of the 
 business year, June 30, 1922. A Balance Sheet prepared at this time is as follows: 
 
 SMILEY, WINTERS & FRENCH 
 Balance Sheet, June 30, 192. . 
 
 Assets 
 Current Assets: 
 
 Cash 
 
 Accounts Receivable 236 .52 
 
 Less Reserve for Bad Debts 50.85 
 
 Inventory — Drugs 
 
 Inventory — Merchandise 
 
 Inventory — Soda Fountain SuppHes •. . . . 
 
 Fixed Assets: 
 
 Office Equipment 300 . 00 
 
 Less Reserve for Depreciation 42 ■ 50 
 
 Store Fixtures I119 .50 
 
 Less Reserve for Depreciation 167 .93 
 
 Soda Fountain Equipment 650 .00 
 
 Less Reserve for Depreciation 48 .75 
 
 Building 9000 .00 
 
 Less Reserve for Depreciation 300 ,00 
 
 Land 
 
 Deferred Charges to Operation: 
 
 Office Supplies 
 
 Advertising Material 
 
 Insurance Unexpired 
 
 Total Assets and Deferred Charges 
 
 Liabilities and Proprietorship 
 Current Liabilities: 
 
 Notes Payable 
 
 Accounts Payable 
 
 Accrued Interest Cost 
 
 Accrued Wages 
 
 Fixed Liability: 
 
 Five- Year Mortgage 
 
 Proprietorship: 
 
 S. M. Smiley, Capital 
 
 D. P. Winters, Capital 
 
 L. S. French, Capital 
 
 Total Liabilities and Proprietorship 
 
 12412 
 
 185 
 
 255^ 
 
 1008 
 
 182 
 
 257 
 
 951 
 
 601 
 
 870c 
 5000 
 
 II 
 
 5^ 
 237 
 
 250C 
 
 4186 
 
 144 
 
 56 
 
 9479 
 2946 
 2946 
 
 16343 
 
 24 
 
 15510 
 
 405 
 
 322"^? 
 
 1 537 1 
 
 322 ,s8 
 
 32 
 
 26 
 
 52 
 
 78
 
 CORPORATION PROBLEMS 341 
 
 The capital stock of the corporation is to be $25,000.00, consisting of five 
 hundred shares at $50.00 per share. The subscriptions at the time the charter is 
 granted July i are as follows: D. P. Winters, 100 shares; L. S. French, 100 shares; 
 S. M. Smiley, 100 shares; A. L. Frost, 50 shares; E. D. Carpenter, 50 shares; 
 and C. C. Lowrey, 50 shares. The corporation agrees to pay the partners $15,000.00 
 for their interest in the partnership, taking over all the assets and assuming all the 
 liabilities. Each partner is to pay cash for the stock subscribed for by him and to 
 receive cash for 95 per cent of his proprietary interest in the business as shown by 
 the Balance Sheet; the remaining five per cent is to constitute a surplus to take 
 care of possible loss resulting from taking over the assets of the partnership. The 
 other subscribers pay cash for their subscriptions. 
 
 1. Prepare in journal form the entries necessary to close the books of the 
 partnership. 
 
 2. Make in journal form the entries necessary to open the books of the cor- 
 poration, taking into consideration the conditions mentioned. 
 
 If desired, the student may show the cash paid to the partners for their interest in the business 
 and the cash received from them by the corporation for the stock subscribed, though in practice 
 only the difference would be paid to or received by the corporation, as it does not buy the cash be- 
 longing to the partnership. 
 
 Exercise No. 113, Distribution of Profit. 
 
 The Union Grocery Company is incorporated with a capital stock of $200,000.00 
 — $100,000.00 preferred, and $100,000.00 common; $90,000.00 of the preferred 
 and $85,000.00 of the common has been issued. The preferred stock pays a dividend 
 of eight per cent. The Surplus account at the close of the fiscal period, December 
 31, 1922, shows a balance of $22,500.00. It is decided to declare a dividend of 
 eight per cent on the outstanding preferred stock and ten per cent on the out- 
 standing common stock, and to transfer to a Sinking Fund Reserve account $5,000.00 
 to provide for bonds which will mature in the future. 
 
 Make in journal form the entries necessary to record the dividends and the 
 sinking fund reserve. 
 
 Exercise No. 114, Stock Dividend. 
 
 At the close of business December 31, 192. . , the Capital Stock account of the 
 Consolidated Manufacturing Co. shows a credit balance of $300,000.00, and the 
 Unissued Capital Stock account, a debit balance of $100,000.00; the Surplus 
 account shows a credit balance of $162,500.00. The board of directors decides to 
 declare a cash dividend of ten per cent and a stock dividend of fifty per cent of the 
 outstanding stock. 
 
 Make in journal form the entries necessary to record these dividends. 
 
 Stock dividend refers to capital stock issued to the stockholders for a part of their interest in 
 the surplus. The value of this stock is debited to the Surplus account. 
 
 Exercise No. 115, Changing from a Corporation to a Sole Proprietorship. 
 
 The Peoples Trading Co. is incorporated with a capital stock of $25,000.00, 
 consisting of 5,000 shares, par value $5.00 each. Four thousand shares are owned 
 by C. H. Love, the other one thousand being owned by various stockholders. 
 Mr. Love decides to change the business from a corporation to a sole proprietor- 
 ship and calls a meeting of the stockholders for this purpose. Holding more than 
 fifty per cent of the stock, he votes a majority for cancellation of the charter and 
 his attorney complies with the necessary legal requirements. December 10, when 
 notice is received that the charter has been canceled, the Balance Sheet of the 
 corporation is as shown at the top of page 342.
 
 342 
 
 CORPORATION PROBLEMS 
 
 THE PEOPLES TRADING COMPANY 
 Balance Sheet, December 10, 192.. 
 
 A ssets 
 Current Assets: 
 
 Cash in Bank 
 
 Office Cash Fund 
 
 Notes Receivable 1 1 lO .oo 
 
 Less Notes Receivable Discounted 55 .00 
 
 Accounts Receivable ., 9845 .20 
 
 Less Reserve for Doubtful Accounts 104.16 
 
 Mdse. Inventory, December 10, 192 
 
 Accrued Interest on Notes Receivable 
 
 Fixed Assets: 
 
 Office Equipment 450 . 00 
 
 Less Reserve for Depreciation 45-00 
 
 Store Fixtures 1 539 . 60 
 
 Less Reserve for Depreciation 307 .92 
 
 Delivery Equipment 2400 .00 
 
 Less Reserve for Depreciation 720 .00 
 
 Buildings 8000.00 
 
 Less Reserve for Depreciation 640 .00 
 
 Land 
 
 Goodwill 
 
 Deferred Charges to Operation: 
 
 Office Supplies 
 
 Advertising Material 
 
 Warehouse Supplies. 
 
 Prepaid Insurance 
 
 Total Assets and Deferred Charges 
 
 Liabilities and Proprietorship 
 Current Liabilities: 
 
 Notes Payable — Bank 
 
 Notes Payable — Trade Creditors 
 
 Accounts Payable 
 
 Accrued Interest on Notes Payable 
 
 Accrued Wages 
 
 Proprietorship: 
 
 Capital Stock Issued and Outstanding 
 
 Surplus 
 
 Total Liabilities and Proprietorship 
 
 19430 
 
 15 
 
 
 
 100 
 
 00 
 
 
 
 1055 
 
 00 
 
 
 
 9741 
 
 04 
 
 
 
 3236.96 
 
 
 
 10 
 
 00 
 
 33573 
 
 15 
 
 405 
 
 00 
 
 
 
 I23I 
 
 68 
 
 
 
 1680 
 
 00 
 
 
 
 7360 
 
 00 
 
 
 
 4500 
 
 00 
 
 15176 
 6049 
 
 68 
 
 
 
 18 
 
 125 
 
 00 
 
 
 
 344 
 
 50 
 
 
 
 218 
 
 94 
 
 
 
 114 
 
 12 
 
 802 
 
 56 
 
 
 55601 
 
 _57 
 
 6000 
 
 00 
 
 
 
 1637 
 
 42 
 
 
 
 4691 
 
 17 
 
 
 
 90 
 
 00 
 
 
 
 392 
 
 50 
 
 12811 
 
 09 
 
 25000 
 
 00 
 
 
 17790.48 
 
 42790.48 
 
 
 55601 
 
 _57 
 
 A. L. Peters, one of the incorporators, who holds twenty shares of stock, owes 
 the corporation an account of $110.00; Mr. Love cancels this account upon sur- 
 render of the certificate of stock. J. L. Browning, another stockholder, who holds 
 forty shares of stock, owes the corporation a note for $200.00 on which $10.00 
 interest has accrued; Mr. Love accepts his stock at $5.50 per share and his check 
 for the balance in settlement of the note and interest. The other stockholders 
 accept cash at $5.50 per share for their stock. 
 
 1. Make the journal entries necessary to record the change from a corporation 
 to an individual proprietorship, 
 
 2. Make in journal form the entries necessary to record the cancellation of 
 stock owned by outside stockholders.
 
 CORPORATION PROBLEMS 
 
 343 
 
 Exercise No. 116, Reduction of Capital Stock. 
 
 The Davis Printing Co. is incorporated with a capital stock of $50,000.00, 
 consisting of five hundred shares, par value $100.00 each. At the close of the fiscal 
 period December 31, 192.., C. U. Davis, who holds $10,000.00 worth of stock, 
 wishes to retire from the business and agrees to accept $8,000.00 for his stock. 
 The remaining stockholders accepted his proposition and the corporation's check 
 was issued for $8,000.00 in payment for this stock. It is decided at the annual 
 meeting of the stockholders held January 2, to reduce the capital stock from 
 $50,000.00 to $40,000.00 and the corporation's attorney is instructed to prepare 
 the necessary legal papers. January 10 the attorney advises that an amended 
 charter has been granted, reducing the capital from $50,000.00 to $40,000.00. 
 
 Record in journal form the purchase of stock from C. U. Davis, and the re- 
 duction of capital stock on January 10. 
 
 Exercise No. 117, Changing from a Corporation to a Partnership. 
 
 THE H. R. JUDSON CORPORATION 
 Balance Sheet, October 31, 192.. 
 
 A ssets 
 Current Assets: 
 
 Cash 
 
 Notes Receivable 
 
 Accounts Receivable 29709 .42 
 
 Less Reserve for Doubtful Accounts 298 .10 
 
 Mdse. Inventory, October 31, 192 
 
 Branch Store Inventory, October 31, 192 
 Accrued Interest Earned 
 
 Total Current Assets. 
 
 Fixed Assets: 
 
 Office Equipment 600 . 00 
 
 Less Reserve for Depreciation 50.00 
 
 Store Fixtures 1450.00 
 
 Less Reserve for Depreciation 185 .00 
 
 Total Fixed Assets . 
 
 Deferred Charges to Operation: 
 
 Office Supplies 
 
 Unexpired Insurance 
 
 Total Deferred Charges to Operation . 
 Total Assets and Deferred Charges 
 
 Liabilities and Proprietorship 
 Current Liabilities: 
 
 Notes Payable 
 
 Accounts Payable ...:.... 
 
 Accrued Rent 
 
 Accrued Wages 
 
 Total Current Liabilities. 
 
 Proprietorship: 
 
 Capital Stock Issued and Outstanding. 
 Surplus 
 
 Total Proprietorship 
 
 Total Liabilities and Proprietorship. 
 
 19580.71 
 
 2725 -45 
 
 29411 .32 
 
 15273.90 
 
 4692 . 86 
 
 24 65 
 
 550.00 
 1265 .00 
 
 253.60 
 85.00 
 
 7000.00 
 
 9186.42 
 
 300.00 
 
 649.60 
 
 50000 . 00 
 6726.47 
 
 71708.89 
 
 1815 .00 
 
 338.60 
 
 73862.49 
 
 17136.02 
 
 56726.47 
 
 73862.49
 
 344 CORPORATION PROBLEMS 
 
 The capital stock of the H. R. Judson Corporation consists of 500 shares of 
 stock, par value $100.00, owned by the following: F. A. McArthur, 100 shares; 
 D. W. Stokes, 50 shares; J. K. Kincaid, 75 shares; E. P. Ramey, 25 shares; C. M. 
 Derrick, 50 shares; C. Vance, 40 shares; J. J. Nolan, 50 shares; H. S. Gordon, 
 35 shares; Roy Sheldon, 15 shares; E. Westover, 60 shares. At the annual meeting 
 of the stockholders October 31, it is agreed to dissolve the corporation; the proper 
 legal steps are taken and the charter is canceled. The first four stockholders decide 
 to continue the operation of the business as a partnership. All of the stockholders 
 are to accept $125.00 per share in settlement for their stock, the retiring stock- 
 holders to be paid in cash. The diiTerence between the purchase price of the stock 
 and the capital and surplus is to be treated as goodwill. Each of the four partners 
 invests $7,500.00 in cash in addition to 'his interest in the assets as shown by the 
 number of shares he owns in the corporation. 
 
 Make in journal form the entries for (a) the transfer of the assets and lia- 
 bilities of the corporation to the partnership; (b) the additional investment of 
 the four partners; and (c) the transactions with the retiring stockholders. 
 Exercise No. 118, Entries for Donated Stock. 
 May 10 the stockholders of the Adams Manufacturing Co. donated $20,000.00 
 (200 shares) of common stock and $10,000.00 (100 shares) of preferred stock to 
 the corporation to be sold by it to meet maturing obligations. 
 May 15. Gave the A. L. Crim Company a check for $2,500.00, 25 shares of 
 donated preferred stock, and 50 shares of donated common stock, 
 in settlement for a past-due account amounting to $8,750.00. Pre- 
 ferred stock is accepted by him at $90.00 and common stock at $80.00. 
 16. Received cash for a sale of 50 shares of donated common stock at $77.50. 
 20. Received cash for a sale of 40 shares of donated preferred stock at 
 
 $86.25. 
 30. Received cash for a sale of 50 shares of donated common stock at $77.25 
 and 30 shares of donated preferred at $86.20. 
 June 25. Sold 40 shares of donated common stock at $91.40. 
 
 1. Record these transactions in journal form. 
 
 2. Post to ledger accounts. 
 
 3. Indicate on journal paper the method of showing the proprietorship on the 
 Balance Sheet prepared under date of December 31, assuming that the authorized 
 common stock is $250,000.00 and the authorized preferred stock, $250,000.00, 
 with $200,000.00 of each subscribed and paid for, and that the Surplus account 
 shows a credit balance of $16,408.50. 
 
 Exercise No. 119, Treasury Stock. 
 
 January 7 the Arnold Shoe Company sold for cash to H. F. Ritter, one of its 
 traveling salesmen, ten shares (par value, $100.00) of capital stock at $113.00, 
 with the understanding that the corporation would buy the stock back at any 
 time he wished to discontinue his connection with the corporation. He paid 
 $500.00 cash, the balance to be deducted from his commission at the end of the 
 year. With this agreement, the stock was issued. 
 
 October 5 H. F. Ritter surrendered half of his stock at $iii.00 and received 
 credit on his account for this amount, less six per cent interest on the amount of 
 his indebtedness from the date he purchased the stock. 
 
 December 31 H. F. Ritter was credited with $216.50, commission on sales. 
 
 January 5 the company paid H. F. Ritter $200.00 cash on account of com- 
 mission. 
 
 March i the company gave H. F. Ritter a check for balance due him on ac- 
 count and for his five shares of stock at $110.00. 
 
 Record these transactions in journal form. An account with Premium on 
 Capital Stock will show a record of the amounts received and paid in excess of the 
 par value.
 
 Chapter XXXVI 
 
 VOUCHER ACCOUNTING AND CASH JOURNAL 
 
 The Purpose of this Chapter is to explain (a) the voucher system of ac- 
 counting and (b) the cash journal. Many business concerns require a voucher 
 for each cash payment; hence, the student of bookkeeping should be familiar with 
 the method of- issuing the vouchers and the checks given in payment of them. 
 The cash journal is very popular with practicing bookkeepers, because of the time 
 saved in proving cash and posting. 
 
 § 350. The Voucher is a written statement, usually prepared on a printed 
 form, containing detailed information regarding a purchase of merchandise, material 
 or service; receipts and canceled checks are sometimes referred to as vouchers. 
 A voucher is prepared for each purchase of merchandise or material at the time 
 the purchase is made, and for labor or other service at the time payment is made. 
 The blank forms prepared for vouchers are usually printed on both sides; full 
 information in regard to the obligation is given on one side, and the accounts 
 affected are indicated on the other side. The voucher may be sent with the check 
 for receipt or it may be folded and the canceled check filed with it. Since it is 
 not always possible to secure return of the voucher sent with the check, even 
 when it is accompanied by a stamped return envelope, it is customary to retain 
 the voucher in the office and file the canceled check with it; this form of voucher 
 
 VOUCHER JACKET 
 
 COWDEN BUICK COMPANY 
 
 No. 
 
 22 
 
 Date of Issue- 
 
 May 13. 
 
 -19- 
 
 Date Due- 
 
 Jvjie 1. 
 
 In Account with- 
 Address 
 
 Fl3k Tire Company. 
 
 816 Main Street. City. 
 
 -for the following: 
 
 Invoice Date 
 
 DESCRIPTION 
 
 Amount 
 
 Kay 
 
 12 
 
 4 
 
 31 X 4 Cord Tires. Type S. S. 
 
 16.45 
 
 75 
 
 80 
 
 
 
 2 
 
 31 X 4 Fabric " " 01. 
 
 12.90 
 
 25 
 
 80 
 
 
 
 1 
 
 33 X 4 Cord " " -S. S. 
 
 
 21 
 
 25 
 
 
 
 IE 
 
 31 X 4 Cord Tubes 
 
 2.15 
 
 25 
 
 80 
 
 
 
 18 
 
 31 X 4 Fabric " 
 
 1.95 
 
 23 
 
 40 
 
 
 
 5 
 
 32 X 4 Cord 
 
 2.85 
 
 6 
 
 75 
 
 
 
 8 
 
 35 X 4 
 
 2.35 
 
 18 
 
 80 
 
 
 
 6 
 
 34 X 4 " " 
 
 2.50 
 
 15 00 
 
 
 
 
 210 60 
 
 ^/r.c/? (Z,.,..^, 
 
 ^M 
 
 jy,^. Ga^-cu^^^^jl^ 
 
 Illustration No. 146, Inside of Voucher or V^oucher Jacket. 
 
 EXPLANATION. This voucher jacket was prepared for an invoice of tires and tubes 
 for which payment is to be made according to the terms of the invoice as shown on the voucher. 
 
 345
 
 346 
 
 VOUCHER SYSTEM 
 
 is sometimes referred to as a "voucher jacket" because the voucher is folded and 
 the check placed inside. The number of the voucher is indicated on the check 
 so that the auditor may know the voucher to which it is applicable. Illustrations 
 Nos. 146 and 147 show one of the vouchers required in the garage business illus- 
 trated in the practice set separate from the text. 
 
 Formerly it was the custom to print the check and voucher on the same form so that the one 
 who received it would be sure to return the voucher with his receipt. This practice is not followed 
 so extensively at present because of the confidential information usually contained in the voucher 
 and the inconvenience to the bank clerks in handling large voucher checks. 
 
 § 351. The Voucher System of Recording Purchases. It is necessary 
 for every business to make purchases of merchandise, material and s.ervice. Where 
 the operations of the business are limited' to a few transactions of this nature, the 
 management can personally supervise the expenditures; but, where the trans- 
 actions are numerous and performed by subordinates, it is necessary to provide a 
 control over the expenditures. One of the best methods devised is to require a 
 voucher for each purchase. 
 
 The voucher prepared for each purchase is usually signed by at least two 
 individuals, (a) the one authorized to make the purchase and (b) the one who 
 verifies the merchandise, material or service purchased, described in the voucher. 
 Each voucher is numbered consecutively and, after it has been paid, is filed in 
 the order of the number; vouchers issued for future payments should be filed 
 under the due date to insure payment when due. Each voucher is recorded in 
 the voucher payable register at the time it is issued. 
 
 There is in reality no voucher method of keeping books, but the use of vouchers in connection 
 with purchases is sometimes referred to as the "voucher method" or "voucher system." When the 
 so-called "voucher system" is used, all purchases, either for cash or on account, are recorded in the 
 voucher payable register from the information given on the voucher; this permits the proper dis- 
 tribution in one book of original entry and thus avoids duplication of special columns where pur- 
 chases on account are recorded in one book and cash purchases in another. 
 
 
 
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 Illustration No. 147, Outside of Voucher or Voucher Jacket. 
 
 EXPLANATION. The accounts affected by the purchase described on the inside of the 
 voucher are indicated by entering the amounts on the line with the name of the account.
 
 VOUCHER PAYABLE REGISTER 347 
 
 § 352. The Voucher Payable Register is a book of original entry ruled 
 to contain a record of each voucher issued. The ruling provides columns for all 
 the information written on the voucher so that the record of each voucher may 
 be made on one horizontal line. When the voucher method of bookkeeping is 
 used, it is not customary to open accounts with those from whom merchandise, 
 material, or service is purchased, but to record all obligations for purchases in 
 the Vouchers Payable account. The method of making the record is further ex- 
 plained in connection with Illustration No. 148. 
 
 § 353. The Cash Journal is a combination of the cash book and the general 
 journal; if desired, the purchases journal, sales journal, notes receivable journal, 
 and notes payable journal may also be combined in the cash journal. The purpose 
 of the cash journal is to save time in proving cash and posting, and to avoid a 
 repetition of special columns in the books of original entry. When transactions 
 of similar nature occur frequently, it is better to record them in a special journal 
 and transfer the totals only to the cash journal, daily, weekly, or monthly. Il- 
 lustration No. 149 shows a cash journal with fifteen amount columns, containing a 
 record of part of the transactions in the practice set (garage business) which is sepa- 
 rate from the text. The following discussion explains the various columns. 
 
 1. Merchants National Bank. The title of these two columns indicates that 
 all cash received is deposited in the bank and all cash payments made by check. 
 If a part of the currency received is used for cash payments, additional columns 
 for "Cash, Dr." and "Cash, Cr." would be necessary. The balance at the begin- 
 ning of the month is entered in the "Name of Account" column because the total 
 of the "Bank, Dr." column is posted to the account with the bank in the general 
 ledger and this account already shows the cash balance. 
 
 The cash received in each transaction is entered in the Bank Dr. column 
 and the credit indicated by the entry in the column or columns at the right. The 
 amount of each check issued is entered in the Bank Cr. column and the debit 
 indicated by the entry in the Vouchers Payable column at the right. The differ- 
 ence between the total of the Bank Dr. column plus the balance on hand at the 
 beginning of the month, and the total of the Bank Cr. column should be the 
 balance of the cash in the bank as shown by the check stub, or in the bank and 
 on hand. To prove cash it is not necessary to add all the columns of the cash 
 journal but it is customary to do so because the credits and debits for the cash 
 received and paid are entered in these columns and the proving of cash also proves 
 their correctness. The method of proving is illustrated by the small figures in 
 Illustration No. 149. 
 
 2. General Ledger. Two columns are provided, one for debits and the other 
 for credits. Only those amounts affecting accounts for which special columns 
 are not provided are entered in these columns; where transactions affecting one 
 account are of sufficient frequency, a special column is provided. 
 
 3. Accounts Receivable Ledger. Two columns are provided for the Accounts 
 Receivable account in the general ledger because the transactions with customers 
 are of sufficient frequency to require the use of these columns. When a trans- 
 action affects the debit of an account with a customer, the amount is recorded in 
 the "Accounts Receivable, Dr." column, and when a transaction affects the credit 
 of an account with a customer, the amount is recorded in the "Accounts Receiv- 
 able, Cr." column; the name of the customer is written in the "Name of Account" 
 column. When transactions affecting the accounts with customers are of frequent 
 occurrence, it is advisable to record the debits and credits each in a special jour- 
 nal and transfer the total to the cash journal for posting. 
 
 The cash journal is popular with bookkeepers because of the time saved in recording transac- 
 tions, but it is not so popular with auditors because of the difficulty of auditing the transactions 
 recorded in it. Perhaps one reason for this difficulty in auditing is the recording of more than one 
 transaction on one horizontal line. If the bookkeeper will record each transaction on a separate 
 line and explain it, the difficulty of auditing the cash journal will be eliminated.
 
 348 
 
 CASH JOURNAL 
 
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 Illustration No. 148, Left Page of Voucher Payable Register. 
 
 EXPLANATION. The ruling provides columns for all the information written on each 
 voucher, thus permitting the record to be made on one horizontal line. The amount of each 
 voucher is entered in the "Vouchers Payable, Cr." column and in the column or columns which 
 show the account or accounts debited. At the end of the month the Vouchers Payable account in 
 the general ledger is credited with the total vouchers issued during the month. 
 
 4. Votichers Payable. A debit column only is provided for Vouchers Payable 
 because the credits to this account in the general ledger are posted from the voucher 
 payable register. If it is desired to post all transactions from the cash journal, 
 transferring the totals from the voucher payable register either daily or weekly, it 
 will be necessary to provide a credit column for Vouchers Payable and debit col- 
 umns for the expenses as in the voucher payable register. The better practice is 
 to post from both the voucher payable register and the cash journal. 
 
