THE LIBRARY
OF
THE UNIVERSITY
OF CALIFORNIA
LOS ANGELES
SOUTHERN BRANCH
UNIVERSITY OF CALIFORNIA
LIBRARY
LOS ANGELES, CALIF.
Library
Graduate School of Business Administration'
Real Estate Accounts
Treating of the Proper Classification, Con-
struction, and Operation of Accounts for the
Real Estate Business, including Forms
By
WALTER MUCKLOW, C. P. A.
Member American Institute of Accountants
NEW YORK
THE RONALD PRESS COMPANY
Copyright, 1917, by
THE RONALD PRESS COMPANY
Bus. Admin.
Library
HF
R3M8
PREFACE
It is a curious circumstance that, although accountants
generally recognize the value of real estate as an asset, and
j^ frequently give evidence of that belief by assigning it a
certain pre-eminence when marshalling assets or arranging
a balance sheet, there is little literature on the subject of
^ real estate accounting, either here or abroad.
One reason for this may be found in the fact that, until
1* recently, we have been almost entirely dependent upon Eng-
, land and Scotland for our accountancy literature ; and in
^ those countries there is not the constant development of
wild lands, timber tracts, and suburban properties, nor the
^ large and rapid increase in the growth of cities, so evident
, throughout the United States; nor is there that habit of
y? quick trading which here has become a second nature. Un-
der such circumstances it is but natural that across the
Q ocean the matter has been overlooked or postponed; and
on this side of the water accountants have been so fully
occupied in keeping abreast of their work that they have
had but little time at their disposal in which to tell others
what they are doing.
A writer in the United States treating of this subject,
is then, in a sense, a pioneer and may with propriety beg
for himself and for his book the consideration and the al-
lowances usually conceded to pioneers in all fields.
While the main foundations of accounts are identical
throughout the world, and it is, for example, as unwise in
Finland as in Florida to anticipate profits or to allow a
fictitious valuation of assets, the structures raised on these
foundations may vary as greatly as do the winter quar-
iii
IV
PREFACE
ters of a Finn and those of a Floridian. Under these cir-
cumstances it is unavoidable that many of the instances and
examples given in the following pages should be almost
pointless outside of the United States, although the author
has endeavored to present principles in a form so broad,
and to give examples of a character so typical, that they
may be of some service wherever real estate accounting is
employed.
While no originality is claimed for the principles which
are enunciated, the methods which are advocated, together
with nearly all the forms presented, are the results of the
author's personal practice ; no merit, however, is claimed for
the fact that they have originated with him and have not
been "compiled" from other sources, the simple reason for
this being that he has been unable to find any sources from
which it was possible to compile.
Special attention is given to the treatment of "time
sales," and the procedure described is original and is de-
veloped to a greater degree than has been general. The
rapid growth of "development" companies, the lack of uni-
formity, and the frequent disregard of the principles in-
volved, all combine in calling for a rather full treatment of
this interesting branch of the subject.
Legal questions w r ill frequently arise in connection with
real estate accounting, and to a lawyer the legal statements
of the present volume may appear meager and crude. The
author has, however, attempted to give merely such ex-
planations of these matters as are necessary to enable the
real estate accountant to make his entries intelligently and
in conformity with legal requirements.
No attempt has been made to give examples of the
various legal forms employed in connection with real es-
tate, such as deeds and contracts. They already occupy
much space in many volumes ; and the general usefulness of
PREFACE v
such a collection, unless it is complete, is impaired by the
fact that the forms, while perhaps excellent for Illinois,
for example, may utterly fail to comply in some essential
with the statutory requirements of other states.
The object of bookkeeping is to show not only the re-
sults obtained by an enterprise, but also the causes of these
results not only to exhibit a gain or a loss, but to show
whence came the values gained, or whither went the values
lost. The very form of a trading statement or of a profit
and loss account shows on its face that this is the object of
its existence. But while the truth of this statement is gen-
erally acknowledged, many accounts may still be found
which fail, in this respect at least, to justify their being.
In real estate accounting, where each item of the in-
ventory has an individuality entirely lacking in the case of
merchandise or manufactured goods, both cause and effect
may be shown with unusual clearness. In the present work
this fact has been kept constantly in view, and the methods
of accounting presented will be found to show clearly at all
times both the results and the reasons therefor even for
a single lot of a large subdivision.
The present work is intended primarily for the use of
accountants, but, inasmuch as it is designed also to be of
practical service to the real estate manager, the bookkeeper,
and the student, considerable space is devoted to details
with which accountants are already familiar. It is assumed,
of course, that all those who use this volume have at least
a rudimentary knowledge of double-entry bookkeeping.
It may also be said that real estate is so closely related
to a large variety of enterprises which are not primarily
concerned with real estate, that a study of real estate ac-
counting proper involves some knowledge of these other
businesses. While, therefore, the present volume is devoted
to real estate accounting, digressions have at times seemed
VI
PREFACE
necessary, in order to explain particular points of contact
with other kinds of business.
\Yhile the author believes that the theories presented
and the practice outlined in the present volume are sound,
his readers will doubtless discover matters of importance
which have been omitted, and other matters which are not
presented as clearly as they might be. Suggestions looking
to a betterment of the book in any way will be received
with gratitude, and will be utilized in the preparation of
subsequent editions.
The author's fairly wide professional experience con-
vinces him that one suggestion may not be entirely out of
place. A patient might read treatises on the disease from
which he suffers, but he would consult a physician to pre-
scribe the remedy; and a wise land owner about to erect
an office building would secure all the information on the
subject obtainable, but he would engage an architect to
draw the plans. In the same way, it is to be hoped that
the manager of a real estate concern will not, when im-
portant accounting matters of a technical nature are on
hand, trust solely to any treatise on real estate account-
ing, but will seek the assistance of a trained and qualified
accountant.
WALTER MUCKLOW.
Jacksonville, Florida,
June 15, 1917.
CONTENTS*
CHAPTER PAGE
I DEFINITIONS i
I. Definitions of Terms
II RECORDS FOR REAL ESTATE 4
2. Records Required
3. Use of Records to Officers
4. Loose-Leaf and Card Records
5. List of Real Estate Records
6. Separate Books for Each Class of Accounts
7. Condensed Records
III CORPORATE RECORDS n
8. Minute Book
9. Stock Certificate Book
10. Stock Record or Stock Ledger
n. Subscription Ledger
IV GENERAL BOOKS OF ACCOUNT 16
12. General Receipt Book
13. Cash Book
14. Petty Cash Book
15. Superintendent's Cash Book
16. Journal
17. General Ledger
V SUB-LEDGERS 30
18. Mortgages Receivable Ledger
19. Mortgages Payable Ledger
20. General Contracts Ledger
21. Commissions Payable Ledger
22. Brokerage (Commissions Earned) Ledger
23. Subdivision Customers Ledgers
VI PROPERTY RECORDS 45
24. Report of Real Estate Transactions
25. Property Index
26. Property Ledger Wild Lands
27. Property Ledger City Properties
28. Field Record
29. Subdivision Ticklers
30. Plat Book
31. Record of Deeds Received
32. Record of Deeds Issued
33. Record of Contracts Issued
34. Record of Options Granted
35. Subdivision Histories
"For list of forms, see Index, page 343.
vii
viii CONTENTS
CHAPTER PACE
VII RENT RECORDS .... 74
36. Record of Leases Given
37. Rent Register (House Address Book)
38. Rent Receipt Books
39. Report of Rent Collections
40. Rent Cash Book
41. Rent Journal
42. Rent Ledger
43. Collector's Pocket Rent Ledger
VIII MISCELLANEOUS RECORDS 85
44. Fire Insurance Record
45. Bills Receivable and Bills Payable
46. Land Notes
47. Mortgage Interest
48. Expense Account Analysis Book
IX THE ACQUIREMENT OF REAL ESTATE 90
49. Methods of Acquiring Real Estate
50. Accounting Procedure
51. Entries Required
52. Mortgages Payable
53. Legal Obligations of Mortgagor
54. Contracts Payable
55. Trusts and Trustees
X PROPERTY COSTS 96
56. The Elements of Cost
57. Treatment of Costs
58. Cost of Improvements
59. Repairs, Renewals, and Improvements
60. Definitions
61. Repairs
XI CARRYING CHARGES . 102
62. Interest and Taxes
63. Interest as Part of Cost
64. Inventories at Cost
65. Interest on Cost
66. Treatment of Interest Charges
67. Depreciation as Affecting Cost
68. Taxes
69. Assessments
70. Cost of Maintenance and Operation
71. Profits on "Value" and "Investment"
XII SALES OF REAL ESTATE no
72. Time Sales
73. Final Sales
74. Form of Entries Relating to Sales of
Property
75. Legal Expenses
76. Surrender of Contract
CONTENTS } x
CHAPTKR PAGE
XIII PROFITS FROM REAL ESTATE SALES 116
77. Definition of Profits
78. Sources of Profits
79. Profits from Sales
80. Cost Price
81. Selling Price
82. Earned Profit
83. Mortgage Assumed by Purchaser
84. Large Cash Payment Balance Secured
by Mortgage
85. Small Cash Payment Balance Secured
by Mortgage
86. Gain on Sales Account
87. Sales on Contract
88. Exchange of Properties
89. Appraisal of Property
90. Development Properties
91. Hidden Profits
92. Anticipated Profits
XIV PROFITS FROM RENTS 125
93- Rent
94. Leases
95. Gross Rent and Net Rent
96. Net Rent and Net Returns
97. When Should Rents Be Entered ?
98. Rents from Mines and Similar Sources
99. Treatment of Mining Rents
XV PROFITS FROM ENHANCEMENT OF VALUE AND FROM
MISCELLANEOUS SOURCES 132
PROFITS FROM ENHANCEMENT OF VALUE
loo. Increased Value of Mineral Lands
101. Enhanced Real Estate Values
102. Fluctuations in Real Estate Values
103. Bank Practice
104. Accounting Treatment
105. Rights of Stockholders
106. Effect of Enhanced Real Estate Values
on Rent Charges
107. Summary
PROFITS FROM MISCELLANEOUS SOURCES
108. Profits from Money Borrowed on Real
Estate
109. Operation of Manufacturing Properties
no. Operation of Agricultural Properties
in. Operation of Orchards Increase in
Value
112. Showing Profit on Annual Statements
113. Profits from Crops Other than Fruit
X CONTENTS
CHAPTER PACE
XVI TIME SALES MORTGAGES 141
114. Time Sales
115. Classes of Time Sales
116. Mortgages
117. Mortgage Notes
118. The Instalment Mortgage
119. Annuity Tables
120. Change of Ownership
121. Foreclosures
XVII TIME SALES CONTRACTS 152
122. Simple Form of Contract
123. Conditions Applying to Contracts
124. Precision as to Amount of Sale
125. Pass-Book Contracts
126. Cancellation of Contracts
127. Comparative Advantages of Mortgages
and Contracts
128. Contract Statements
129. Contract Accounts
XVIII OPTIONS . 163
130. Nature of an Option
131. Accounting Treatment of Options
132. Refusals
133. Deeds in Escrow
XIX INTEREST 166
134. Mortgage Interest
135. Interest Adjustments
136. Unearned Interest
137. Unearned Interest Methods of Calcu-
lating
138. Unearned Interest Alternative Methods
of Calculating
139. Unearned Interest Various Examples
140. Unearned Interest Phraseology of In-
terest Clause
141. Unearned Interest Journal Entries
142. Interest Accrued Not Due
XX EARNED PROFITS AND BOOK PROFITS 178
143. Book Profits
144. Gains Distinguished from Earned Profits
145. Rule for Calculating Earned Profits
146. Anticipation of Earned Profits
147. Equity as a Basis for the Calculation of
Profits
XXI CANCELLATIONS OF TIME SALES . . . . . . 185
148. Time Sa-les and Cancellations
149. Amount of First Payment
150. Payments in Arrears
151. Accounting Treatment of Cancellations
152. Erroneous Cancellation Entries
CONTENTS x i
CHAPTER PAGE
153. Cancellation Profits Account
154. Cancellation of Subdivision Sales
XXII SUBDIVISION, DEVELOPMENT, AND SUBURBAN PROP
ERTIES 192
155. Acquirement
156. Release of Lots from Encumbrances
157. Cost Price of Property
158. Cost Per Lot
159. Cost Price When Improvements Are
Incomplete
160. "Constant Cost Price"
161. Comparison of Cost Finding Methods
162. Check on Unsold Lots
163. Subdivision Property Expenses
164. Advertising Expense
165. Advances to Settlers
XXIII EARNED PROFITS ON SUBDIVISION, DEVELOPMENT,
AND SUBURBAN PROPERTIES 201
166. Determination of Earned Profits
167. The Cost Price
168. The Selling Price
169. The Average Profit
170. Amount of Payments Actually Made
171 Reserve Profit Account
172. Application of Rule
173. Alternative Methods
174. Special Subdivision Ledger
175. Use of Special Ledger
176. Holding Subdivision Properties
XXIV SELLING CONTRACTS 214
1*7. Definition of Selling Contract
178. Classes of Selling Contracts
379. Treatment of Selling Contracts in the
Accounts
XXV ANALYSIS OF A TYPICAL TRIAL BALANCE . . . 217
180. Clean Bookkeeping
181. A Typical Trial Balance
182. (i) Accounts Payable
183. (2) Advertising
184. (3) Automobiles
185. (4) Bills Payable
186. (5) Bills Receivable
187. (6) Brick-yard Royalties
188. (7) Building Green
189. (8) Building Black
100. (9) Building Brown
191. (10) Cancellation Profits
192. (u) Capital Stock
193. (12) Charity
xii CONTENTS
CHAPTER PAI;K
194. (13) Commissions Earned; (14) Com-
missions Paid
195- (15) Contracts
196. (16) Contracts Payable
197. (17) Dawes Purchase
198. (18) Directors' Meetings
199. (19) Unpaid Dividends
200. (20-23) Eureka Gardens Accounts
201. (24) Expense, General
202. (25) Expense, Legal
203. (26) Expense, Mortgage
204. (27-30) Fairmount Accounts
205. (31) Gain on Sales
206. (32-34) Grandville Accounts
207- (35i) Handbook
208. (30) Hilton, A. B.
209. (37) Improvements
210. (38) Fire Insurance, etc.; (39) Mort-
gage Insurance
211. (40) Interest Earned; (41) Interest Paid
212. (42) Mortgage Interest Payable; (43)
Overdue Mortgage Interest Payable
213. (44) Mortgage Interest Receivable; (45)
Overdue Mortgage Interest Receivable
214. (46) Interest Unearned
215. (47) Judgments
216. (48-54) Kingslake Accounts
217. (49) Kingslake Purchase; (52) Kings-
lake Lots
218. (50) Kingslake Gains
219. (51) Kingslake Expense
220. (53) Kingslake Commissio'ns
221. (55-60) Ladore Accounts
222. (59) Ladore Commissions
223. (60) Ladore Town Lots
224. (61) Life Insurance
XXVI ANALYSIS OF A TYPICAL TRIAL BALANCE (Continued) 243
225. (62-65) Malvern Hill Accounts
226. Malvern Hill Determination of Profits
227. (66) Manning, R.
228. (68) Mortgages Payable; (69) Mort-
gages Receivable
229. (67) Mortgage Deficiency Account ; (70)
Mortgages in Settlement
230. (71) Office Furniture; (72) Office Fix-
tures
231. (73) Options Granted; (74) Options Held
2 3 2 - (75-79) Parkville Accounts
233. (80) Petty Cash
234. (81) Postage
235. (82) Profit and Loss
236. (83) Profits
CONTENTS xiii
CHAPTER PAGE
237. (84-87) Prospect Park Accounts
238. (88) Real Estate
239. (89) Rent Account
240. (go) Repairs
241. (91) Rinders, T. ; (92) Rinders, T. ;
Reserve
242. (93) Robinson, J., Trustee
243. (94) Salaries; (106) Stationery and
Printing
244. (95-104) South Bay Accounts
245. (105) Sperry, J. M.