 5. Used Cars. This column is applicable to the use of a garage which acts 
 as sales agent for automobiles and accepts used cars as part payment for new cars. 
 The exchange value of each used car is entered in the debit column, the credit for 
 this being included in the entry in the "New Cars Sales, Cr." column. The debits 
 for purchases are recorded in the entries in the voucher payable register, but since 
 it is not customary to pay cash for used cars, the debit to this account will not be 
 supported by a voucher unless it be a journal voucher issued by the management, 
 and this is not entered in the voucher payable register. 
 
 6. Sales Columns. Seven columns are provided for sales; the use of each is 
 indicated by the name of the account written at the top. The cost of the material 
 sold is recorded in the voucher payable register. The debit for each sale is recorded 
 in one of the columns at the left. Thus, if cash is received for a tire, the amount 
 is entered in the "Bank, Dr." column and in the "Tires and Tubes Sales, Cr." 
 column; if a tire is sold to a customer on account, the amount is entered in the 
 "Accounts Receivable, Dr." column and in the "Tires and Tubes Sales, Cr." column. 
 
 7. Repair Order Number. Each repair order is given a number, and, when 
 completed, the Repairs account is credited for the amount of the labor. The num- 
 ber of the repair order is entered in the "Remarks" column to facilitate auditing. 
 
 8. Remarks. This is for any special explanation of the transactions which 
 will be of assistance in interpreting the record, either by the management or by
 
 CASH JOURNAL 
 
 349 
 
 J^ew Cars 
 
 Acf^Parls 
 
 Ti'rej^Tubci 
 
 Gas, Greasp 
 eoiX Pup . 
 
 Labor. 
 
 ?hopI 
 
 ^ 
 
 SpllExp. 
 
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 ffuadry Accoaats, Dr. 
 
 Dr. 
 
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 Dn 
 
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 Dr. 
 
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 Illustration No. 148, Right Page of Voucher Payable Register. 
 
 EXPLANATION. Each account affected by the vouchers issued is debited with the total 
 of the amounts entered in the column provided for the account. No accounts are opened with the 
 individuals or business concerns to whom vouchers are issued. When a check is issued in payment 
 of a voucher, the Vouchers Payable account is debited by entering the amount in a column pro- 
 vided for "Vouchers Payable, Dr." in the cash book or cash journal. 
 
 the auditor. Care should be used by the bookkeeper in explaining the transac- 
 tions so as to avoid confusion. Where the entry is supported by a journal voucher, 
 the number of this voucher should be indicated in the "Remarks" column and 
 the journal voucher filed for reference. Accountants sometimes refer to the 
 cash journal as the "hash" journal because of confusion in recording the transac- 
 tions; much of this confusion could be avoided by a careful explanation in the 
 "Remarks" column. 
 
 9. Method of Recording Transactions. The equality of debits and credits 
 is maintained in the recording of transactions in the cash journal the same as 
 in the elementary journal used at the beginning of the course. To insure the 
 equality of debits and credits, transactions which affect more than two accounts 
 should be recorded in journal form on scratch paper before the entry is made 
 in the cash journal. 
 
 When cash is received through the performance of a transaction, the Cash 
 account is debited by entering the amount in the "Bank, Dr." column, and the 
 proper account or accounts are credited by entering the amount in the column or 
 columns at the right. When cash is paid through the completion of a transaction, 
 the Cash account is credited by entering the amount in the "Bank, Cr." column, 
 and the Vouchers Payable account is debited by entering the amount in the 
 "Vouchers Payable, Dr." column at the right. When credit is extended to a 
 customer, his account is debited by entering the amount in the "Accounts Re- 
 ceivable, Dr." column, and the Sales account or accounts credited by entering 
 the amount in the "Sales, Cr." column or columns affected. Should a customer 
 return a part or all of the merchandise purchased and receive credit for its value, 
 the Sales Returns account is debited by entering the amount in the "General 
 Ledger, Dr." column, and the customer's account is credited by entering the amount 
 
 {Concluded on page 352)
 
 350 
 
 CASH JOURNAL 
 
 ^??^a^ /f^ 
 
 ~t^,'2Z<^-'S!C^v(iiW^>^,-7'i.i2^ 
 
 Alerchairts /Jaf 1 BanK. 
 
 LJ 
 
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 Illustration No. 149, Cash Journal, Left Page. 
 
 EXPLANATION. The cash balance at the beginning of the month is entered in the "Name 
 of Account ' column because this already appears in the ledger on the debit side of the Merchants 
 National Bank account and if entered in the Bank Dr. column might be posted again. When 
 provmg cash, the total receipts (Bank Dr. column) is written on scratch paper and the balance on 
 hand at the beginning of the month is added to this amount before deducting the payments (Bank 
 Cr. column). The credit for each amount entered in the Bank Dr. column and the debit for each
 
 CASH JOURNAL 
 
 351 
 
 •2^^f:>«?-Z-€>i-?-Z-«Z^ 
 
 VchPay 
 Dr. 
 
 y^ew Car 
 Sales, Cr. 
 
 Olspd Cars 
 
 "Pur.Dr Sales, Cr 
 
 Stora^p 
 Cr 
 
 I^ppairr 
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 Ace S Tls 
 Sales, Cr, 
 
 Tiip.?^ Tubes 
 Sales, Cr, 
 
 Gas, Grease 
 6 Oil Sales-. 
 Cr. 
 
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 Illustration No. 149, Cash Journal, Right Page. 
 
 amount entered in the Bank Cr. column are recorded in one or more of the columns at the right of 
 the name of the account. Transactions which do not involve the receipt or payment of cash are 
 recorded in the columns at the right of the name of the account. The breaks indicate a number 
 of entries omitted. The small figures above the totals show the page of the ledger on which the 
 account to which the amount is posted appears. This amount is posted to the debit or credit side 
 of the account as indicated by "Dr." or "Cr." at the top of the column.
 
 352 
 
 CASH JOURNAL 
 
 in the "Accounts Receivable, Cr." column; it will be necessary to write "Sales 
 Returns" in the explanation column on a line with the amount entered in the 
 "General Ledger, Dr." column, and the name of the customer on a line with the 
 amount entered in the "Accounts Receivable, Cr." column. Each transaction 
 should be recorded on one or more lines; two transactions should never be re- 
 corded on one line. A full explanation of the transaction should be made in the 
 "Remarks" column at the right; this is provided for the explanation of the transac- 
 tion in the same manner as space is provided for an explanation of each transac- 
 tion in a book of original entry. 
 
 § 354. Sales JournaL When the individual sales are recorded in a special 
 sales journal, the total only of this journal is transferred to the cash journal, either 
 weekly or monthly depending on the desires of the management. Illustration No. 
 150 shows the form of sales journal that would be required to record the transac- 
 tions in the practice set, provided these occur with sufficient frequency to require 
 the use of this special journal. 
 
 Sales .lournal 
 
 Date 
 
 L.F. 
 
 Account Debited 
 
 Address 
 
 Terms 
 
 Accts. 
 Rec. 
 Dr. 
 
 Ace. & Pts. 
 Sales 
 Cr. 
 
 Tires & T. 
 Sales 
 Or. 
 
 G.,G.&0. 
 
 Sales 
 Cr. 
 
 Storage 
 Cr. 
 
 Repairs 
 Cr. 
 
 Repair 
 
 Order 
 
 No. 
 
 Illustration No. 150, Form of Sales Journal. 
 
 § 355. Cash Receipts JournaL When transactions in which cash is re- 
 ceived from customers on account or in full of account occur with sufficient fre- 
 quency to justify the use of a cash receipts journal in which to record them, the 
 total only is transferred to the cash journal at the time each deposit is made, or 
 at such other time as the management may direct. Illustration No. 151 shows the 
 form of cash receipts journal which would be required to record the cash received 
 from customers in the practice set when these are not entered direct in the cash 
 journal. 
 
 Customers' Cash Receipts Journal 
 
 Date 
 
 L.F. 
 
 Account Credited 
 
 Explanation 
 
 Accounts 
 
 Receivable 
 
 Cr. 
 
 Merchants 
 
 Natl Bank 
 
 Dr. 
 
 Illustration No. 151, Form of Cash Receipts Journal. 
 
 GARAGE SET 
 
 This is a practice set without vouchers consisting of the transactions for two 
 months, performed by the Cowden Buick Company, a corporation engaged in operat- 
 ing a garage. The transactions are separate from the text and are included with 
 the books of account necessary to record them. The purpose of this set is to pro- 
 vide practice in the voucher method of bookkeeping and in recording transactions 
 in the cash journal.
 
 Appendix A 
 
 SINGLE ENTRY BOOKKEEPING 
 
 The Purpose of this Appendix is to explain and illustrate Single Entry 
 bookkeeping, sometimes referred to as a "method" of keeping books. The informa- 
 tion given will be of assistance to the student who may be required to keep books 
 for one who thinks there is a Single Entry method; it will also be useful if the 
 student is called upon to change from this so-called method to Double Entry. 
 
 § 356. Single Entry Bookkeeping. Bookkeeping is the systematic record- 
 ing of business transactions as explained in § 8. When the values received and the 
 values parted with in each transaction are recorded, the method is usually referred 
 to as "Double Entry." Single Entry bookkeeping is best defined as any method 
 that is not Double Entry. This means that in Double Entry bookkeeping the 
 values received and the values parted with are always recorded, but in Single Entry 
 the values received and the values parted with may be recorded in some transac- 
 tions, but in others only the values received or the values parted with are recorded. 
 
 § 357. Comparison. In Single Entry the record may be made according 
 to the wishes of those interested, and any desired accounts kept; in Double Entry 
 the record and accounts kept must conform to certain principles, which can not 
 be changed; the name of an account might be changed, but its real meaning must 
 remain the same. In Single Entry, the bookkeeper has no check on his accuracy 
 in posting, footing accounts in the ledger, and making the Statement of the Busi- 
 ness; in Double Entry he proves the postings and footings by the Trial Balance 
 and the net profit through the Balance Sheet and Statement of Profit and Loss. 
 
 The advantages of Double Entry are so apparent that this method is used by every up-to-date 
 business man who employs a bookkeeper, and by many who keep their own books. The reason Single 
 Entry is used in many cases is that the one who keeps the books knows nothing of the many advan- 
 tages of Double Entry. 
 
 § 358. Books of Account. Any book used with the Double Entry method 
 may be used with Single Entry; but the day book, cash book, and ledger are the 
 most popular with those who claim to "know" the latter method. Of course, they 
 do not know any method, but only know what they want their books to show, and 
 can get the desired results by using these three books. 
 
 § 359. Day Book. This is a book of original entry. All transactions, except 
 those in which cash is received or paid, are entered in this book in the order in 
 which they occur. The two money columns do not indicate debits and credits, 
 hence it is necessary to write Dr. and Cr. (abbreviation of debit and credit) after 
 the name of the account. This shows to which side of the account in the ledger 
 the amount is to be posted. Amounts to be posted are placed in the second column 
 on the same line as the name of the account. Illustration No. 152 shows the form 
 of day book to be used. 
 
 § 360. Single Entry Cash Book. Any desired form of ruling may be used. 
 The form given in Illustration No. 153 shows one very popular with those who 
 keep a cash book in connection with a Single Entry set of books. The ruling is 
 similar to the ordinary journal; receipts are entered in the first column, and pay- 
 ments in the second column. When the cash book is ruled at the end of the month, 
 the balance is entered in the credit column, the word "Balance" written at the left, 
 the two columns ruled, and the balance brought down, as in Illustration No. 153. 
 
 § 361. Ledger. This book may be similar to any ledger used with a Double 
 Entry set of books; that is, it may have the regular ledger ruling or any special 
 ruling adapted to the needs of the business. In every case it must be ruled with 
 
 * 353
 
 354 
 
 APPENDIX A 
 
 two money columns, one for the debit amounts, and one for the credit amounts. 
 Some blank book manufacturers make a book which is labeled "Single Entry 
 Ledger." This is ruled like the day book and provided with an index. This form 
 is used when the day book and cash book are omitted, and the transactions are 
 entered direct in the ledger. 
 
 a<Jy^^£.''<:'-C^y>x.''C^-i'^}^ 
 
 2., /f. 
 
 S'oo 
 S'oo 
 
 ■■7? p— I 
 
 '0 
 
 // 
 
 /3 
 
 J 
 
 <^ 
 
 J 
 
 Illustration No. 152, Single Entry Day Book 
 
 /^o 
 
 ¥J 
 
 So 
 
 ^-^.^-fec 
 
 
 / ^O O 
 
 
 SS^tf 
 
 / o o 
 /.So 
 
 6SY0 
 
 Z^ (i o 
 
 ~nr 
 
 3/ */ 
 
 ^<^ ^'^'yLC*^'*!^^ 'X-.-f-i^ <!^^-^-'*^-''f-'<f-^-^ 
 
 / ^ 
 
 'V'!^-gt.^C-a^->-t^<,e^ 
 
 J / J. J" J J 
 
 (73; 
 
 '33 
 
 /tf^f Co\ 
 
 Illustration No. 153, Single Entry Cash Book. 
 *The break indicates a number of entries omitted. 
 
 7 -i -r// J 
 
 Jf^. 
 
 i 
 
 '33
 
 APPENDIX A 355 
 
 TRANSACTIONS FOR DECEMBER. 
 
 Record the following transactions in the Single Entry day book and cash book, and post to 
 the ledger when instructed. Accounts will be kept with Notes Receivable, Notes Payable, 
 C. W. Ogden Capital, persons from whom merchandise is purchased on account, and persons to 
 whom merchandise is sold on account. 
 
 1. C. W. Ogden invests $1,500.00 in the retail stationery and office supplies 
 business. 
 
 Enter in the cash book as in Illustration No. 153. 
 
 2. Bought from W. H. LaRue, City, stock of stationery and office supplies 
 for $2,250.00, paying cash $1,000.00, two notes of $500.00 each, due in 60 and 90 
 days, balance to be paid before January ist. 
 
 Enter in the day book and cash book as in Illustrations Nos. 152 and 153. 
 
 3. Bought from Belknap Stationery Co., Louisville, on account, stationery 
 per invoice of this date, $150.00. 
 
 Enter in the day book as in Illustration No. 152. 
 
 Sales on account: C. G. McClure, City, i section, base, and top, Y. & E. 
 files, $25.00; I gross note books, $17.50. University School, University Park, i 
 multigraph, $170.00; i doz. ribbons, $5.00. 
 
 Enter in the day book as in Illustration No. 152. 
 
 4. Bought from Graham Paper Co., St. Louis, stationery per invoice of the 
 3d, $196.42; terms, 3/10, n/30. 
 
 The terms indicate that 3% may be deducted if payment is made within ten days. 
 
 5. Paid Gouffon Transfer Co. $14.87, freight and drayage on above goods. 
 
 Enter in the cash book as in Illustration No. 153. No account is kept with Freight and Dray- 
 age, hence the check mark { V ) in the L. F. column. 
 
 6. Sale on account: C. J. McDaniels, City, i ledger, $3.50; i doz. pencils, 
 75c; 2 boxes typewriting paper at $1.00; i dictionary, $14.00. 
 
 Paid W. H. LaRue $150.00 on account; 
 
 Paid employees' wages to date, $65.40. 
 
 Cash sales to date, $204.09. 
 
 Post the entries in the da\' book and cash book. Each amount in the second column of the 
 day book is posted to the debit or credit side of the account written on- the same line with it; the 
 debit or credit is indicated by "Dr." or "Cr." Each amount in the first column of the cash book 
 is posted to the credit side of the account written on the same line with it, unless it has a check mark 
 in the L. F. column; each amount entered in the second column is posted to the debit side of the 
 account written on the same line with it, unless it has a check mark in the L. F". column. Allow 
 one-fifth of a page for each account. 
 
 8. Bought from American Stationery Co., Cincinnati, merchandise per 
 invoice of the 6th, $264.75; terms, 5/10, n/60. 
 
 9. Sale on account: R. R. Oglesby & Co., Hamilton, i typewriter, $100.00; 
 I desk, $35.00; 5 gross note books at $14.00; 2 sections Y. & E. files with top 
 and base, $64.00. 
 
 10. Received $175.00 from University School in full of account. 
 
 11. Paid electric light bill, $13.60; phone rent, $6.00; and stamps, $5.00. 
 Sales on account: Ormendorff Bros., City, i set of Dickens, $70.00. City 
 
 Electric Co., City, i gross tablets, $17.00; 3 sections Y. & E. files at $14.00; i desk, 
 $36.00; 5 ink wells at 25c. 
 
 12. Bought from Yawman & Erbe Mfg. Co., Rochester, merchandise per 
 invoice of the loth, $136.42; terms, 60 days. Bought from Johnston Bros., City. 
 on account, 5 gross mucilage at $2.50. 
 
 13. Paid Graham Paper Co. amount due, less discount. 
 Enter in the cash book as in Illustration No. 153. 
 
 {Continued on page 356 )
 
 356 APPENDIX A 
 
 {December Transactions — Continued from page^SS-) 
 
 13. Sales on account: M. B. Arnstein, City, 2 gross tablets at $17.75; i 
 desk, $39.50; 2 sections Y. & E. files at $14.00. Bean, Waters & Co., City, 3 
 gross tablets at $14.00; i box typewriting paper, $1.00. 
 
 Paid cash as follows: C. W. Ogden, private use, $50.00; employees' salaries 
 for the week, $86.45; Gouffon Transfer Co., freight and drayage, $32.65. 
 
 Cash sales to date, $291.76. 
 
 Post from the day book and cash book. 
 
 15. Collected from the following parties: C. G. McClure, $42.50; C. J. 
 McDaniels, $10.00; Ormendorfif Bros., $50.00; City Electric Co., $70.00. 
 
 Sales on account: C. G. McClure, 5 gross tablets at $14.00; i desk, $57.50. 
 H. O. Nelson, City, i typewriter, $100.00; i gross penholders, $5.00; 5 boxes type- 
 writing paper at $1.00; 10 lbs. writing paper at 25c. 
 
 16. Paid American Stationery Co. $175.00 on account. 
 
 This is subject to 5% discount as per terms. Be sure to debit them with the correct amount. 
 Sale on account: Central Business College, City, 5 gross note books at $14.00; 
 I gross tablets, $30.00; i gross penholders, $4.00; 8 gross ink at $3.75. 
 
 17. R. R. Oglesby & Co. gave us their note due in 30 days for $200.00 to 
 apply on account. 
 
 Bought from Yawman «& Erbe Mfg. Co., Rochester, merchandise per invoice 
 of the nth, $1,254.78; terms, 60 days. 
 
 18. Sales on account: C. G. McClure, 3 typewriters at $100.00; i gross 
 pens, $5.00; I doz. ribbons, $7.50. W. R. Austin, Wilmington, i journal, $6.00. 
 
 Bought from Graham Paper Co., stationery per invoice of the 15th, $136.49; 
 terms, 3/10, n/30. 
 
 19. Accepted Yawman & Erbe Mfg. Company's 60-day draft in full of in- 
 voice dated December loth. 
 
 Paid W. H. LaRue $50.00 on account. 
 
 Sales on account: Ormendorff Bros., i desk, $35.00; i gross note books, 
 $18.00; 3 sections Y. & E. files at $14.00. W. H. Pedigo, Danville, i desk, $45.00; 
 I chair, $12.50; 3 gross tablets at $17.50; 100 blotters, 25c. 
 
 20. Bought from Yawman & Erbe Mfg. Co., merchandise per invoice of the 
 i8th, $234.75; terms, 4/10, n/30. 
 
 Cash sales to date, $408.50. 
 
 Withdrew $75.00 for private use; paid employees to date, $92.75. 
 Post from the" day book and cash book. 
 
 22. Collected from customers as follows: M. B. Arnstein, in full; Bean, 
 Waters & Co., in full; C. G. McClure, $100.00; Central Business College, $100.00, 
 
 Discounted R. R. Oglesby & Co.'s note at the bank, receiving credit for the 
 face value, less $3.00 discount. 
 
 Enter face of the note in the first, and discount in the second column of the cash book. 
 
 23. Sale on account: University School, 3 gross note books at $17.00; 2 
 gross penholders at $5.00; 5 gross pencils at $4.00; 100 lbs. writing paper at 20c; 
 I ledger, $2.75. 
 
 Paid W. H. LaRue balance due him. 
 
 24. Bought from American Stationery Co., merchandise per invoice of the 
 22d, $186.75; terms, 5/10, n/60. 
 
 {Concluded on page 357.)
 
 APPENDIX A 357 
 
 {December Transactions — Conthiued Jroni page 356.) 
 24. Sales on account: Central High School Supply Store, City, 2 gross jour- 
 nals at $20.00; 2 gross ledgers at $20.00; 5 gross note books at $14.00; 10 gross 
 penholders at $5.00; 5 gross pencils at $4.55; 2 gross ink at $4.00. City Electric 
 Co., I duplicator, $75.00. 
 
 Sent Graham Paper Co. a check in full of account, less discount. 
 
 26. Central High School Supply Store settled their account in full, less 2%, 
 per contract. 
 
 W. H. Pedigo gave us his note due in 30 days in full of account. 
 Paid Belknap Stationery Co., $75.00 on account. 
 
 Bought from Standard Stationery Co., Cincinnati, merchandise per invoice 
 of the 23d, $62.75; terms, 60 days. 
 
 27. Sent Yawman «& Erbe Mfg. Co. a New York Exchange in full of invoice 
 dated the i8th, less 4% discount. The bank charges 50c for issuing the exchange. 
 
 Sale on account: H. O. Nelson, i typewriter with special keyboard, $105.00. 
 
 29. Received from H. O. Nelson a 60-day note in full of account. 
 
 30. Bought from Chatfield & Woods, City, merchandise per invoice of the 
 27th, $169.25; terms, 3/10, n/60. 
 
 31. Cash sales to date, $268.15. 
 
 Paid employees to date, $86.27; rent for the month, $50.00; Gouffon Transfer 
 Co., bill for freight and drayage to date, $62.75. 
 
 Post all entries to date, and make a Statement of the Business as explained in § 362 and Illustra- 
 tion _No. 154 using the following inventories: Merchandise in stock, $2,565.87; Office Equipment, 
 consisting of desks, chairs, safe, etc., $200.00. Close the ledger as explained in § 363, and make 
 the opening entrj' in the journal to change to Double Entry as explained in § 364 and in Illustration 
 No. 155. When this is completed, post the entries to the ledger, take a Trial Balance and present 
 all books for approval. 
 
 § 362. Single Entry Statement. The net profit or net loss can always be 
 ascertained whether the books are kept by Single Entry or Double Entry. To 
 make a Single Entry statement proceed as follows: First, ascertain the value of 
 all property on hand by taking an inventory. Second, list the assets and liabilities. 
 As nothing but asset and liability accounts are kept, all debit balances are assets, 
 and all credit balances, except the investment, are liabilities. Third, ascertain the 
 difference between the assets and liabilities; this is the present worth of the busi- 
 ness. If it is more than the net investment, there is a profit; if less, a loss. Illus- 
 tration No. 154 shows the correct form of Single Entry statement. 
 
 §363. Closing the Ledger. As each account in the ledger, except the 
 proprietor's Capital account, shows an asset or a liability, the proprietor's Capital 
 account is the only one to close. It is closed in the same manner as the proprie- 
 tor's Capital account in Double Entr>^ as explained on page 93. The profit is 
 entered on the credit side, or the loss on the debit side, with red ink, the account 
 ruled with single and double red lines, footed with black ink, and the "Present 
 Capital" brought down in black ink on the credit side. 
 
 § 364. Changing from Single to Double Entry. When it is desired to 
 change the books from the Single Entry method to that of Double Entry, it is 
 necessary to make a statement of the business, and close the ledger, as explained 
 in §§ 362 and 363. A journal entry is made from this statement, debiting all 
 accounts that show assets, and crediting those showing liabilities, and the pro- 
 prietor for the investment; see Illustration No. 155. This journal entry will balance, 
 since the total liabilities, plus the present worth of the proprietor equals the assets.
 
 358 
 
 APPENDIX A 
 
 SINGLE ENTRY STATEMENT, DECEMBER 31, 19 
 
 
 ASSETS 
 
 
 
 
 
 
 Cash 
 
 1099 
 
 60 
 
 
 
 
 Merchaniilse in stoclc f Inventory) 
 
 2555 
 
 87 
 
 
 
 
 Office Equipment (Inventory) 
 
 200 
 
 
 
 
 
 Ledger Accounts : 
 
 
 
 
 
 
 Notes Receivable 
 
 337 
 
 66 
 
 
 
 
 C. G. McClure 
 
 350 
 
 
 
 
 
 University School 
 
 101 
 
 50 
 
 
 
 
 C. J. McDaniels 
 
 12 
 
 75 
 
 
 
 
 R. R. Ogleeby & Co. 
 
 87 
 
 
 
 
 
 City Electric Co. 
 
 110 
 
 25 
 
 
 
 
 Ormendorff Bros. 
 
 103 
 
 
 
 
 
 Central Business College 
 
 30 
 
 
 
 
 
 W. R. Austin 
 Total Assets 
 
 8 
 
 
 
 
 
 
 
 5005 
 
 63 
 
 
 LIABILITIES 
 
 ■ 
 
 
 
 
 
 Ledger Accounts: 
 
 
 
 
 
 
 Notes Payable 
 
 1146 
 
 33 
 
 
 
 
 Belknap Stationery Co» 
 
 95 
 
 
 
 
 
 American Stationery Co. 
 
 276 
 
 59 
 
 
 
 
 Johnston Bros. 
 
 13 
 
 75 
 
 
 
 
 Yawman & Erbe Mfg. Go. 
 
 1252 
 
 38 
 
 
 
 
 Standard Stationery Co. 
 
 58 
 
 80 
 
 
 
 
 Chatfield & Woods 
 Total Liabilities 
 
 C. W. Ogden's Present Capital 
 
 172 
 
 50 
 
 
 
 
 
 
 3015 
 
 35 
 
 
 1990 
 
 28 
 
 
 C. W. Ogden'8 Net Investment 
 C. W. Ogden's Net Profit 
 
 
 
 1375 
 
 
 
 615 
 
 28 
 
 
 
 
 
 
 Illustration No. 154, Single Entry Statement. 
 
 It is customary to write "Inventory" in the explanation columns of the Merchan- 
 dise Inventory and Office Equipment accounts, and "Balance" in the explanation 
 column of the Cash account. After all the accounts are opened in the ledger, a 
 Trial Balance is taken to prove that the books are in balance. 
 
 JANUARY I, 19 .. 
 
 Cash 
 
 Merchandise Inventory 
 
 Office Equipment (Inventory) 
 
 Notes Receivable 
 
 C. G. McClure 
 
 University School 
 
 C. J. McDaniels 
 
 R. R. Oglesby & Co. 
 
 City Electric Co. 
 
 Ormendorff Bros. 
 
 Central Business College 
 
 W. R. Austin 
 
 Notes Payable 
 
 Belknap Stationery Co. 
 
 American Stationery Co. 
 
 Johnston Bros. 
 
 Yawman & Erbe Mfg. Co. 
 
 Standard Stationery Co. 
 
 Chatfield & Woods 
 
 C. W. Ogden, Capital 
 Assets and liabilities at the beginning of the business 
 
 Illustration No. 155, Journal Entry to Change from Single Entry to Double Entry. 
 
 1099 
 2565 
 
 60 
 
 87 
 
 
 
 200 
 
 
 
 
 337 
 
 66 
 
 
 
 350 
 
 
 
 
 lOI 
 
 50 
 
 
 
 12 
 
 75 
 
 
 
 «7 
 
 
 
 
 no 
 
 25 
 
 
 
 103 
 
 
 
 
 30 
 
 
 
 
 8 
 
 
 
 
 
 
 1 146 
 
 33 
 
 
 
 95 
 
 
 
 
 276 
 
 59 
 
 
 
 13 
 
 75 
 
 
 
 1252 
 
 38 
 
 
 
 58 
 
 80 
 
 
 
 172 
 
 50 
 
 
 
 1990 
 
 28
 
 Appendix B 
 
 DIRECT METHOD OF CLOSING THE LEDGER 
 
 The Purpose of this Appendix is to explain the process of making the 
 closing entries direct in the ledger as explained in § 60. The student should under- 
 stand both methods so that he may apply either as directed. 
 
 § 365. Closing the Ledger, as explained in § 53, is an accounting term 
 applied to the process of transferring the net profit or net loss to the owner's Cap- 
 ital account at the close of a fiscal period. The process of making direct in the 
 ledger the entries necessary to transfer the net profit or loss to the owner's Capital 
 account is the same as with the journal entry method. 
 
 A comparison of Illustration No. 156 with the illustrations on pages 360 and 
 361 shows the use of the Statement of Profit and Loss as a guide in closing, and 
 the method of making these entries. The complete accounts used in the illus- 
 trations are shown on pages 72 and 73 and are the same accounts as those used 
 as a basis for discussing the closing by the journal entry method, pages 94-96. 
 The ledger on pages 362 and 363 shows the accounts on pages 72 and 73 after 
 the closing entries explained on pages 360 and 361 have been completed; these 
 pages are the same as the accounts on pages 91-93, except that red ink is used in 
 the closing entry in each account and the page of the ledger is shown in the folio 
 column instead of the page in the journal. 
 
 When the direct method is used, it is customary to indicate the closing entries which require 
 the transfer of the balance of one account to another, by the use of red ink; for this reason, the 
 direct method of closing the ledger is sometimes referred to as the "red ink method." The date, 
 page of the ledger to which the balance of the account is transferred, and the amount, are entered 
 with red ink, but the same facts, when entered on the opposite side of the account to which they 
 are transferred, are entered in black ink. 
 
 
 6 ¥■ 
 
 (jA^i.£^-;'-zPL^C<:^'>-z^ C_-<5^^^^> 
 
 •3 J- 3 S" 
 / 3 ^ o 
 
 r3- f <' _ 
 
 Illustration No. 156, Statement of Profit and Loss. 
 
 359
 
 360 
 
 APPENDIX B 
 
 C^CO: 
 
 (yU 
 
 The First Entry is that required to record the merchandise inventory at the close of the fiscal 
 period. This entry is neces- ^^ . 
 
 sary because the cost of sales ' ^;^Zi-^>--c-^C-t^-^^^i,^- 
 
 is ascertained on the State- 
 ment of Profit and Loss by 
 subtracting the inventoryat 
 the close of the fiscal period 
 from the net purchases. The 
 Inventory account is debited 
 to record the asset; the Pur- 
 chases account is credited for 
 the inventory to indicate the 
 subtraction. 
 
 The illustration at the 
 right shows the Purchases 
 account before the first entry 
 has Iseen made, and the In- 
 ventory and Purchases ac- 
 counts as they appear after 
 this entry has been made. 
 
 t:j'vE.i!/t-rf^>z;z5»-7^ 
 
 O-C^, 3' '.2^.4!^i</t«r^/ At 
 
 / M77 
 
 il^Z^i-t^f-c-'/i'C-^ 
 
 o-^\ 
 
 Ch^\ 
 
 \\:^>tyt.,-'-&''?tJZ^-7^ 
 
 ' ^7 A " ' 
 
 The Second Entry is that required to transfer the balance of the Purchases account to the 
 Sales account. This entry is Js^4-^:^:^> 
 
 necessary because the profit 
 on sales is ascertained on the 
 Statement of Profit and Loss 
 by subtracting the cost of 
 merchandise sold from the 
 net sales. The Sales account 
 is debited for the cost of sales 
 to indicate the subtraction. 
 Purchases is credited because 
 this account shows the cost 
 of sales. After this entry is 
 made, the Purchases account 
 will balance and be ruled, 
 and the balance of the Sales 
 account will show the net 
 profit on sales as shown by 
 the Statement of Profit and 
 Loss. 
 
 The illustration at the 
 right shows the Sales and 
 Purchases accounts before 
 the second entry has been 
 made, and the Sales and Pur- 
 chases accounts after this 
 entry has been made. 
 
 The Third Entry is that required to transfer the balance of the Sales account to the Profit 
 and Loss account. This entry 
 is necessary because it is cus- 
 tomary to show in the ledger 
 a summary of the facts shown 
 by the Statement of Profit 
 and Loss. The Sales account 
 is debited because it shows 
 the profit on sales; the Profit 
 and Loss account is credited 
 because this account is cred- 
 ited for all income. After 
 this entry is made, the Sales 
 account will balance and be 
 ruled, and the Profit and Loss 
 account will show the profit 
 on sales. 
 
 The illustration at the 
 right shows the Sales account 
 before the third entry has 
 been made, and the Sales and 
 Profit and Loss accounts after 
 this entry has been made. 
 
 6W 
 
 3/ 
 
 II II '^ 
 
 1 y^sJp^ 3^ 
 
 
 1 
 
 1! 
 
 
 ^^^<:>^»-'^:-;>C<«.«:i<^V 
 
 o-^ 
 
 3/ 
 
 
 
 3 /^ ^ / o 
 
 Oz^ 
 
 3/ !»-?- 
 
 i o 
 
 
 
 
 
 
 
 ^/ (:q|<^»-t^-s-»i-Z5r^ -^ ' V ■^y? ^ '^~ 
 
 JS^^^.^i-^^' 
 
 
 3/ 
 
 3/ 
 
 1 " 
 
 /^y^Y^a^ 3/ ^3C^ 
 
 
 '^i!-e,'7'-t>A'€!i^iC'C~^ 
 
 
 
 
 J /JJ- 
 
 / a 
 
 
 J/ 
 
 s/ 
 J/ 
 
 
 
 y C .3 J^ 
 
 
 
 
 3^^s£ 
 
 ff^=^ 
 
 •S / .9.f 
 
 / e 
 
 Jy 
 
 
 >-3£ V 
 
 y-J i-^ 
 
 H>-^^^- 
 
 }\CH^j/ l,^^.„>»*^
 
 APPENDIX B 
 
 361 
 
 The Fourth Entry is that required to transfer the balance of the Expense account to the 
 
 Profit and Loss account. This 
 entry is necessary because the 
 net profit is ascertained on 
 the Statement of Profit and 
 Loss by subtracting the ex- 
 pense from the profit on 
 sales. The Profit and Loss 
 account is debited to indicate 
 the subtraction; the Expense 
 account is credited because 
 this account shows the ex- 
 pense for the period. After 
 this entry is made, the Ex- 
 pense account will balance 
 and be ruled and the balance 
 of the Profit and Loss account 
 will show the net profit. 
 
 The illustration at the 
 right shows the Profit and 
 Loss and the Expense ac- 
 counts before the fourth 
 entry has been made, and 
 the Profit and Loss and the 
 Expense accounts after this 
 entry has been made. 
 
 C-^c^La^v^^^-a^ 
 
 O-c^ 
 
 Ch^ ^/ 
 
 ^ij„.^jL^ 
 
 /yj\3o 
 
 Q-i^ \j/ l^'C^Cc-^T^^^ 
 
 Oi^. \j/ \^i^.m;i>4Ui. V 
 
 
 
 
 ^<;e,^Le^'n.=^-e-^ 
 
 
 
 
 
 ''' 1 
 
 1 
 
 
 
 JT-r 
 
 f-a 
 
 
 3/ 
 
 ^^^^^ 
 
 S- 
 
 / 
 3 XJ 
 
 / a 
 
 
 ^ >r 
 
 yo 
 
 jf-r 
 
 j-<if 
 
 
 
 
 
 
 
 
 
 The Fifth Entry is that required to transfer tht balance of the Profit and Loss account to the 
 proprietor's Capital account. 
 
 This entry is necessary be 
 cause the purpose of closing 
 the ledger is to transfer the 
 net profit to the proprietor's 
 account. The Profit and Loss 
 account is debited because 
 this account shows the net 
 profit; the proprietor's Cap- 
 ital account is credited be- 
 cause this profit is equivalent 
 to an additional investment. 
 When this entrj' is made, the 
 Profit and Loss account will 
 balance and be ruled, and the 
 proprietor's Capital account 
 will show his present pro- 
 prietorship as shown by the 
 Balance Sheet. 
 
 The illustration at the 
 right shows the Profit and 
 Loss account and the account 
 with W. A. Gordon, Capital, 
 before the fifth entry has 
 been made, and the Profit 
 and Loss and W. A. Gordon 
 Capital accounts after this 
 entry has been made. 
 
 (}'cJ:\ 
 
 0-c^\ 
 
 («^^^-,«^l<^ <Z-?&«>^«i?^«-<2 
 
 C'i>/'\ ^A C^^iC^lu^n-ii-e^ 
 
 ^Si'^ 
 
 
 j/^^it]&<^ 
 
 Closing the Inventory Account 
 
 The inventory of merchandise at the close of the fiscal period may remain in the Purchases 
 account throughout the next fiscal period, or it may be closed into the Purchases account at the 
 beginning of the next period; the transfer of the inventory from the Inventory account to the Pur- 
 chases account, whether made at the beginning or close of the fiscal period, should be through a gen- 
 eral journal entry as illustrated on page 96. •
 
 362 
 
 APPENDIX B 
 
 
 -/ 
 
 
 (2^ 
 
 >7 
 
 3. J C -it- a o 
 
 
 
 // 
 
 
 /^ 
 
 
 V 
 
 
 ^ / 
 
 _. ^ 
 
 3/ 
 
 T-rfC^^ 
 
 il 1 
 
 ys-^!-^/ 
 
 
 
 O-c^. 
 
 S/ 
 
 cy y \/ cTJij 
 
 d:^^£^c--7^'-t>^'^Z^t:c.-^Le-<^ 
 
 7 J> J 
 
 ry 
 y o f 
 
 / >f 
 / J 6. 
 
 / / 
 £ f 
 
 <:, J- 
 r o 
 
 / f 
 
 -'f 
 
 ^^ 
 
 
 
 7 '^ 
 
 <Ay o 
 
 
 •J/ 
 
 y^^ e o 
 
 
 / r 
 
 i£ 7 r. 
 
 cTO 
 
 ^ 
 
 
 
 y-i^ 
 
 / 6 J J- 
 
 3 f -^ J' 
 
 .9 y ■^■-r 
 
 7 
 
 ^ T-g- 
 
 J 
 
 
 V o 
 
 ^^a 
 
 Illustration No. 157, Ledger Closed by Direct Method — Continued. 
 
 The Above Accounts Before They are Closed are shown on page 73. It is necessary to open the 
 Inventory account in connection with the closing entries because it is an asset which is not recorded. 
 The process of closing these accounts is analyzed and explained on pages 360 and 361.
 
 APPENDIX B 
 
 363 
 
 
 aj 
 
 L^/ y^:./A<n/-(3t^>c:^ 
 
 
 •it\ 
 
 / r r^jz ^ 
 
 OrOr 
 
 / 
 
 
 Illustration No. 158, Ledger Closed by Direct Method — Concluded. 
 
 It is Customary to Balance the Capital Account after the ledger is closed and to carry the pres- 
 ent capital down under date of the next business day. The illustration above shows the process 
 of balancing W. A. Gordon's Capital account which appears at the bottom of page 72. 
 
 The Profit and Loss Account contains a summary of the cost and income as shown by the State- 
 ment of Profit and Loss. The account is opened at the close of the fiscal period in connection with 
 the closing entries and closed when the profit is transferred to the Capital account, and remains 
 closed throughout the period. 
 
 
 Oe^?::,?-^^^^ 
 
 3/yf 
 
 / 
 
 J 
 ¥- 
 
 
 
 
 2. tf ir '2. 
 
 jL^IL 
 
 ■>■ 7 
 
 
 2:^^ 
 
 ^7 
 
 
 Illustration No. 159, Post-closing Trial Balance, Model Set 
 
 The Equality of Debits and Credits is maintained in recording the closing entries; hence the 
 ledger should be in balance if these entries have been made correctly. The Trial Balance in the illustra- 
 tion is taken from the ledger accounts on pages 70, 71, 91 and 362. The accounts receivable and 
 accounts payable are grouped and entered in one amount because none of these accounts in the 
 ledger are affected by the closing.
 
 Appendix C 
 
 INCOME TAX RETURN 
 
 The Purpose of this Appendix is to explain briefly the income tax and to 
 show the method of preparing the return for an individual, a partnership and a cor- 
 poration on blanks provided by the Government. The student can see from the 
 discussion and illustrations that when all the information needed is available, the 
 preparation of the return is not a difihcult problem. 
 
 §365. Income Tax. There are thfee methods of taxation : (a) a percentage 
 of the value of property, (b) a fixed amount for privilege granted, and (c) a per- 
 centage of net income. Taxes collected on a property valuation basis are referred 
 to as "property taxes;" taxes collected for privileges, as "license" and "stamp 
 tax;" taxes collected on income, as "income tax." The property owner submits 
 a schedule of his property as a basis for taxation; the one who wishes to secure a 
 privilege pays in advance for the same and receives stamps or a receipt authorizing 
 him to exercise the privilege granted thereby — that is, he receives a license to 
 perform certain business transactions; the one who receives an income submits 
 a schedule of his gross income and the deductions therefrom, as a basis for taxation. 
 
 State, city and county governments usually levy taxes on property and privi- 
 leges, though a few states have levied taxes on income. The United States Gov- 
 ernment levies taxes on privileges and income; privileges are granted through the 
 sale of stamps, and the taxes on income are collected yearly. The full amount of 
 the tax levied on income may be paid at the time the income tax return is pre- 
 sented to the collector, or quarterly — one-fourth at the time the return is made 
 and the balance in three equal installments. 
 
 The income tax return is prepared by the taxpayer on a blank provided by 
 the Government, and within seventy-five days from the close of the period which 
 it covers. The offtcial form contains two pages of instructions in addition to the 
 pages required for the return. The taxpayer should retain a copy of the return; 
 he removes the two pages of instructions from the blank before it is presented 
 to the Collector of Internal Revenue. 
 
 The discussion of income tax here refers to that levied by the United States Government. The 
 states which levy taxes on income usually accept the report made to the Federal Government 
 as a basis for taxation. The process of levying a tax on income by foreign governments is along the 
 same line as that used by the United States Government. 
 
 § 367. Gross Income, as defined in Section 213 (a) of the 1921 Revenue 
 Act, includes income derived from salaries, professional services, the operations 
 of a business, or special transactions from which the taxpayer derives profit. The 
 amount of all such items is to be included in the gross income for the taxable year 
 as listed on the income tax return. 
 
 Income from the operations of a business, income received as salary for services rendered, in- 
 come from the rent of real estate owned by the taxpayer, interest on bonds, and dividends on stock 
 owned by the taxpayer are examples of items composing gross income. 
 
 § 368. Exempt Income. The taxpayer is not required to pay tax on all 
 income. Space will not permit a complete discussion of these exemptions here, 
 but they are given in detail in Section 213 (b) of the 1921 Revenue Act, a compli- 
 mentary copy of which will be provided any teacher of bookkeeping by the pub- 
 lishers of this text. 
 
 The proceeds of life insurance policies, the value of property acquired by gift, interest on the 
 obligations of the United States (with certain exceptions), income from domestic building and loan 
 associations (with certain exceptions), and the rental value of a dwelling house furnished a minister 
 of the gospel are examples of exempt income. 
 
 364
 
 APPENDIX C 365 
 
 § 369. Deductions Allowed Individuals. Every individual taxpayer is 
 allowed certain deductions from his gross income which are to be subtracted from 
 the gross income to ascertain the net income on which he is to pay tax. He is also 
 allowed a personal exemption of $1,000.00, if single; or $2,500.00 if married or 
 the head of a family. These exemptions are given in detail in Sections 214 and 
 216 of the 1 92 1 Revenue Act. 
 
 All the expenses necessary for the operation of a trade or business, including salaries, travel- 
 ing expenses, rent, etc.; interest paid on borrowed capital; taxes paid to a city or state; losses sus- 
 tained from failure to collect accounts receivable; losses sustained on account of the sale of prop- 
 erty belonging to the taxpayer; a reasonable allowance for exhaustion, wear and tear of property 
 used in the of>erations of the business of the taxpayer; and contributions to charity (by individuals 
 only) are examples of the deductions allowed. 
 
 § 370. Deductions Not Allowed. The taxpayer cannot deduct all of his 
 expenses from gross income in order to ascertain his net income. Items which are 
 not deductible are given in Section 215 of the 1921 Revenue Act. 
 
 Personal, living and family expenses, amounts paid for new buildings, improvements or better- 
 ments, amounts expended in restoring property or in making good the exhaustion thereof, and 
 amounts paid as premiums for life insurance are examples of deductions not allowed. 
 
 § 371. Individual Income Tax Return. Every individual having a net 
 income of $1,000.00 or more, if single, or $2,000.00 or more, if married, or a gross 
 income of $5,000.00 or more, must submit an income tax return showing the amount 
 of his gross income and the deductions therefrom. The income of an individual 
 may be derived from a salary, investment, or the profits resulting from the opera- 
 tions of a business, as explained in § i. The return includes the income and de- 
 ductions for one year, which may end December 31 or on any other date. 
 
 Illustrations Nos. 160 and 161 show the income tax return submitted by W. A. Gordon for the 
 year ending August 31, 1922. This was prepared from the facts given in § 374. Illustrations Nos. 
 162 and 163 contain instructions for preparing the income tax return. 
 
 § 372. Partnership Income Tax Return. A partnership is required to 
 submit an income tax return at the conclusion of each fiscal period of twelve months, 
 but the tax is paid by the individual partners. The information for the income 
 tax return is obtained from the Statement of Profit and Loss prepared from the 
 accounts resulting from the performance of business transactions during the year. 
 The partnership is allowed the same deductions as the individual, with the ex- 
 ception of contributions to charity. 
 
 Illustrations Nos. 164 and 165 show the front and back of the partnership income tax return 
 prepared from the Statement of Profit and Loss (Illustration No. 93) for C. W. Keeland & Co., a 
 partnership composed of C. W. Keeland and A. D. Munson. The distribution of the expenses as 
 given in Illustration No. 93 is not the same as that given on the income tax return; these changes 
 are explained in § 375. 
 
 § 373. Corporation Income Tax Return. Every corporation is required to 
 pay tax on its annual net income. The method of ascertaining its net income is ex- 
 plained in Section 239 of the 192 1 Revenue Act. The income tax return submitted 
 by the corporation is signed by two officers of the corporation, usually the president 
 and treasurer. 
 
 Illustrations Nos. 168-171 show the front and back of both sheets of the income tax return 
 prepared for a corporation. The information in this return is obtained from the Balance Sheet 
 and Statement of Profit and Loss in Illustrations Nos. 130 and 131. 
 
 § 374. Explanation of Illustrations Nos. 160 and 161. W. A. Gordon 
 operates a retail grocery business. His profits from the operations of this business 
 are shown in the illustration on page 366. In addition to his income from the 
 grocery business, Mr. Gordon has received $300.00 salary from the Peoples' In- 
 surance Company for services as a member of the board of directors, $47.50 divi- 
 dend on one share of stock in the Citizens Building and Loan Association, and $25.50 
 interest on a Liberty Bond which he owns; his traveling expenses in connection 
 with attending board meetings were $30.00, the taxes on his home, $35.50, and 
 his contributions to charity, $50.00. The dividend and income from interest on
 
 366 
 
 APPENDIX C 
 
 the Liberty Bonds are not shown in Illustration No. i6o because this income received 
 by Mr. Gordon is exempt from taxation. The $30.00 expenses in connection 
 with obtaining the salary of $300.00 is deducted because $270.00 is the net income 
 received. The taxes paid by Mr. Gordon and contributions to charity are deducted 
 from his net income because they are authorized deductions. 
 
 The illustration below shows the Statement of Profit and Loss prepared from the income and 
 cost accounts in the ledger 
 
 W. A. GORDON 
 Statement of Profit and Loss, August 31, IQ22 
 
 Returns from Sales: 
 
 Gross Sales 
 
 Deduct Sales Returns 
 
 Net Sales 
 
 Cost of Mdse. Sold: 
 
 Mdse. Inventory 9/1 /21 500.00 
 
 Add Purchases 11 ,026.85 
 
 Less Purchases Returns. 
 
 11,526.85 
 85.40 
 
 of W. A. Gordon at the 
 close of business August 31, 
 1922. The transactions com- 
 pleted by W. A. Gordon 
 during the first two months 
 during which he operated 
 his grocery business, are 
 given in the Model Set, 
 Chapter VL A Statement 
 of Profit and Loss prepared 
 by his bookkeeper at the 
 conclusion of the first two 
 months is given in Illus- 
 tration No. 42; the state- 
 ment at the right is in the 
 same form but the amounts 
 are different because it shows 
 the costs and income and the 
 net profit for twelve months. 
 All the information needed in 
 connection with the prepara- 
 tion of the income tax return 
 may be obtained from the 
 Statement of Profit and Loss, 
 but it is usually necessary to 
 analyze some of the operat- 
 ing accounts in order to show 
 certain facts in regard to the 
 cost of operation. In Illustration No. 161 the expenses are distributed as rent, taxes, 
 salaries, delivery cost, advertising, and miscellaneous; this distribution is obtained from 
 sis of the Expense account. 
 
 Net Purchases Cost 
 
 Less Mdse. Inventory 8/31/22. 
 
 Net Cost of Mdse. Sold. 
 Gross Profit on Sales. . . 
 
 Operating Cost: 
 Expense 
 
 Net Profit. 
 
 1 1. 44 1 45 
 1,477-15 
 
 15,275.80 
 101.92 
 
 15.173- 
 
 9,964-30 
 
 5,209.58 
 2,039.90 
 
 3. T 69.68 
 
 msurance, 
 an analy- 
 
 § 375. Explanation of Illustrations Nos. 164 and 165. The business 
 operated by C. W. Keeland & Co. is owned by C. W. Keeland and A. D. Munson. 
 The results of operating the business during the year ending December 31, 1922 
 are shown by the Statement of Profit and Loss (Illustration No. 93). The facts 
 shown on the income tax return are the same as those shown on the Statement 
 of Profit and Loss except that some of the expenses are analyzed. The salary paid 
 one partner ($1,200.00) was debited to Selling Expense and the salary of the other 
 partner ($1,200.00) was debited to Administrative Expense, but salaries paid 
 partners must be shown as a separate item on the return. Purchases discount is 
 deducted from the net cost of goods purchased, and sales discount from the net 
 sales, instead of being shown as non-operating income and cost. The adjustment 
 on page 2 of the return is necessary because the partnership paid a fine of $25.00 
 (which was debited to Selling Expense) for one of its drivers who exceeded the 
 speed limit, but this cannot be deducted as an expense on the return because it 
 is one of the costs which are not deductible. Each partner will be required to 
 show his share of the net income on his individual income tax return, which will 
 be prepared in the same form as that for W. A. Gordon, pages 367 and 368, except 
 that the income received by each wull be entered as Item 3 instead of Item 5. 
 