246. (107) Stumpage
247. (108) Suspense
248. (109) Taxes
249. (no) Mortgage Taxes
250. (111-114) Torbay Heights Accounts
251. (115) Treasury Stock
252. (116) Cash Superintendent
253- (117) Cash in Bank
254. Preparation of Balance Sheet
XXVII THE TRIAL BALANCE AND MONTHLY STATEMENTS . 260
255. The Purpose of a Monthly Trial Balance
256. The Monthly Statement
257. Advantages of the Monthly Statement
258. Method of Preparing the Monthly State-
ment
259. Determination of Earned Profits
260. Comparison of Monthly Statements
261. A. General Accounts
262. B. Expense
263. C. Earnings
264. D. Real Estate
265. E. Selling Contracts
266. F. Contracts
267. G. Profits in Reserve
268. H. Summary
269. I. Sales and Cancellations
270. J. Cash Receipts for the Month
271. K. Earned Profits Cash Receipts
XXVIII THE BALANCE SHEET, THE ANNUAL REPORT, AND
SCHEDULES 274
272. Nature of the Balance Sheet
273. Continental and English Forms of Bal-
ance Sheet
274. Arrangement of Balance Sheet Items
275. Schedules Accompanying a Balance
Sheet
276. Form of Balance Sheet
277. Schedules to Accompany Annual Report
x iv CONTEXTS
CHAPTER PAGE
XXIX REAL ESTATE AUDITS 283
278. Real Estate Inventories
279. Verification of Real Estate Assets
280. Examination of Records
281. Mortgage Frauds
282. Details of an Audit
283. Methods of Conducting an Audit
284. Audit of Cash Receipts
285. Audit of Cash Disbursements
286. Audit of Property Ledger
287. Appraisals of Real Estate
288. Mortgages Receivable
289. Commission Accounts
290. Contracts
291. Auditing Subdivision Property
292. Subdivision Sales
293. Subdivision Histories
294. Equipment
295. Sundry Debtors
296. Capital Stock and Treasury Stock
297. Mortgages Payable, Contracts Payable,
Bills Payable, Sundry Creditors
298. Purchase Accounts
299. Unpaid Dividends
300. Rents and Repairs
301. Reserve Accounts
302. Reserve Profits
303. Profit and Loss Account
304. Auditing Time Sales
305. Trustees' Accounts
XXX AGENTS AND BROKERS, AND THEIR ACCOUNTS . . 300
306. Accounts for Office Buildings and Apart-
ment Houses
307. Monthly Reports
308. Brokers' Records
309. Commissions
XXXI REAL ESTATE ORGANIZATIONS 307
310. Abstract Companies
311. Leasehold Companies
312. Building and Loan Societies
313. Cemeteries
314. Cemetery Subdivision Accounts
XXX II DEPRECIATION 313
315. Depreciation of Realty
316. Nature of Depreciation
317. Systemmatic Treatment of Depreciation
318. Percentage of Depreciation
319. Calculation of Depreciation
. 320. Depreciation vs. Appreciation
321. Depreciation on the Balance Sheet
322. Depreciation on Leasehold Property
CONTENTS xv
CHAPTER PACK
XXXIII INSURANCE RECORDS 319
323. Expiration Register and Card System
324. Life Insurance in Connection with Time
Sales
325. Life Insurance in Connection with Mort-
gages Payable
XXXIV RENT RECORDS; BUILDING ACCOUNTS .... 324
RENT RECORDS
326. Rentals
327. Records Used
328. Repairs
329. The Rent Ledger
330. Arrangement of Rent Ledger
331. Rent Collectors
332., Vacant Houses
BUILDING ACCOUNTS
333. Building Operations and Building Ac-
counts
334. Building Operations Subdividing Costs
XXXV TAXES 333
335- Entering Tax Payments on the Books
336. Mortgage Taxes
337. Descriptions
338. Federal Income Tax
339. Distinction Between "Gains" and
"Profits"
XXXVI FILING 339
340. Scope of Filing System
341. Consecutive Numbering
342. Sundry Documents
343. Ticklers
Real Estate Accounts
CHAPTER I
DEFINITIONS
i. Definitions of Terms
Before dealing with real estate accounting, it is neces-
sary to understand clearly what constitutes "real estate."
The Century Dictionary gives the following definition:
"Land, including with it whatever by nature or artificial
annexation inheres with it as a part of it or as the means
of its enjoyment, as minerals on or in the earth, standing
or running water, growing trees, permanent buildings, and
fences."
Buildings, orchards, mines, etc., are therefore real es-
tate and should be shown as such. It is not uncommon to
find under the head of assets such an entry as
Real Estate
Buildings (or Improvements)
This is incorrect, and should be of the form :
Real Estate :
Land $
Buildings
In the present work, for the sake of brevity, uniformity,
and clearness, the following words and phrases are used
with the limited meanings given. It will, of course, be un-
i
2 REAL ESTATE ACCOUNTS
derstood that these limitations are purely arbitrary, and
apply only to the use of these words and phrases in this
book. This is especially true in regard to the terms
"gains" and "profits," which are usually synonymous and
interchangeable.
1. Contracts. This term is always applied to any kind
of lease or agreement providing for the sale of real estate
on an instalment plan.
2. Gain; Gain on Sales. These expressions are used
to indicate the gross gain on sales, or book profits on
transactions, in which the payment of the full purchase price
is deferred and the profit has therefore not been fully
realized. Such "gains" are not available for dividend-pay-
ing purposes until they have become "profits."
3. Profits; Realized Profits; Earned Profits. These
terms are used to designate "gains" that have been earned
or realized gains that may be carried to the Profit and
Loss account as distinguished from those which are some-
times called "book profits."
4. Time Sales. In this classification are included all
sales which are not paid for in cash or its equivalent
sales in which the purchaser is allowed time for the com-
pletion of the payment for the property. They are also
known as sales "on the instalment plan," "on deferred pay-
ments," etc.
5. Subdivision Properties. This term is used to indi-
cate such properties as consist of a number of lots or farms,
these together forming a whole tract. Such properties are
also known as "allotment," "development," "suburban,"
etc., properties.
6. General Contracts. This classification is intended to
include contracts given by the concern on properties other
than subdivision properties, which frequently require more
detailed accounting than subdivision contracts.
DEFINITIONS 3
7. Contracts Payable, This term applies to contracts
entered into by the concern for the purchase of property.
They are therefore the reverse of the contracts considered
under ( i ) on the preceding page. Contracts payable vary
in form to meet the circumstances. While they may not
carry any obligation to complete the purchase, and may
be therefore in the nature of a contingent liability, they
differ from the obligation toward the owner under a "selling
contract," inasmuch as all payments made by the concern
are forfeited if the contract payable is not completed.
8. Selling Contracts. By this term is meant a contract
giving the concern the right to sell certain property owned
by another, the title, as a rule, not passing through the
concern.
9. The Concern. This term is used to designate the
proprietor of the accounts under consideration; it may be
a corporation, a partnership, or an individual acting either
for himself or in a fiduciary capacity. In some cases "the
concern" is an owner ; in others, merely a broker or agent ;
so, as a matter of convenience, the word "concern" is used
to cover all cases.
CHAPTER II
RECORDS FOR REAL ESTATE
2. Records Required
To record properly all transactions arising in connec-
tion with real estate, a considerable number of books and
forms must be provided. No one concern may need them
all, but they are treated here to provide for the varying
conditions and requirements of the real estate business.
In a large business, such as that of many land develop-
ment companies, the books will be numerous, for efficient
management requires that the business be regarded from
many standpoints. The more important activities of such
a concern may be roughly classified as follows :
1. The management of its capital and the recording
of all items relating thereto.
2. The collection of income arising from the opera-
tions of the business, and the proper entering
thereof in the books of account.
3. The proper recording of each piece of property in
which the concern has any interest.
4. The recording of all sales, with full details in each
case.
5. The keeping of an account with each debtor to and
creditor of the concern.
3. Use of Records to Officers
It not infrequently happens that there are several of-
ficers in a real estate company, and perhaps several com-
mittees, each looking at the affairs of the concern from a
4
RECORDS FOR REAL ESTATE 5
different standpoint and requiring different information.
This necessitates the keeping of accounts in such detail and
yet in such clear form that they may be readily understood
by each of the interested parties. Under such circumstances
its records must be arranged to fill the following require-
ments at all times and on short notice :
1. To keep the manager of the business informed as
to its general condition.
2. To inform the treasurer as to his current resources
and liabilities, and particularly as to approaching
liabilities, such as notes becoming payable, in-
surance to be renewed, taxes to be paid, etc.
3. To show the collection department the standing of
each debtor.
4. To inform salesmen fully as to all unsold proper-
ties.
5. To show on the face of each account in the prop-
erty ledger the cost to date of the property to
which the account pertains, and to show in their
appropriate places the costs of all other securities
owned.
4. Loose-Leaf and Card Records
Except in the cases of the few general accounts speci-
fied below as requiring bound books, the larger part of the
real estate records may be most conveniently kept in loose-
leaf ledgers or on cards. In some few cases, as for in-
stance, insurance records (see 330), the loose-leaf ledger
is much to be preferred to cards, for two main reasons:
1. There is less likelihood of loss and confusion when
accounts are to be consulted.
2. It requires far less space.
Take for example a sub-ledger for a subdivision tract
6 REAL ESTATE ACCOUNTS
with 750 customers, to which frequent reference is made
by the bookkeepers, by the credit man, and by a number
of salesmen. The examination of one of these accounts, if
they are kept on cards, usually necessitates the removal of
that card from the file, and, unfortunately, these cards are
not always returned promptly. It is perhaps kept out for
reference, for correction, or for copying; other matters
intervene, its return is postponed indefinitely, and the card
too often is lost.
In the case of a loose-leaf ledger, on the other hand, an
account to be consulted is found in the ledger ; a slip may
be inserted to mark the sheet, but the account itself never
leaves its proper place.
Again, who has handled card records in any quantity
without seeing at least once a file full of cards dropped
or upset, requiring hours, perhaps, to sort out and re-
arrange ?
As to compactness, the space required for 750 cards is
several times greater than that required for the same num-
ber of ledger sheets, especially if the latter are of thin
paper. A number of such ledgers containing thousands of
accounts can be kept in an ordinary safe, while an equal
number of cards require a special series of filing cabinets
and more vault space than can as a rule be conveniently
given.
5. List of Real Estate Records
The following list is intended to include the more im-
portant books and records required in the many ramifica-
tions of the real estate business. The list looks formidable,
and in practice no office, save perhaps a few of the largest,
would use them all. All are needed, however, somewhere,
at some time, to record adequately the numerous and vary-
ing transactions of real estate.
RECORDS FOR REAL ESTATE
1. Corporate Records:
Minute Book
Stock Certificate Book
Stock Record or Stock Ledger
Subscription Ledger
2. General Books of Account :
General Receipt Book
Cash Book
Petty Cash Book
Superintendent's Cash Book
Journal
General Ledger
3. Sub-Ledgers :
Mortgages Receivable Ledger
Mortgages Payable Ledger
General Contracts Ledger
Commissions Payable Ledger
Brokerage (Commissions Earned) Ledger
Subdivision Customers Ledgers
4. Property Records:
Report of Real Estate Transactions
Property Index
Property Ledger, Wild Lands
Property Ledger, City Lots
Field Record, City Property
Field Record, Wild Lands
Subdivision Tickler
Plat Book
Record of Deeds Received
Record of Deeds Issued
Record of Contracts Issued
Record of Options Granted
Subdivision History
8 REAL ESTATE ACCOUNTS
5. Rent Records:
Record of Leases Given
Rent Register (House Address Book)
" Receipt Book
" Reports
" Cash Book
" Journal
" Ledger
6. Miscellaneous Records :
Fire Insurance Record
Bills Payable Book
Bills Receivable Book
Mortgage Interest Receivable Record
Mortgage Interest Payable Record
Expense Account Analysis Book
6. Separate Books for Each Class of Accounts
The idea sometimes prevails with those unfamiliar with
accounting that the simplicity of an accounting system may
be measured by the number of books employed an idea
which is frequently fallacious. The simplest system is the
best, if it is adequate ; but speaking generally, nothing could
be more mistaken than the idea that simplicity and the
number of books employed have any necessary connection.
Simplicity is frequently attained by keeping different
classes of entries in different books, rather than by enter-
ing many varied transactions in one book, a method which
necessitates much analysis at a later day.
The terms "a few records" and "simple methods" arc
not synonymous; they are in fact opposed to each other.
"Few records" usually mean poor records, and poor rec-
ords not infrequently result in a poor owner of those rec-
ords. In the case of a large real estate business with nu-
RECORDS FOR REAL ESTATE 9
merous branches and much detail work, a certain complexity
is unavoidable. It is a condition common to all affairs that
the larger and more involved the business, the more com-
prehensive and complex must be its system of records.
Also in any business, no matter what its size, a sufficient
number of books must be employed to record properly its
transactions, and the accountant when installing a system,
usually finds that simplicity and clearness are obtained by
the use of records sufficient in number to keep each class
of entry separate and distinct.
7. Condensed Records
Several decades ago there was an unnecessary amount
of writing caused by the multiplicity of day-books, the need-
less journalizing of every entry, and useless transcriptions
from book to book. It was discovered that much of this
was duplication, still more was needless, and that much
elimination was possible. A reaction set in ; the pendulum
swung to the opposite extreme, and all kinds of condensed
systems and combinations were devised, copyrighted, and
patented, but have in most cases been abandoned. One
enterprising retailer whose small business allowed him
ample leisure, even devised a single book which was to take
the place of journal, cash book, and ledger. It required
no balancing, and in fact was a whole accounting system
in itself. Most accountants who have audited such a method
when applied to a large concern and where carelessness has
existed in the bookkeeping, will testify to the troubles in-
volved by such attempts at simplicity. It must not be gath-
ered from this, however, that columnar books are to be
condemned. On the contrary, they are invaluable, but they
must be designed and used with judgment.
In considering the number of records it must be remem-
bered that competent accounting calls for no word and no
I0 REAL ESTATE ACCOUNTS
figure beyond those actually necessary. Each transaction
must be entered, and be entered clearly, but no more time
is required to make these entries in a properly designed
series of books than to crowd them into a single volume,
which, if the business is large, must necessarily assume
clumsy proportions. Also, it is obvious that reference to a
set of books in which the entries are properly classified and
displayed will be easier and much more satisfactory than
is possible under the limitations of a single-volume system.
CHAPTER III
CORPORATE RECORDS
8. Minute Book
The minute book is of the first importance among cor-
porate records, for it is usually the original and sole record
of the proceedings at corporate meetings. It also contains
copies of both the charter and the by-laws. These, how-
ever, as a rule are only copies and could be replaced ; while
the minutes do not appear elsewhere and could not be du-
plicated if the minute book were destroyed.
In the case of a real estate company the minutes are
particularly important, as the business itself is peculiarly
fertile in special resolutions and authorizations. For this
reason it is perhaps well to insert a word of caution as to
the use of loose-leaf minute books. The minute book, and
usually the minute book alone, contains the final authori-
zation for all important transactions approved by the di-
rectors. Considering the probability of changes in the
board of directors, and the fact that the minutes are perhaps
written by different individuals at different times, and that
it may be necessary to refer to them years after they have
been made, the wisdom of confiding such important records
to loose sheets is obviously doubtful, unless every precau-
tion be taken to prevent loss, change, or substitution.
The loose-leaf minute book has many attractions. It
is convenient; it enables minutes to be typewritten; a du-
plicate copy may be made if desired; and it presents a bet-
ter appearance than the ordinary book. These advantages,
however, do not warrant the use of the book so long as any
II
I2 REAL ESTATE ACCOUNTS
page can easily be removed without detection, and it should
not be used unless it is of a style that makes removal or
substitution of leaves difficult if not impossible. This end
is sometimes attained by the use of a special paper, each
page having its proper folio number printed on ; sometimes
by numbering and initialing the pages as they are written ;
or, still more effectively, by watermarking the page num-
bers or some private emblem into the sheets when the paper
is made. In the case of the numbered pages, every sheet
must be accounted for and substitution or change will be
quite as difficult as in a bound book.
9. Stock Certificate Book
The form of the stock certificate book and the general
design of its certificates vary but little. The matter appear-
ing on the body of the certificates is determined by custom
or by the statutes of the state in which the corporation is
organized. The essential requirements are that each cer-
tificate shall show the name of the company, the state in
which it is incorporated, the total authorized capital, the
name of the owner of the certificate, the number of shares
which the certificate represents, the value of each share, the
nature of the stock whether common or preferred and
the date of issue. The certificate should also provide a
blank form of transfer for the owner to use when his stock
is to be assigned.
The certificates, which are usually in a bound volume,
are numbered consecutively and have stubs numbered to
correspond. These stubs contain blanks for recording the
most important data given on the certificate.
The stock certificate book is usually kept by the secre-
tary of the corporation. No difficulty is likely to be en-
countered in keeping it, provided the necessary entries are
made at the time each transaction occurs. It is, however,
CORPORATE RECORDS ^
of the greatest importance that no certificate be issued until
the essential facts have been entered on its stub. When a
certificate is surrendered for reissue, it should be cancelled
by perforation, by a rubber stamp, or by some other method
equally effective. It should then be pasted back on the
stub of the stock certificate book from which it was origin-
ally torn, and there should be entered on this stub the num-
ber of the certificate issued in lieu thereof, or, if none is
issued, the reason for its surrender.
These matters appear almost too elementary to dwell
upon, and yet a vast amount of labor and trouble may be,
and frequently is, caused by the failure of the secretary or
bookkeeper to make the proper entries at the proper time.
Stock certificates are occasionally printed and kept loose,
that is, not attached to any stub or bound in a book. Such
a course is unwise and unsafe.
10. Stock Record or Stock Ledger
This is really a sub-ledger, in which an account is opened
with each stockholder, charging him with certificates is-
sued to him and crediting him with those which he has
surrendered. (See Form I.) Inasmuch as the stubs in
the stock certificate book constitute a bound volume from
which entries are made into the stock ledger, the latter rec-
ord is not t>ne of original entry. It is therefore safe and
entirely proper to use a loose-leaf book for this ledger with-
out the precautions necessary in the case of a loose-leaf min-
ute book. The loose-leaf stock ledger is usually arranged
alphabetically, thereby saving all reference to an index. If
the company is a large one, there is considerable advantage
in this alphabetical arrangement. In some states the alpha-
betical arrangement is required by law. The fact that ac-
counts can be removed as they are closed is also an impor-
tant feature of the loose-leaf ledger.
REAL ESTATE ACCOUNTS
CORPORATE RECORDS 15
ii. Subscription Ledger
This book is needed only where capital stock is not paid
for immediately upon subscription. In it, an account is
opened for each subscriber for stock, showing his name and
address, the amount of his subscription, and the terms of
payment. The subscriber's account is charged with the
amount of his subscription, and credited with the payments
thereon as they are made. When the subscription is com-
pleted the account is closed. Inasmuch as this is merely a
sub-record, the entries for which are taken from the jour-
nal and the cash book, the loose-leaf ledger is convenient
and unobjectionable. The subscription ledger corresponds
to the English record known as the "call book," in which
is recorded each call made for unpaid capital subscribed.
The debit entries to the subscription ledger are posted
from the journal, where the entry is usually made in the
following form :
Subscription Account
To Capital Stock Account
For the following subscriptions to stock :
John Brown, 5 shares, $500, payable
James Smith, 10 shares, $1,000, payable
The credit entries to the subscription ledger are usually
posted from the cash book as payments are made, although
occasionally a journal entry is required when some consid-
eration other than cash is received for capital stock or when
subscriptions are cancelled.
CHAPTER IV
GENERAL BOOKS OF ACCOUNT
12. General Receipt Book
It is essential that every item of cash received should be
immediately entered on the records, and the best method
of accomplishing this is to use a receipt book in which the
receipts are numbered consecutively in duplicate, the sec-
ond copy being made out at the same time as the original
by means of carbon paper. There can be no doubt that
the carbon duplicate in such book is far better than the re-
ceipt stub. Not only does it save time but it gives an ab-
solute duplication of the receipt delivered to the party mak-
ing the payment.
The original of each receipt in the general receipt book
is perforated so that on being made out it can be torn from
the book and given to the payer, the duplicate (preferably
on colored paper) remaining in the book. The receipt book
then forms the book of original entry, on which all sub-
sequent entries relating to cash received are based. This
book takes the place of a cash "blotter" or counter book for
receipts, and in the temporary absence of the regular cashier
provides his substitute with a convenient and reliable means
of accounting for all money he may receive.
It is a good rule, and in large offices an essential one,
that all receipt books shall be kept by the cashier or other
responsible officer under lock and key, and that new books
be issued to collectors and others only as the old books are
returned. A written record should be kept of the date of
issue of each book and the name of the person receiving it.
16
GENERAL BOOKS OF ACCOUNT 17
It is convenient to paste on the back of each book its num-
ber, and the first and last dates of all the receipts it con-
tains.
The used receipt books must be filed with care, for in
the event of a controversy over any payment they are, as
books of original entry, of even more value than the cash
book itself.
THE ALPHA LAND COMPANY
NOCATEE, GEORGIA
No. 72457
Received of
Address
The sum of
ON ACCOUNT OF
Mortgage No ............. Principal .................... $
Interest ..................... $
Contract No ........................................... $
Eureka Gardens ....................................... $
Fairmount ............................................ $
Grandville ............................................ $
Kingslake ........................................ .... $
Ladore ............................................... $
$
THE ALPHA LAND COMPANY,
By
(This receipt made in duplicate)
Form 2. General Receipt Book
x g REAL ESTATE ACCOUNTS
The form of receipt book shown in Form 2 has been
in actual use for a number of years and meets every gen-
eral requirement. Receipts for rents are given on a dif-
ferent form.
Speaking generally, every penny of cash received should
be accounted for on a receipt. In practice there arise a
few exceptions to this rule, as for instance, proceeds of dis-
counted notes, proceeds of bills payable and of mortgages
and bonds sold. Even in such cases it is, when possible,
usually advisable to fill out a receipt showing the details,
although the original receipt is not necessarily delivered to
the person from whom the money is received.
13. Cash Book
In modern practice it is customary to speak of the cash
book as distinct from the journal, and this naturally leads
those unfamiliar with bookkeeping to think that some radi-
cal difference exists between the two books. This, however,
is not the case, for a cash book is neither more nor less
than a special form of journal devoted to cash entries, and
might, therefore, properly be called a cash journal, just as
a journal devoted to sales entries is called a sales journal.
In practice, the term "Cash Journal" is usually re-
stricted to the columnar form of cash book, an example of
which is shown in Form 3. The use of this name has caused
some confusion and has sometimes been made an excuse
for bringing into this record items which do not refer to
cash. Considered in the light of accounting history, this
practice is a step backward rather than forward. Our fore-
fathers brought the record of all their transactions into one
book a journal, i.e., a "day-book" from which they
posted to the ledger; but after years, centuries in fact, it
was found advantageous to eliminate cash items from the
journal and record them in a cash book. This idea has
GENERAL BOOKS OF ACCOUNT
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20 REAL ESTATE ACCOUNTS
been further developed and expanded until today we find
cash journals, sales journals, purchase journals, and many
others. It should be observed, however, that all such books
have one aim in common, namely, to start the work of
analysis as entries are made, and thus segregate each dis-
tinct class of entry in an appropriate record. Whenever a
departure is made from this principle and entries relating
to all kinds of transactions are crowded into one record, we
are clearly returning to those methods which science and
experience have taught us should be abandoned.
The actual form of cash book used in any particular in-
stance must depend upon the nature of the business. There
are, however, a few rules which apply in almost all cases.
One of these requires that the cash book be a bound book
and not of the loose-leaf form. A dishonest cashier may, of
course, make changes in a bound book, but it presents more
difficulties than a loose-leaf book, and gives the auditor a
far better opportunity of discovering any irregularity and 1
particularly any carelessness on the part of the cashier
which may have occurred.
There is one exception to the rule above mentioned,
which applies to a concern that has two offices at different
points, as for example, an English concern which operates
both in England and in the United States. In such a case
the home office frequently desires a monthly transcript of
the cash book, and it is then entirely proper to have the cash
book in loose-leaf form, arranged with duplicate pages,
printed on thin paper, and ruled on one side only, so that
by the use of carbon paper the alternate sheets give a copy
of the original writing. This is easily secured by the use
of the typewriter or of a hard pen, and it saves the labor
of rewriting the entire cash book. At the end of each month
the duplicate sheets are taken out and sent to the home of-
fice. They then pass beyond the control of the bookkeeper,
GENERAL BOOKS OF ACCOUNT 2 I
and should any question involving them arise in the future,
they are always at hand for reference.
Another general essential for the cash book is the use
of special columns. It is almost invariably found that such
a book is most convenient for the bookkeeper, the manage-
ment, and the auditors. The number of columns depends,
of course, upon the nature of the business, the main point
being that every account which is used often should have a
column allotted to it, as indicated in Form 3.
In the case of a large company handling a considerable
number of active subdivisions, it is often convenient to have
a cash book containing forty or fifty columns. It is then
advisable to enter the receipts in one volume and the pay-
ments in another an arrangement which presents many
advantages, as two bookkeepers can work on the books at
the same time, and the auditors can examine one volume
without interfering with work on the other.
The cash book should be written up and balanced each
day, the debit side being entered from the receipt books,
and the credit side from the check stubs, check register, or
voucher list.
The rule that all incoming cash items be entered at least
daily, should be invariably observed, and the total cash re-
ceived should be deposited in the bank each day. In this
way the cashier is at once relieved of all further responsi-
bility as to the custody of that particular cash, and the
auditor can very quickly check each day's receipts with the
amount shown in the bank pass-book. This is probably the
most important of all rules for the keeping of cash books.
On the credit side of the cash book are entered the dis-
bursements, all of which should be made by check. Small
items are paid out of the petty cash, which is described
in 14.
When such a cash book as is shown in Form 3 is used,
22 REAL ESTATE ACCOUNTS
each of the bank accounts is kept in it, and no cash or bank
accounts need be kept in the ledger (except occasional or
special bank accounts outside the usual current business),
the cash book balance being carried direct to the trial bal-
ance. A fastidious bookkeeper may claim that the ledger
should show each and every account, and for the sake of
completeness may add a cash account to his ledger, the total
receipts and disbursements being posted once a month. Such
a ledger account has the advantage of furnishing a state-
ment of monthly receipts and disbursements, which is some-
times of value.
It may be noted that one of the chief objects in having
the bank column in the cash book is to avoid the necessity
for a check register. With the cash book so arranged, and
a good system of voucher checks, either in duplicate or with
stubs, the register may safely be dispensed with.
It is not an uncommon practice for agents who sell prop-
erties, especially subdivision properties, to deduct their com-
missions from the remittances they make to the home office.
In an office where many such transactions occur, it is con-
venient to use a column on the debit side of the cash book
in which to write such deducted commissions. If this is
done, the two amounts cash received and commissions
should be credited to the customer; and at the end of the
month the total of the commission column must be treated
as a journal entry and debited to Commission account, being
omitted, of course, from the cash book totals of receipts.
This method is similar to that followed by many mercantile
houses in connection with the discounts allowed to cus-
tomers.
It is a better practice to have the agent remit his col-
lections in full and receive a check for his commissions ; but
the enforcement of such a rule in face of an established prac-
tice might handicap the selling force.
GENERAL BOOKS OF ACCOUNT
14. Petty Cash Book
As already stated, all payments entered in the general
cash book must be made by check, and as in every office
there are sundry disbursements too small to justify sep-
arate checks, some proper means of making these must be
provided.
The usual and proper method of handling such pay-
ments is through a petty cash account maintained on the im-
PETTY CASH
DATE
NAME
EXPENSE
REPAIRS
COM-
MISSIONS
POSTAGE
ADVER-
TISING
MISCEL.
TOTALS- MISCEL.
ADVERTISING
$
POSTAGE
$
COMMISSIONS
$
REPAIRS
$
EXPENSE
$
GRAND TOTAL-miD BY CHECK
K)
$
Form 4. Petty Cash Book
prest system. The method of keeping this is simple. To
open the account, a check for a round sum sufficient to care
for such expenditures for a month or other convenient
period, is given to the cashier and is charged on the gen-
eral ledger to "Petty Cash" or "Imprest Fund." This
ledger account remains unchanged unless the amount of the
fund in the hands of the cashier be increased or diminished.
24 REAL ESTATE ACCOUNTS
This is so because, as explained later, subsequent checks
drawn to replenish petty cash are not debited to Petty Cash
account, but are charged directly to the various accounts for
which the petty cash funds have been expended.
From this petty cash fund the cashier makes such pay-
ments as are necessary, recording each one in a book similar
to that shown in Form 4. Before the entire amount is ex-
pended, he casts up each of the columns and finds the total
of his expenditures; a check is then drawn for this exact
amount, and the cashier again has the original sum with
which he started and can repeat the whole process. The
check itself is entered on the cash book and divided among
the various accounts to which it is chargeable, as shown by
the columns of the petty cash book.
It will be noticed that Form 4 differs from the usual
form of cash book in that it records disbursements only.
This is owing to the fact that after the initial check is
drawn for petty cash, each succeeding check is for the exact
amount of the expenditures up to a given point, and when-
ever petty cash is thus replenished by a check from the
general cash account, the petty cash book is ruled off and a
notation made, substantially as follows :
Total Disbursements $
Covered by
Check No.. Date..
The distribution headings shown on Form 4 are not
printed as their position cannot be determined in advance,
but are written in whenever the columns are totaled.
It is an excellent practice to provide the cashier with
petty cash vouchers, as shown in Form 5, printed on inex-
pensive paper and bound in pads in the same manner as
are the debit and credit slips in a bank. The used vouch-
ers can be filed in bundles, each one of which should repre-
GENERAL BOOKS OF ACCOUNT 25
sent the disbursements covered by one of the checks from
the general account.
AJAX LAND COMPANY
PETTY CASH
VOUCHER
JORDAN, N. C, 191 . .
Received of the Cashier
Dollars
For .
Form 5. Petty Cash Voucher
15. Superintendent's Cash Book
It is frequently desirable that a superintendent or resi-
dent manager whose headquarters are distant from the head
office, be furnished with funds to meet current expenses.
If the amounts he expends are large, he should make his
payments by means of checks on a special bank account.
If they are small, he may make them in currency, as sug-
gested in connection with the management of petty cash.
A superintendent's account should be kept, as far as
circumstances permit, on precisely the same lines as the
cashier's petty cash, and a similar record is therefore ap-
propriate. Inasmuch as the superintendent must render to
the chief office a report of his transactions, it is convenient
to have his book printed with the alternate leaves perforated
so that they may be detached ; and by means of carbon pa-
per, those sheets remaining in the book can be made to
show a copy of each report sent to the head office. Experi-
ence has shown that unless some such method is followed,
26
REAL ESTATE ACCOUNTS
the cash account of the superintendent may easily become
confused and thereby entail the waste of much time.
Whatever system be followed for recording the dis-
bursements of a superintendent or resident manager, it will
be found wise to establish the rule that any collections he
makes must invariably be remitted intact to the main of-
fice, and never allowed to become a part of, or to be in-
REPORT Or CASH &
BV THE SUPERINTENDENT /
DECEIVED AND EXPENDED
*T
DATE
RECEIVED
AMOUNT
DATE
EXPENDED
VO.NO
AMOUNT
TOTAL RECEIPTS
SUBMITTED HEREWITH
TOTAL EXPENDITURES
PER VOUCHERS HEREWITH
TO BE CREDITED TO'
TO BE CHARGED AS fOLLOWS'
Form 6. Superintendent's Cash Book
eluded in, his petty cash; for if they are, the necessity for
journal entries will arise, whereas all these cash transac-
tions should be recorded on cash books.
When a superintendent receives and disburses cash, as
already suggested, a uniform style of report (Form 6)
should be adopted. This, as stated, should be arranged so
as to provide, by means of carbon copies, an original for
GENERAL BOOKS OF ACCOUNT 27
transmission to the principal office and a duplicate to be
retained by the superintendent.
1 6. Journal
Inasmuch as the journal is a book of original entry, and
contains entries vitally affecting nearly all sales and pur-
chases, the book should be permanently bound and not of
the loose-leaf form. The number of columns must depend
somewhat upon the requirements of the particular case, but
as a rule at least four columns should be provided, and fre-
quently it is a convenience to have six or more columns. In
connection with the accounts for subdivision properties, the
columnar form of journal presents advantages so great as
to render it practically indispensable for the proper entry
of contracts and the entries relating to the cancellation
thereof.
It is a common practice in offices handling such proper-
ties, to reserve in the journal on the first of each month a
page or other appropriate space for each subdivision, in-
serting merely the heading, e.g. :
Kingslake Contracts
To Kingslake Purchase.
" Kingslake Gain
From time to time during the month, as contracts are
made, they are entered in columnar form, as follows:
Contracts Purchase Gain
Dr. Cr. Cr.
J. Doe, ^182 $250.00 $200.00 $50.00
R. Roe, 183 500.00 400.00 100.00
At the end of the month these columns are added and
the totals inserted in the headings.
2 g REAL ESTATE ACCOUNTS
In the case of cancellations the form of entry may be:
Real Estate
Gain
To Contracts
" Cancellation Profits.
In this case, four columns would be required.
It is obvious that this form of entry requires less labor,
and gives a record better adapted to quick reference, than
if each contract were made the subject of a distinct journal
entry.
17. General Ledger
Inasmuch as in a properly designed system the number
of accounts in the general ledger is small compared with
the total number of accounts, a bound book can often be
conveniently used. In the case of a large concern it is, how-
ever, usually advisable to use a loose-leaf book, particularly
as certain accounts contain numerous items and it is almost
impossible to predict how many folios they will cover.
The loose-leaf ledger is no more likely to lead to errors
of carelessness than a bound book, and any bookkeeper
capable of wilfully falsifying his books could do so with
almost equal ease under either system. In many offices
efficient safeguards can be provided by a properly arranged
system of internal checking, the ledgers and cash books being
kept by different bookkeepers who are occasionally changed
from one book to another. An additional security is fur-
nished when each sheet is initialed by an officer of the con-
cern at the time the account is opened, and the rule enforced
that no sheet may be removed until again initialed. If the
books are subject to the audit of an accountant, the periodic
initialing of balances and checking of items render any
substitution still more difficult.
Whichever style of book is chosen, the ledger shown in
GENERAL BOOKS OF ACCOUNT
Form 7, which differs somewhat from that generally used,
is strongly recommended. This form of ledger greatly aids
in the preparation of monthly trial balances, and also facili-
tates the analysis of any account at any time.
In real estate accounts particularly, it is often desirable
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to find out how the monthly sales of some one subdivision
have been running during a given period, and a glance at
such a ledger shows this without further calculation. In
a concern doing a large business, there is frequently a
very short interval between the closing of the books and
the preparation of the annual report, while at the same time
there is an unusual amount of work in connection with the
calculation of realized profits. Every hour saved in such
work is of great value, and the advantages of this form of
ledger are then manifest.
CHAPTER V
SUB-LEDGERS
1 8. Mortgages Receivable Ledger
This is a sub-ledger intended to show all the particulars
of every mortgage held by the concern. (See Form 8.)
It is of minor consequence whether it be a bound book or
a loose-leaf ledger, as the mortgages may be entered in the
order of their serial numbers. The form of ruling adopted
in either case should provide for the exhibition of the fol-
lowing facts:
Serial number of mortgage; name of mortgagor; de-
scription of property and serial property number; amount
of mortgage ; date made ; date due ; value of security ; rate of
interest ; dates when interest falls due ; amount of insurance
to be carried; details of notes number, due dates,
etc. ; particulars of the recordation of the mortgage ; profit.
Rulings should also be provided for a "Principal" ac-
count and for "Interest and Charges."
The mortgages receivable book shown in Form 8 meets
the above requirements, and in connection with the property
ledger gives all necessary information regarding mortgages
receivable.
As soon as a mortgage receivable that is, a mortgage
given to or acquired by the concern is executed and de-
livered, it should be entered in this book under the first
vacant serial number. For instance, if the first of such
mortgages were made by Alfred Jones, it would be known
in the accounts as "Mortgage Receivable No. i Jones."