 The purpose of illustrating a partnership income tax return is to show the student that the 
 information desired by the Government is obtained from the Statement of Profit and Loss and not 
 to explain the technicalities of the income tax law. The student should compare the above infor- 
 mation with Illustrations Nos. 164 and 165 and the instructions in Illustrations Nos. 166 and 167.
 
 APPENDIX C 
 
 367 
 
 FILE RETURN 
 
 WITH THE 
 
 COLLECTOR OF 
 
 INTERNAL 
 
 REVENUE FOR 
 
 YOUR DISTRICT 
 
 ON OR BEFORE 
 
 MARCH 15, 1922 
 
 INDIVIDUAL INCOME TAX RETURN 
 
 FOR NET INCOMES OF NOT MORE THAN $5,000 
 For Calendar Year 1921 
 
 Or for periid begun Sept . 1 , _ 1921 a„j e„j^ , Aug .. 31.,.. .19S2 
 
 PRINT NAME AND ADDRESS PLAINLY BELOW 
 
 ^. :..A.'....?9^A9R!... 
 
 (Nanio.) 
 
 6p5.J'Iain..St?.?et,. 
 
 (Street and utjmbor or rural route.) 
 (Post office.) 
 
 (Cnunty.) 
 
 .Ohio.-.., 
 
 (State.) 
 
 OCCUPATION, PROFESSION, OR KIND OF BUSINESS ■PQ.1??:J-l-..^?P°Q^y- 
 
 D« Ml wille in lk!s sjiau 
 
 FIHST PAYMENT 
 
 (Caililcr'a Stimp) 
 
 CASH CHECK M. O. 
 
 Euotncd kr 
 
 Stein- 
 
 13 
 
 E.pUil in 
 S<baU« 
 
 (Mi' 2) 
 
 14 
 
 
 IS 
 
 A 
 
 16 
 
 B 
 
 17 
 
 C 
 
 18 
 
 D 
 
 19 
 
 
 20 
 
 
 21 
 
 
 22 
 
 E 
 
 23 
 
 F 
 
 24 
 
 F 
 
 25 
 
 F 
 
 INCOME. 
 
 1. Salaries, Vfagea, CommiaBions, etc. Amoun! Eipmea 
 
 (StQtondmeaoaaddreas of i>erson from whom received.) received. jiaid. 
 
 Peoples Insurance .0.9.5153:^;?.... $..?P.P..*..QP.... $-....?P..?..Q.Q.. 
 ...l^M.MO^.A.-.P.k?:.?..!... -- _. 
 
 2. Interest on Bank Deposits, Notes, Mortgages, and Corporation Bonds 
 
 3. Income from PartnersliipB, Fiduciarios, etc. (Stato name and address of partnerships, etc.) 
 
 270 
 
 4. Rents and Royalties 
 
 5 . Profit (or loss) from Btisiness or Profession (not including income from partnerships). 
 
 C. Profit (or loEB) from Sale of Real Estate 
 
 7. Profit (or loss) from Sale of Stocks, Bonds, etc 
 
 8. Other Income (except dividends from domestic corporations and iatcrest on obligations cit tho 
 U.S.) (State nature of income) 
 
 (fc)-. 
 
 3169 
 
 00 
 
 68 
 
 9. Total Income in Items 1 to 8 (less losses shown above, if any). 
 
 DEDUCTIONS. 
 
 10. Interest Paid (not including interest deducted above) 
 
 11. Taxes Paid (not including taxes deducted above) 
 
 12. Losses by Fire, Storm, etc _ 
 
 13. Contributions _ _ 
 
 14. Bad Debts (not including bad debts deducted above) 
 
 15. Other Deductions Authorized by Law _ 
 
 16. Total op Items U) to 15 _ 
 
 17. Taxable Net Income (Item 9 minus Item 16) 
 
 .35 
 50 
 
 3439 
 
 85 
 
 3354 
 
 68 
 
 .50 
 18 
 
 COMPUTATION OF TAX. 
 
 18. Net Income (Item 17 above) 
 
 19. Lees Personal Exemption and Credit 
 
 for Dependents _ 
 
 :3354 
 
 2900 
 
 454 
 
 20. Balance (Item 18 minus Item 19) . 
 
 Checks will be accepted if payable at par at Collector's Office. 
 
 18 
 
 21. Tax Due (i% of Item 20).. 
 
 22. Less: Tax Paid at Source |$.. 
 
 23. l.icjmo una proOU I 
 
 24. Balance Due (Item 21 minus 22 and 23). 
 
 25. Tax Paid when Filing Return 
 
 18 17 
 
 18 
 
 $. — 
 
 11 
 
 18 17 
 
 Illustration No. 160, Page i of Individual Income Tax Return.
 
 368 
 
 APPENDIX C 
 
 SCHEDULE A.-EXPLANATION OF ITEM 4. (Rexts and Royaltiei.) 
 
 
 
 
 
 1. Kind of property. 
 
 2. Cost, or March 
 1, 1913, value. 
 
 3. Amount 
 received. 
 
 4. Repairs. 
 
 5. Depreciation 
 and depletion. 
 
 6. Other 
 expenses. 
 
 7. Net proOt 
 (or loss). 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 State estimated life of property and how yog fi gured depreciation . 
 
 SCHEDULE B.-EXPLANATION OF ITEM S. (B. 
 
 15173188. 
 I.2OO4I2O, 
 
 Total Income from Business or Profession ...Gr 3 .3.. S al 6 3.. J 1 S.j 2 75 .. 8 — R 
 
 Total Business Expenses (state specifically, see InstrucUon IC) -M.^5^.A.j:#.?.i.?.ii?..t.V.Q.i...E.?P.?.Il.?.?....$.§a.y.?.?./^ 
 
 Kit PEoriT (oe Loss) (If profit is less than usual, explain) 
 
 Explanation of business expenses..lLeJ...I)]irG has e.3...| 11., 441 
 
 Rent |780 .00 , taxes J7.5 ^BO, insura^^^ 
 
 .3169J.68. 
 
 ery cost ^100. 
 
 00,..adv9 
 
 rtising.. 
 
 _$50,00.,_. 
 
 misce 
 
 llaneous 
 
 ..t84.-.40.. 
 
 
 
 
 SCHEDULE C.-EXPLANATION OF ITEM 6. (Sale of Real Estate.) 
 
 1. Kind of property. 
 
 2. Date 
 acquired. 
 
 3. Amount 
 received. 
 
 4. Cost. 
 
 5. March 1, 1913, 
 value. 
 
 6. Subsequent 
 improvements. 
 
 7. Depreciation. 
 
 8. Net profit 
 (or loss). 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 If not acquired by purchase, state how acquired . 
 
 SCHEDULE D.-EXPLANATION OF ITEM 7. (Sale of Stocl. 
 
 Stipends, etc.) 
 
 
 
 
 
 1. Kind of property. 
 
 2. Date 
 acquired. 
 
 3. Cost. 
 
 4. March 1,1913, 
 value. 
 
 5. Amount 
 received. 
 
 6. Net profit 
 (or loss). 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 If not acquired by purchase, state how acquired 
 
 SCHEDULE E.-EXPLANATION OF ITEM 12. (Lo>M> by Fi 
 
 e. Storm, 
 
 etc.) 
 
 
 
 
 1. Kind of property. 
 
 2. Cost, or March 
 1, 1913, value. 
 
 3. Depreciation 
 previously taken. 
 
 4. Salvage value. 
 
 5. Insurance. 
 
 6. Net loss. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 SCHEDULE F.-EXPLANATION OF DEDUCTIONS CLAIMED IN ITEMS 1, 13, 14, and IS.) 
 
 J.tem__l.: t?ave.ling exjjenses. in^^^ 
 
 LteiP...!.?.: -Q.o^Jt?^i^.l^Jt.ipn3..Jp...Cpffm^^^ 
 
 1. Are you a citizen < 
 
 2. If you filed a return for 
 
 States? tSj?... oflSce was 
 
 4. Was a separate If so, state: (J) Name and address 
 
 return filed by your TTfi (a) Exemption entered at head of 
 
 i,„oKoT,.i „, n,!/.? i> ^ claimed, I that return 
 
 3. Is this a joint 
 return of husband 
 and wife? 
 
 husband or wife? . 
 
 6. Were you married and living with husband V q o 6. If not, were vou on the last day of your taxable period sunporting one or more persons 
 
 or wile on the last day ol your taxable period? ji.y.S? living in your household who are closely related to you by biood, marriage, or adoption? 
 
 One child 
 
 .Ko. 
 
 7. How many dependent persons (other than husband or wife) under IS years of age or incapable of self-support because 
 mentally or physically defective were receiving their chief support from you on the last day of your taxable period? . 
 
 8. State amount of dividends received 9. State amount of 10. State amount of interest received on 
 from domestic corpomtions (including Interest received on other obligations of the United States 
 
 dividends received through partner- "J QQ QQ Victory Liberty A J ^Q (except Liberty Bonds) on a principal Ot; t=,r) 
 
 ships, fiduciaries, etc.) - >— f:y.r„--r-„- Loan 4}% Notes .- %....^.:.,\:^.r... in excess of S5,000 „ - -,- S. - . . ! ~'.?..l.^^.. 
 
 I SWEAB (or affirm) that this return, including the accompanying schedules and statements (if any), has been examined by me, and, to the best of my knowledge 
 and belief, is a true and complete return, made in good faith, for the tasable period as stated, pursuant tothe Revenue Act of 1921 aad the Regulations issusd under 
 authority thereof. 
 
 (If return i» made by «seot, the rsMOD therefor miut be Bbttcd oa thifl line.) 
 
 Sworu to and subscribed before me this day of. 
 
 (SiEcaturo cf iodividual or ogeot } 
 
 (Bi<n»ture of offictr tdmiaielvTluz oath.) (Titte.) (Addroaa of icdividiml or agent.) 
 
 (An amended r*tum must be plainly nnarkad "Amended** aeroM tha face of the return.) 
 
 Illustration No. i6i, Page 2 of Individual Income Tax Return.
 
 APPENDIX C 
 
 369 
 
 INSTRUCTIONS FOR INDIVIDUAL RETURN 
 
 1. PERSONS REQUIRED TO MAKE A RETURN OF INCOME. 
 
 An Incorao tax return must be flled by evory citizen of tbo Unitod States 
 whether residing at horao or abroad, and every person residing in the United 
 States, thoiiRh not a citizen thereof, whose gross income for the taxable period 
 1921 amounted toS5,000, or whoso net income amounted to— 
 
 (a) $1,000 iisinglo or If married and not living with husband or wife. 
 (6) S2,000if married and Uvine with husband or wife. 
 
 If the combined net Income of husband, wife, and dependent minor chil- 
 dren equalled or exceeded e2,000, or if the combined cross income of husband, 
 wife, and dependen t minor children c 'Quailed or exceeded $5,000 all such income 
 must bo reported ona joint return, or on separate returns of husband and wife. 
 If singleand the net income, including tl'.at of dependent minors, il any, equalled 
 or exceeded jl,00U, or if the gross Income equalled or exceeded ?5,0c"0, a return 
 must be filed. A minor, however, having a net income of $1,000 or S2,000, ac- 
 cording to the marital status, or a gross income of $5, 000, must file a return. 
 
 Under each of the above conditions, a return must be filed even though 
 Rotaxlsdue. Nolo especially Instruction 8, "Credits for Personal Exemp- 
 tion and Dependents.". 
 
 The income of a minor or incompetent, if derived from a separate estate 
 under control of a guardian, trustee, or other fiduciary, must be reported by his 
 guardian or otberleeal representative. 
 
 Income of (a) estates of decedents before final settlement; (6) trusts, whether 
 created by will or deed, for unasrertained persons or persons with contingent 
 interests; or income held, or which underthetermsof the will or trust may bo 
 held, for future distribution, is taxed to the fiduciary as a single person, except 
 that from the income of an estaf e there may first be deducted any amount prop- 
 erlv paid or credited to beneficiaries. 
 
 If the net income of a decedent from the bet^inning of the taxable period 
 to the date of his death was $1 ,000, if unmarried . or S2,000, i f married and living 
 with wife or husband, or if the gross income was 25,000 or over, the executor or 
 administrator siiall file a return on Form 1010 or i040A for Buch dcccdout. 
 
 2. WHEN TO USE FORM 1040 INSTEAD OF THIS FORM. 
 
 You must file vour return on Form 104O— 
 
 (a ) If the combined net ijicome of husband and "wife exceeds S5,C90. 
 
 (b) If vour net income exceeds J5,iX>0. 
 
 (c) If tho net inoome reported in this return e:xCGcd3 $4,000 and the entire 
 family exemption hae been claimed in a separate return filed by husband 
 or wife. 
 
 (d) It tho return is filed for a period of loss than one year and the net income 
 when placed on an annual basis exceeds $5,000. (3eo Instruction 3 bolcw.) 
 
 3. PERIOD TO BE COVERED BY RETURN. 
 
 Your return must bo filed forthecalecdrtrycarendlnf; December 31, 1921. 
 orforthefiscalvearendingon the last day of any month other than December. 
 The dates on which the period covered by the return begins and ends, if other 
 than a calendar year, must b« plainly stated at the head of the return. 
 
 You were required to fila your return for 1018 on the basis of your annual 
 sccotinting period. Ha\'inpestablishedan accounting period for 191SthiEpsriod 
 must be adhered to for subsatjuent years, unless permission was received from 
 theCommiseicner tomakoachange. !n the case of a return for a period of less 
 than one year, tho net income Bha Jibe placed on an annual basis by multiplying 
 the amouh t thereof by twelve and di\'iding by tho number of months included 
 in such period; andtho tax shall besuch part of a tax computed on such annual 
 basis as the number of months in such period is of twelve months. 
 
 4. ACCRUED OR RECEIVED INCOME. 
 
 If your books of account ara kept on an arcrual basi*;, report all income 
 accrued, even thouch it has not been actually received or entered on tho 
 books, and expenses incurred instead of expenses paid. 
 
 If your books do not show income accrued and expenses incurred, report 
 all income received or constructively received, such as bank: interest credited 
 to your account, and eipense« paid. 
 
 S. INSTALLMENT SALES. 
 
 If you have tised the in<itallment method in computing income from In- 
 stallnicnt sales you must attach to vour return a schedule showint; separately 
 for the vear.s 1918, 1919, 1020, and iOl'l the following information: (a) Gross 
 pales; (b) cost of goods sold; (c) gross profals; (d) percentage of profits to gross 
 sales; (e) amount collected; (/) cross profit on amount collected. 
 
 €. ITEMS EXEMPT FROM TAX. 
 
 The following Items are exempt from Federal income tax and should not 
 be reported, unless it is desired to estabUsh a net loss, in which case see Section 
 204 of the Revenue Act of 1921: 
 
 (a) The proceeds of life insurance policies paid upon the death of the insured; 
 
 (6) The amount received by the insured as a return of premium or premiiuns 
 paid by him under Life insurance, endowment, or annuity contracts, cither 
 during the term or at the maturity of tho term mentioned In the contract or 
 upon surrender of the contract; 
 
 (c) Gifts (not made as a consideration for service rendered), and money and 
 property acquired under a will or by inheritance (but tho incomo derived from 
 money or property received by gift, will, or inheritance is taxable and must be 
 reported); 
 
 (d) Interest upon (1) the obli^tions of a .Stat6, Territory, or any poUtical 
 subdivision thereof, or the District of Columbia; or (2) securities issued under 
 the provisions of the Federal Farm Loan Act of July 17, 1916; or (3) cho oblipa- 
 tions of the United States or its possesiiions; or (4) bonds issued by the War 
 Finance Corporation. In the case of obligations of the United States issued 
 alter Septemoer 1, 1917 (other tlian postal savings certificates of deposit), and 
 in the case of bonds issued by the War Finance Corporation, tho interest is 
 exempt only if and to the extent provided in tho respective acts authorising 
 the issue thereof as amended and supplemented by Section 1328 of tbo Revenue 
 Act of 1921, and should be excluded from ^oss income only if and to the extent 
 it is wholly exempt to the taxpayer from income, war profits, and excess profits 
 taxe*;; 
 
 (r) Amounts received through accident or health in^rurance or under work- 
 men's compensation acts, as compensation for personal injuries or sickness, plus 
 the amount uf any damages received, whether uy suit or agreement, on accoujit 
 of such Injuries or sickness; 3_i 1^2 
 
 if) Amounts received as componsatlon, family allotments and allowances 
 under tho provisions of tho War Risk Insurance and tho Vocational Rehabilita- 
 tion Acts, or as pensions from the United States for ser\'ice of tho beneficiary 
 or another in tho military or naval forces of tho United States In time of war- 
 
 (?) Tho rental valuo of*a dwelling houso and appurtenances thereof furnished 
 to a minister of the posnel as part of his cornpcnsatio 
 
 7. FARMER'S INCOME SCHEDULE. 
 
 end attach to this return, Form 1040 F, Schedule of i^arm Income and Expenses. 
 Koter the net farm income as Item 5, pace 1 of tho return. If your farm 
 books of account are kept on an accrual basis, the Cling of Form 1(M0F Is optional. 
 
 8. CREDITS FOR PERSONAL EXEMPTION AND DEPENDENTS. 
 
 If you wcro married and living %\ith your husband or wifo or were head 
 of a family ou the last day of your taxable period, you may subtract from your 
 net income on Form 1040.\, before calculating your normal tax, an exemi'tion 
 of ??,500, plus 5100 for each person (other than luir.oand or wife) under is years 
 of age or incapable of .self-sunport becausementally or physically dti'tviive, uho 
 was receiving his chief support from you on that date. If htr 1> : 1 :■ 1 . if - 
 make separate returns, the exemption of $2,500 may be claimed 1 , '■ 1 ii 
 
 not by both) or may bo divided between them, but tho exemt M i -. ■ ' r 
 eachdcpendent may be claimed only by the person furnisliing the < ; i- 1 n i , t. 
 
 If you were not married or did not live with husband or wilu and were 
 not head of a family on the last day of your taxable period, you areeniitled to 
 a personal exemption of $1,000 plus S400 for each dependent person under 18 
 yeara oiago or incapable of self-support because mentally or physically defoc- 
 live, who waarcceiving his chief support from you on that date. 
 
 An exemption of $1,000 may be claimed in cases where Form I040Ais filed 
 forestatesin process ofadministration, or with respect to income held for future 
 distribution. 
 
 If by reason of a chango in your accounting period a return is filed for 
 part of a year, the personal exemption and credit for dependents may be claimed 
 :n accordance with your status on the last day of such taxable period. (See 
 alsoImtructionSon this page.) 
 
 A "head offamily" is a person who actually supports one or more persona 
 living in his (or her) houseliold, v/ho are closely telated to him (or her) by blood, 
 marriage, or adoption. 
 
 9. AFFIDAVIT. 
 
 The afBdavit must be execulod by the person whose income Is reported 
 unless he is a minor or incompetent, or unless he is ill, absent from the country, 
 or otherwiso incapacitated, in s/hich case the legal representative or agent may 
 execute the affidavit. A minor, however, making his owu return, must execute 
 tho affidavit. 
 
 The oatli will be administered without chargo by any collector, deputy 
 collector, orintcraalrevenuoagent, or (if you arc in the miHtary or naval scrvioo 
 oltho Unilod.Statcs)by any military or naval officer who is authorized to admin- 
 ister oaths for purposes of miUtary'or naval justice and administration. If an 
 internal revenue onioer is net available, the return should be sworn to before a 
 notary public, justico of the peace, or other person authorized to administer 
 oaths. 
 
 10. WHEN AND WHERE THE RETURN MUST BE FILED. 
 
 If thercturnisfor the calendar year 1921,fiIoit with the Collector of Internal 
 Revenue for the district in which ycu U vc or have your principal plice of business 
 on or before March 15, 19.?2. If for a period oilier than tno calendar year, the 
 relurnshould be filed ou or bcforo the 15th day of the linrd month following tho 
 close of such period. 
 
 In case tho taxpayer had no legal residence or place of business in the 
 United States, the return should bo forwarded to the Collector of Internal Reve- 
 nue, Baltimore, ild. 
 
 If the address of the collector is not printed on the return and you do not 
 know it, ask at the post offioe or bank. 
 
 I!, WHEN AND TO WHOM THE TAX MUST BE PAID. 
 
 The tax should bo paid, if possible, by sending or bringing with the return 
 a check or money order drawn to tho order of *' Collector of internal Revenue 
 at (insert name of city and State)." 
 
 Do not send cash through the maU, or pay it in person, except at the office 
 oftho collector. 
 
 The tax may be paid in four equal installments as follows: The first install- 
 ment shall be paid at the time fi\ed by law for filing the return, the second 
 installment shall be paid on the 1 jthdav of thethird month, tho third installment 
 on tho iothday oftliesLxth month, arid thefoiu-thinstallmeut on the 15th day 
 of I ho ninth month after tho time fixed bylaw for fiUng tho return. 
 
 Tho total tax may be paid at the time of filingthcreturn.orif not sopald, 
 one installment must be paid and the balance may bo paid in installments, or 
 in full, on or prior to any subsequent installment date referred toabove. Failure 
 to poy any installment on the ditc £-\ed bv law makes the taxpayer liable for the 
 payment of the balance of lax duo upon notice and demand by tho collector. 
 
 12. PENALTIES. 
 
 For Mji!ane False or Fraudulent Returns. 
 
 Not Rxceeding $10,000 or not exceeding one year's imprisonment, or both, 
 in the discreiion of tho couit, and, in addition, M per centum of the tax evaded. 
 
 For Failingr to Make Return on Time. 
 
 Not mote than $1,000, and, in addition, 25 per centum of the total tax. 
 
 For Failing to Poy Tax Wlion Due, or Understatement of Tax Through 
 Negligence, etc. 
 
 Five per cent of the lax duo but unpaid, plus Interest &t the i-ale of 1 per 
 centum per month during tbo period in which It remains unpaid. 
 
 Illustration No. 162, Page i of Instructions for Individual Return.
 
 370 
 
 APPENDIX C 
 
 13. INCOME FROM SALARIES, WAGES. COMMISSIONS, ETC. 
 
 Report all salajie"? or other compensation credited hy or received from 
 outside sources, and any salaries included as a deduction in Item 5 for 
 (o) yourself, (6) your wife (or husband), if a joint return is Hied, and (c) each 
 dependent minor child having a net income of less than $1,000 per annum. 
 Use a separate line for each entr^-, f:i^ing tho information recjussted. 
 
 Any amount claimed as a deduction for necessary expenses against salaries, 
 etc., should be fully explained in Schedule F, page 2 of the return, or in an 
 attached statement. 
 
 Traveling eipense^(including the entire amount expended lor meals and lodg- 
 ing) while away from home in the pursuit of a trade or business are deductible. 
 
 14. INCOME FROM PARTNERSHIPS. FIDUCIARIES. ETC 
 
 Report your share {whether received or not) in tho profits of a partner- 
 ship or personal service corporaUon, or in the income of an estate or trust, 
 except the part of such share that consisted of dividends on stoct of domestic 
 corporatious, and taxable interest on obligations of the United 8tates, vrhich, 
 should be included in Items R, 9, and 10, at foot of page 2 of tht return. 
 
 Report in Item 1, salary received from a partnership or personal service 
 corporation. 
 
 If the taxable period on the basis of wliich you file your return fails to 
 coincide with the annual accounting period of the partnership, personal service 
 corporation, or fiduciary, then you snould include in your return your dis- 
 tiibutive share of tho total not income for such accounting period, ending 
 within your taxable period. 
 
 15. INCOME FROM RENTS AND ROYALTIES. 
 
 If you received property or crops in lieu of cash rent, report the income as 
 though the rent had been received in cash. Crops received as rent on a crop- 
 share basis should bo reported as income for the year in wtiich disposed of 
 (unless your rGtum shows income accrued). 
 
 Explain in Schedule A, repairs, depreciation, depletion, and other expenses. 
 
 Other expenses include interest, taxes, fire insurance, fuel, light, labor, and 
 other necessary expenses of this character. 
 
 16. INCOME FROM BUSINESS OR PROFESSION. 
 
 Report in Item 5 income from— 
 
 (a) Sale of merchandise, or of products of raanulacturing, construction, min- 
 ing, an<l agriculture. 
 
 (o) Business service, such as transportation, storage, launderinR, hotel and 
 restaurant service, livery and parage service, etc., if you owned the business. 
 If vou areonly an employee of a business, report your salary or wages in Item 1. 
 
 (c) A profession, such as medicine, law, or dcntistrv', if "you practiced it on 
 vour own account. If you were employed on a salary, report your salary in 
 Item 1. 
 
 In general, report in Item 5, any income in the earning of which you in- 
 curred expenses for labor, rent, etc. 
 
 If you are a farmer (or a farm ov/ner renting your farm to another person on 
 shares), see Instruction 7. 
 
 - Describe the business or profc.'^sion, as "grocery," "retail clothing," "drug 
 store," "latradry," "doctor," "lawyer," "farmer," etc. 
 
 Report the total income derived fromsales or from services, less any discounts 
 or allowances from the sale price or service charge. (For instalhnent sales see 
 Instructions.) 
 