Inasmuch as precedence among several liens upon the
30
UJ
CO
g
UJ
o
LU
CC
UJ
UJ
(T) CL-
OD O
SUB-LEDGERS
<-D
g
o
C_J
UJ
or
22 REAL ESTATE ACCOUNTS
same piece of property may depend very largely, if not en-
tirely, upon the dates of their respective recordation, no
time should be lost in sending each mortgage received to
the proper recording officer ; and when this is done a pencil
memorandum of the fact should be made on the mortgages
receivable ledger. When the mortgage is returned, the full
particulars of its recordation should be entered in this ledger
and the mortgage itself should be filed in its proper place.
In the mortgages receivable ledger, each Principal ac-
count is debited with the original amount of the loan and
credited with each payment on account of principal as it is
made. The total balances of these columns of the sub-ledger
must therefore agree with the balance of the Mortgages
Receivable account in the general ledger.
It is frequently convenient in determining action re-
garding mortgages (for instance, when a mortgage is in
arrears), to know the amount of profit in the original trans-
action. A place for this information is therefore provided
in the mortgages receivable ledger under the heading "Re-
serve," this saving reference to the journal or other book
in which the amount is recorded in the ordinary routine.
The Interest and Charges account of each mortgage is
debited in the mortgages receivable ledger with interest as
it falls due, and also with all expenditures for taxes, in-
surance, paving assessments, etc., paid by the concern but
which are to be repaid by the mortgagor. The account is
credited with money received from the mortgagor, or from
other sources, in payment of these charges.
The total balance of the Interest and Charges account
of the mortgages receivable ledger must equal the sum of
the balances in the general ledger under the accounts Over-
due Mortgage Interest Receivable, Mortgage Taxes, Mort-
gage Insurance, Mortgage Assessments, etc.
If it is intended that the lending of money on mortgage
SUB-LEDGERS 33
shall form a distinct branch of the business, proper forms
of application and forms for reports of valuers and inspec-
tors should be provided. Properly speaking, these are not
accounting forms and therefore are not discussed further
in this volume.
19. Mortgages Payable Ledger
This is a sub-ledger somewhat similar to that just de-
scribed, but containing the particulars of all mortgages (en-
tered in numerical order) which are payable by the concern.
A special form of ruling is required in order to show
clearly the following facts :
Serial number of mortgage; name of the mortgagee or
his assignee; description of the property, with serial prop-
erty number ; amount of mortgage ; date of mortgage ; date
due; value of security; rate of interest; dates when interest
falls due ; insurance called for by the mortgage ; particulars
of the recordation of the mortgage. (See Form 9.)
Provision must also be made for keeping separately the
Principal account and the Interest account, as in Form 8.
Where mortgages are made by the concern, all this in-
formation can be obtained direct from the original papers
before they are delivered to the mortgagee. It is frequently
the case, however, that mortgages payable are assumed by
the concern as a part of the purchase price for property ac-
quired, and in such cases abstracts of title must be relied
upon for this information, which is to be checked against
the statements of the mortgagors. (See 52, 53.)
In the mortgages payable ledger the Principal accounts
are credited with the amounts of the respective mortgages
and are debited with payments made on account of the
principal. The total of the balances must agree with the
balance of the Mortgages Payable account in the general
ledger.
34
REAL ESTATE ACCOUNTS
at
fc-
UJ
LL)
SUB-LEDGERS
35
It will usually be found that entries to the Interest ac-
counts of mortgages payable relate solely to interest, and
do not include such a variety of entries as appear in the
corresponding accounts in the mortgages receivable ledger.
This being so, the total balances of the Interest accounts will
agree with the balance of the Overdue Mortgage Interest
Payable account in the general ledger.
HELD BY.
MORTGAGE PAYABLE NO.
PROPERTY N0._
PRINCIPAL
INTEREST
Form 10. Ordinary Ledger Ruling Adapted to Mortgages
Payable Ledger
In the event that it is not desired to have so complete a
record as Form 9 provides, a substitute may be arranged
in any ledger-ruled book as indicated on Form 10; but if
there is a great number of these mortgages, the more com-
prehensive form should be adopted. In passing, it may be
well to mention that unusual liabilities are often incurred in
connection with mortgages payable, and that the execution
36 REAL ESTATE ACCOUNTS
or assumption of all such instruments should be authorized
by the board of directors or other proper authority, the en-
tries of which in the minutes may be compared with the
entries in the ledger. The general subject of mortgages
payable is discussed further in 52 et seq.
20. General Contracts Ledger
The sub-ledger known as the "General Contracts
Ledger" should contain particulars of all those sales with
deferred payments not secured by mortgage which do not
belong to any special subdivision and which are known in
this book as "general contracts."
The accounts in this sub-ledger may be arranged either
alphabetically or numerically. The latter method is doubt-
less preferable, as it provides for a chronological arrange-
ment and is uniform with the plan suggested for the mort-
gage ledgers. This method necessitates the use of an ac-
companying index, but as the employees usually designate
transactions by their book numbers, reference to the index
is seldom necessary. If the alphabetical arrangement is se-
lected, a loose-leaf form of book is necessary; but for the
numerical order either a bound or loose-leaf form can be
used, the latter being preferable.
The legal papers in connection with such sales vary con-
siderably in form; but whether known as leases, bonds for
title, or similar name, they can be best considered for ac-
counting purposes under a single head such as "Con-
tracts."
The general subject of contracts will be dealt with later
(Chapter XVII), and at this point it is sufficient merely to
enumerate the various items of information which should
appear on the general contracts ledger. It is better, as a
rule, to keep only one account for each contract, and to let
that include the principal, interest, taxes, and all other
SUB-LEDGERS 37
charges which must be paid by the purchaser before obtain-
ing a conveyance of the title to the property which he has
purchased.
The general contracts ledger, as will be seen by refer-
ence to Form n shown on page 38, provides for the fol-
lowing particulars:
1. Serial number of the contract.
2. Name of the purchaser.
3. Original amount, being the total purchase price.
4. Amount of the first payment (which is frequently
considerably more than any of the subsequent
periodic payments).
5. Amount of subsequent payments and their due
dates.
6. Date of the contract.
7. Term of the contract (the number of years for
which it is to run).
8. Rate of interest.
9. Dates when interest is to be calculated. (It is also
well to note the date when the interest is pay-
able, as it may be payable at fixed periods or it
may be covered by the regular periodic pay-
ments.)
10. Street address of buildings on the property.
11. Amount of insurance called for by the contract.
12. Description of the property, with serial property
number.
13. Profit.
14. Reserve.
Speaking generally, it is not the business of the vendor
to see that contracts are placed on record; still, there is
plenty of space in the heading of the ledger sheet shown in
Form 1 1 to insert any notation which it may be desired to
REAL ESTATE ACCOUNTS
!fl
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SUB-LEDGERS 39
make should the purchaser have caused his agreement to be
recorded.
In practically all cases contracts are brought onto the
books of account through the journal. The amount of the
original payment is in each case posted to the debit of its
proper account in this sub-ledger, as are all subsequent pay-
ments for taxes, etc., made by the vendor, and all charges
for interest; while money received on account of any con-
tract, whether for principal or for interest, is posted to the
credit of the appropriate account. The total of the bal-
ances of the general contracts ledger will therefore agree
with the balance of the Contracts account in the general
ledger.
The four principal forms of sub-ledger, viz., Mortgages
Receivable, Mortgages Payable, Contracts, and Property,
should be of uniform size, not only as a matter of general
convenience, but in order that when desired they may all
be kept in one set of covers, each sub-ledger under its own
index.
21. Commissions Payable Ledger
One of the minor difficulties sometimes encountered
in a real estate office is the keeping of a simple and effec-
tive record of amounts paid to brokers or agents as com-
missions on time sales of the concern's property where the
commission is paid as instalments are received from the
purchasers. This difficulty becomes serious when there is
a large number of such sales running at the same time.
Form 12 will be found useful under such circumstances,
especially in connection with commissions payable on op-
tions, etc. As will be seen, it is at once an option and com-
mission ledger, but it is equally applicable to any time
sale.
REAL ESTATE ACCOUNTS
Name
Addre:
Assign
Lot
Pric
Cod
Cor
Deet
WnrJt A
ddHio
nourr
n
|0
e*
ra
mi
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4
edte
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to
ssion* Pay to
>
DATE
ITEM
rcuo
AMOUNT
CATC
ITEM
raw
AMOUNT
COMMISSION RAID
,.
~~" .
_
Form 12. Commissions Payable Ledger
22. Brokerage (Commissions Earned) Ledger
The brokerage ledger is used for the purpose of record-
ing all the transactions which yield a brokerage or a com-
mission. (See Chapter XXX.) The record is a simple one
and may be of the style shown in Form 13.
The profits arising from commissions on the sale of real
estate are unusually simple. In the great majority of cases
they are paid in cash or its equivalent as soon as a sale is
completed, and are entered directly in the cash book or
journal, as the case may be. In the matter of commissions
on time sales, especially where the payments are small, it is
a common custom for the owner to make some particular
arrangement with the agent, such as agreeing to pay him,
say, 50% of all collections until the commission is fully
paid.
SUB-LEDGERS
Z
SHEET NQ
NAME
ADDRESS.
ACCOUNT na
DATE
ITEMS
rocytC&W
tWvWOXKW Jffo
DEBITS
tlooo
ITEMS
in
J CREDITS
1&QSLOQ -
Form 13. Brokerage (Commissions Earned) Ledger
23. Subdivision Customers Ledgers
These sub-ledgers (Forms 14, 15, 16) contain accounts
with individual purchasers of lots included in subdivisions
handled by the concern ( 173, 174). If the concern buys
a house, and then sells that house on contract, the account
with the purchaser would be entered in the general con-
tracts ledger (Form n) ; but if the concern bought 1,000
acres of land and divided it into 500 tracts, the accounts
with the various customers for each of these tracts would
be kept in one of these subdivision customers ledgers, one
such ledger being devoted to each subdivision.
Inasmuch as these accounts are of a somewhat tempo-
rary nature, frequently lasting not more than two or three
years, it is not necessary to use so substantial a book as
REAL ESTATE ACCOUNTS
NAME
ADDC
'
CCOUNT NC
WEET NO._
1
=SS ?
NT
DATE
IDM
ra.
DEBHS
CREDTTS
BALANCE
DATE
rrtu
TX.
DEBITS
CREDfTS
BALANCE
~*~~~
_^~\_
pj
Form 14. Subdivision Customers Ledger
has been indicated for the preceding ledgers. Form 15,
discussed in 174, shows an improved method for keeping
these accounts.
In some cases it is possible to use a tabular form of
ledger not unlike the "Boston" ledger so largely used in
banks. This form is well adapted to a comparatively small
subdivision in which all the lots are disposed of by contract
in a short time. In such a case each lot is entered in order
of date on one line, or the names of the purchasers are en-
tered in alphabetical order, an index being provided in the
former case to show the name of each customer and the
number of his contract. Form 16 shows the proper ruling.
By the use of "short leaves," a record of this kind ex-
tending over three or four years can be kept in a book of
convenient size. The chief advantage of this form lies in
SUB-LEDGERS
43
o
NAM!
STRE
CITY.
j
TERMS
LOT
OB
TPA/T
T
E
1
1LOCK
lECTION
prvovr
IWE
DC.
CO.
BALANCE
RESERVE
RESERVE
REAUZED
Form 15. Subdivision Customers Ledger
the fact that it dispenses with the necessity of drawing off
a trial balance of the sub-ledger, as a total of the "Balance"
column gives this at once. If any error has been made it
can be quickly detected, for the total of the receipt column
for any month must agree with the total of the correspond-
ing column in the cash book plus any journal entries which
may have been made.
Whatever the form of record used for these subdivision
accounts, a fixed rule should always govern where contracts
are transferred a proceeding of frequent occurrence. In
some offices it is the practice to write the name of the trans-
feree on the existing ledger sheet, and then transfer this
sheet to its location in alphabetical order; e.g., if a lot is
bought by John Doe and an account opened with him, and
this lot is sold to Richard Roe, the latter's name is written
over Doe's, and the sheet transferred and placed under the
44
REAL ESTATE ACCOUNTS
PRICE
REOl
RECD.
rca
BALANCE
52-
joo
Form 16. Tabular Ledger for Subdivision Accounts
R's. This method leads to confusion, for the sale is re-
ferred to sometimes under one name and sometimes under
the other ; or the tickler and other records may fail to show
the transfer. The best method is to close John Doe's ac-
count by the entry (preferably in red ink) "Balance trans-
ferred from John Doe to Richard Roe." In this way it is
always easy to trace the history of any lot, even if the
tickler is deficient.
The accountant should allow no month to pass without
taking off a trial balance from each and every sub-ledger,
even if it is only an adding machine list ; and in all cases
these lists should be filed with the month's papers for future
reference.
CHAPTER VI
PROPERTY RECORDS
24. Report of Real Estate Transactions
To record the technical details of real estate transactions
in a proper manner, the bookkeeper must be furnished with
complete data, and this can best be accomplished by the use
of special forms. Form 17 will suggest the lines to be
followed, the salesman's report shown giving the facts of
each sale. A slight modification of the sales form will
adapt it for a report of purchases. After these facts are
recorded by the bookkeeper, the reports should be per-
manently filed for reference in case any question arises in
the future as to the details of a transaction.
The use of some such adequate form of report cannot
be emphasized too strongly, for otherwise the records will
often show blank spaces where information should be found.
In other words, it is impossible to maintain a complete set
of real estate records without a sure and uniform founda-
tion as to purchases and sales, such as is afforded by this
form of report.
The certificate of title shown in Form 18 is the result
of a good many years' experience and may be taken as a
general indication of what is desired, the chief object being
to set forth clearly and briefly the main facts, instead of
leaving them to be "dug out" of an opinion of title occupy-
ing perhaps many pages of typewriting.
25. Property Index
The purpose of this index is to enable the bookkeeper
to turn to the records of any piece of property though only
45
46 REAL ESTATE ACCOUNTS
THE ALPHA LAND COMPANY
JACKSONVILLE, FLA.
REPORT OF PROPOSED SALE
No
I have this day arranged to sell to
................................ of
the following described property owned by
Lot
Block
Subdivision
on which there is situated
The total purchase price is .............................. $
Payable as follows : Cash .................. $ ..........
Contract, payable $ ......... monthly ........ $ ..........
First payment due ..........................
Mortgage, payable .......................... $ ..........
He is also to assume mortgage, viz :
........................ $ ..........
Making the total price of $
Interest is to be payable at the rate of per cent.
Commission of $ payable to
IMPROVEMENTS:
The company agrees to erect for the purchaser a
which is estimated to cost $ , which is to be added to the
above figures and is to be covered by the above payments.
Salesman
Papers drawn:
Entered, Property No. Mtge. Payable No.
Contract No. Book tickler
Mtge. Receiv. No. Plat
Approved
Form 17. Report of Sale
PROPERTY RECORDS 47
Opinion No Application No Loan No
UNITED STATES TRUST & SAVINGS BANK,
Jacksonville, Fla.
191
Gentlemen :
I hereby certify that I have examined the title to the following
described property, lying County, viz. :
as set forth in the following abstracts, viz. :
No made by Dated
(Leave blanks here for further abstracts.)
Based upon these abstracts, my opinion as to the title to said
property is as follows :
1. The Fee Simple title was on the day of 191 ..
vested in
Subject to the following encumbrancees :
2. Mortgages
See entries Nos Abstracts Nos
3. Taxes, State and County
4. Taxes, Municipal
5. Other liens and judgments
See entries Nos Abstracts Nos
6. If the encumbrances noted above be cleared from the title by the
following action
7. In my opinion a promissory note, secured by a mortgage executed
by would, when duly
recorded, constitute a first lien on said property.
Attorney-at-Law
Remarks :
Form 18. Certificate of Title
REAL ESTATE ACCOUNTS
the name of the vendor is known, and furnish a list of all
real estate acquired. It is convenient to number each piece
of property consecutively as it is acquired, and to give it
some descriptive title, as the "J ones Property," the "Carsley
Hill Property," or the name of a subdivision of a larger
property, as "Lake Side." In any case, the name or names
NO
DESCBIPTION
A
B
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Form 79. Property Index
selected are entered on the property index in the column
headed with the initial letter of that name, as indicated in
Form 19. Each piece of property should be entered im-
mediately on receipt of the deed. Such an index enables
any employee, whether familiar with the books of account
or not, to refer promptly to any particular property.
26. Property Ledger Wild Lands
The property ledger is the most technical and distinc-
tive of the entire series of real estate records, and one of
PROPERTY RECORDS
49
Width
Column Purpose of Column Inches
1 For description (By metes and bounds or by forties) 6 7/8
2 Section 7/l6
3 Township 7/16
4 Range 7/16
5] ("Deed No 1/2
6 Whence P ate of Deed 3 / 4
I Derived Grantor ;" ~" * *A
\\ [Recordedl^.... ..................... 1/2
10 Abstract No 1 1/16
11 f Instrument 3/4
12 r> :^,, From .. . i 1/2
==
16 1 f Valuers i
17 [ Value Date 3/4
i8J [Amount I
19 Cost i
20 1 f Nature i
21 \ Encumbrances Mortgage No 1/2
22 J [ Amount I
23] [Year 1/2
24 State and Valuation I
25 County Amount of Taxes I
26 Taxes Date Paid 3/4
27 J [ Receipt No 5/8
28] [Date 3/4
29 \ Charges Purpose I 5/8
30 J [ Amount I
3i] [Date 3/4
32 I- Disposition To i 1/2
33 J [ Sales Record 3/4
34 Remarks 6
Form 20. Property Record or Tract Book (table showing the nature
and width of columns)
the most important. It records all the details of every
piece of property in which the concern is interested. In
other lines of business there is no record with which the
property ledger may compare, unless perhaps a perpetual
inventory; but real estate is a less liquid asset than mer-
chandise, and the items of a property ledger have a value
REAL ESTATE ACCOUNTS
PROPERTY RECORDS
t
52 REAL ESTATE ACCOUNTS
far more permanent than the items of a mercantile inven-
tory. Particulars regarding merchandise can usually be
gathered from filed invoices, whereas the corresponding
information regarding real estate is more varied and tech-
nical, and is more difficult to obtain as it must be drawn
from a variety of records. The property ledger will be
found equally useful in other lines of business when large
tracts of land are held.
Owing to the many purposes which a property ledger
serves, it is difficult to devise a single form which will in all
cases yield the best results. Several forms are therefore
given, which, besides meeting the requirements of the special
cases for which they were designed, will suggest forms
suitable under other conditions. The problem is to provide
a record which is convenient for reference and which ex-
hibits clearly all the essential facts.
Forms 20 and 21 illustrate respectively the bound vol-
ume and the loose-leaf book. Experience has demonstrated
the great superiority of the loose-leaf form. It is more con-
venient in size, and provides for indefinite expansion by the
insertion of additional leaves wherever they may be re-
quired. On account of this elasticity it has nearly displaced
the bound book.
Form 20, the bound volume, can be used to best ad-
vantage in cases where no new land is to be acquired, i.e.,
where the concern can at once make up complete and final
lists. The following remarks apply equally to Forms 20
and 21.
The first step in writing up a property ledger is to
select the unit, and as there is no uniform method of sur-
veying which has been adopted throughout the entire
United States, it is impossible to give forms applicable
everywhere. The examples which follow are based on a
United States township as being the most generally used.
PROPERTY RECORDS 53
In making the entries, the data should always be taken
direct from original deeds and not from transcripts or mem-
oranda. Every time a description is copied the probability
of error is multiplied, and for this reason the record should
always be made directly from deed to ledger.
For convenience in making up tax lists and tax returns,
it is best first to arrange the lands by counties, as it is
usually the county which assesses and collects the taxes.
Having done this, let it be assumed that the unit within the
county is the township. This unit is six miles square, and
is ordinarily divided into 36 sections, numbered from i to
36, although it frequently happens that, owing to old grants
or other similar causes, townships are irregular. In such
instances the irregular sections are usually indicated by
numbers from 37 upwards. As a rule, all the lands owned
in any one section should be entered on the same sheet of
the property ledger, although in some cases a finer sub-
division may be made with advantage, as for instance,
where different lands in the same section are derived from
different sources.
The sheets of the property ledger should then be ar-
ranged in regular order, either of township or of range,
some offices preferring one order and some the other. By
the order of township is meant the following arrangement :
Section I Township i Range I
I i
i "2
1 "2
2 " i
2 "2
The regular section consists of 640 acres, divided into
quarter sections and described as N.E. *4 e tc., each of
which is again subdivided into 4O-acre tracts, described as
N.E. *4 f N.E. ^4, etc. When a whole section, or
54
REAL ESTATE ACCOUNTS
s
"2
5
h
9
PROPERTY RECORDS
55
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sn
REAL ESTATE ACCOUNTS
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PROPERTY RECORDS 57
any portion consisting of more than 40 acres, is written
on the property ledger sheet, the tract should be broken up
into these forties, and the exact acreage be shown. It will
be seen in the timber land record shown in Form 22 that
1 6 lines are provided, one for each "forty" in a section, so
that if this plan is followed, the disposition of any forty
may be shown without disturbing or rewriting the descrip-
tions for the rest of the section. It will frequently occur
that descriptions of small tracts in irregular sections are
so complex that it is advisable to enter each one on a sep-
arate sheet as in Form 23.
It is sometimes required to form a bound-book record
from a mass of deeds covering contiguous lands. In such
cases it is convenient to use the listing slip shown in Form
24 for the description of the property. These slips measure
5^2 X ii inches, and when printed can be put up in pads.
They are written up, one for each deeded piece of land, ar-
ranged in order, and copied into the book, the entries being
checked against the original deeds.
The property record outlined in Form 20 is one used in
an office which controls large tracts of land of varied char-
acter and widely distributed. It is a bound book and its
data was compiled by the use of the land list shown in Form
23, and, as no further lands were acquired, the bound-book
form has not been found inconvenient, though the entries
relating to taxes have overflowed the space allotted to them.
The sheets used in this record are 21 inches wide and
i7 l /2 inches deep, making a book 42 inches wide when open,
the record running entirely across the folios. The books
from which these dimensions are taken form a series in
which were recorded lands in some thirty different counties.
Each page is headed with the name of the county in
which the land lies. The horizontal ruling is in faint blue
with five lines to the inch, every ninth line being ruled in
REAL ESTATE ACCOUNTS
PROPERTY RECORDS
59
heavy purple ; no more than one section of land is entered
in the space between the purple lines.
Columns 5 to 9 are frequently of great use in showing
the source from which the particular land came a fact
it is often convenient to have at hand. Columns n to 14
are required in cases where it is convenient to show those
through whom title has passed. This information is es-
pecially useful in some states where land is held under tax
titles of more or less uncertain value. If these columns
are omitted, a double set of "Taxes" columns may be in-
serted.
The property ledger shown in Form 21 was devised for
a land company owning wild lands and city property, and
is practicable for both classes. The size of the sheet is
shown as 9)4 X nj4 inches, although many prefer n X 12
inches. The blank heading is of sufficient size to allow an
ordinary description to be given at length. The back of
the sheet provides for a record of taxes paid and expenses
incurred.
The timber land record shown in Form 22 was arranged
for an estate consisting of pine lands, the title of which
rested in sundry individuals. It provides for the following
special points :
1. Plats of the lands described, this information being
permitted by the large headings.
2. Particulars as to turpentine and logging, etc.
3. The record of the tax assessor's description in the
tax statement on the reverse side of the sheet.
As a considerable part of these lands lay in large grants,
the descriptions being by metes and bounds, the tax as-
sessor's description was merely the book and page on which
was recorded the deed conveying the particular piece tc be
taxed. Until this information was entered on the prop-
60 REAL ESTATE ACCOUNTS
erty record, there was constant difficulty in assigning to the
particular property any item of taxes paid.
This form was used in connection with the land list
shown in Form 23, and as the lands were being continually
used for grazing, logging, and turpentine, it proved very
satisfactory.
Whatever form of property record is adopted, great
care must be taken to insure the entry of all particulars of
a general nature, such as quality of soil, timber, minerals,
etc. ; also all options, leases, or privileges of any kind which
may have been granted, as well as the receipt of any con-
sideration therefor, either on the Principal account or on
the memorandum income account.
As will be noted, apart from its other uses the property
ledger forms a perpetual inventory of what is practically
the "merchandise" of a real estate concern. One of the
features of real estate accounting is the comparative ease
with which an absolutely correct record of everything "on
hand" can be maintained.
All the property records shown here provide for the
entry of details regarding taxes as well as of land descrip-
tions. Thus the value of such a record increases with its
age. The forms must necessarily be modified to meet local
conditions. (See Chapter XXXV.) It is important to
have such a complete record, but this fact is frequently
overlooked.
27. Property Ledger, City Properties
It is beyond question that the most convenient form for
the record of city properties is a loose-leaf book. As al-
ready stated, the property ledger shown in Form 21 is
suitable for this purpose, as is also the city property ledger
shown in Form 25. The latter form provides for the entry
of all essential information and is almost self-explanatory.
PROPERTY RECORDS 6l
Particulars as to appraisals and selling price may be entered
in the "Remarks" division, while expense and receipts may
be put on the back as memoranda.
The most convenient method of arranging this ledger
is to keep together all sheets relating to the same subdi-
vision, arranging them in alphabetical or geographical or-
der as may be desired, and separating them by blank sheets
of heavy paper, to each of which is attached a movable in-
dex tag giving the name of the plat referred to on the
sheets following. This method gives immediate access to
the records of any piece of property of which the descrip-
tion is known. If the name of the vendor is known, refer-
ence to the property index (Form 19) will give the subdi-
vision ; while, if only the street address is known, the prop-
erty can be located by means of the rent record given in
Form 32 ( 37).
Such an arrangement assists an auditor materially, as
it insures against the duplicate entry of any piece of prop-
erty and provides for the entry of all mortgages on any
property in one place matters which could not be de-
termined under any other arrangement without much
search.
To illustrate, let us suppose that a piece of property is
described in several ways, such as "part of lot," or "north
^2 of lot," or by metes and bounds. Quitclaim deeds to the
property may be obtained, in each of which a different form
of description is used. If the property ledger is arranged
in the order of the dates of deeds, or in alphabetical order
by the names of grantees, separate mortgages might be en-
tered under the several descriptions, and one or more might
escape even a careful checking.
When writing up the property ledger sheet for any im-
proved property, care should be taken to enter separately
the. value of the land and the value of the improvements,
62
REAL ESTATE ACCOUNTS
PROPERTY RECORDS
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even if this division of the cost must be approximated. This
information is necessary for insurance purposes, and also
in connection with tax matters, and to determine whether
or not depreciation should be charged .something 1 con-
sidered more fully under "Depreciation" (Chapter XXXII).
It not infrequently occurs that land bought and en-
tered as wild land, or as a city block, is subsequently sub-
divided and replatted into small parcels. If the subdivision
contains a large number of lots, it is not necessary to enter
each separately on the property ledger, as they can better
be recorded on the plat books and ticklers discussed in
29, 30.
If comparatively few lots result from such subdivision
or replatting, it may be advisable to carry each lot in the
property ledger on its own account. In such case, the origi-
nal account in the property ledger is closed by a journal
entry and new accounts are opened, one for each lot of the
subdivision, care being taken to divide properly the cost
among the new subdivided lots.
The property ledger shown in Form 26, given as an
alternative method of recording property, is entirely differ-
ent from the property ledgers already shown. It was de-
signed for English practice a fact which accounts for
the small space reserved for rents, which in that country
are generally paid quarterly.
28. Field Record
It is often advisable to have a record of wild lands or
of city lots, which may be carried in the pocket. In such
cases, the most convenient form is a small loose-leaf book,
5 X 724 inches, in which each page is devoted to one piece
of property and shows the important particulars. For lands
divided into United States townships, pocket plats may be
used, on each page of which a skeleton township is ruled.
66
REAL ESTATE ACCOUNTS
R E No No.
Price $
Bet.
Height-
Material
Lot
SJ36
Heated by
Rooms
Lease
Plumbing
Survey
Assd.Val. Mtqe.
Price
Ina Due
Improvements
Remarks
bt $ 1st $
2nd $ 2nd*
3rd $ 3rd $
4ih $ 4ihJ
5h $ 5tti$
Total-tental $
O
Form 27. Card Property Record (face)
O
Form 28. Card Property Record (back)
PROPERTY RECORDS 67
Still another alternative is to keep a card index, subdi-
vided so that it is possible to remove quickly all the cards
relating to a certain district, and carry them when making
an examination on the grounds. A card record of this
style is shown in Forms 27 and 28, the particulars being
practically the same as would appear in the small loose-leaf
book mentioned above.
Such records are almost essential, as much information
can best be secured on the grounds and, with this pocket
record, may be immediately entered in its appropriate place.
The record then forms also a tickler, which may be car-
ried in the pocket during inspection trips or when showing
properties to prospective buyers.
29. Subdivision Ticklers
In the case of what is known as subdivision property,
it is well to have a separate tickler for each subdivision.
The usual method of keeping this is either on cards or in
loose-leaf books, each tickler being accompanied by a plat
or map of the subdivision in question. This plat should
show clearly all lots in the subdivision owned by the com-
pany, those covered by option or by contract, and those
which have been conveyed to purchasers or others. To dis-
tinguish these various classes of lots, check marks of differ-
ent colors may be used. Such plats are not only of daily
use to the office force, but display clearly the facts which
an auditor must have when verifying the amount of prop-
erty on hand as against the amount of money charged to
such property in the real estate ledger.
A loose-leaf form of tickler is shown in Form 29, one
leaf or more being devoted to a block (or corresponding
division), and two or three lines being allowed for each
lot in that block. On these lines appear the names of the
purchasers, which in the case of time sales are best written
68
REAL ESTATE ACCOUNTS
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PROPERTY RECORDS 69
in pencil, as transfers or assignments are of frequent oc-
currence.
30. Plat Book
This book is composed of plats of the lands described
in the property ledger. In those states in which the United
States township is used, these plats can be most easily shown
on the official government plats of each township, which
may be obtained from the United States land offices and
should be mounted on canvas before being bound. By the
use of varied tints, different interests and different con-
ditions may be more conspicuously shown on these plats
than in a written record, although the property ledger must
furnish the necessary information.
31. Record of Deeds Received
The object of this record is to facilitate reference to
any desired deed. There are two forms in which this rec-
ord may be kept, one of which is a numerical index in
which there are columns for the following details: num-
ber of deed; name of grantor; kind of deed, that is, war-
ranty deed, quitclaim deed, etc. ; date of deed ; place of
recording deed ; county ; space for various entries.
Form 23 ( 26) may be used as an alternative. Although
this form requires more writing than that described above,
it saves constant reference to the actual deeds, which should
be kept in the vault. The form chosen must depend on
the preference of the person keeping the record and on the
requirements of his office. In a general way it may be
said that the form first mentioned is better adapted to the
needs of a general land company which buys and sells lands,
while Form 23 better serves the needs of those who hold
lands, not primarily for sale, but for investment, grazing,
logging, or other similar purposes.
7 REAL ESTATE ACCOUNTS
32. Record of Deeds Issued
Special attention is called to the record of deeds issued
(Form 30), the object of which is to keep a permanent
record of every deed executed by the concern. This matter
is often overlooked in real estate offices, but a little thought
Deed No.
Date From
To
Consideration $. . . Actual
Terms
Payable
Property: Tract Book No Serial No.
County
Contract No Mortgage No.
Other Papers delivered
Executed by
Delivered to
Total Acres Value on lists $.
C. B Gain $.
Journal Loss $.
Verified by
Form jo. Record of Deeds Issued
PROPERTY RECORDS 71
will show its importance. No wholesale merchant will de-
liver goods without keeping some record of the transaction ;
yet many real estate offices, even though doing a large busi-
ness, fail to keep any distinct record of deeds and other
similar papers executed and delivered.
If all deeds given by a concern are to be of one form,
it is best to have them printed, numbered consecutively, and
bound in book form on stubs. Each stub should provide
appropriate spaces for the following information :
Date of deed; name of grantee; consideration (both the
actual and the nominal, if they differ) ; terms of sale and
method of payment; description of property, with serial
number ; number of contract or mortgage in connection with
which deed is issued ; names of parties executing the deed ;
name of person to whom deed is delivered ; any other pa-
pers delivered, such as releases, quitclaim deeds, etc.
In using this form, the blanks are filled in with pen and
ink. Care should be taken to compare the stub with the
deed, when both are completed, and to have the stub in-
itialed by the person responsible for the verification. In
the case of subdivision properties of large size, it is con-
venient to have a separate deed book for each subdivision,
with the name or description of such subdivision printed
thereon.
Another system of keeping office records of deeds is-
sued is to have the deed form occupy but a single page,
and to make a carbon copy of each deed as it is issued.
These copies are then arranged numerically and filed in a
binder. This system gives good results, the only serious
objection being that when a copy of a certain deed is called
for, there is a strong temptation to remove it from the
binder, with the probability that it may not be returned to
its proper place.
If various forms of deeds are used, the record may be
72 REAL ESTATE ACCOUNTS
kept in a book specially prepared for that purpose. In ad-
dition to the particulars already mentioned, this book should
show the kind of deed given, i.e., warranty, special war-
ranty, quitclaim, etc. The record shown in Form 30 has
been used for this purpose for many years by a company
whose head office is far distant from the local office in
which the business is transacted. The head office keeps a
complete duplicate set of records, copied originally from
the local books and kept up to date from the record of
deeds issued.
Whatever method may be adopted, the rule should be
rigidly observed that no deed be allowed to leave the office
until a permanent written record of it is made. At the
time, this may appear of little consequence, but in all rec-
ords connected with real estate there is a strong possibility
that at some future time it may be necessary to refer to
the original transaction, and permanent records are there-
fore even more necessary in this line of business than they
are in a mercantile or manufacturing enterprise.
33. Record of Contracts Issued
The general remarks as to the importance of office
records of deeds issued apply also to the record of con-
tracts; but the method of keeping this record is somewhat
simpler, owing to the fact that the important particulars of
each contract are shown by the entries in the contracts
sub-ledger.
It is a general practice, from which there should be no
deviation, to execute every contract in duplicate, the vendor
and the purchaser each receiving a copy. If this is done
and the copies filed, numerically or alphabetically, in the
order followed in the contracts ledger, and if the contract
is entered on the property ledger, no further record is
required.
PROPERTY RECORDS 73
34. Record of Options Granted
This record is similar in all respects to that for con-
tracts, and it is to be noted that three distinct records are
required :
1. A copy of the paper executed.
2. Particulars in the sub-ledger.
3. Particulars in the property ledger.
35. Subdivision Histories
This form is required only in those offices where many
different subdivisions are handled. It consists of a memo-
randum book or collection of loose leaves, one or more
pages being devoted to each subdivision and the necessary
particulars entered thereon, as indicated in Form 31.
Originally carried as Property No. 275
2811 NOCATEE FARMS
Transfer to Nocatee Purchase 1916 Owned by the Concern
Commenced in 1914 report. Bought from Union Bank. Tracts 5 acres
each.
(No. 275) 3,890 acres bought from Union Bank for $11,670.