 "Total Business Kxpense"/' include: (1) cost of goods sold, which la usually 
 obtained by adding to tho inventory at tho beginning of the year the mer- 
 chandise and supplies purchased during the year, and deducting from this 
 sum tho inventory at the end of the year; (2) business expenses, wbicli inclucfo 
 all ordinary and necessary business expenses not classified above, such as 
 office wages, rent, heat, light, and traveling expenses (see Instruction 13); 
 (3) repairs, wear and tear, ob.-ioleicence, depletion, and property losses (other 
 than merchandise), .*^uch as (a) ordinary repairs required to keep property 
 In usable conditon, (6) reasonable allowance for exnaustion, wear and tear 
 of property used in the trade or business, including a reasonable allowance for 
 obsolescence, and (c) losses of businessproperty by fire, storm, or other casualty, 
 or theft, not compensated for by insurance or otherwise and not made good by 
 repairs claimed as deductions; and (4) bad debts, or portions therrof, arising 
 from sales or professional services that have been reported as income, which 
 have been deilnitelv ascertained to be "worthless and charged ofl within tho 
 year, or such reasonable amount as has been added to a reserve for bad del>te 
 within the year. A Utbt previously charged oQ as bad. if subsequently col- 
 lected, must be returned as income for the year in which coUected. Explain 
 these deductions under Schedule B, page 2 of the return. 
 
 Do not Include cost of business etiuipment or furniture, expenditures for 
 replacements or for permanent improvements to property, or personal living 
 or family expenses, nor any deduction for Uepreciatioii in the value of a build- 
 ins occupied by you as a dwelling, or of other property held for personal Use. 
 
 If Item 5 shows a deficit, indicate by using red ink or a minus sign, 
 
 17. PROFIT FROM SALE OF REAL ESTATE. 
 
 Describe tho property briefly, as "ferm," "house," "lot." 
 State the actual consideration or price received, or, in case of an exchange, 
 the fair market value of the property received. 
 
 Enter the original cost of the property, and if it was acquired prior to 
 March 1, 1913, the fair market value on that dato. Attach statement explain- 
 ing how value at March 1, 1913, was determined. Expe'isosinciclentn.lto the 
 purchase may Be included in the cost if never claimed in income tax returns 
 as deductions from income. 
 
 Enter as depreciation the amount of vrcxr and tecu- and obsohscence, or 
 depletion, sustained since March 1, 1913 (or since date of acquisition, if sub- 
 sequent to March 1, 1913). 
 
 In case the property was acquired by gift, bc-nuest, devise, or inheiitanco 
 after March 1, 1913. or in any manner prior to that date, see Section 202 of the 
 Revenue Act of 1921. 
 
 If the net result t<( bo entered In Item 6 is a deductible loss, indicate the 
 deficit by using red ink or a minus sign. 
 
 18. PROFIT FROM SALE Of STOCKS, BONDS, ETC. 
 
 Tho method of computation and the information to ba submitted in the 
 case of sales of stocks, bonds, etc., is similar to that required for Item C, 
 except that subsequent improvements and depreciation are not involved. The 
 profit (or loss) should be computed in accordance with Instruction 17 above. 
 
 19. OTHER INCOME. 
 
 Report all other taxable income for which no place is provided elsewhere 
 on page 1 of the return, including dividends reci'ivcd on stock of foreign cor- 
 poratious. Dividends received on stock of domestic corporations and taxable 
 interest on obligations of the United States should be reported in Items S, 9, 
 and 10 at the foot of page 2 of the return. 
 
 20. INTEREST PAID. 
 
 Enter as Item 10 interest paid on personal indebtedness as distinguished 
 from business indebtedness (which should be deducted under Schedules A, B, 
 C, or D). Do not include interest on indebtedness incurred for the purchase 
 of bonds and other obligations, the interest on which is excmi t from tax, 
 except interest on indebtedness incurred to purchase or carry oblieatioas of 
 tho United States issued after September 24, 1917, and originally subscribed 
 for by the taxpayer. 
 
 21. TAXES PAID. 
 
 Enter as Item 11 personal taxes pnid and all taxes on property not used 
 In business or profession, not including those assessed against local benefits 
 of a kind tending to increase the value of the property. Do not include 
 Federal income taxes, taxes imposed upon the taxpayer upon his interest as 
 lihareholdcr or member of a corporation, which are paid by the corporation 
 without reimbursement from the taxpayer, nor income and profits taxes 
 claimed as a credit in Item 23, page 1 of the returri. 
 
 22. LOSSES BY FIRE, STORM, ETC. 
 
 Enter as Item 12 losses of property not connected with your trade, business, 
 or profession, sustained during the year from fire, storm, shipwreck, or other 
 casualty, or from theft, which were not compensated for by insurance or other- 
 wise. (Losses chilmed should be explained in Schedule E, on page 2 of the 
 return.) 
 
 Do not deduct losses incurred in transartions which v.-ero neither cotmectod 
 with your trade or business, nor entered into for profit. 
 
 23. CONTRIBUTIONS. 
 
 Enter as Item 13 contributions or gifts made mthin tho taxable period to 
 or for tho uee of: (a) tho United States, any State, Territory, or any political 
 subdivision thereof, or the District of Columbia, for exclusively public pur- 
 poses; (6) any corporation, or commimity chest, fund, or foundation, orgam^ed 
 and operated eiclusivelj; for religious, charitable, srit>ntilic,literary, or edu- 
 cational purposes, including posts of the American Legion or-tlie Women's 
 Auxiliary units thereof, or lor tho prevention of cruelty to children or animals, 
 no part of the net earnings of which inures to the benefit of any private 
 stockholder or individual; or (c) the special fund for vocational rehabilitation 
 authori-'ed by section 7 of tlic Vocational Rehabilitation Act; to an amount 
 which in all the above cases combined docs not exceed 15 per centum of tho 
 taxpayer's net income as computed without the benefit of th is paragraph . 
 
 Fiduciaries filing this return for estates in the process of administration 
 are allowed, in lieu of this deduction, that provided in Section 219 (ft) of the 
 Revejiue Act of 1921. Liiit names of organizations and amounts contributed to 
 each in Schedule F. 
 
 24. BAD DEBTS. 
 
 Enter as Item 14 all "bad clebts other than those claimed as a deduction 
 in Items above. State in Schedule F (a) of what the debts consisted, (6) when 
 they were created, (c) whe:i they became due, and (t/) how they were actually 
 determined to be v/orthless. 
 
 25. OTHER AUTHORIZED DEDUCTIONS, 
 
 If this return is filed for an estate In the process of administration, there 
 
 DETACH AND RETAIN THIS INSTRUCTION SHEET WITH YOUR WORKING PAPERS. 
 
 COVCRHUENT PRMTtNC OFFICE 
 
 Illustration No. 163, Page 2 of Instructions for Individual Return.
 
 APPENDIX C 
 
 371 
 
 THIS RETURN SHOULD 
 BE FILED NOT LATER 
 THAN THE 15TH DAY 
 OF THE THIRD MONTH 
 FOLLOWING THE CLOSE 
 OF THE ACCOUNTING 
 PERIOD 
 
 PARTNERSHIP AND PERSONAL SERVICE CORPORATION RHURN OF INCOME 
 
 FOR CALENDAR YEAR 1922 
 
 Do not ^rilc in this spAC* 
 
 Or for priod begun . 
 
 1921, and ended ,1922 
 
 PRINT NAME AND ADDRESS PLAINLY BELOW 
 
 C. W. Keeland & Co. , 
 (Wii<i..y 
 
 208 Commeroe Street. 
 
 {8(tMt4odniimW.i 
 
 Clnoinnatl. Ohio. 
 
 Data r«c«Ivad 
 
 KINO OF BUSINESS ?^.^i.l„„?®®?:..-^.J...9-?.?.l STATE WHETHER PARTNERSHIP OR CORPORATION . 
 
 Partnerahtp 
 
 SCHEDULE A-INCOME TO BE ACCOUNTED FOR BY MEMBERS. 
 
 CROSS INCOME 
 . Groaa aalea, less returns nnd allowances - „ _ .„ l| I 26!. 4_7^ J 7 6 
 
 . Leas coal of goods sold, exclusivo of it«me called loraeparat^ly below (attach Schedule A2)... |..^ I ^,P.[..g.r.y.|.g.fi- 
 
 . Grots income from eervicoa or operatiooa other than trading 
 
 . Taxable interest from all other sources (not including in 
 
 . Rents .„ 
 
 . Royalties _ 
 
 . Share of net iDcome earned by a partnership or personal a 
 
 manufacturing, lesa allowances (attach Schedule A^).. 
 ■oferred to under Items 2 and 3, Schedule C) 
 
 e corporation (whether received c 
 
 
 . Dividenda subject to surtax only (attach Schedule A8) „. 
 
 . Dividends subject to both normal and surtax (attach Schedule A9) _ _ 
 
 . Other income (not including any amount reported in Item 23 below nor interest on Liberty Bonds) (atuch Schedule AlO).. 
 
 Total op Items 1 to 10 _ , 
 
 DEDUCTIONS ] 
 
 . Expenses (except amouots reported in Item 2 above, or called for separately belowj (attach Schedule A12) $... 
 
 . Compensation of partnera or stockholders in whatever form paid (attach Schedule A13) ' 
 
 . Repairs (including labor, supplies, etc.) (attach Schedule A14) „ _ „ „ „ 
 
 . Interest (attach Schedule A15) __ _ „ < 
 
 . Taxes (attach Schedule A16) „ „ | 
 
 . Bad debts (attach Schedule A17) „ L .. 
 
 . Exhaustion, wear and tear (including obsoleecence) (attach Schedule A18) _ 
 
 . Depletion (attach Schedule A19) _ .... 
 
 . Amortization of War facilities (attach Schedule A20) I 
 
 ToTAi, OF Items 12 to 20 _ 
 
 Item 11 hinds Item 21 _ „ „ 
 
 . Profit or lose en salee of capital assets and miscellaneous investments (attach Schedule A23) — I 
 
 . Losses sustained by fire, storm, etc. (attach Schedule A24). Extend diflerenco between or sum of Items 23 and 24 1.: 
 
 . Net Income TO BE AccotjsTED for by Members fiTFM 22 mikcb Item 24 extended) , 
 
 Enter below the ahare of net income 
 ons of the United States), each partnei 
 r corporation to a foreieii country or 
 
 If the distributable intiyesta in the 
 
 SCHEDULE B— PARTNERS' OR STOCKHOLDERS' SHARES OF INCOME AND CREDITS. 
 
 I (whether distributed r,r not) of i 
 
 's or stockholder's ehsre of any ir _ 
 
 [o a possession of the United States. (See page 1 of Instructions, paragraphs 9 to 14, inclusive.) 
 
 net income are determined on a basis other than a percentage basis, attach an explanatory statement. 
 
 c CoaPoaiTioN. 
 
 (1 address of «BCta, u shown oa lndlTtdual tax r 
 
 («)...C.^..W.^.K.?.9larld, 952 Park Ay^^^^^^ 
 
 (6K.A^_P.^..M\iP3A^J...814 Wajjiut 3^. Cinciimati.J One-half l.„ 
 
 2209 82 
 2209 1 82 
 
 , 4419L6.4j$ I T 
 
 The undersigned, being severally duly e»vtu, ^<».>i >ui uA>xi<n;<i v 
 and is to the best of his knowledge and belief a true and complete r 
 lions issued under the authority thereof. 
 
 Sworn to and eubscribed before me this day of 
 
 
 (Sltnatun ot offlctr BdmlnUUrlog oatb. ) 
 
 Membtr o/partntrihip. 
 Tntuurtr oj corporation. 
 
 Illustration No. 164, Page i of Partnership Income Tax Return.
 
 372 
 
 APPENDIX C 
 
 SCHEDULE C— RECONCILIATrON OF NET INCOME AND ANALYSIS OF CHANCES IN SURPLUS. 
 
 iteiMt on obUj;sU0DSOf the I 
 Victory Ubwtj Loan 3i% I 
 
 «pt 
 
 (o)li 
 
 ' Liberty L4m'3i%Not«S,&adobU^UoDS 
 
 Ol UOJICa BIUICI UOSMSSIODS — „„ 
 
 (b)IaUrastoa oblicatioDB of &Ute3,TemUirics.uid poliUoJ lub- 
 
 <e) Iat«r«toD Farm Coin Bond&lssued uadtf Federal Turn Lofto 
 
 .» mmsd durloe tbe period b 
 
 lisrEesifKl 
 
 ■r bad debts U lUm IT, Scbedola A 
 
 :;i:::::::::]:: 
 
 . ToUlof Itein3lto5,iadiulr«_ 
 
 I. Other credits U> surplus (to be d 
 
 (6> 
 
 . ToUl ot llOBS 8 to 10, lodiulve- 
 
 . ToUlfrom 18..„ „ 
 
 >ccounUngpenod(lt«mnii.l 
 
 TZJ 
 
 9, and coDtribatlons . 
 
 (a) DonaUou.Kra 
 
 (b) Uicome and profits i 
 
 or a (oreVn eouDirr — "..- - 
 
 (0 Spedal trnprorement tues tcndlcf 
 
 property auessed — 
 
 (d) Purnllor* and Bitures, additions, a 
 
 Jolted SUKj, lU pcosesslous 
 
 (t) Replacementi and rCTieirab... 
 
 Vioorr Liberty I^oan 3}% ] 
 (0 Add/uDDs to tinUJt'i'bladVaa 
 
 )I any oiSccf or employM lor 
 
 tb« porcbase of bonds and 
 itucb Is wboUy exampi Irom 
 Incorred to purtbase or cury 
 orlcliiaily eubscrlbfd to by 
 
 Ich en Dot included 'lii'itflm 
 
 id other conilfifeades (to be 
 
 0) Otbar unallowable dedocUons (lo be dMatted): Pl^jlO 
 
 143-9 164 I 
 I 25 100 
 
 (3)- 
 
 1 by balance sheet nt dose 
 
 f property): 
 
 . Total ot Item 
 
 (oj iJato pai^.' 
 
 (6) Dale paid Chartctcr. 
 
 le) Date paid. 
 
 (^ Date paid Oiaracter.. 
 
 surplus (to ba detailed): 
 
 fie 
 
 jzsfim: 
 
 SCHEDULE D— BALANCE SHEETS. 
 
 AtUch hereto balance Bbcets as at the beg^ning and end of the accounting period (preferably in parallel columns), ehowLng as nearly aa practicable the details called for bcio' 
 (These balance ehcete should be prepared from the boolca and should be in agroement therewith, or any differences ehould be reconciled.) 
 
 Casb (Inctading cash la banJc and on I 
 
 iccounta and ootes recclnblA (to be ctassUli 
 
 ). bonds and obligations (aadi Issae to be stat«d sepantclyi 
 
 Tools and mlfior rqulpmeoL 
 
 Other lstat« charactar). 
 
 I<ess reserves for deerec 
 applicable to each Us 
 
 Patents, food wUl. and elhi 
 
 Created by stool 
 Dlscotmt: 
 
 n and depletion (show soparatflyai 
 
 UABILTZIBS. 
 
 jthen (induding bank loaos). 
 
 I etpeoses and resnrea, the cbarges creating i 
 
 CapUal stock ootstandlnf ( 
 
 
 e claslfled) or all partocrs' capital d 
 
 * Reserres lor deprocUtlon maj be deducted ti 
 
 QUESTIONS. 
 
 -Afttcuitufe and 
 
 KIND OF BUSINESS. 
 
 ettcrs clvcD beltnr, Identify the corporaUon's main Income produd 
 follow this by a special description ol the business, suflicteDt to give 
 
 eA lodostries, Including flshinc, logeinc. loe harrestioi!, etc , and 
 J product or products. B— MLoing and quarr^ln^. Including ga 
 
 implied by 
 
 equipping and insuuing s&mi 
 
 ,_ .. electric light or power (hydro or steam 
 
 phooe. waterworks or power. Ea—Storafe— without trvdln^: o 
 yards, etc.) Stale prodoct stored. E4— Leasing transpoi 
 Trading in eoods bou^t and not produced by the trading o 
 
 
 
 ircbjlorotberrf 
 
 example, coooeras 
 
 •s. G— ServlCB— 
 faUlnc is abot« 
 
 
 a F may transport o 
 
 Srtand market their own product exchislvely or malnlv, i 
 C (monulacturtof) which own or control tbelrsouroe of material 
 e\i. or Install their own product exduslrely or malnlj, abculd be 
 may control or own source of supply of materials used exdusli^y 
 
 their own tTUH-ffhfttviiM, bat m [^odtKUon would Ideotliy Ihem 
 
 F _ _._ 
 
 pedficsUy I 
 
 D Uquldatloo. 
 
 class (use key letter dealgnalloD). 
 
 .R.fttail.. business 
 
 ..ProdU(?.t3:...hay.,.„grain,^ 
 
 
 OTHER CORPORATIONS IN SAME BUSINESS. 
 
 ddrwics of Ave rvpreseauUve corpontiODS I 
 
 )( the country ensagad in U 
 
 .. Dale ot orcanlzauon or incori-oi 
 
 Ike o%'cr or conduct part of the business of another 
 
 corparstiooT If so, sUta name and addms ol predecessor or otbei orcanluUoo. aod, la the latter 
 
 case, tbe Onandal, maAagertal. and coDtnctnal relatlonshlpi existing between yoaraclTU and the other orcsal- 
 
 VALUATIONS OF CAPITAL STOCK. 
 0. What was tbe talr value ol the toul capital stock ot the oorporatlonasdetenniDed in tbe but « 
 
 Uaoy, ot the capital stock taxF^..^..^ ~ 
 
 Dais ot that assessment _ 
 
 AFFIUATIONS WITH CORPORATIONS. 
 to. Does the corporation own directly or control through closely allUlated Interests or by a a 
 Domlooes over 70 percent ol the oatstanding voting capital slock of another corporsUonT ....... 
 
 rotlog capital s 
 e capital I 
 
 k owned by another corporation or by two or mote oorpora- 
 
 ck as well as owr TO per cent of the voiine ca;dlal stock ot 
 or controtkd by the same Individual or partnership or by 
 
 I. Ifthean»werloquesHonslO,H,andl2,oranyoflhem,U"yK; "IhefoUowinginfonnatlonshouIdbt 
 1 as at tbe becinnloK ol the Bccountlng period. Indicating any substantial changes durlog such period: 
 
 
 (NftmooTco^onUoo.) 
 
 
 .v»ME o, SR^taotm. 
 
 (NuiMotcorponiioaO 
 
 
 S1«™M4. ,^i'S,°<J2^; 
 
 slunsbeU. 
 
 Percentage of 
 
 
 
 
 
 
 
 . 
 
 
 
 1 
 
 
 
 
 1 
 
 
 
 
 1 
 
 1 
 
 aura nutsUDdin UtSSLnii, ot 
 
 
 
 Phar«9 ouuundinic en4 of vear 
 
 
 
 d slock Indicating (I 
 
 tdJvl 
 
 
 voting privileges may oe sacrificed or acquired. 
 
 (6) Stat? the dividend privileges of the rcspectlre classes cf stock: i 
 accounting period ; the date and rale of last dividend payment: and whi 
 preterred stock participates In the earnings above tbe fixed dividend rale. 
 
 (e) State If the preftrred stock has preference in respect to distribution of assets, dividends or otherwise. 
 
 (d) Show seperaiely the number ofshares or each class held by the respectlye stockholders of each company 
 
 {t) Indicate whether any of thoslock was held dunnglhe acroun ting period conditionally or by 
 expressed or ImpUed, and state whether such arraogtmeuis are considered valid, giving supporting n 
 (() Indicate whether any stock Ishcld bv emplovefs orofHcers and sUte their relntioiidiip 
 
 ocqulsiUon: <1) Par value of stock, (2) book value of stock; (3) market value of stock, (4) consideration or 
 amount paid lor such stock; (i) method of payment for such slock. 
 
 sUte the relations exlstlnc between the various stockhcaders and whether such slock was acquired by gift, pur- 
 corpcntlons a disproponionate tnare ol 
 
 (ft> ExDlainfuIlytbea 
 Foreign corporations m 
 
 GOVERNMENT CONTRACTS. 
 
 Hove an y^ adjustments during the accounting period been mode on account of ?'"*"j'^'^[j5l^JJ 
 --sotlromanyGovcmmcntrontraciorconiracUlnw you v 
 
 board or olhenrtser (Answer "Vcs" or "No")_i.'.r; 
 
 ; whether or not such amounta are Irclnilwl in thb 
 
 Qded retom accounlins for the additional Locofflo Hied 
 
 nUng period In which the contract was tenmnatedT Submit a schedule ihowing fuD 
 
 rs cliht wintract, date entcrvd into, date the work ceased under said contract or conirocts, aud Uio 
 
 AMORTIZATION. 
 
 bcendalffiodT (.Vnsrccr "yes" or "No") If so, for what year_ 
 
 (5ic« paragraph at top ol page 
 
 LIST OF ATTACHED SCHEDULES. 
 
 schedules accompsLnylDg this return, gl^'tiie '<" ^ach o b 
 
 le and a srtirdute number. 
 
 Illustration No. 165, Page 2 of Partnership Income Tax Return.
 
 APPENDIX C 
 
 373 
 
 Page 1 of InstructioDS. 
 
 GENERAL INSTRUCTIONS. 
 Partnership and Personal Service Corporation Return of Income. 
 
 1. Partnerships. — Every partnership, whether domostic or foreign, 
 doing business in the United States must make a return of income on 
 this form regardless of the amoant of its gross or net income. (See Sec- 
 tions 218 and 224 of Revenue Act of 1921.) 
 
 2. Personal service corporations. — Every personal service corporation 
 must make a return of income on this form regardless of the amount of its 
 gross or net income. (See Section 21S of Revenue Act of 192l.) 
 
 3. Personal service corporation defined. — The term "personal service 
 corporation" means a corporation, not expressly excluded, the income of 
 which is derived from a, profession or business (a) which consists prin- 
 cipally of rendering personal service, (6) the earnings of which are to be 
 ascribed prLniarUy to the activities of the principal owners or stock- 
 holders, and (c) m which the employment of capital is not necessary or 
 isonlyincideutaJ. (See Section 200, paragraph 5, Revenue Act of 1921.) 
 
 4. Corporations excluded. — The following classes of corporations are 
 expressly excluded from classification as personal service corporations: 
 (a) Foreign corporations: {b) corporations 50 per cent or more of whose 
 gross income consists of gains, profits, or income derived from trading as a 
 principal; and (c) corporations 50 per cent or more of whose gross income 
 consists of gains, profits, commissions, or other income derived from a 
 Government contract or contracts made between April 6, 1917, and 
 November 11, 1918. inclusive. 
 
 A corporation is not a personal service corporation merely because 
 less than 50 per cent of its gross income was derived from trading as a 
 principal or from Government contracts. A coi-poration can not be 
 considered a personal sen'ice corporation when another corporation owns 
 or controls substantially all of its stock, or when substantially all of its 
 stock and of the stock of another corporation, (not itself a personal 
 service corporation) forming part of the same business enterprise is 
 owned or controlled by the same interests. (See Sections 200 and 240 
 of the Revenue Act of 1921.) 
 
 5. More than one business. — A corporation engaged in two or more 
 professions or businesses which are more or less related, one of which 
 does not consist of rendering personal service, is not a personal service 
 corporation unless the nonporsonal service element is negligible or merely 
 incidental and no appreciable part of its earnings are to be ascribed to 
 such sources. (See also Section 303 of the Revenue Act of 1021.) 
 
 6. Activities of stoclholders. — In determining whether a corporation 
 is a personal service corporation, no weight can be given tothe fact that 
 it renders person&l services imless (a) the principal owners or stock- 
 holders are regularly engaged in the active conduct of its affairs, and are 
 engaged in such a manner that the earnings are to be ascribed primarily 
 to their activities, and (b) its affairs are conducted principally by such 
 owners or stockholders. If employees contribute substantially to the 
 services rendered by a corporation, it is not a personal service corporation 
 unless in every case in which services are so rendered the value of and the 
 compensation charged for such services are to be attributed primarily to 
 the experience or skill of the principal owners or stockholders. 
 
 7. Stocl: interest of active members. — No corporation or its owners 
 or stockholders shall make a return in the first instance on the basis of its 
 being a personal service corporation unless at least 80 per cent of its stock 
 is held by those regularly engaged in the active conduct of its affairs. 
 
 8. Capital. — In de,termining whether a corporation is a personal 
 service corporation, no weight can be given to the fact that the invested 
 capital of the corporation under Title III of the Act or the actual invest- 
 ment of the principal owners or stoclcholders is comparatively small. 
 If the use of capital is necessary or more than incidental, capital is a 
 material income- producing factor and the corporation is not a personal 
 service corporation. 
 
 INSTRUCTIONS FOR FILLING IN SCHEDULE B, PAGE 1. 
 
 9. This Schedule is to be used for showmg the share of each partner or 
 stockholder in the income of the partnership or personal service corporation, 
 whether distributed or not. Where the ownership of a personal service 
 corporation has changed during th^ accounting period, the distributed 
 portion of the net income is taxable to the recipients, while the undis- 
 tributed portion is taxable to the owners as at the end of the accounting 
 period. 
 
 10. Enter on lines (a), (6), (c), etc., the proportionate amount of the 
 totals shown in colxmins 3 and 4 to which each individual partner or 
 stockholder is entitled, whether distributed or not. If the amount to be 
 entered in column 4 is a loss, the amount should be indicated by red ink 
 or a minus sign. 
 