Payable
October I, 1914, $2,000
Quarterly payments $1,000 each, with interest at 8% per annum.
(No. 2811) 160 acres bought from J. Summer for $958.75.
Up to April 30, 1917, all profits based on cost of $3.00 per acre.
There are 3,890
160 4,050 acres
Cost Bank $11,670.00
" Summer 958-75
Interest to Bank 953-IO
" estimated on un-
paid balance. 200.00 $13,781.85,
or, say
$4.00 per acre.
April 30, 1917 245 tracts unsold at $20.00. . . $4,900.00
Purchase Account $4,438-75
Form 31. Subdivision History
CHAPTER VII
RENT RECORDS
36. Record of Leases Given
In those few offices in which it is possible to issue a
considerable number of leases of the same general char-
acter, either of the methods outlined in 32 for the record-
ing of deeds may be followed.
In most cases, however, the forms and terms of leases
vary so greatly that such a record cannot profitably be
kept, and it is sufficient to number consecutively all leases
given, as indicated in 342, the original papers being filed
accordingly and a simple index of all leases maintained.
In any event, whatever the nature of the property leased,
it thereupon becomes rent-producing, and the lease should
accordingly be entered by its serial number on the property
ledger, the rent register, and the rent ledger, together with
such details of the terms as may be desired. If the rent is
payable at frequent intervals, as once a month, no further
record is required; but if the payments fall due at longer
intervals, as quarterly, semiannually, or annually, there is
danger that they may be overlooked unless some tickler
record is made. In such cases the rent payments may be
indicated on the rent record shown in Form 32, or they
may be entered on the same form as the interest receivable,
but in such manner as to indicate to the bookkeeper that
the entries refer to rents and not to interest.
37. Rent Register (House Address Book)
This book is invaluable for any office interested in a
large number of houses for rent or sale. It is intended to
74
RENT RECORDS
75
contain a record of all rentable properties owned by the
company, or in which it has an interest through contract,
mortgage, or as renting agent. It may be bound or in
loose-leaf form. In either case, it should be indexed al-
phabetically and each page be headed with the name of a
street or neighborhood in which the concern has rental prop-
erty, the object being to provide a means for finding quickly
STREET
NO.
DtSCBIPTION
Lot B. , Map
OWNER
REMARKS
Form 32. Rent Record
all the houses on any one street and to indicate the nature
of the interest involved. As it contains a complete list of
all rentable properties in which the concern is interested, it
forms the basis for the work of the rent department.
The loose-leaf rent record or register shown in Form
32 has been in use for many years and is self-explanatory.
If houses are sold on time, this fact is shown in the "Re-
marks" column, and when the sale is completed, reference
76 REAL ESTATE ACCOUNTS
is made to the serial number of the mortgage, contract, or
option, and a red ink line is ruled through the entry.
If the number of rentable houses is large, it may be
advantageous to prepare a rent register board similar to
that used for recording the occupancy of rooms in a hotel.
This board should be large enough to hold a card for each
house on the rent register, and so constructed that a smaller
card may be inserted in front of, and covering up the lower
part of, the larger one.
Each of the larger cards (which may be i X 3 inches)
bears along its upper edge the address of a house and the
nominal rent thereof. These cards are arranged on the
board in order of streets, of rental values, or of owners,
as may be most convenient. Upon a house being rented,
the date, name of tenant, and particulars as to the rent are
entered on one of the smaller cards (which may be ^2 X 3
inches and of a different color from the larger cards), and
this card is then placed on the board in front of the larger
card in such a way as to leave exposed the address of the
house. A board so arranged shows at a glance every house
offered for rent, all houses that are vacant, and all houses
that are rented, together with the name of the tenant and
other particulars.
38. Rent Receipt Books
The same principles that obtain with reference to the
general receipt book (12) apply with equal force to rent
receipt books, the main difference being that the latter are
properly of such size that collectors can easily handle them.
(See Form 33.)
Not infrequently an unscrupulous tenant will claim to
have made more payments than appear on the cash book,
and may produce in support of his claim a receipt which
has been changed as to amount, date, or name. The best
RENT RECORDS 77
THE ALPHA LAND COMPANY
NOCATEE, GEORGIA
$ 191..
Received of
Dollars,
being rent of No Street,
for . .to IQI.. i
Collector
(This receipt made in duplicate)
Form jj. Rent Receipt
evidence against such a claim is the carbon copy of the
receipt, which cannot be rebutted.
39. Report of Rent Collections
The rent report shown in Form 34 was designed by
English accountants for use in this country in connection
with property owned in England, a copy being transmitted
to the home office. In such cases, or wherever the chief
office is located at a distance from the property, this form
is valuable for tabulating the large number of details to
be reported. Its practical value here, however, is impaired
by the difficulties which attend the collection of arrears of
rent, owing to "exemption" laws and the general leniency
toward delinquent tenants which is found in so many states.
All offices employing rent collectors should require from
them regular and uniform reports of their daily collections.
For this purpose the report shown in Form 35 has been
found convenient. It may be printed on inexpensive paper,
bound in pads of fifty each, and perforated for filing in a
"Shannon" file. (See also Form 49, 307.)
REAL ESTATE ACCOUNTS
RENT RECORDS
REPORT OP RENT5 C(
ELECTED
1Q1
BOOK
NO
STREET
NO.
STREET
TENANT
OWNED
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Form 35. Rent Collector's Report
40. Rent Cash Book
For an office handling- many rental houses, it is usually
convenient to keep all matters pertaining to rents out of
the general cash book. An ordinary cash book may be
used for this purpose. All rents received, taken direct from
the rent collectors' reports, are entered on the debit side,
while on the other side are entered all payments made on
account of such houses for repairs, insurance, etc.
Where such a book is kept, it is well to deposit all re-
ceipts from rent as shown therein, in a separate bank ac-
count, and to charge against this account all moneys paid
out for repairs, etc., using for this purpose a check differ-
ing from that used in connection with the general cash ac-
count. At the end of each month the balance of this ac-
count is transferred to the general fund. This method
go REAL ESTATE ACCOUNTS
eliminates from the general cash book a vast amount of de-
tail which is shown to better advantage by itself.
41. Rent Journal
The journal entries required in connection with a rent
department are few and simple, an ordinary journal with
three or four columns meeting every requirement. Such
entries relate almost entirely to the issue of material from
the "yard," if such is maintained, and to brokerage charged
against clients, as outlined under "Rent Ledger" in 329.
42. Rent Ledger
This sub-ledger shows the gross and net rent received
from each building on the rent roll, and is used when the
items in these accounts are too numerous for the space pro-
vided in the property ledger. The subject is considered
more fully in 329, 330.
No special form of ruling is required for the rent ledger,
but each account should be headed with the street address
of the property to which the account refers, and be cred-
ited with all rents collected from that property and debited
with all expenditures thereon for repairs, water rent, etc.
The total of the balances of all the accounts in this sub-
ledger will therefore agree with the difference between the
Rents account and the Repairs account in the general ledger.
If it is desired to keep in the property ledger a permanent
record of the income from each piece of property, the bal-
ances from the rent ledger may be transferred periodically
to the appropriate spaces in the property ledger.
Where there are many houses paying rents weekly, the
rent ledger shown in Form 36 has been found serviceable.
This ledger gives a continuous record of each house, and
one page will hold the records of several years, thus serving
to exhibit changes of tenure, amount of repairs made, the
RENT RECORDS
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RENT RECORDS 83
tenant for whom they were made, and regularity with
which rents have been paid.
For the record of rents collected from such properties
as office buildings and apartment houses, a tabular form of
rent ledger, such as shown in Form 37, may be used. The
simple addition of the several columns for each month
gives :
1. Balance uncollected on the first of each month.
2. Total rents due from tenants each month.
3. Total rents paid by tenants each month.
4. Total rents unpaid at the end of each month.
In order to contain a year's record of monthly rents,
the tabular ledger will require some forty columns. The
convenience of handling such a book is greatly increased
by using "short leaves," which will allow a book 29 inches
wide to be used. The method of dealing with the monthly
totals shown on such a ledger is explained in Chap-
ter XXXIV, "Rents."
43. Collector's Pocket Rent Ledger
One of the difficulties experienced by all rent collecting
agencies is that of keeping the collectors informed as to the
condition of each account, particularly rents in arrears.
For this purpose many offices use a card system similar
to that employed by furniture dealers and others in con-
nection with their sales on the instalment plan. One such
card is maintained for each house and on it are entered the
rents as they are paid. These cards are then sorted, and
each day, or at frequent intervals, a certain number of them
are given to the collectors, indicating to each the houses at
which he is to call. As these calls are made, the collector
turns back the proper cards to the office. The record is
therefore necessarily divided, and is seldom, if ever, all in
REAL ESTATE ACCOUNTS
one place; also it occupies considerable space and is subject
to loss and disarrangement.
In order to avoid these difficulties, the "Collector's
Pocket Rent Ledger" (Form 38) was devised, the use of
.STBEET
JAN FEE MAP. APR
MAY JUN ML. Ai SO? OCT. NOV DCC.
Form 38. Pocket Rent Ledger
which requires no explanation. If printed on thin paper,
a book about 4^2 Y. 6 l /2 inches, and about one-half inch
thick, will contain the records of one thousand houses for
one year. The space between any two heavy horizontal
lines is devoted to one house or building, the blue lines in-
dicating the first, second, third, fourth, and fifth weeks of
each month. Each street has one or more pages allotted
to it, and by arranging the streets alphabetically at stated
intervals, the book can be kept in alphabetical order through-
out its life. Being primarily for the use of collectors, the
book contains no other record than that of rents collected.
CHAPTER VIII
MISCELLANEOUS RECORDS
44. Fire Insurance Record
This record is intended to show the expiration of all
insurance policies in which the concern is interested. Any
of the recognized forms of expiration register used by fire
insurance agents may be adopted, or the system outlined in
323 may be followed.
45. Bills Receivable and Bills Payable
Bills receivable and bills payable books may be of any
convenient form. They should contain details of all notes
not entered in the mortgages receivable and mortgages pay-
able ledgers ( 18, 19).
46. Land Notes
Some companies engaged in selling lands "on time"
make a practice of taking payment in serial notes. When
this is done, it is better to enter such notes in a record
separate from the regular bills receivable book. Probably
the most convenient form for this record is a modification
of the mortgages payable ledger (Form 9, 19), space
being allowed in the heading for details as to the due date
and disposition of each note in the series. In preparing
such a form, it should be remembered that such notes are
frequently hypothecated or lodged with a bank or trust
company, or placed in the hands of an agent for collection.
Ample space should be provided to record such facts, so
that the location of each and every note may be shown.
85
86
REAL ESTATE ACCOUNTS
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REAL ESTATE ACCOUNTS
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MISCELLANEOUS RECORDS 89
47. Mortgage Interest
The necessity for a record from which each mortgage
may be charged with interest as it becomes payable is ob-
vious. The only form required for this purpose is a book
made of analysis paper and having at least twelve money
columns, one for each month, as indicated in Form 39.*
It is sometimes necessary to make monthly reports re-
garding mortgage interest. For such cases Form 40, taken
from English practice, gives a convenient record and is
particularly adapted to branch offices which have to report
to the home office or to other branch offices located at a
distance. The forms required for interest payable are
identical with those for interest receivable.
48. Expense Account Analysis Book
It is essential to the highest economy that the expense
account be frequently analyzed, and kept in such condition
as to afford at all times data for a classified statement of
expenses. This may be done by carrying a large number
of expense accounts in the general ledger, such as salaries,
stationery, etc. ; but this method tends to complicate the
trial balance. For some years past, many banks and other
institutions with large expense accounts have made it a
practice to charge all expense items to one account, and
keep an expense analysis book, which provides for a more
elaborate classification than can conveniently be carried in
a ledger. Form 41 gives a page from such a book, which
is of the loose-leaf form and well adapted to real estate
offices.
*Some accountants claim that better results can be secured by dependence
upon the mortgage record for all information as to interest.
CHAPTER IX
THE ACQUIREMENT OF REAL ESTATE
49. Methods of Acquiring Real Estate
There are at least five legitimate methods by which the
control of real estate may be acquired, viz.: (i) by gift,
(2) purchase, (3) exchange, (4) recovery, (5) agency.
1. Control through gift occurs so rarely in business
that it need not be seriously considered, for even when a
gift is apparently made, some consideration is usually
passed.
2. Purchase includes the majority of transfers, and the
method of treating these in the accounts is fully considered
in the present chapter.
3. Simple exchange embraces but few instances of real
estate acquirement; as a rule some pecuniary consideration,
or its equivalent, is involved.
4. Recovery. Unfortunately, most real estate offices
occasionally find it necessary to recover property sold "on
time" under some form of agreement, the terms of which
have not been complied with. This involves the foreclosure
of mortgages or cancellation of contracts, although it some-
times happens that a purchaser voluntarily reconveys the
property gratuitously or for some consideration. In such
cases the balance due on the debt, together with interest
to the date of recovery, and all expenses for taxes, legal
charges, etc., should be included in the cost price. If, how-
ever, this cost price exceeds the value of the property, the
Mortgage Deficiency account ( 229) should be brought
into use.
90
THE ACQUIREMENT OF REAL ESTATE 91
5. Agency, as a rule, does not convey title, but it fre-
quently carries with it the management and sometimes the
practical control of property owned by another.
50. Accounting Procedure
In the acquisition of real estate there are certain mat-
ters with which the accountant is particularly concerned.
The more important of these are :
1. The report of the purchase, giving the particulars of
the acquirement.
2. The documents involved, consisting usually of deeds
of conveyance, quitclaim deeds, previous conveyances, sat-
isfactions of mortgages, tax receipts, etc.
3. The certificate from the attorney as to the title, or
the title policy guaranteeing the title. In large concerns
this is sometimes made on a printed form. If an attorney's
certificate is used, it should give not only the name of the
owner, but a description in sufficient detail to identify the
property positively. It should not read merely: "The
property of John Doe" a description so indefinite that
it may be used by fraudulent persons to stretch a certificate
over titles which never were submitted to the attorney for
examination. (See Form 18, 24.)
4. Any policies of fire insurance transferable with the
property. These should be examined not only as to their
general terms, but particularly as to indorsements which
may be necessary on account of changes of ownership, or
in connection with mortgages, etc.
5. The entry on the office records of the land acquired,
beginning with the property index and proceeding as far
as may be necessary, through the property ledger, mortgage
ledger, insurance record, etc. In the entries in the property
ledger, the value of land and of the improvements thereon
should be shown separately, as already stated'.
9 2
REAL ESTATE ACCOUNTS
51. Entries Required
Newly acquired real estate is brought on the books
through the cash book and the journal. The cash book
entries represent merely cash paid for, or on account of,
any purchase. Such amounts are debited to Real Estate in
the general ledger, and also to the specific account in the
property ledger.
A full report of each purchase should be made, using
a blank for the purpose, similar to that shown in Form
17 ( 25). The property is then entered on the property
index, and the property sub-ledger sheet is filled in and in-
serted in its proper place. If a portion of the purchase
money is represented by a mortgage given or assumed by
the purchaser, this part of the transaction will appear in
the journal in substantially the following form:
Real Estate $5,ooo
To Mortgage Payable $5,000
For mortgage No on property No
given or assumed by the company and held
by
This amount is posted in the general ledger to the ac-
counts shown, also in the property ledger, and in the mort-
gages payable sub-ledger.
52. Mortgages Payable
Mortgages payable are of two classes, namely:
I. Mortgages given by the concern (a) to secure a
part of the price paid for property, and (b) as
security for money borrowed by the concern. In-
asmuch as the latter may require approval by the
stockholders, or others, it is sometimes well to
observe this subdivision.
THE ACQUIREMENT OF REAL ESTATE 93
2. Mortgages already standing on properties, the
equities in which have been acquired by the con-
cern through purchase or exchange.
The two classes are similar, and the method of enter-
ing them on the books has already been given.
53- Legal Obligations of Mortgagor
There is, however, one important distinction between
these two classes of mortgages. Every mortgage imposes
an obligation on the maker to fulfil the conditions named,
and to make stipulated payments at definite times and places.
In the case of a mortgage of Class i, failure to live up to
the obligations imposed renders the concern liable to cer-
tain penalties in addition to forfeiture of title. In Class 2,
however, the concern is not the maker of the mortgage, and
the extent of the obligation incurred may depend in whole
or in part upon the wording of the deed conveying title to
the land.
Deeds of conveyance usually contain a clause, more or
less broad, warranting the title to the grantee (i.e., the pur-
chaser), and mentioning any existing liens such as mort-
gages, unpaid taxes, etc., which are to be paid by the
grantee. If, then, after mentioning a specific mortgage, the
deed merely continues with such words as, "to which this
deed is subject," or prefixes the description of the mortgage
by the words, "subject to the following mortgage," but does
not in terms obligate the purchaser to pay that mortgage,
the exact extent of the obligation assumed by him depends
on the circumstances surrounding the particular transaction.
Speaking generally, in default of payment of principal or
interest, the holder of the mortgage has the usual recourse
against the original maker of the mortgage and against
the property; but should the property fail to yield a sum
sufficient to pay the debt and the expenses, the holder can-
94 REAL ESTATE ACCOUNTS
not obtain a judgment against the purchaser for any de-
ficiency.
If, however, the description of the mortgage is followed
by such words as, "which mortgage is hereby assumed by
the grantee," the conditions are changed. The purchaser
then assumes the obligations of the original mortgagor ; and
should default and foreclosure ensue, the holder can obtain
a judgment against him for any deficiency remaining after
the foreclosure sale.