 11. If the partnership or personal service corporation received 
 directly or through another partnership, personal service corporation, or a 
 fiduciary, interest on corporation bonds containing a clause by which 
 the debtor corporation agrees to pay the interest without any deduction 
 
 for taxes, and there were filed with such interest coupons a white certificate, 
 Form 1000, not claiming exemption, a tax of 2 per cent was paid at the 
 source, and this ta.x should bo allocated to the members or stockholders in 
 column 5. 
 
 12. If any amount is entered in column 6, a copy of Form 1116, 
 completely filled in and sworn to or afiHrmed, must be submitted with 
 this return. If euch taxes have boon paid, Form lllti must have 
 attached to it the receipt or other evidence of each such tax payment. 
 If such taxe^ have been accrued, Form 1116 must have attached to it 
 a copy of the return on which each such accrued tax was based, or other 
 evidence as to the accrual of taxes. 
 
 13. When a credit is claimed on Form 1040 or Form 1040.\ for 
 accrued taxes, the Commissioner may, as a condition precedent to the 
 allowance of such credit, require the taxpayer to give a bond (Form 
 1117), with sureties satisfactory to and to be approved by him, in such 
 penal sum as he may require, conditioned for the payment by the tax- 
 payer of any amount of taxes found due if the taxes when paid differ 
 from the amoxmt claimed in respect thereof. 
 
 INTEREST ON LIBERTY BONDS. ETC. 
 
 14. In cose the partnership or personal service corporation owned 
 Liberty Bonds or other obligations of the United States issued since 
 September 1, 1917 (except Victory Liberty Loan 3j% Notes, and postal 
 saving certificates of deposit), or a share of these obligations hold by 
 another partnership, personal service corporation, or a fiduciary, the 
 partnership or personal service corporation ehoiJd odvLsc each partner 
 or stockholder as to his proportionate amount of these obligations and the 
 interest thereon, in order that the partner or stockholder may determine 
 whether the interest is taxable on his individual income-tax return. 
 
 PERIOD COVERED. 
 
 15. The accounting period is the calendar year ending December 31, 
 1921, or the fiscal year ending on the last day of any month other than 
 December in the calendar year 1921. The accounting period established 
 for the year immediately preceding must be adhered to, imless permis- 
 sion was received from the Commissioner to make a change. 
 
 16. If a partnership or corporation changes its accounting period, 
 it shall as soon as possible give to the collector for transmission to the 
 Commissioner written notice of such change and of its reasons therefor. 
 Upon approval by the Commissioner, the taxpayer shall thereafter make 
 his returns upon the basis of the new accounting period. (See Sections 
 212 (c) and 226, Revenue Act of 1921.) 
 
 TIME AND PLACE FOR FILING. 
 
 17. Returns must be sent to the Collector of Internal Revenue for the 
 district in which the partnership's or corporation's principal place of 
 business is located, so as to reach the Collector's office on or before the 
 15th day of the third month following the close of tHe accounting period. 
 
 SIGNATURES AND VERIFICATION. 
 
 18. Returns of partnerships must bo sworn to by a member of the 
 partnership. Corporation returns must be sworn to by the president, vice 
 president, or other principal officer and by the treasurer or assistant 
 treasurer of the corporation. If receivers, trustees in bankruptcy, or 
 assignees are operating the property or business of the partnership or 
 corporation, such receivers, trustees, or assignees shall execute the return 
 under oath. 
 
 PENALTY FOR FAILURE TO FILE RETURN ON TIME. 
 
 19. A penalty of not more than $1,000 attaches for failure to file a 
 tetum within the time required by law. If the failure is willful or an 
 attempt is made to defeat or evade the tax, the penalty is an amount 
 not in excess of $10,000 or imprisonment for not more than one year, or 
 both, together with costs of prosecution. 
 
 INFORMATION AT THE SOURCE. 
 
 20. Every corporation making pajTncnts of salaries, wages, interest, 
 rent, commissions, or other fixed or determinable income of $1,000 or 
 more during the calendar year, to any indi\'idual or partnership, is re- 
 quired to make a true and accurate return to the Commissioner of Internal 
 Revenue, showing the nature and source of such payments and tlie name 
 and address of the recipient. Forms 1096 and 1099. for reporting such 
 information, will be furnished by any collector of internal revenue. Such 
 returns of information covering the calendar year 1921 must be forwarded 
 to the Commissioner of Internal Revenue, Sorting Section, Wabhingtou, 
 D. C, in time to bo received not later than March 15, 1922. 
 
 Illustration No. i66, Page i of Instructions for Partnership Return.
 
 374 
 
 APPENDIX C 
 
 Page 2 o( Instructions. 
 
 SCHEDULES TO BE FURNISHED IN SUPPORT OF ITEMS IN SCHEDULE A. 
 
 The schedules called for below should be prepared and firmly attached to the return. Designate each schedule with the number of the item in 
 Schedule A which it explains. Make achedules on paper of unif orm size, so far as practicable, and enter the name and address on each sheet. Attach 
 a Ijst of schedules accompanying the return, giving for each a brief title and schedule number. 
 
 SCHEDULE A2: COST OF GOODS SOLD, EXCLUSIVE OF EXPENSES, 
 REPAIRS, AND OTHER ITEMS CALLED FOR SEPARATELY. 
 
 H you are engaged in a trade or buHinesa in which the production, purchase, or aale 
 of meichandifle ia an income- producing factor, (a) secure from the Collector of Internal 
 Revenue and &leaa a part of this return Certificate of Inrentory, Form 1126, and (6) submit 
 a schedule ehowing — 
 
 (1) Cost of merchandiae bought for aale. 
 
 (2) Cost of manufacturing or otherwise producing goods, (Liet principal items of 
 
 cost, grouping minor items in one amount.) 
 
 (3) Plus inventory at beginning of year. 
 
 (4) Total of Items I to 3. inclusive. 
 
 (5) Less inventory at end of year. 
 
 (C) Cost of goods sold, Item 4 minus Item 5. 
 
 Submit a schedule showing the nature and amount of the principal items included 
 herein, the minor items being grouped in one amount. 
 
 SCHEDULE A8: DIVIDENDS SUBJECT TO SURTAX ONLY. 
 
 Submit a schedule showing the amount received as dividends (a) from each domestic 
 corporation other than a corporation entitled to the benefits of Section 262 of the Revenue 
 Act of 1921, or (6t from each foreign corporation when it is shown to tiie satisfaction of the 
 Commissioner that more than 50 per centum of the gross income of such foreign corporation 
 for the three-year period ending with the close of its taxable year preceding the declaration 
 of euch dividends (or for such part of such period aa the corporation has been in existence! 
 was derived from sources within the United States aa determined under the provisions of 
 Section 217 of the Act. 
 
 SCHEDULE A9: DIVIDENDS SUBJECT TO BOTH NORMAL AND SURTAX. 
 
 Submit a schedule showing dividends subject to both normal and surtax, whether 
 received from foreign or domestic corporations, and which are not allowed as a credit 
 under Section 216 of the Revenue Act of 1921. 
 
 unt with respect to 
 interest on Liberty 
 
 SCHEDULE AlO: OTHER INCOME (not including any am 
 sales of capital aaseta or miscellaneous investments no 
 Bonds). 
 
 Submit a schedule showing the source, nature, and amount of the principal itenu 
 included herein, the minor items being grouped in one amount. 
 
 SCHEDULE A12: ORDINARY AND NECESSARY EXPENSES (except amounU 
 called for oeparately in Schedule A). 
 
 Submit a schedule ebowiog character and amount of the principal items includeJ 
 herein, the minor items being grouped in one amount. 
 
 SCHEDULE A13: COMPENSATION OF PARTNERS OR SHAREHOLDERS. 
 
 Submit a schedule showing for each member of the partnership or stockholder of the 
 corporation who was performing active service or who received compensation in any form 
 from the partnership or corporation, (a) name. (6) duties, (c) time devoted ti' such duties, 
 and id) total compensation for the accounting period. A personal service corporation 
 should also explain fully the manner and degree in which the earnings of the corporation 
 are dependent on the acliWties of the stockholders. 
 
 SCHEDULE A14: REPAIRS (including tabor, supplies, overhead, and other 
 items properly chargeable to repairs). 
 
 Submit a echcdule shiiwing the nature and amount of the principal items included 
 herein, the minor itema being grouped in one amount. 
 
 Incidental repair?, which do not add to the value or appreciably prolong the life of 
 property, are deductible as expenses. Expenditures for new buildings or for permaDeot 
 improvements or betterments which increase the value of the property are chargeable 
 to capital account. Expenditures for restoring or replacing property are not deductible 
 under this or any other item of the return. Such expenditures are chargeable to capital 
 account or to depreciation reserves, depending on the treatment of depreciation on the 
 books of the taxpayer. 
 
 SCHEDULE A15: INTEREST. 
 
 Submit a detailed schedule with respect to interest paid or credited to any member. 
 State the character and origin of the principal on which the interest was computed, and 
 whether such principal is evidenced by notes or other forms of contract. Describe fully. 
 
 Theamountof interest deductible under Item 15, Schedule A, is the amount of interest 
 paid or accrued within the taxable year on indebtodneea, except on indebtedness incurred 
 or continued to purchase or carry obligations or securities (other than obligations of the 
 United States issued after September 24, 1917, and originally subscribed for by the tax- 
 payer) the inlercet upon which is wholly exempt from taxation. 
 
 SCHEDULE AI6: TAXES. 
 
 Submit a schedule showing 
 (a) income, war profits and excei 
 States, (b) 90 much of the incom( 
 authority of any foreign country 
 credit under Section 222, neveni. 
 a kind tending 
 the taxpayer upon his 
 
 nposed by the 
 
 by the corporation unlhout i 
 
 xcs paid or accrued within the taxable year except 
 
 profits taxes imposed by the authority of the United 
 
 war profits and excess profits taxi 
 
 r possession of the United States, 
 Revenue Act of 1921, (c) taxes assessed agai 
 the value of the property assessed, and (<f) 1 
 erost as shareholder or member of a corporati 
 
 nbun 
 
 ■nent from the taxpayc 
 
 local benefits of 
 ?8 imposed upon 
 which are paid 
 
 SCHEDULE A17i BAD DEBTS. 
 
 Submit a schedule showing debts, or portions thereof, arising from sales or professional 
 services that have been reported as income, which have been definitely ascertained to 
 be worthless and charged oft within the accounting period, or auch reasonable amount 
 as has been added to a reserve for bad debts within the year. 
 
 If the amount entered as Item 17, Schedule A, ia an addition to a reserve, fumiih 
 proof of the reasonableness of the amount. (See Section 234 (a) 5 of the Revenue Act 
 of 1921.) 
 
 SCHEDULE A18: EXHAUSTION, WEAR AND TEAR (including obsolescence). 
 
 Submit a schedule in colujrnar form showing for each t;laa8 of property the following 
 'information: 
 
 (1) Kind of property (if buildings, state material of which constructed). 
 
 (2) Date acquired. 
 
 (3) Age when acquired. 
 
 (4) Cost, or if acquired prior to March t, 1913, the fair market value on that date. 
 
 (5) Probable life after acquirement. 
 
 (6) Amount of depreciation charged oft this year. 
 
 (7) Total amount of depreciation charged off previous to thJB year. 
 
 The total amount claimed in this schedule should correspond with the figures reflected 
 in the balance sheet. 
 
 If obsolescence is a factor Li determining your deduction, attach a statement showing 
 the amount claimed for the accounting period and the basis on which computed. 
 
 The amount deductible on account of d.^preciation ia an amount charged off which 
 fairly measures the loss during the accounting period in the value of physical property by 
 reason of exhaustion, wear, tear, and obsolescence. Such an amount should be determined 
 on the basis of the cost of the property, or if acquired prior to XIarch 1 . 1913, the fair market 
 value on that date and the probable number of years constituting ita life. The capital 
 sum to be replaced should be charged off over the probable life of the property either in 
 equal annual installments or in accordance with any other recognized trade practice, such 
 asanapportionmtntof the capital sum over units of production. Whatever plan or method 
 of apportionment is adopted must be reasonable and should be described in the return. 
 Stocks, bonds, and like securities are not subject to exhaustion, wear and tear within the 
 meaning of the law. 
 
 SCHEDULE A19: DEPLETION. 
 
 If a deduction is claimed on account of depletion, secure from the Collector Fortn X) 
 (minerals), Form E (coal), Form F (miscellaneous nonmetals). Form (oil and gaa), or 
 Form T (timber), fill in and file with return. If complete valuation data has been filed 
 with questionnaire in previous yeaiB, then file with this return information necessary to 
 bring your depletion schedule up to date, setting forth in full statement. of all transactions 
 bearing on deductions or additions to value of physical asaet^ n'ith explanation of how 
 depletion deduction for the accounting period has been determined. In case of timber 
 this should be done by filling in Form T (timber). 
 
 SCHEDULE A20: AMORTIZATION OF WAR FACILITIES. 
 
 In case a deduction is claimed on account of amortization, a schedule should be sub- 
 mitted containing the information called for in Guide Form 1007M, which explains in 
 detail the manner in which a claim of this nature should be presented. A copy of this 
 form may be obtained from the Commisaioner. (See Section 214 [a) 9 of the Revenue Act 
 of 1921.) 
 
 Submit a schedule in columnar form showing the following information for each a3aet 
 sold: 
 
 (1) Kind of property. 
 {2} Date acquired. 
 
 (3) Sale price. 
 
 (4) Cost. 
 
 (5) Fair market value o 
 
 (6) Cost of subsequent 
 
 (7) Depreciation. 
 
 (8) Net profit (or loss). 
 
 (9) Amount in column 5 which represents good will, if any. 
 
 If any of the assets were acquired prior to March 1, 1913, state how the (air marbi 
 \'alue on that date was determined. 
 
 In case of exchange of property, submit evidence substantiating the basij u^ed i 
 arri\'ing at the (air market value of the property received, 
 
 1 March 1, 1913, if acquired prior to that date, 
 mprovementa. 
 
 SCHEDULE A24: LOSSES SUSTAINED BY FIRE. STORM, ETC. 
 
 A schedule similar to the one requested above should be submitted with respect to 
 losses of property arising from fires, storms, shipwreck, or other casualty, or from theft, 
 and not compensated for by insurance or olherwiae, except that column 3 should show 
 " Insurance and salvage " instead of "Sale price." 
 
 CAPITAL EMPLOYED IN BUSINESS. 
 
 If the balance sheet (Schedule D) of a personal service corporation indicates that a 
 substantial amount of capital (invested or borrowed) is employed in the business, submit a 
 statement explaining why the employment of sucji capital is incidental and not necessary. 
 
 WORKING PAPERS. 
 
 Every partnership or corporation should pressrve, available for inspection by a revenue 
 officer, working papers showing — 
 
 1. The balance in each account on the partnership's or corporation's books that 
 
 was used in preparing Schedule A. 
 
 2. The amount deducted from each such balance on account of each class of non- 
 
 taxable income, unallowable deductions, and other adjustments indicated 
 in Schedule C, vath a reference to the number of the item in Schedule C in 
 which each amount so deducted was included. 
 
 3. The remainder of each such balance, analyzed to ehow the amount included 
 
 in each item of Schedule A, ■with a reference to the number of the item in 
 Schedule A. s— 11743 
 
 Illustration No. 167, Page 2 of Instructions for Partnership Return.
 
 APPENDIX C 
 
 375 
 
 Form 1120 
 
 U. S. INTEENJU, ReTEOTE 
 
 CORPORATION INCOME AND PROFITS TAX RETURN 
 
 FOR CALENDAR YEAR 192 
 Or for period begun , 192 , and ended _ , 192 
 
 PRIKT PLAINLY CORPORATION'S NAME AND BUSINESS ADDRESS 
 
 J. A. T7hltney & Co., 
 
 Page 1 of Return 
 
 (DO NOI WHITE IN THESE SPACES) 
 
 THIS RETURN SHOULD 
 BE FILED NOT LATER 
 THAN THE 15TH DAY 
 OF THE THIRD MONTH 
 
 Eiaaiadbr 
 
 (Cuhln-.Sump) 
 
 FOLLOWING THE CLOSE 
 
 OF THE TAXABLE 
 
 PERIOD 
 
 815 Main Street, 
 
 
 <Slract KDJ DumUr.) 
 
 Cinoirmati, Ohio. 
 
 
 
 (I'MtofflMondiltau.) 
 
 CASH CHECI M.O. CERT. OPINIO 
 
 KIND OF BUSINESS- 
 
 Wholesale Srooery 
 
 IS THIS A CONSOLIDATED RETURN 7 NO 
 
 SCHEDULE A— TAXABLE NET INCOME. 
 
 CROSS INCOME. 1 
 
 108 1 393 
 
 73 
 
 »___.. 
 
 34 
 ^1.. 
 
 335 
 .44.1. 
 
 32 
 .96. 
 
 ■73" 
 
 
 36 
 
 
 
 2. Leaa cost of rooJh sold, exclasivo of itema called for Boparately b«1ow (from Schedule .\2). 1 , 
 
 741056 
 
 41 
 
 1 
 
 3. Groea income from operationa other than trading or manufacturing, leea allowances (from Schedule A3) 
 
 105 
 
 
 
 
 
 
 
 
 
 l.'SB 
 
 94 
 
 
 
 
 " "~ 
 
 
 
 
 
 8. Share of net income earned by personal service corporation (whether received or not) 
 
 
 
 
 10. Gross income from all other sources (not including any amount reported in Item 23, bolow) (fimn Schedule AW) 
 
 ■■". 
 
 85 
 
 00 
 
 
 
 
 95 
 
 DEDUCTIONS. 
 
 12. Expensee (except amounts reported in Item 2 above, or called for separately below) (from Schedule A 
 
 
 f zs 
 
 248 
 
 000 
 
 31 
 
 00 
 
 
 30 
 
 092 
 
 
 
 5 
 
 
 
 1 
 
 018 
 
 fiO 
 
 
 
 
 .2.Q7_ 
 
 ^ 
 
 
 
 
 
 TOR 
 
 ?fi 
 
 
 IS. Exhaustion, .^ear and tear (including obsolescence) (from Schedule A18) „ 
 
 10 Tl„i,1„i;„n ((mm .S<-),™1.,1« »1Q) 
 
 i 
 
 
 £56 
 
 22. 
 
 
 ■"I "" 
 
 
 20. Amortiration of war facilitiee (fmm Schedule A20) 1 ! 
 
 
 
 
 21. Total OF Items 12 TO 20 _ 
 
 12 
 
 2?. Ttkvi 11 MlNii.'i Item 21 ._ _.. 
 
 « 1 6 
 
 013^81. 
 
 
 1 
 
 1 
 
 
 24. Lessee by fire, storm, etc. (From Schedule A2'l.) (Extend difference between or sum of Items 23 
 
 and 24) ..1 J 
 
 1 
 
 1 
 
 ... 
 
 ^ — "T" " 
 
 1 — 
 
 
 
 1 
 
 27. Net Inxomr (Item 25 minus Item 26) tif return ia for a period less than twelve months, see page 1 of Instructions, paneraph 10) . . 
 
 s. 
 
 .6 
 
 013 183 
 
 SCHEDULE B— INVESTED CAPITAL. 
 
 . Capital, euipliu, and undivided pro&ta at be^iuDg of taxable period (from Schedule E, Item 11).. 
 . riuB adjuetmcnta by way of additiona (from Schedule F, Item 4) 
 
 . Less adjufitmeDtd by way of deductioos (from Schedule G, Item 7)_ 
 
 . riu3 or minuB chaogee in invested capital during taxable period (net lacrease or Decrease from Schedule Q) 
 
 Total (or Remaisdes).„ „_ 
 
 , Lc33 deduction on account of inadmissible aaseta (from Schedule J) 
 
 ..3i|.5.2.e..L4l 
 
 5 063 !4S 
 
 02"..26.4.'S.a. 
 
 ,6 1 56.3 [17. 
 
 y. Invested capital for taxable period.. . 
 
 ' - I 
 
 i....3.6-i..a4.6.'..15. 
 
 SCHEDULE C— EXCESS PROFITS CREDIT. 
 
 1. Eight per cent of invested capital for taxable period (Item 9 of Schedule D) „ 
 
 2. Exemption ($3,000) (except for a foreign corporation or a corporation satisf>-ing the conditiona provided in Section 262 of the Act) . 
 
 3. Excess Profila Credit (Item 1 plus Item 2) 
 
 SCHEDULE D— COMPUTATION OF TAXES. 
 
 (ITEII 27, ^CHXDULZ ^ 
 
 s Proftts Cactnr 
 
 . Daumce SeBlZCT TO Tax. 
 
 I. AMOtrm or Tax. 
 
 -. 20* S- 
 J40» L 
 
 . Net income, not in excess of 20^ of invested capital 
 
 . Totals computed under Section 301(a) 
 
 .6....Q.13..!.8.3_5 
 
 .6.I..107.I.85L l.....l'.one 
 
 I I 
 
 . Exccsa Profits Tax, if computed under SectioDS 302, 303, 3 04{c> or 337 of the Revenue Act of 1921 (i 
 . Net income (Item 27, Schedule A) 
 oMIi^tloos of 
 
 UUtod &tAtes(lU<m4 
 Eicou pro&U tftx (Itei 
 
 homi 
 
 nlc corporation 
 
 10. Balance flt^m 5. Ices Items8, 7, and 9, or Iteroa 6, 8. and 9)..|$-. 
 
 .Gli 
 
 .82.. 
 
 9 2 of InatTuctiona. paragraph 14> 
 
 11. Tncomo tax (\0% of Item 10) 
 
 12. If net income dooa not exceed $:2^,200, enter amount 
 in exccoB of 126.000 
 
 13. Totaltax(Item3or4lhcIcsBer,or8.plu5ltcmsllaodl2). 
 
 14. I-ms: Incoma und T>roOLi tuu paid 
 
 15. T»x pttKl » " "* ' '" ' 
 
 16. Balanco o 
 
 e Aci ofini}.. 
 c (Item 13 m 
 
 a Itcma 14 and 15) 
 
 401 1 38 
 
 An amended i 
 
 : b« plainly marked "Amended.* 
 
 Chccka and drafts will be accepted only if payable nt par. 
 
 Illustration No. i68, Page i of Corporation Income Tax Return.
 
 376 
 
 APPENDIX C 
 
 Page 2 of Return. 
 
 centered In thIssctieJula 
 
 
 
 e precedlDK taxable period. 
 
 ^fmputios net Incomo asTv-lunied In prevlCTu years may.ir properly ftxplained, bo enWed 
 
 ElO. If th8con>oratloo liad on hand at any tlmo diirlnR the toiablo period any treasury s( 
 nial entries coverinBthooriirioaliisuinee. repossession and any subseqwsnt adjustroenlsstn: 
 asory s'oct Includes all stock reacquired by the corporation and not conceM, regardless of 
 cqiilsliloB. 
 
 Capital stockpald up i 
 
 1. First preferred.,,. 
 
 2, Seresd prclened^ 
 
 d actually outstaDdlac at tbe close o( t he precedlnc year 
 
 ■5.0.Q0P..--Q.Q-. 
 
 Surplus and uodlrlded profits: 
 5. Paid-in surplus. , 
 
 (to be reoDQclled 
 S. Otber Iteisi (to be detailed). 
 
 -■'T'"' 
 
 ...acQQQ.on.,.. 
 
 ,.3.73Z8..AX.. 
 
 ..Z1ZZS..A1.. 
 
 SCHEDULE F.-ADJUSTMENTS BY WAY OF ADDITIONS, 
 
 IdltloD to tnrejl«d capital h claimed In Item 1. Schedule F. submit i 
 roperty, (^) the year In which 1 1 mas paid In. (c) from whom acquired. e» 
 ration, (d) the actualcash Tohie of snch property at the date when paid Ir 
 sued therefor and tbo amount at which such property was entered in the a 
 
 it ot depreciation sustained o: 
 
 3 Icrdepredatloc 
 
 e beslnrlne of the 
 te bet;lrrinf; of the 1 
 
 ildepreclaiio 
 
 
 at the beglnnln 
 proposed res tot 
 
 3. Schedule F, stale specifically tb 
 e beciuulng o( f'b (luible period. 
 
 I.», 
 
 .„ou„,. 
 
 '•■■'|f;?K;;*s's?sS^'i;roW,'?;&^^^^^^^ 
 
 
 - Mim tt !. t «(<«>6 cU™32«(.13oUheArt) 
 
 
 .i. IJoprMlalion or ilepletion r^arrrd In the awvunls of the MMporallon bol 
 
 
 ,. T-T,, 
 
 
 SCHEDULE C— ADJUSTMENTS E 
 
 - DEDUCTIONS. 
 
 CI. Is any patent. copyrlEht, t 
 other simlliir Intangible property, i 
 not entered speciTically as such, Is I 
 
 
 ID? ..-;?2cr... in 
 
 U acquired pnor to ) 
 stocic outsi ending oi 
 
 itangible value mereed under anj 
 
 It Issued therelorT ..?2slf-- 
 
 le par value ol 
 
 r 
 
 mpleto explanation of the basis upon » 
 le besitmlDg of the tasoble period, (/) thi 
 
 Ifnll 
 
 he inlanplbles were acqwl 
 
 ll^?tim1 
 
 Intanciblenww. 
 Bibles excwds 
 
 acquired 
 
 Bee"e»K) 
 
 oliotanc 
 
 blessb 
 
 yinote.ce 
 
 lUst be included 
 e March 3, 19i:. 
 > Included In invested caplUI for i 
 
 KoTE.~If the stocic ol tbo corporatloD was Issued at a nominal value or wl 
 
 of issue. The agiirecate value so determfTiPd of stock out-itandliie on Uarcb 3 
 tiuabia period, Eball bo the basis lor tho computation. 
 
 'boutstandlngattbebeglniiint: 
 
 )r the purpose 
 'ginning ol the 
 
 i.„t ...2z<r 
 
 n acquired, (f ) par val 
 
 sttwoc;uestionsls' 
 ksdotcnnlned,(/)T 
 tern 2, Schedule G, 
 
 it by IhecorporatK 
 
 r Section 326 (a) 2 of the Rovcm 
 
 lo period. 
 
 mgcd ownership re 
 
 C3. Was the business reincorporated, rcorgwiiied, or consolidated or was tl 
 • change la ownership ol property after March 3, 19I7f — -^^^^ "*"• 
 
 (o) Did on Interest of SO per cent or more Id the business or la the property _. „__ . __ , __ 
 
 'in the control ol the same persons, corporations, associations, or portncrihlps. or of any ot themT ..i^?**:. 
 
 (b) Woreony ol the assets entered on tho books ol tho corporation making this return at a hlgher^ilue than 
 on the books©; its predecesscrT gtZ^. 
 
 (c) If such previous ovucr was not a corporation, attach a statement showing (O the cost ol acquisition to 
 the previous owner ol any asset so trmsferred or received, (-)eipeji<ijtures subsequent to that dateCor bettcnncnl 
 or development not deducted as expense or otherwise since ilorcb 1 , 1913. by such previous owner ,(3) the allow. 
 aneo lor depreciation, depTellun, or 1 rapolnncnt since the date of acquliition by such previous owner. 
 
 (if) If all, or substantially all. ot the properly was acquired (rom a corporation during the taxable period, 
 Bttach hereto balance sheets of such predecessor corpora tlonsar at thehegtnningoi tho taiaMe period end asat the 
 Oatolminodiately prior to tho transfer of the property to the corporation maJrin? the return, and al5.> a baliinct 
 sheet or statement of the corporation making tbJs return showing the values at which such properly received 
 
 
 [vested capital e: 
 
 %, Is any property (includin; physical property, securities, and laianpblc property) paid for with cash 
 'i other tonslble property entered on the books of thr> corporation at a value In excess ol the amount of cash 
 
 berefor or the actual cash value ot the tanpiblc property paid therefor? J^iZ^Of.... II so, suhmjt a 
 
 ,rs (u) kind of property, (6) amount of cash paid therefor, (e) actual cash vaUio of other tangible 
 properly paid tbcrc'or, (rf) how I 
 
 d(/)cxccssol{0over(6)or(c) 
 for the laiahlc period. 
 
 kind? LJaJLA^,...., CO depredation? ..U^. 
 mineral iK^osits. llmNir supplier, ar^d the lilfr? . 
 
 
 e period or periods la which I 
 
 !. VaUia 
 
 Vatuallor 
 
 property paid In ton 
 
 L Apprerlatlnn - 
 
 I. Depreclitlon, depletion, I 
 
 
 D Boothrr corporation.. 
 
 (n) Dysaleofcapit: 
 (ft) By payment of 
 
 
 ) Dy payment-olc; 
 
 (n) If si 
 
 Instructions should be followed in maldn 
 ,Uon or deduction, deduction beinc dfsifni 
 
 Is schedule. Assets (other than ca.^ ) paid in for stock must 
 
 t6) I( capital stock ot the corporation Is reacquired but not 
 stock should bo deducted tromlavested capital. 
 
 (() Report diridends paid out otproRtsol prior years but i 
 period. Any distribution made during the Brst fiO days ol the ta 
 from earnings or profits accumulated during preceding ta.iob 
 
 dates when due and payable w 
 
 Should no obangas be no 
 
 ed.thereasoo 
 
 bove adjustments; each 1 
 
 em should be 
 
 o amount of discount) she 
 
 jM bo entered 
 
 leonlyl 
 
 ered In column 7 equsis total Income and prsi 
 uinns 1 to 5 should be given for a 
 rroacquisillon ot tho corporaiions 
 
 Ibo proBts tor that period l< 
 1 bo prorated and dedufli 
 [ multlpUedbyO. 
 
 blo period (Including tl 
 
 e date of change). 
 ir decreases reflected 
 
 ,nth.b«l,nc.sh»tt. 
 
 »'<">• 
 
 luUjr^ODdMlhmrtlh. 
 
 
 
 '•s;;'.'y^;r.- 
 
 .L. 
 
 3i 
 
 "'.Lu?" 
 
 BCtiM.ryrecrivwI 
 or poid out. 
 
 eirffivl 
 
 7. Adjusted averaee. 
 
 ^ Ns. dar. >D Uubl. / 
 
 
 'Ask: 
 ■lllJx.: 
 
 ^... 
 
 Z'M'.. 
 
 .IBDJlt 
 
 Zk/.^i* 
 
 ..j.a.t.f,M 
 
 
 i.jr.a.ac.-Cff. 
 .~..^.r..c..£A 
 .-.iJ-.a..'/./. 
 
 M!/.i.x3. 
 
 '.: ^ - 
 
 'M.-. 
 
 .ZL..}^. 
 
 ^ 
 
 
 
 
 
 
 
 ». KET IMC^BASS OB VtCXXASK 
 
 t.2.Jr.'ir3..i.7. 
 
 Xlas the corporation 
 
 ilallorpartotthelnie 
 the capital invested Ir 
 
 SCHEDULE J.-INADIVIISSIBLE ASSETS. 
 
 r obligations, except obligation) 
 
 i in part of gain or proQt from the sale or other disposition thereof, or 
 
 le)7 ,..2Z^.. 
 
 [ved Ir 
 
 
 Is deemed a 
 
 nedcjlved from such assets and the computation of tho part ot the capital 
 e Inadmissible assets shall bo valued at cost of acquisition, except that II 
 
 icid a: 
 
 D Regulations 
 
 1 during any year may 
 beginning of the tax- 
 
 Kloiljuii'i with respect to tho 
 nespondingly adjusted. Cut 
 
 icr authority of the Revenue 
 
 held at beginning ol 
 
 sld at beginning of t! 
 
 Illustration No. 169, Page 2 of Corporation Income Tax Return.
 
 APPENDIX C 
 
 377 
 
 Pasro 3 of Return. 
 
 QUESTIONS. 
 
 KIND OF BUSINESS. 
 
 1. By mcftDB of the key lottora given bolow, identify the 
 producing ft^tinty with one ol th« general 
 of the busincflB sulTicieot to pive the information called for under ench ppneral rlaas 
 
 A. — Aerit-ulluro and rebtrd indufltrie«. includint: ri^hinR, logjnnK. ico harvertinf*, 
 and (Ubo the leasing of such Droporty. State the product or prodi " - .- ■ 
 
 > product * 
 
 'kntfXw 
 
 MioiDg and 
 
 luding ga3 and oO wellB. and also the loaain^; of such proj: 
 ■ proffucta. C. — Miuiuffictiiring. State tho product and also the material 
 plied by the name of tlie product. D. — Conotruction— oxcavfttiooB, buildingn, 
 bridf;c9, railroads, nbipe, etc , al«> e<|uipping And inatalling same with Bj'StemB. deWcec. 
 or machinery, without thcL- manuiacturo. Stite nature of etructurea built, matcriala 
 used, or kind of inntallationfl. El.— Transportation—rail, water. local, etc. State- tho 
 kind and epecial product transported, if any. E2.— Public utilities— gaa (natural, coal, 
 or water); electric lipht or power (hydro or eteam generated); beating (steam or hot water); 
 telephone; watcnrorka or power. E8.— tutorage — without trading or profit from salea — 
 (elevators, warebousea. Htocltjarda, etc) State product rtored. E4.— leasing transpor- 
 tation or utilitiea. State kind of property. P. — Tracing in goods bought and uot pro- 
 duced by the trading concert). Stato manner of trade, whether wholeaaje, retail, or com- 
 miaaion.'and product handled. SaJos with etorage with profit primarily from aalea. O. — 
 ■ -e— doniertir, including hotels, reslauranta, etc.: amu"ement3; other profeasional. 
 
 porsonal. or technical 
 several of th< 
 
 H. — Finance, including banking, 
 
 nee. I. — roncems not falling in above clawca (a) because of combining 
 
 ith no pr<vlominant buflotas, or (b) fr^r other reasons. 
 
 whose bumoeas involves activity falling in two or more of the above 
 
 here the lamf product is concerned, should report buaineee as identified 
 
 * ■ * • example, concerns in A or B which also 
 
 avely or mainly, should still bo identified 
 
 1 C (manufacturing) which own or control the' 
 
 ly in A or n and which also transport, aell, or install their own prw 
 
 ■ mainly, should be identified witii manufacturing; coacema in T> may 
 
 control or own eource of supply of materials used exclusively or nuunly i 
 
 i work; concerns in El or E2 may own or control the source of their material or power; 
 
 icluaively • 
 
 product 
 
 r construc- 
 
 F may transport or otore their own merchandise, but its production would 
 identify them with A, B, or C. 
 
 3. Answers: p 
 
 ia) (General clase fuse kev letter designation) „". -. 
 
 (6) Main income-prod ucing buaiuess igive epecifically the information called for 
 under each Key letter, also whether acting as principal, or aa a^cnt c 
 
 
 1 liquidation).. 
 
 ..y^Jl'tPj e s al e...bu3_in e_S3^^ 
 Product: groceries . 
 
 OTHER CORPORATIONS IN SAME BUSINESS. 
 
 4. Enter on the following lines the names and flddressea of five representative corpora- 
 tions in your locality or section of the couutr\' engaged in tho eame kind ol business: 
 
 ■The Colter Company. 555 Reading Roftd. City. 
 
 Fo ltz Gro . & B aking. Co., 7 E. V/ater St., City. 
 
 ^lati.„Whole.3ale..Gro.....Cb..,...9th 
 
 American Grocery Co. . 580 W. Sixth St.. City. 
 
 .Janszen. Grocery Co.. Second & V?al nut. Ci ty. 
 
 INCORPORATION. 
 
 6. Date of incorporation Jan)iary_Jl. 
 
 6. Under the laws of what State or countr,- .Qhi.Q. 
 
 192. 
 
 REORGANIZATION AND ACQUISITION OF MIXED AGGREGATES OF ASSETS. 
 
 T!F/ ofi',3 prrdeassoTs, been reorganized, or hae it, or any 
 
 v ?(iuire'i a mi:^ed aggregate of tangible 
 
 3 whole or in part with stock or other 
 
 . statement 
 
 7. Has the corporation^ 
 ofit$ ■predecrssort , taken over a gning bii 
 and intangible property, and paid lor Buch property 
 
 aecurities since the closo of the preceding taxable period? j^^.Q 
 
 8. If 80, furnish a brief narrative history of the buaioesa and eubmit 
 showing: 
 
 (a} The name of the concern taken over (or fmm which the property was acquired); 
 CoS The nature of the assets and liabilities eo acniiircd ; 
 (c) TIio total par value of the stock ieaucd therefor, 
 
 (if) The value at which each claae of asBets waa carried on the booke of the concern 
 from which acquired (submit a balance sheet of the predecessor concern as at the dato of 
 
 thifl return, and full details of any adjuatmenta subsequently made pertaining thereto a _ 
 the basis on which such revaluation was made. 
 
 9. If patents, copyrighta, secret proceeses or formula?, pood will, trade-marks, trade 
 brands, franchises, or other intangible property we.-e acquired, ?tato the basis on which 
 their \-alijG was determined and how they were paid for. 
 
 10. 1 f at the time of any purchase or reorganization a 
 property wa 
 
 e entered on the books of the r 
 a value in exceee of that at whirh it waa carried c 
 the basis on which the revaluation was made. 
 
 , the books of the vendor c 
 
 II. Does the corporati( 
 
 by 
 
 another 
 
 tions owned or controlled by the e 
 r partnerships? ■._, 
 
 r partnerahip or by the s 
 
 a directly or control through closely afRIioted inlerestB or 
 ' 70 per cent of the outstanding voting capital stock of 
 
 Ito 
 
 •orporation or of other corporationa? 
 
 iz. IS over 70 per cent of your outstanding voting capital stock owned by another cor- 
 poration or by two or more corporations that are affiliated? Ai.9. , 
 
 13. Is over 70 per cent of your outstanding voUng capital stock aa well aa over 70 per 
 cent of the outetandint; voting capital stock of another corporation or of other < 
 
 e individuals 
 
 14. If tho answer to questions II, 12, and l-t. oi 
 following: 
 
 (a) Did tho corporation file AflUintcdCorporatic 
 
 If the 
 
 T^ 
 
 
 to any of them, i« "yes." aninrer the 
 
 9 Quertionnairo, Form 819. for 1917 or 
 
 .nswrr to IhLa nuetitioD i« "yed." a 
 circuavtancoe ae!<?ribcd in question 
 
 and tho answer t*> questioOB 11, 12, and 
 
 procure from the Tollpctor of Internal Itovonuo for y 
 district Form 810. which shall bo filled out and filed a« a part of this roluru. II 
 answer to thin queBtion iB "no," quertion (6) need not bo answered 
 ({>) Did ouDBtantialty tho aamo conditions, as ■ 
 
 1*)20 or prior yearp, obtain during th< 
 
 If the answer to this quoetion is "no." : 
 
 the situation has changed, should bo attache*) to i 
 
 have been subBtantial changea in stockholdinp, 
 
 should bo eubmit ted in tho form pre 
 
 U tho 
 
 tho queBtionnoiro filed for 
 
 taxable period 1021? 
 
 itting forth the poniculars in which 
 
 aadn a part of this rt'turti. If there 
 
 ipleto Bchudule of BUch changes 
 
 TablcB 3 and 6 of tho quivitionnai 
 If there are companies other than thoae covc-ftHi by tho queationnairo for 1»20 or prior 
 yeara which, appfpngthe te«tjicontaine<l iu questions 11, 12, or 13, may havo comn into 
 the affiliated group since 1020, a questionnaire, Form 819, is required for the entire 
 group for the taxable period. 
 
 VALUATION OF CAPITAL STOCK. 
 
 15. What was tho fair valuo of tho total capital etock of tho corporaUon ts determined 
 in the last asBeasment. if any. of the capital Btock tax7 $..22.gQ.Q.:.P.Q. Dat« of tlmt 
 asaesBment iJine^JSg^ J,92 . „. 
 
 PREDECESSOR BUSINESS. 
 
 16. Did the corporation file a return undor the same name (or tho praceding taxable 
 
 period?' .„,iS.3. If not. was the eorpofation in any way i 
 
 continuation, or reorganization of a business or bosi 
 
 03," give namo and oddnMS of 
 
 BASIS OF RETURN. 
 
 17. Is this return made on the basis of actual receipts and disbursements? — *IS- 
 Qot, describe fully what other basis or method was used in computing net income — 
 
 Accrual 
 
 GOVERNMENT CONTRACTS. 
 
 ) from which the corporation derived i 
 operations of a claim board or otherwise? 
 "yes, " state the amounts involved $ 
 
 3 directly or indirectly, through the 
 _ Tf the answer to this question is 
 ; whether or not such amounts 
 
 9 included in this return ._ 
 for the additional i 
 
 was terminated'' 
 
 dato entered into, dato the 
 and naturo of the adjuatment. 
 
 AMORTIZATION. 
 
 19. Has amortizotiou been claimed? 
 
 is " yee, " state for what year .. Amount $ — 
 
 LIST OF ATTACHED SCHEDULES. 
 
 n, giving for each a brief 
 
 To _acGpmp_anx,.S.chedul of In- . 
 
 Xent.ory'.^..FprTn...ll26..„„ „ . 
 
 S chedule A3 : Gross Income from Operatlona 
 
 Other thaji Trad ir,g_or.Jlan^^ 
 
 S ched.-a 1 o A 1 : Gr o 3 3 „ Inc pjne _f i^Qm^JL l_Q.t hjL? 
 
 __. Sourcea 
 
 .Schedule A 12: 
 Schedule A 13: 
 
 ExpenseSj 
 
 -Q-9^-P-'g-^-g'^J.^o^- °-^- Officers . 
 
 .Schedule_,A14:_Re£air^ 
 
 Schedule A16: Taxes. 
 
 .SchMul.e. A17;,._ Bad. Debtg.... 
 
 To ac compaiijf.. Schedule.. A^^ 
 
 " " " '" „" Gi:_Go.odw.lll.i. 
 
 _]] 7 "_ G3_(„cJj._.?X®-TiO]^sjp.wn.er 
 
 Xal^ation of Assets at Time of Acguisl- 
 
 tionhy CorDorationj; 
 
 Schedule K: Balance Sheets. 
 
 SCHEDULE K.— BALANCE SHEETS. 
 
 s practicable the detailB called for below. ( 
 lidatcd return, balance sheets i 
 
 Otber aecouats tnd 
 
 ASSETS- ContJouoO. 
 
 ASSETS- Omtlnuvd. 
 
 UAfilUTIES. 
 
 rrs«r\'ri (to b« detailM). 
 :k ouMandtDC (lo ba eb 
 d uoDvtded pnflU. 
 
 All corporations engaged in an interstate and introHtate trade or >)urane8s and roporuni 
 officer, may submit in lieu of above form, copies of their balance ohceta prescribed by said i 
 
 10 UabllUr 
 liiiicipal authi 
 
 of xtM htkUaco i1 
 
 Illustration No. 170, Page 3 of Corporation Income Tax Return.
 
 378 
 
 APPENDIX C 
 
 Page 4 of Return. 
 
 SCHEDULE L.— RECONCILIATION OF NET INCOME AND ANALYSIS OF CHANGES IN SURPLUS. 
 
 
 »... _.. 
 
 5 
 
 013 
 
 85.' 
 
 13. Unallowable deductions: 
 
 
 inn 
 
 nn 
 
 3 Ngnttiable Incoma: 
 
 (a) Interofc on obUEnUonaotthttUnitod States and lb pMswsIoos 
 
 
 
 (6) Income and prolJU i^xos paid to (he United fiUtes.lU poa- 
 sesaions, or rorclpn countli^■^ 
 
 — 
 
 
 
 
 (5) latcrpit OQ ObVigaUoas of States, TerritoriM, aad political sub-' 
 
 
 
 
 
 
 
 
 {fl Furniture and (lita'rMroddiUonV, orbettormenu'treaMd Vj' 
 
 
 
 — 
 
 (d; Dividends deductible under SecUon 33tfa] 6 ol the Revenuu 
 
 <e) B*placamenW and renewals — 
 
 (/) Insurance prPtniums paid on the ll/o olx.ay officer or oisployee 
 
 wheroihccorp.jraHonlsd;rccUvcrindirectlyab«ncricfarr.... 
 
 (fl) Interest on indebi*dn».-a incutrrd or contmuod to purchase or 
 
 carry obUiri'.i'ii - •-:ar\u- . fi'i^ Inllcd StaUs. the interest 
 
 Incurred I'.T ry 3?;% Notes, origlaally 
 
 
 
 
 
 — 
 
 (0 Dlvtdpn.l5 oD slf«k otp^rwnal (wrrico corpcratlons ool of earo- 
 
 i ncs upon ■which b. Federal Income Oa b» been imposed 
 
 </} OtberitcmsorDootuablolDcomedobedDtaUod): 
 
 (., 
 
 
 
 
 
 — 
 
 -- 
 
 ~ 
 
 
 
 
 
 
 
 <*) *f^'i^|^^ ,':' ' " "'^^ =»" =0* tacluded 
 
 
 
 
 
 
 
 
 
 (i) Addttlonsto '1 ' ! , .|„i reserves (or bad d«bts 
 and other c*u*mKUi-.iL = ^ l .. ./« ^i^Ul..udJ; 
 
 
 3. ChBfijwnpilnstreserTesrorbaddebls.ltlUniK.SebedtileA.lsnottn j | 
 
 
 1 
 
 
 
 
 
 
 
 
 
 1 I 
 
 _._ 
 
 (6) _ 
 
 
 
 
 
 
 
 • 1 
 
 
 /■>^ 
 
 
 " 1 " " 
 
 
 5. Total or Items 1 to 4, IncliulTo — 
 
 3 
 
 _.3.!.0l3.ie3.. 
 
 
 
 
 
 
 e. Totol from Iwm 14 .„ _. 
 
 
 Iigoj.oo 
 
 M. TolMofltcviia 
 
 15. Dhidends p-ild durinc the taiahto period (itata whether paid In cub, 
 stock ot this compoDf, or other property): 
 
 r 
 
 
 M)0 
 
 Ttrr 
 
 7. Net prodt for year as shown by books, before any adjostments are 
 
 t 
 
 51913 183 
 
 
 
 
 
 *, Surplus ana undivided profits as shown by halaoca sheet at close ot 
 
 7 
 
 38fl 
 
 41 
 
 
 
 
 
 
 
 
 
 
 
 
 s. otber credit, to EUTlns (to be detailed): 
 
 (c) Date paid . .. . Character 
 
 
 
 
 
 
 — 
 
 (1) 
 
 
 
 
 
 
 
 
 16. Other debits to sorplu; (to be detailed): 
 
 f„y ISii., Income Tax 
 
 
 
 ..5.21. 
 
 55 
 
 
 f 
 
 ZlS" 
 
 .521.155. 
 
 
 1 
 
 
 17 ' 
 
 
 1 
 
 
 
 12. Surplus and undivided profits as shown by balance sheet at close or 
 taxable period (Item lOmlnos Item in 
 
 J 
 
 _.12J 72DJ.63.. 
 
 
 ! .....J LS.S1. 
 
 EC 
 
 SCHEDLXES TO BE FURNISHED IN SUPPORT OF ITEMS IN SCHEDULE A. 
 
 The followicg Dchedulea muflt be furniflhed, and thoeo prepared on acparatc shectfl ehould be firmly attached to thia return, Enter name and address ot corporation on each eheet. 
 
 SCHEDULE A2: COST OP GOODS SOLD. EXCLUSrVE OF ITEMS CALLED FOR SEPARATELY. 
 If engaged In a *"»''•«' business In which f^o production, nurcbai*. or ailo^of merchandise of any^Wnd 
 
 aiely before Uie amount calutoo. tb" ictwrs "C," cr "C or il," to indicate that iaveaiories is« valucd'at C4tber 
 
 '°'\"ul)Z,"ST^^aX'lii'°"': - - - t .9.Q.7.14...14 
 
 a being grouped Ii 
 
 » beglnato; of year.. 
 it end olyear 
 
 C or V. 
 
 14606.05.. 
 
 ....10..5.5.2.0...19. 
 
 ..C...Qr..Ji.... ■3.12.6.l.-..?.a 
 
 being ^rfuped in 
 SCHEDULE A4: 
 
 COHE FROM OPERATIOITS OTHER TI 
 
 ■ tha nature end amount of thn prindpal Items U 
 
 IHTEREST ON LIBERT? BONDS. ETC. 
 
 ...-.7.4.Q5a*41..... 
 t MAim- 
 
 e period, attacs a 
 50lidated rotuxn, c; 
 
 
 ETomptions. 
 (AEgrcgolo Principal Amount). 
 
 5. Principal amount 
 
 prineipSfa^ 
 
 
 3 SSOMO 3 8135 000 
 
 4 S500a 
 
 oxe'Spllons 
 
 
 
 
 
 '" ''i"rlhl'S^li"°i"'°°'"^°°' 
 
 
 
 
 
 ""'Cu3!l'Sd','^°'rS 
 
 
 
 
 
 <e) other obUpttioQs issued since 
 September 1. 1917 (cjceptVic- 
 
 
 
 
 
 id) Victory LiDcrtv Loon 4}% 
 
 
 
 
 
 
 
 
 
 s 
 
 SCHEDULE AIO: GROSS DICOME FROM J 
 leipect to sale ot upllsl aeaMa or mlscellaneeaa li 
 
 iienia being grouped In ono ftoiount. The loial ol 
 SCHEDULE A12: EXPENSES (eieept ameunU 
 Rubmlt a statetr.ent showing character and an 
 lielQC crouped In one amount. (For schedules to 
 tions. r^'-^^"pbs3io7. ) 
 
 J^CHEDULE A13: COMPENSATION OF 
 
 : REPAIRS (Inclodlos 
 duloshoiring 
 
 being grouped u 
 SCHEDULE A: 
 
 SCHEDULE All: BAD DEBTS. 
 
 ? SOURCES (not Inelndlng any amoonl wlt!i 
 of tbc principal Items Included herein, the minor 
 
 by insurance com panics see pace 2 of Instruc- 
 
 fl, f 3) time deTof «1 toanch dntks.M) shares nf 
 compensation (or the tasablo period, and (S) 
 
 llcma pnpeily charseabia to 
 
 Lions, paragrapb 8.) 
 
 luppUe*. overlieed, and 
 ount of the prlnclpil iioi 
 
 
 a salei or profrsslonal services that hare 
 :scrve, tumisb proof of the rcasonablemss 
 
 : EXHAUSTION. ' 
 
 ludlnf obseleacence). 
 rasrapb 10, and S..>cUon Jj*(e) 7 
 
 
 
 J 
 
 Jepreclatlon ctairsod ol 
 
 ......S.os.o.e.i. /.S.:So\. i.7.J.£ 
 
 -^jiaod /.<?.::r.e\ /.zas. 
 