In large transactions, and especially if values fall, or
if a title proves faulty, this apparently slight difference in
the conditions may cause bankruptcy to one of the parties.
Suppose, for example, a tract of land has been acquired
without personal assumption of an existing mortgage by
the purchaser, and some defect in title is discovered which
renders further sale of the property difficult or impossible.
The holder may then elect to convey the property to the
mortgagee, who under such circumstances has no redress
against him. If the value of the property depreciates to
such an extent as to be worth less than the amount of the
mortgage, it could again be transferred to the mortgagee,
and the mortgage thereby be satisfied so far as the purchaser
of the property was concerned.
On the other hand, if the grantee specifically assumed
the mortgage, he would be forced to pay it even though the
value of the property fell far below the amount of the mort-
gage. This is not an imaginary happening, as it has often
been the cause of serious loss. In one instance alone, in
the writer's experience, a loss of this nature amounted to
over a quarter of a million dollars.
To the accountant the difference between these two
classes of mortgages is. the distinction between a contingent
and a fixed liability, for in the first case the liability may
cease to exist if the property is surrendered to the mort-
THE ACQUIREMENT OF REAL ESTATE 95
gagee. A discussion beyond this point would involve legal
matters rather than those pertaining to accounts.
54. Contracts Payable
The general principles applying to mortgages payable
apply equally to contracts payable, except that frequently
in the case of contracts there is no legal obligation on the
part of the purchaser to complete the purchase a failure
to do so resulting only in the forfeiture of any money
already paid.
55. Trusts and Trustees
The acquiring of property frequently necessitates some
form of trusteeship in connection with a mortgage given
or bonds issued a matter which is touched upon in 305.
Only general directions can be given to cover this case. Full
details of each trust should be brought into the books of
account, and such ledger accounts should be opened as may
be necessary to show clearly and separately all transac-
tions relating to the principal and interest of each trust.
CHAPTER X
PROPERTY COSTS
56. The Elements of Cost
While the question of holding or disposing of any given
piece of property is usually decided by the executive rather
than by the accounting department, the decision often de-
pends on information furnished by the latter. This infor-
mation relates largely to the cost of the property present
or future. This cost may include one or more of five dis-
tinct classes of expenditure, viz.: cost of (i) acquirement,
(2) holding, (3) maintenance, (4) operating, (5) invest-
ment.
1. The cost of acquirement has been discussed in the
preceding chapter. It represents the actual amount spent or
guaranteed in acquiring the property, and also includes the
cost of physical improvements added thereto.
2. The cost of holding includes those expenses, such as
interest and taxes, which are necessary to retain the prop-
erty (not to maintain it), which do not increase its intrinsic
value, and which are often classed under the head of "Fixed
Charges."
3. The cost of maintenance applies to improved prop-
erty only, and consists chiefly of such items as repairs and
renewals.
4. The cost of operating applies only to a limited num-
ber of cases, such as office buildings and apartment houses,
and includes lighting, elevator service, and other similar ex-
penditures necessary to obtain the normal returns.
96
PROPERTY COSTS 97
5. Tjje cost of investment, as here used, does not cover
the full cost of acquiring, but only the actual cash outlay
involved Strictly speaking, this amount is not a cost, al-
though it is sometimes convenient to regard it in that light
when calculating profits derived or to be expected.
57. Treatment of Costs
It will readily be seen that the cost of acquirement dif-
fers in one notable particular from each of the other costs,
in that it represents what is known in mercantile and manu-
facturing accounts as the "cost price" - the actual value at
some definite moment; while no item of any of the other
"costs" affects the intrinsic value of the property. These
differences in the five classes of costs are so radical as to
necessitate an entirely different treatment for each on the
books of account. Provision for such treatment is made on
property ledgers shown in Forms 20 and 21 ( 26), where
the main accounts show the cost of acquirement of each
piece of property, the total of which must agree with the
Real Estate account in the general ledger.
58. Cost of Improvements
The only addition to the original cost price of property
is the cost of improvements, a record of 'which is provided
for in the property ledger main account. Such items may
properly be charged directly from the cash book to Real
Estate, or, as is sometimes more convenient, they may be
charged to "Improvements" account, which is transferred
to Real Estate account at the close of each fiscal period.
The latter plan has the advantage of showing the total of
such expenditures in one amount on each monthly trial bal-
ance. If it is adopted, each item should at once be posted
to its proper account. in the property ledger, and the total
balance of these accounts will then equal the sum of the
Cjg REAL ESTATE ACCOUNTS
balances of "Real Estate" and "Improvements" in the gen-
eral ledger.
59. Repairs, Renewals, and Improvements
From the accountant's standpoint, there are few ac-
counts on the books which require more careful examina-
tion than the Improvements or Betterments account a
condition applying equally to all businesses in which the
maintenance of any physical structure plays a part. There
is frequently considerable difficulty in drawing the line be-
tween the expense item of repairs or renewals and the asset
item of improvements or betterments. This difficulty is still
increased by the general tendency among officials of all
ranks to increase assets rather than expenses. The clerk
in charge of a rental department is as desirous of keeping
low his ratio of repairs to rents, as is the manager report-
ing to the stockholders; whereas the stockholders them-
selves would, sometimes at least, charge everything to as-
sets and nothing to repairs, for by so doing these asset
increments might be quickly turned into dividends and in
this form reach their pockets.
If a list were made, commencing with undoubted im-
provements and gradually changing to undoubted repairs,
nothing would be easier than to classify the items at each
end of the list, while it would be extremely difficult to
classify properly some of the items in the middle. The
building of a new house on a vacant lot or the digging of a
drainage canal through a swamp are beyond all doubt "im-
provements," while the replacing of a pane of window
glass blown out by the wind is clearly "repairs." The dif-
ficulty in classification is not merely that of finding a defini-
tion, but of applying the definition when found. The final
decision in- each case must necessarily depend upon the
conditions.
PROPERTY COSTS
99
60. Definitions
Repair is the "restoration to a sound or good state after
decay, waste, injury, or partial destruction; it is the supply
of loss."
Betterment is defined under American law as "an im-
provement of real property which adds to its value other-
wise than by mere repairs."
Improvement is defined as "a betterment ; that by which
the value or excellence of a thing is enhanced ; a beneficial
or valuable change or addition. An improvement in real
property is something done or added to it, which increases
its value, as cultivation, or the erection of or addition to
buildings."
The following definitions are taken from the rules of
the Interstate Commerce Commission :
"Additions include additional structures, facilities, or
equipment, not taking the place of anything previously
existing."
"Betterments include the enlargement or improvement
of existing structures, facilities, or equipment, or a proper
proportion of the cost of new structures, facilities, or equip-
ment of an improved or higher class, taking the place of
others previously existing."
61. Repairs
The definition of repairs given in the preceding section
is clean-cut and definite; but even here difficulty may be
experienced, particularly in connection with the time when
repairs are made. In the case of the renewal of the roof of
a dwelling, if that dwelling has been erected by the concern
and carried for a considerable period on its books, the mat-
ter is clearly one of repairs. On the other hand, if the
concern bought an old house knowing that such repairs were
required immediately, the cost of the new roof would be
I00 REAL ESTATE ACCOUNTS
chargeable to Improvements, for the poor state of repair
of the building was undoubtedly considered when the price
of the property was agreed upon.
Consider, however, a case between these two. A dwell-
ing supposed to be in good condition is bought at a fair
market price. After a couple of years it is found that a
new roof is necessary. To what shall its cost be charged?
The property is already on the books at a fair and proper
value. The new roof adds nothing to the supposed con-
dition of the building, and the cost thereof may bring the
total cost of the house fully up to, or even above, the price
at which it could be sold. In such case the Repairs account
would be the proper place for the entry.
The above remarks are based on the assumption that
the new roof is of the same character as the old one. If
the new roof is of tiling or slate and the old one was of
shingles, the difference between the cost of a new shingle
roof and a new tile roof is, without doubt, chargeable to Im-
provements account.
Professor Cole, in "Accounts, Their Construction and
Interpretation,"* deals with another difficulty, encountered
when a building is altered for its tenant, who, in considera-
tion of these alterations, pays an increased rental, but leaves
at the end of a year and the new tenant requires the
premises restored to their original condition. If such
changes were continued, and the cost charged to "Improve-
ments," the result would be a fictitious value, ultimately ex-
panding to infinity. This question is fully dealt with by
Professor Cole, and further discussion here is unnecessary.
This brings us directly to the difficulties contained in
the definitions of "improvements" and "betterments." A
change in property which may result in an increase in value
or excellence for one purchaser, may destroy its value or
Chapter VII.
PROPERTY COSTS IOI
excellence for another. Examples could easily be multiplied,
but enough has been said to show that, given full knowledge
of any particular case, honesty and good judgment will
direct the charges to their appropriate place. This disposal
of the question, however, only emphasizes the necessity for
a careful scrutiny on the part of an auditor to see not only
that subordinates or principles have made fair distributions,
but that no one is misled or deceived.
CHAPTER XI
CARRYING CHARGES
62. Interest and Taxes
It is to be noted that the cost of carrying property dates
from the time the purchase price is paid or guaranteed.
The mere holding necessitates the use and the tying up of
capital which otherwise could be earning interest; and
capital invested in property is as worthy of its hire as is a
contractor erecting a building thereon. Again, every owner
of property in civilized countries receives, nominally at
least, benefits and protection from one or more govern-
mental bodies, and his property is required to contribute
its quota of the cost of providing such benefits and protec-
tion. This is paid in the form of taxes. Interest and taxes,
therefore, comprise the total cost of holding unimproved
property, and this gives rise to the question: Should interest
and taxes be included in the cost of property?
The writers on accounting subjects are rather indefinite
in their answers to this question. Pixley,* for example,
while stating that, theoretically, the cost of real estate should
be confined to the purchase price, so that even legal expenses
incurred in acquirement should not be included in cost,
admits that the usual custom is to include such items and
enters no protest against it. Many of the older authors
pass the matter by, almost without remark. Recent writers,
however, have treated the matter fully, and perhaps no
clearer exposition of both sides of the question can be found
'"Auditors, Their Duties and Responsibilities."
I O2
CARRYING CHARGES 103
than that given by Nicholson in his work on "Cost
Accounting."*
63. Interest as Part of Cost
In this country, if a construction company undertakes
to build a railway, it is permitted by law to include in con-
struction expenses "interest on loans effected and on notes
issued for construction purposes." A similar practice is
allowed in other countries.
From this it has been argued that a company buying
land for development purposes is entitled to include in the
cost of the land the interest it may pay on loans which it
makes in order to raise the purchase money. This, how-
ever, does not seem to be a logical position, for if interest
is charged on such loans, which are practically a part of the
purchase money, why should not interest be charged on
the entire price?
It should be remembered that the holdings of a concern
dealing in real estate are its stock in trade and form its
inventory, and are subject to the basic rules governing any
other stock in trade. A merchant would not add interest
to the purchase price of his goods when taking their cost
value in an inventory, nor is it usual for an investor buying
stocks, bonds, or other security, to add the interest thereon
to the original price and call this total the cost of the
securities. Any merchant following such a course would
be anticipating his profits a practice inconsistent with good
business.
The fact that an individual or a corporation, not having
sufficient money to pay the full purchase price of an article,
must borrow the money, does not in any way change the
value of the article bought, although the fact that interest
must be paid on borrowed money may apparently increase
*"Cost Accounting, Theory and Practice," by J. Lee Nicholson,
I04 REAL ESTATE ACCOUNTS
the cost. On the other hand, if interest on a part of the
purchase price is charged to cost, then interest on the
whole price should be so charged, for the simple reason
that the money which the purchaser invested in property
would, presumably, if not so invested, have been used for
income-producing purposes.
The fallacy of charging interest on the borrowed money
only, may be shown by an example: Suppose a concern
finds at the end of a month that it has $5,000 in bank ; that
$5,000 on a piece of property purchased a year ago is now
due; and that it must also pay salaries to the amount of
$5,000. It therefore goes to the bank and borrows $5,000.
Is there any good reason why the interest on this loan
should be charged to the cost of the property? Both the
debts are valid obligations ; either one of them could be paid
without borrowing, but if the money in bank is used for
the payment on the land, a like sum must be borrowed to
pay the salaries, and interest on such a loan is chargeable to
"Income." Who can say to which purpose the bank balance
was devoted, or to which the borrowed money ?
Possibly the fact that interest on money borrowed for
current expenses must be deducted from "earnings," while
interest on money borrowed to pay for land may be
absorbed in the Real Estate account, and thereby apparently
increase assets rather than expenses, explains the practice
of including such interest in the cost of acquirement.
64. Inventories at Cost
The auditor on inquiring as to the cause of the sudden
increase in values shown by the Real Estate account is often
told that "the land was valued by three experts, and that
the new figures represent the lowest valuation." Still, the
land is not yet sold. Again, a conservative merchant who
has on hand 1,000 barrels of flour which cost $8 each, would
CARRYING CHARGES 105
not enter them in his inventory at an increased price, even
though a hundred experts might truly testify that the flour
was worth $10 a barrel. Why should a different practice
obtain in the case of real estate ?
This is one of the questions which must ultimately be
decided by the circumstances of each case. As a general
rule, especially in companies where real estate forms the
main asset, the safe and proper plan is to take the real
estate at its actual cost, and to adhere strictly to the
recognized principle that inventories should always be based
on such cost.
The balance sheet, and therefore the Property account
in the general ledger, should always show the actual cost of
real estate, that is, the cost of acquirement. Most people,
when examining a balance sheet, do not consider interest
as a part of the cost, and would therefore be misled to some
extent if it were included in the Real Estate account.
The cost of acquiring real estate will properly include
those expenditures which materially enhance the value of
the property, such as physical improvements; but the mere
payment of interest does not in any way affect that value,
and should not be treated as if it did.
65. Interest on Cost
There is another phase of the interest question to be con-
sidered. When land is bought with the idea of holding it
for a future rise in value, the owner must necessarily take
into consideration interest on the purchase price. It is not
an uncommon thing to hear that a man who bought a
piece of real estate ten years ago for $1,000 and sells it
today for $1,200, has made $200; whereas interest on
$1,000 for ten years at 6% amounts to $600. In such cases
there is some reason for considering the interest as a part
of the cost, but even then it is a better plan to carry the
I0 6 REAL ESTATE ACCOUNTS
interest, and also the taxes, etc., in separate accounts, the
total of which, added to the original price, will show tlie
cost at any given date.
On the other hand, when improved property is bought
and rented, the owner, in estimating his profits, does not
add to the original cost the interest accruing since the pur-
chase price was paid. This indicates that the method of
treating interest in connection with cost depends to some
extent on the purpose for which the property is held.
Speaking generally, interest ard taxes, being fixed and
beyond the control of the owner, should be charged against
income in the balance sheet, for they represent that which
is past, while profits are among the things hoped for. This
periodic charging up, however, does not in any way preclude
the keeping of such records of these expenditures as will
instantly show the true history of any property. Memoranda
accounts for this purpose are fully provided for in the
property records which are shown in Forms 20 and 21
( 26).
In instances where tracts of land are held by develop-
ment companies for purposes of subdivision, the best prac-
tice is to leave out of the books of account all interest on
the investment, except, of course, such interest payable as
accrues upon mortgages payable, and this interest should
be written off to Profit and Loss whenever the books are
closed. This avoids adverse criticism, as well as the
possibility of misleading the interested parties.
66. Treatment of Interest Charges
The foregoing discussion may be summarized as follows:
Interest on purchase money, even though this be borrowed
in whole or in part, is not ordinarily a proper charge against
cost. Interest on borrowed money, according to the best
authorities, may be included in the cost of construction,
CARRYING CHARGES 107
during construction or development; but such charges must
stop the instant construction is completed, and thereafter
all interest becomes a debit, not against "Investment" or
"Capital" account, but against "Income." At the same
time, the records should be so arranged as to afford full
information regarding such items as interest and taxes. In
other words, the balance sheet should be based on the cost
of acquirement, while the subsidiary records should show
also the cost of holding.
67. Depreciation as Affecting Cost
One other matter affects the cost of holding, and that is
the depreciation of buildings. This subject presents some
complications and requires consideration in some detail.
It is therefore treated separately and at length in Chapter
XXXII.
68. Taxes
The principles which apply to interest are in a general
way applicable to taxes with the marked difference that
the actual payment of taxes on the whole assessed value
admits of no evasion. Though a necessary expenditure as
well as expense, taxes do not enhance the value of property
and should be treated, as a rule, in the same manner as
interest.
Possibly, in the treatment of taxes and assessments upon
subdivision property, the clearest way is to keep distinct
the taxes upon each subdivision for a given year ; and at the
closing of the books, after calculating the earned or realized
profits on this particular subdivision, to deduct from that
profit the taxes which apply to the year under consideration.
This brings them eventually into the Profit and Loss ac-
count, and gives the same final result as if all taxes were
charged direct to Taxes account, which also is written off
I0 8 REAL ESTATE ACCOUNTS
as a whole to the debit of Profit and Loss account. The
plan first outlined has the advantage of showing exactly the
net results yielded by each subdivision. (See also Chapter
XXXV.)
69. Assessments
The word "assessment" is here used in a limited sense,
referring only to such charges as do not necessarily enhance
values. The term is, however, frequently applied to the
owner's share of the expense of laying pavements, sewers,
water mains, etc. In such cases, it is evident that the
amount should be charged to Improvements and be treated
accordingly, for the paving of a street or the draining of a
neighborhood increases directly the value of all abutting
properties.