 ..■2:_Q..Cgrm t.C!..JM /Z.S.:2Ji. 
 
 J.OP..O0.Q\ ..../.:^.^..-.('.S\ ....J.OO.P.O. 
 
 \ij:r:c!X.o(^i...z.j:.c.:i.-i 
 
 
 T In dotormlnloc y 
 
 li computed. 
 
 
 lalmod for the taxable period and the b 
 SCHEDULE AlS: DEPLETION. 
 
 If a deduction Is claimed on acwnint of depletion, sei 
 
 or addidons to ralue of physical 8s.«eis with explanation o( how depletion d 
 
 SCHEDULE A20: AMORTIZATION 
 
 SCHEDULE ^ 
 
 ISVESTMB 
 In caso of < 
 
 nisbed.uilngn 
 
 Kl). °^' era ^ 
 
 • OR LOSS ON SALES OF CAPITAL J 
 
 o^r. (Sc^eSKUonZll 
 ) MISCELLANEOUS 
 
 l.KlndoIptopmty. 
 
 ^S^l 
 
 3. 6ala 
 price. 
 
 4. Cost. 
 
 SH' 
 
 "m'S."' 
 
 ■■■^ 
 
 profit 
 (or loas.) 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total 
 
 >. — 
 
 value of property received .-._ — 
 
 SCHEDULE A2I: LOSSES BY FIRE, E 
 
 SCHEDULE A2f 
 
 than a corporal lo 
 
 i should bo ■;nbmltted ^ 
 
 I PREMIDM ON BONDS SOLD. 
 
 )n drtTF the folfo»ini-''uiforin&ticT)*foi ciasf. m t 
 
 ot tho corporatioa for which thia return 13 mado. bein;? Beverally duly ewom, each for himBelf deposes and Bays that thu return, 
 
 ^v.,..^oB .... „..„^^,„..,„6 jnt«, baa be«n examined bv him and is. to the best of hia knowledge and belief, a true and complete return mado m good faith, for the 
 
 taxable period aa st^ited, pursuant to the Revenue Act of 1921 and tho Regulations iseued under authority thereof. 
 
 ,Dd subscribed before mo this . 
 
 (OOtclnl capacity.) 
 
 Illustration No. 171, Page 4 of Corporation Income Tax Return.
 
 ALPHABETICAL INDEX 
 
 Page 
 
 A. B. A. Check, § 83 113 
 
 Acceptance, § 92, ^ i 121 
 
 Account, Defined, §12 9 
 
 Accounting, Defined, § iii 139 
 
 Account Sales, § 231 240 
 
 Accounts Payable, § 28 22 
 
 Accounts Payable Account, §§ 163. 
 
 309 172, 280 
 
 Accounts Peculiar to a Corporation, §§ 265- 
 
 275 256-260 
 
 Accounts Peculiar to a Partnership, § 121 . . 142 
 
 Accounts Receivable, § 27 21 
 
 Accounts Receivable Account, §§ 161, 
 
 308 169, 280 
 
 Accounts with Merchandise, § 138 155 
 
 Accrued Interest Cost, § 201 209 
 
 Accrued Interest Cost Account, § 202 210 
 
 Accrued Interest Earned, § 193 205 
 
 Accrued Interest Earned Account, § 194. . . 205 
 
 Accrued Wages, § 197 207 
 
 Accrued Wages Account, § 198 207 
 
 Adjusting Entries, § 46, If 4, § 217 56, 219 
 
 Administrative Expense Account, § 155. . . . 165 
 
 Admission of a Partner, §118 142 
 
 Advertising Cost, § 289 273 
 
 Advertising Expense Account, § 290 273 
 
 Advertising Material Account, § 291 273 
 
 Agencies, § 300 277 
 
 Agent's Account with Principal, § 301 277 
 
 Agreement of Principal's and Agent's Ac- 
 counts, § 303 278 
 
 Analysis of Closing Entries 94, 95, 96 
 
 Analytical Statement, § 323 300 
 
 Arrangement of Accounts, § 190 202 
 
 Articles of Copartnership, §115 140 
 
 Ascertaining Cost of Goods Manufactured 
 
 and Sold, § 337 321 
 
 Ascertaining the Profit or Loss, § 48 77 
 
 Assessment, § 257 253 
 
 Asset, § 3 _ 5 
 
 Authorized Capital Stock Sold at Time of 
 
 Organization, § 284 265 
 
 Auxiliary Book, § 171 181 
 
 Balance of an Account, §12 9 
 
 Balance Sheet, §§ 50, 219 79, 222 
 
 Balancing an Account, § 61 89 
 
 Bank, Defined, § 71 107 
 
 Opening an Account with, § 72 107 
 
 Bank Draft, Defined, §81 112 
 
 Bar Graph, § 346 331 
 
 Bill, Defined, § 68 102 
 
 Bill of Lading, § 179 190 
 
 Bond, § 259 253 
 
 Bonds Payable Account, § 274 259 
 
 Book of Original Entry, Defined, § 21 14 
 
 Bookkeeping, Defined, §§ 8, 1 1 1 7, 139 
 
 Books of Account for Mercantile Business, 
 
 §311 283 
 
 Books of Account Peculiar to a Corpora- 
 tion, §§ 276-283 261-264 
 
 Books of Account with Special Columns .284-292 
 Branch Store Account, § 305 279 
 
 Page 
 
 Branch Store Accounting, § 304 278 
 
 Branch Store Inventory Account, § 306. . . . 279 
 
 Building Expense Account, § 156 165 
 
 Buildings Account, § 135 151 
 
 Business, §2 5 
 
 Purpose of Organizing a, § 137 155 
 
 Business Forms and Accounts for Consign- 
 ments, § 229 239 
 
 Business Form or Voucher, § 63 99 
 
 Filing, § 70 104 
 
 Use of, § 64 99 
 
 Business Letter, § 177 189 
 
 Business Transaction, Defined, § 7 6 
 
 How Recorded, §311 283 
 
 Buying Expense Account, § 151 163 
 
 Capital, §§ 33, 109, 114 32, 130, 140 
 
 Capital Accounts, §§34, 122 33, 142 
 
 Capital and Capital Stock, § 244 249 
 
 Capital Stock Account, § 265 256 
 
 Capital Stock Sold on Installment Plan, 
 
 § 287 269 
 
 Cash Account, §15 10 
 
 Cash Book, §§ 43, 168 50, 177 
 
 Posting from, § 45 53 
 
 Cash Journal, § 353 , 347 
 
 Cash Proof, §§ 16, 44, 168, \ \ 10, 51, 179 
 
 Cash Purchases, § 38 43 
 
 Cash Receipts Journal, § 355 352 
 
 Cash Record, § 42 50 
 
 Cash Sales, § 40 46 
 
 Cashier's Check, Defined, § 82 113 
 
 Certified Check, § 178 190 
 
 Charter, § 246 249 
 
 Check, Defined, § 76 109 
 
 Check Book, § 175 184 
 
 Circular Graph, § 348 333 
 
 Classification of Stock, § 249 251 
 
 Closing Entries, § 46, II 4, § 222 .56, 226, 313-315 
 
 Closing the Ledger, Defined, § 53 87 
 
 Entries Necessary, §§ 57, 222 88, 226 
 
 Methods of, § 58 ". 88 
 
 C. O. D. Shipments, § 187 198 
 
 Collateral Security, § 319 298 
 
 Collecting Notes and Drafts, § 185 198 
 
 Combined Journal Entry 93 
 
 Commission Account, § 236 242 
 
 Commission Set 245 
 
 Common Stock, § 250 251 
 
 Comparative Balance Sheet, § 341 327 
 
 Interpretation of, § 342 327 
 
 Comparative Statement of Profit and Loss, 
 
 §343--; 327 
 
 Interpretation of, §344 327 
 
 Compensation of Consignee, § 227 239 
 
 Consignee, Defined, § 225 239 
 
 Consignment, Defined, § 225 239 
 
 Purpose of, § 228 239 
 
 Consignment In Account, § 234 242 
 
 Consignment Out Account, § 232 241 
 
 Consignor, Defined, § 225 239 
 
 Controlling Account, §§ 160, 307 169, 280 
 
 379
 
 38o 
 
 ALPHABETICAL INDEX 
 
 Page 
 
 Corporation, Defined, § 240 247 
 
 Accounts Peculiar to, §§ 265-275. . . .256-260 
 
 Bookkeeping for, § 264 255 
 
 Books of Account Peculiar to, §§ 276- 
 
 283 261 -264 
 
 Comparison with Partnership, § 242 248 
 
 Income Tax for, § 263 254 
 
 Method of Conducting Business, § 262. . . 254 
 
 Method of Organizing, § 245 249 
 
 Opening Entries for, §§ 284-287 265-270 
 
 Proprietorship in, § 243 248 
 
 Purpose of, § 241 247 
 
 Corporation Organized to Continue a Go- 
 ing Business, § 286 267 
 
 Corporation Problems 337~344 
 
 Correcting Entries, § 46, ^ 3 56 
 
 Correcting Errors, § 189 202 
 
 Cost, §5 6 
 
 Credit Defined, §13 9 
 
 Credit Bill, § 180 I93 
 
 Creditor, Defined, § 25 21 
 
 Current Assets, Defined, § 109 130 
 
 Current Entries, § 46, ^ 2 56 
 
 Current Liabilities, Defined, § 109 130 
 
 Curved Graph, § 347 332 
 
 Customer, Defined, § 25 21 
 
 Day Letter, § 181, 1[ 2 193 
 
 Debit, Defined, § 13 9 
 
 Deferred Charges to Operation, § 205 211 
 
 Deferred Credits to Income, § 210 214 
 
 Deferred Credit to Building Revenue Ac- 
 count, § 211 214 
 
 Delivery Equipment Account, § 132 150 
 
 Delivery Expense, § 297 275 
 
 Delivery Expense Account, §§ 153,298.164, 276 
 
 Deposit Ticket, Defined, § 73 107 
 
 Depositor's Record of His Transactions 
 
 with the Bank, § 78 1 10 
 
 Depreciation, §§ 127, 325 147, 301 
 
 Detecting Errors in Trial Balance, § 192 . . . 203 
 Direct Method of Closing, §§ 60, 365. . .89, 359 
 Discount, see Interest, Merchandise Discount. 
 
 Dividend, § 256 253 
 
 Dividend Account, §272 259 
 
 Domestic Exchange, § 186 198 
 
 Draft, Defined, § 91 120 
 
 Collection of , § 1 85 198 
 
 Effect of, on Bookkeeping Records, § 97. 122 
 
 Endorsement of, § 96 122 
 
 Use of, § 95 122 
 
 Drayage Account, § 238 245 
 
 Endorsements, §§ 84, 88 114, 119 
 
 Endorsements for Transfer, § 85 115 
 
 Endorsement, Position of, § 84 , 114 
 
 Entries for the Admission or Withdrawal of 
 
 Partner, § 125 144 
 
 Entries Required to Close the Ledger, § 57 . 88 
 
 Exchange, §§ 81, 186 112, 198 
 
 Exhibit, § 321 299 
 
 Expense, § 31 32 
 
 Expense Account, § 32 32 
 
 Express Money Order, see Money Orders. 
 
 Express Shipments, C. O. D., § 187, H 2 . . . 200 
 
 Face of a Note, § 86, H i 118 
 
 Fast Day Message, § 181, If i 193 
 
 Filing Business Forms and Vouchers, § 70. . 104 
 
 Page 
 
 Fiscal Period, Defined, § 47 77 
 
 Fixed Assets, §§ 99, 109, 126 126, 130, 147 
 
 Foreign Exchange, § 186 198 
 
 Forming a Partnership, § 117 142 
 
 Freight In Account, § 142 157 
 
 Freight Out Account, § 299 276 
 
 Freight Shipments, C. O. D., § 187, 1| i . . . 199 
 
 Furniture and Fixtures Account, § 100 126 
 
 Garage Set 352 
 
 General Journal, §§ 46, 169 55, 180 
 
 Posting from, § 46, t 5 56 
 
 General Rule for Debits and Credits, § 108. 129 
 
 Goodwill Account, § 275 260 
 
 Graph, Defined, § 345 330 
 
 How to Correct Errors, § 189 202 
 
 Income, §5 6 
 
 Income Accounts, § 109 130 
 
 Income Tax Return, Appendix C 364 
 
 For Individual, Illustrated 367-370 
 
 For Partnership, Illustrated 371-374 
 
 For Corporation, Illustrated 375~378 
 
 Index to Ledger, § 191 202 
 
 Instructions for Writing Checks, § 77 109 
 
 Insurance Account, § 208 213 
 
 Insurance Policy Record, § 174 181 
 
 Interest, Defined, § 104 127 
 
 Accrued, §§ 193, 201 205, 209 
 
 Legal Rate of, § 104, 1[ 2 128 
 
 Method of Calculating, § 104, If 4 128 
 
 Interest Cost Account, §§ 106, 158. . . .129, 166 
 
 Interest Earned Account, §§ 107, 149. .129, 159 
 Interpretation of Comparative Balance 
 
 Sheet, § 342 _. 327 
 
 Interpretation of Comparative Statement 
 
 of Profit and Loss, § 344 327 
 
 Inventory, Defined, § 49 77 
 
 Inventory Account, §§ 55, 143 87, 157 
 
 Closing the 96 
 
 Inventory of Consignments In, § 235 242 
 
 Inventory of Consignments Out, § 233 241 
 
 Invoice, § 66 100 
 
 Invoice of Shipment, § 230 239 
 
 Journal, Defined, § 22 14 
 
 Posting from, § 23 15 
 
 Journal Entry Method of Closing, § 59 . . . . 89 
 
 Journal Voucher, § 320 299 
 
 Labor Account, § 335 321 
 
 Land Account, § 134 151 
 
 Ledger, §§ 14, 170 9, 181 
 
 Legal Rate of Interest, § 104, ^2 128 
 
 Letter, see Business Letter. 
 
 Liability, § 3- • -. 5 
 
 List of Inventories, Accruals, etc., § 216. . . 217 
 
 Loss, §§5, 109 6, 130 
 
 Loss on Doubtful Accounts Account, § 154 . 164 
 
 Manufacturing, § 333 320 
 
 Manufacturing Account, § 338 322 
 
 Manufacturing Expense Account, §336. . . . 321 
 
 Manufacturing Process, § 340 323 
 
 Materials Account, § 334 320 
 
 Maturity Value of a Note, § 86, If 2 118 
 
 Memorandum, § 179 190
 
 ALPHABETICAL INDEX 
 
 381 
 
 Page 
 
 Merchandise Accounts, § 138 155 
 
 Merchandise, Defined, § 17 10 
 
 Merchandise Discount, § 147 I59 
 
 Merchandise Inventory, § 49 77 
 
 Method of Ascertaining Cost of Goods 
 
 Manufactured and Sold, § 337 321 
 
 Method of Ascertaining Profit or Loss, § 48 77 
 Method of Determining Debits and Credits, 
 
 § 108 129 
 
 Method of Forming a Partnership, § 117.. . 142 
 
 Method of Maicing a Deposit, § 74 107 
 
 Method of Recording C. O. D. Shipments, 
 
 § 188 202 
 
 Methods of Closing the Ledger, § 58 88 
 
 Minute Book, § 283 264 
 
 Model Set 61-74 
 
 Purchases Journal, Illustrated 61 
 
 Sales Journal, Illustrated 62, 63 
 
 General Journal, Illustrated 64 
 
 Cash Book, Illustrated 66, 67, 68, 69 
 
 Ledger, Illustrated 70, 71, 72, 73 
 
 Trial Balances, Illustrated 74 
 
 Money Orders, Defined, § 83 113 
 
 Name of an Asset or a Liability, § 4 6 
 
 Name of a Cost or an Income, §6 6 
 
 New Accounts Required to Close Ledger, 
 
 §54 87 
 
 Night Letter, § 181, ^ 4 194 
 
 Night Message, § 181, t 3 i94 
 
 Non-operating Expense, § 157 165 
 
 Non-operating Income, § 137 155 
 
 No Par Value Stock, § 252 252 
 
 Note, Defined, § 86 118 
 
 Collection of, § 185 198 
 
 Effect of, on Bookkeeping Records, §89. 119 
 
 Endorsement of, § 88 119 
 
 Signing a, § 90 120 
 
 Use of, § 87 118 
 
 Notes Payable Account, § 103 127 
 
 Notes Payable Book, § 173 181 
 
 Notes Receivable Account, § 102 127 
 
 Notes Receivable Book, § 172 181 
 
 Notes Receivable Discounted Account, § 310 281 
 
 Number of Accounts in the Ledger, § 14. . 9 
 
 Numbering Accounts, § 324 300 
 
 Office Equipment Account, § 128 148 
 
 Office Supplies Account, § 206 212 
 
 Opening an Account with the Bank, § 72.. . 107 
 
 Opening Entries, § 46, 1[ I 55 
 
 Operating Cost, §§ 31, 109, 150. . . .32, 130, 163 
 
 Operating Income, § 137 155 
 
 Order, see Purchase Order. 
 
 Organization Expense Account, § 273 259 
 
 Original, § 179 190 
 
 Outline of Accounts, Part I, § 109. 130 
 
 Outline of Accounts, Part II, § 164 173 
 
 Parcel Post Shipments, C. O. D., § 187, 
 
 \?, 200 
 
 Partner's Capital Account, § 122 142 
 
 Partnership, Defined, §112 139 
 
 Accounts Peculiar to, § I2I 142 
 
 Capital of, § 114 140 
 
 Income Tax Return for, § 120 142 
 
 Method of Forming, § 1 17 142 
 
 Opening Entries for, § 124 143 
 
 Purpose of Forming, § 113 139 
 
 Page 
 
 Partner's Personal Account, § 123 143 
 
 Partnership Problems 231-237 
 
 Part of Authorized Capital Stock Sold at 
 
 Time of Organization, § 285 266 
 
 Partial Payments on Account, § 27, ^ 5, 
 
 §28, If 5 22, 23 
 
 Partial Payments on Note, § 88 119 
 
 Pass Book, § 75 108 
 
 Payment of Invoice Less Discount, § 184. . 197 
 
 Percentages, § 349 334 
 
 Personal Accounts, § 26 21 
 
 Petty Cash Book, §313 283 
 
 Petty Cash Fund, § 312 283 
 
 Postal Money Orders, see Money Orders. 
 
 Post-closing Entries, § 223 228, 315 
 
 Post-closing Trial Balance, §§ 62, 224. . .89, 229 
 
 Posting from the Journal, § 23 15 
 
 General Journal, § 46, 1| 5 56 
 
 Purchases Journal, § 39 44 
 
 Sales Journal, § 41 48 
 
 Cash Book, § 45 53 
 
 Power of Attorney, § 318 298 
 
 Preferred Stock, § 251 252 
 
 Principal's Account with Agent, § 302 278 
 
 Profit, §5 6 
 
 Special, § 109 130 
 
 Profit and Loss Account, § 56 88 
 
 Proof of Net Profit, §§ 52, 221 84, 224 
 
 Proprietor's Capital Account, § 34 33 
 
 Proprietor's Personal Account, § 33 33 
 
 Proprietorship, Defined, §3 5 
 
 Proving Cash, §§ 16, 44, 168, If i.. . .10, 51, 179 
 
 Protest, § 98 123 
 
 Purpose of Bookkeeping, §§9, 10 7 
 
 Purchase Invoice, Defined, § 66 100 
 
 Purchase Order, Defined, § 65 99 
 
 Purchases Account, §§ 17, 139 10, 156 
 
 Purchases Journal, §§ 38, 166 43, 177 
 
 Posting from, § 39 44 
 
 Purchases on Account, § 25 21 
 
 Purchases Allowances Account, § 141.. 156 
 
 Purchases Discount Account, § 148 159 
 
 Purchases Returns Account, § 140 156 
 
 Radio Set I37 
 
 Receipt, Defined, § 69 103 
 
 Reconciliation of Bank Account, § 80 in 
 
 Recording Transactions, §§ 19, 24, 37, 46 
 
 II, 15, 43- 55 
 
 Red Ink Method of Closing, § 365 359 
 
 Relation Between the Partners, § 116 140 
 
 Relation Between the Two Reports, § 52. . . 84 
 Relation of Consignor and Consignee, § 226 239 
 
 Requirements of the Individual, §1 5 
 
 Reser\'e Accounts, § 127 147 
 
 Buildings, § 136 152 
 
 Delivery Equipment, § 133 150 
 
 Doubtful Accounts, § 162 171 
 
 Office Equipment, § 129 148 
 
 Store Fixtures, § 131 149 
 
 Retirement of a Partner, § 119 142 
 
 Rule for Debits and Credits, § 108 129 
 
 Ruling Personal Accounts, § 27, If 4 22 
 
 Ruling Profit and Loss Accounts 92 
 
 Salaries in Selling Department Account, 
 
 § 292 274
 
 382 
 
 ALPHABETICAL INDEX 
 
 Page 
 
 Sales Account, §§ i8, 144 10, 158 
 
 Sales Invoice, § 66 100 
 
 Sales Journal, §§ 40, 167, 354 46, 177, 352 
 
 Posting from, § 41 48 
 
 Sales Allowances Account, § 146 158 
 
 Sales Discount Account, § 159 166 
 
 Sales Returns Account, § 145 158 
 
 Sales Ticket, Defined, § 67 102 
 
 Sales on Account, § 25 21 
 
 Schedule, § 322 300 
 
 Selling Expense, § 288 273 
 
 Selling Expense Account, § 152 163 
 
 Shipping Order, § 179 1,90 
 
 Shipping Room Material Account, § 206, 
 
 note 212 
 
 Sight Draft, Defined, § 93 121 
 
 Signature Card, Defined, § 72 107 
 
 Signing a Note, § 90 120 
 
 Single Entry, §§ 356-364 353-358 
 
 Sinking Fund, § 260 254 
 
 Sinking Fund Reserve, § 261 254 
 
 Space Required for an Account, § 14 9 
 
 Special Columns, § 314 284 
 
 Special Journals, § 37 43 
 
 Special Profits and Losses, § 109 130 
 
 Statement of Account, § 182 195 
 
 Statement of Profit and Loss, §§ 51, 220. 82, 224 
 
 Stock Certificate Book, § 279 262 
 
 Stockholder, § 248 250 
 
 Stockholders' Journal, § 280 263 
 
 Stockholders' Ledger, § 281 263 
 
 Stock Transfer Journal, § 282 263 
 
 Storage Account, § 237 244 
 
 Store Fixtures Account, § 130 149 
 
 Subscribers' Journal, § 277 262 
 
 Subscribers' Ledger, § 278 262 
 
 Subscribers to Capital Stock Account, § 267 257 
 
 Subscription Book, § 276. ; 261 
 
 Subscriptions to Capital Stock Account, 
 
 §268 257 
 
 Summary of Chapter I 7 
 
 Summary of Chapters H, IH, IV, and V. . . 59 
 
 Summary of Chapters VI, VIJ, and VIII ... 97 
 
 Surplus, '§258 253 
 
 Surplus Account, § 271 258 
 
 Telegram, Defined, § 181 193 
 
 Terms on Invoices, § 183 197 
 
 Time, § 104, If 3 128 
 
 Page 
 
 Tracer, § 179 191 
 
 Trade Acceptance, §§ 94, 315 122, 296 
 
 Purpose of, § 316 296 
 
 Accounting Procedure, § 317 297 
 
 Trading or Income Accounts, § 109 130 
 
 Trading Account, § 339 322 
 
 Transaction, §7 6 
 
 How Recorded, §19 11 
 
 How Represented, § 176 189 
 
 Transactions with Notes and Accepted 
 
 Drafts, § loi 126 
 
 Traveling Expense Account, § 293 274 
 
 Treasury Stock, § 254 252 
 
 Treasury Stock Account, § 269 257 
 
 Treasury Stock Donated Account, § 270.. 257 
 
 Time Draft, § 92 120 
 
 Trial Balance, Defined, § 20. . . 12 
 
 At Close of Period, Illustrated 74, 218 
 
 Final, § 218 221 
 
 Of Totals, Illustrated 12 
 
 Of Balances, Illustrated 12, 74 
 
 Post-closing, §§ 62, 224 89, 229 
 
 Turnover, § 326 301 
 
 Unissued Capital Stock Account, § 266. . . . 256 
 
 Unissued Stock, § 253 252 
 
 Use of Business Forms and Vouchers, § 64 . 99 
 
 Use of Drafts, § 95 122 
 
 Use of Notes, § 87 118 
 
 Value of Stock, § 255 253 
 
 Value Received, § 13 9 
 
 Value Parted with, §13 9 
 
 Voucher, see Business Form or Voucher. 
 
 Voucher, § 350 345 
 
 Voucher Payable Register, § 352 347 
 
 Voucher System, § 351 346 
 
 Warehouse Expense, § 294 275 
 
 Warehouse Expense Account, § 296 275 
 
 Warehouse Material Account, § 295 275 
 
 Working Sheet, § 327 304 
 
 Preparation of, § 328 304 
 
 Copying the Trial Balance, § 329 304 
 
 Entries in Adjustment Columns, § 330. . . 306 
 
 Extensions, § 331 308 
 
 Results of Extensions, § 332 308 
 
 Work Required at Close of Period, § 214. . 217 
 
 For Partnership, Illustrated 218-229 
 
 For Corporation, Illustrated 305-318 
 
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