70. Cost of Maintenance and Operation
The case of an office building may now be considered,
as differing as widely as possible from unimproved proper-
ties. Here the income is from "rent." As to expenditures,
we have in addition to those already considered, another
and quite distinct class, consisting, first, of repairs and
cost of maintenance; and second, of such charges as those
for engineer and janitor service, and for light, power,
elevators, etc. All these expenditures are necessitated solely
by the fact that certain conditions must be complied with
before rents can be collected, and they are classified as the
costs of maintenance and operation.
This difference, however, in no way affects the principles
already laid down in discussing unimproved property, or
the procedure to be followed, except that the memorandum
accounts in the real estate ledger, dealing with improved
property, should show the net income derived from this
source.
CARRYING CHARGES
71. Profits on "Value" and "Investment"
In improved properties another distinction is, however,
quite commonly found. The profit on the value of the
property frequently differs from the profit on the actual
cash investment. This is clearly shown by the following
example :
If an office building be bought for $500,000, of which
$200,000 is represented by a mortgage bearing interest at
5% per annum, and the net rents are $60,000, the taxes
and insurance $10,000, and the cost of maintenance, re-
pairs, service, insurance, etc., $15,000, then the net income
is: $60,000 ($10,000 + $15,000) = $35,000, which is
J% on the cost of acquiring; whereas the return on the
cash invested is $35,000 ($% on $200,000) = $25,000,
which is 8.3% on the cash invested.
These figures show the importance of recording clearly
and in one place all particulars regarding each piece of
property, in such a manner as is provided for in the real
estate ledgers.
CHAPTER XII
SALES OF REAL ESTATE
72. Time Sales
From the fact that real property is usually sold with
some form of guaranty on the part of the vendor, thereby
creating a contingent liability, it is fully as necessary that
the records should show exactly the disposition of each
property as it is that they show the method of its acquire-
ment and the cost of holding it. The manner of disposition
is twofold, viz.: (i) time sales; (2) final sales.
The particulars for time sales are taken from the report
of sale (Form 17, 25) and entered on the books, such
entries closing the Real Estate account for the property in-
volved. This, however, does not entirely relieve the ac-
countant of responsibility, for he should see that the ab-
stracts are retained until the final payment is made, and
that insurance policies and similar papers are, properly
indorsed and delivered to the owner or mortgagee, as the
case may demand.
73. Final Sales
When property is finally disposed of and completely paid
for in cash or its equivalent, it is well to enter on the face
of the Real Estate account for the particular piece of prop-
erty sold, an indorsement in substantially the following
form:
"Deed delivered to (name)
on (date) , together with abstract,
insurance policies, etc." (specifying each paper so
delivered).
110
SALES OF REAL ESTATE
The making of such entries saves much time later. It
is all the more important because such papers are frequently
delivered not to the purchaser himself, but to some agent or
attorney, so that by the time they reach the purchaser they
have passed through several hands; and it is essential that
the concern be able to show from its records the delivery of
all the necessary papers.
74. Form of Entries Relating to Sales of Property
To illustrate the entries required on selling a piece of
property, assume the case of property sold to Richard
Haines for $1,200, the cost price being $1,000. There are
four distinct methods of payment, viz.: (i) cash sale; (2)
mortgage as part payment; (3) payment by cash, note,
and mortgage building to be erected by vendor; (4) sale
on contract.
i. If a cash sale is made, the amount of $1,200 will be
posted from the cash book to the credit of Property account
in the general ledger, and to the credit of the account of this
particular lot in the property ledger. This will cause the
latter to show a credit balance of $200, which may be
allowed to remain until the books are closed and a balance
sheet prepared. This amount, with other similar amounts,
is then carried to the Gain on Sales account. Or the balance
of $200 might be carried at once to Gain on Sales account
without passing through the Property account. The Gain
on Sales account is eventually closed into Profit and Loss
account, as will be described in Chapters XIII to XV
inclusive.
2. Suppose that instead of paying $1,200 in cash,
Haines makes a cash payment of $500 and gives a mortgage
for $700. The cash would be credited as in the above
instance, and the journal entry might be formulated as
follows:
II2 REAL ESTATE ACCOUNTS
Mortgage Receivable $700
To Property Account $500
" Gain on Sales 200
For mortgage receivable No made by Richard
Haines as part payment for property No
The postings are made to the general ledger, and a new
account showing all particulars of the mortgage is opened
in the mortgages receivable ledger.
3. Again, suppose that Haines bought the same lot, the
concern agreeing to erect thereon a building estimated to
cost $600, for all of which Haines is to pay $2,000, made up
of a cash payment of $500, a note for $200 payable on com-
pletion of the building, and a mortgage for $1,300. The
cash entries would be the same as before, and the journal
entry would be as follows:
Mortgages Receivable $1,300
Bills Receivable 200
To Property Account $500
" Building Richard Haines 600
' Gain on Sales 400
In addition to the entries made in the last case, a new
account is opened in the general ledger, entitled "Building
Richard Haines," which is credited with $600, the esti-
mated cost of the building. This account will be debited
with expenditures on account of the building as they are
made.*
Care should be taken to see that the estimated cost of
the building is for an amount sufficient to cover the entire
cost of the building, for there is sometimes a tendency to
make the estimate too small for the sake of increasing the
apparent profit on the sale. This will be considered further
The transaction mentioned under (3) might be criticized from a business
point cf view. However, such sales do occur frequently and in various localities,
and this case is discussed here simply to show how to deal with the problem
whenever it arises.
SALES OF REAL ESTATE 113
when we take up the accounts appearing on the trial balance.
(See Chapters XXV, XXVI.)
Another point to be considered is the note given by
Haines, which is payable on completion of the house. This
note should be drawn to fall due on a fixed day, which should
be set sufficiently far ahead to insure ample time for the
completion of the building.
4. Suppose the property were sold on "contract,"
Haines buying the property for $1,200; $200 in cash and a
contract for the balance. The transaction is entered in the
journal as follows:
Contracts $1,200
To Property Account $1,200
For contract No made with Richard
Haines on property No
After posting to the general ledger, a new account would
be opened in the contracts sub-ledger, and all particulars
entered therein as shown above. The cash payment in this
case is credited to "Contracts."
It will be noted that in the case of a contract the journal
entry is for the total amount of the purchase, the first cash
payment being credited to Contracts (not to Property ac-
count) ; while, in the case of a mortgage, the journal entry
is for that part of the purchase price remaining unpaid.
Although this appears simple, the writer has found a number
of bookkeepers who have difficulty in keeping this distinction
clearly before them, and who are therefore always in some
doubt as to what account should be credited with the cash
payment when a portion of the purchase price is represented
by some form of deferred payments.
To emphasize this matter, if cash and a mortgage are
given by a purchaser, this first cash payment (which added
to the amount of the mortgage, makes the total price) is to
REAL ESTATE ACCOUNTS
be credited to Property account. In the event of a sale with
part cash under a contract, the amount of the first payment
is shown on that contract, which is not the case with a
mortgage. As the contract shows on its face the total
amount of the principal, this amount is debited to the ac-
count of the contract, and all payments, from first to last,
must be credited to the contract.
75. Legal Expenses
It is the rule in some offices to charge each mortgagor
with a fixed sum to cover the legal expenses incurred in
obtaining an attorney's opinion on title, in drawing the
papers, etc. As this amount increases the principal of the
mortgage on one side, and is credited to Legal Expense, it
may well be included in the journal entry covering the
transaction.
76. Surrender of Contract
A word of caution may be given as to the importance of
seeing that all proper formalities are complied with before a
deed is delivered. This applies not only to the receipt of
the actual consideration, which may involve the execution
of a mortgage, but also to the surrender of any outstanding
contract.
It has been shown that a contract carries with it an
obligation on the part of the owner of the land to convey
title to it upon the fulfilment of certain conditions. Such
contracts are usually transferable, and before delivering a
deed, the owner should receive back the original contract
in order to insure him against a subsequent claim there-
under. If this contract is lost, the purchaser should give a
written undertaking stating that the deed is received in
completion of the said contract, and absolving the owner
from all further liability. It is a safe practice to insert in
SALES OF REAL ESTATE 115
such a deed a clause stating that it is issued in accordance
with the terms of a specified contract, especially when the
original contract has been transferred by the original pur-
chaser, who might, in some states, present a claim against
the vendor.
It should be noted, however, that the custom of return-
ing the original contract to the owner is by no means uni-
versal, and where the custom does not exist, it is obvious
that the above precautions do not apply.
CHAPTER XIII
PROFITS FROM REAL ESTATE SALES
77. Definition of Profits
The word "profit" is variously defined according to its
use in general business or in economics; but the particular
definitions of this term in connection with real estate ac-
counting are :
1. Excess of selling price over original cost.
2. Advantage (gain) resulting from the employment
of capital, the corresponding gain from labor
being known as wages.
78. Sources of Profits
It has already been shown that real estate may perform
a number of distinct functions, and it follows that profits
on real estate may arise in a number of different ways.
Among the principal sources are the following, which cor-
respond to the functions already discussed:
1. Profits from sales
Gains resulting from bargain and sale.
Interest on deferred payments.
2. Profits from rents
3. Miscellaneous profits
Gains arising from enhancement of values ; from
consumption of assets, as in mining; from
crops, profits accruing indirectly from the use
of land for such buildings as factories, fur-
naces, etc. ; profits pertaining to a broker or
dealer ; and profits obtained indirectly from the
use of borrowed money secured by real estate.
116
PROFITS FROM REAL ESTATE SALES 117
In regard to each of these the following questions must
be answered :
1. From what source do the profits come?
2. How can the amount of profits be determined?
3. Having determined this amount, what disposition
should be made of it?
79. Profits from Sales
These profits are evidently the difference between the
cost price and the selling price. There are, however, cer-
tain questions to be considered in determining just what
these two prices are, for the amount actually paid for a
piece of property may not represent the cost of that prop-
erty, and the amount actually received from a purchaser
may include, besides the purchase price, interest, taxes, and
insurance, and hence may not be the true selling price.
80. Cost Price
The original consideration for property may have been
entirely cash ; or cash in part, with mortgages in some form.
Beyond this there are taxes, insurance, interest, and im-
provements to be considered, and, after the proper entries
have been made, the amount charged against the property
will represent its actual cost at the time of the sale.
81. Selling Price
As already suggested, the selling price also may involve
considerations other than the actual purchase price. It fre-
quently includes taxes paid or to be paid, and insurance
paid in advance. In such cases the amounts included in
these accounts should be treated in the same manner as simi-
lar items under cost price. If taxes have been included in
the cost they should be included also in the selling price;
otherwise, they should be credited to Taxes account.
REAL ESTATE ACCOUNTS
82. Earned Profit
If the sale is for cash, the difference between the cost
and the selling price, as these terms have been qualified
above, will show at once the profit which is earned and
realized. The entries required are simply the posting of
the amount received, from the cash book to the credit side
of Real Estate account. If the transaction has yielded a
profit, a credit balance will result to this account, which is
best disposed of immediately.
The balance, or profit, may, theoretically, be carried
direct to Profit and Loss but it is preferable to carry all
such items into a special account, "Gain on Sales" or
"Profits," and at the close of the fiscal period to carry the
balance of this account to Profit and Loss. (See 235,
236.)
The journal entry required to transfer the credit bal-
ance of the Real Estate account to Profits would be -as
follows :
Real Estate $
To Profits $
For profits earned on sale of property
No
In this instance and in those which follow, the gain
from a sale, when carried to Profits account, may be car-
ried to Profit and Loss at the end of the fiscal period, while
the same profit carried to Gain on Sales should be treated
in the manner described in Chapter XX.
83. Mortgage Assumed by Purchaser
It very frequently happens that a transaction involves
more than the exchange of cash for real property. There
may be a mortgage or some other lien which the purchaser
assumes; or, more often, the purchaser may give a mort-
gage as a part of the price ( 52, 53).
PROFITS FROM REAL ESTATE SALES 119
In the first instance the journal entry should show that
the seller is relieved of any obligation which is assumed by
the purchaser, and in many cases this entry should include
some mention of interest on the mortgage. It may be over-
due, or it may be the sum which has accrued since the last
interest date, as in the case of property sold on the ist of
August subject to a mortgage payable on which interest
had been paid up to the ist of June.
In case a mortgage were assumed by the purchaser, the
journal entry on the books of the seller would take the
following form:
Mortgages Payable $
To Real Estate $
For mortgage No , assumed by
on the
purchase of property No
In the case of overdue interest assumed by the pur-
chaser, the following journal entry would be made by the
seller:
Mortgages Payable $
Overdue Mortgage Interest Payable
To Real Estate $
If accrued interest not yet payable be included, the
entry would be :
Mortgages Payable
Mortgage Interest Payable.
To Real Estate..
84. Large Cash Payment Balance Secured by Mortgage
In those cases where a part of the purchase price re-
mains unpaid and is secured by a mortgage, the situation
becomes rather more complicated, especially as to the meth-
I2 o REAL ESTATE ACCOUNTS
ocls of entering the profits. No one rule can be made to
apply to all such cases, and each transaction of the kind
should be carefully examined by the accountant.
Of such cases the simplest is where the purchaser makes
a substantial cash payment and gives a mortgage for the
balance. The ratio between the cash payment and the mort-
gage then determines the proper course to be followed. If,
for example, half the purchase price is paid in cash, the
mortgage is secured by property worth twice the amount of
the mortgage, and such mortgages are usually regarded as
first-class securities. It would therefore be safe to place
the mortgage among the assets at its face value. In other
words, although the entire consideration has not been paid,
we can regard the sale as completed and the profit as fully
earned. The mortgage receivable can be treated as a bona
fide asset for its face value.
85. Small Cash Payment Balance Secured by Mortgage
It frequently happens, however, that only a small cash
payment is made, the greater part of the purchase money
being secured by mortgage. In such a case the safest
method is not to consider the transaction as entirely closed,
nor the profits as actually earned. For example, if only
one-tenth of the purchase money has been paid, and nine-
tenths is secured by mortgage, that mortgage could not,
as a rule, be considered good marketable security, as the
amount of the debt is too near the value of the security
and the mortgage has but a small "margin." Should the
mortgagor fail to pay the debt before it has been substantial-
ly reduced, and should it be necessary to resort to legal pro-
ceedings in order to recover the title, the expense of such
proceedings would, in many cases, swell the amount of the
mortgage to a sum equal to, or greater than, the original
debt.
PROFITS FROM REAL ESTATE SALES 121
86. Gain on Sales Account
In cases where mortgages are taken in part payment,
the apparent gain should be carried to the Gain on Sales
account ( 79-82). The handling of this account is treated
more fully in Chapter XX.
The entries made on the cash book should credit Real
Estate with the amount of cash received, and the journal
entry is as follows :
Mortgages Receivable $
To Real Estate $
" Gain on Sales. .
87. Sales on Contract
It is a practice common probably throughout the United
States, for owners of real estate, especially corporations
whose business it is to buy, develop, and dispose of real
estate, to sell their property under some form of agreement,
which for the sake of brevity we will call a "contract." The
subject of contracts is more fully discussed in Chapter XVII.
In a great majority of cases, the first payment is small, and
the contract may carry with it no obligation on the part of
the purchaser to complete the purchase. In such an instance,
the general procedure is the same as in the case of mort-
gages on which a small payment has been made. The jour-
nal entry would be in the following form:
Contracts
To Real Estate . . ,
" Gain on Sales.
88. Exchange of Properties
Another method very frequently used in disposing of
real estate is in the nature of an exchange, the owner selling
his property and taking in payment therefor other prop-
I22 REAL ESTATE ACCOUNTS
erty, with perhaps some cash payment in addition. The en-
tering of such a transaction on the books is a simple matter,
and takes the following form in the journal :
Real Estate $
To Real Estate $
For exchange of property No for
property No
The most important point for investigation in such
transactions is the value at which the new property is taken,
for it sometimes happens that matters other than the actual
cash value of the property are taken into consideration
when the exchange is made; and the amount allowed for
the property received may not indicate its market value,
since it is not unusual to place a higher valuation on prop-
erty when it is paid for "in trade" than would be asked if
the consideration were cash. For instance, the owner of
a piece of property may be willing to give it in exchange,
at less than its actual value, for other property situated in
a neighborhood in which he is interested, or which is suit-
able for some special purpose which he desires to carry out.
It is evident that in such a case the property so acquired
may be brought on the books at a figure in excess of its
market value.
89. Appraisal of Property
The appraisal of any real estate is, of course, merely an
expression of opinion, and the only true measure of its
value at a given time is an actual sale, or a bona fide offer
of cash or its equivalent. At the same time, before pass-
ing such an entry as that described, an accountant should
satisfy himself that the property taken on the books, to
the best of the information obtainable by him, is taken at
a fair valuation. This valuation, of course, should never
PROFITS FROM REAL ESTATE SALES 123
exceed the price actually paid for the property. In other
words, if an owner takes property in exchange and allows
$1,000 for it, it should be entered at this figure even if he
considers it worth $1,500. The excess of $500 should not
be put on the books until an actual sale of the property has
proved that such value exists.
90. Development Properties
The treatment of profits accruing from the sale of sub-
urban tracts or development properties (that is, land bought
in considerable quantities, subdivided by the owner and sold
off in comparatively small lots) is treated in detail in Chap-
ter XXIII.
91. Hidden Profits
In some cases the profits from real estate may be said
to be hidden a condition most clearly explained by an
example from actual practice.
Four partners together bought a tract of 3,000 acres of
land, for which they paid $15,000. This was held for a
period, during which the value of the land materially in-
creased. The tract was then platted, and, after deducting
roads and waste land, 500 farms of 5 acres each were laid
off. The immediate minimum selling price for these was
estimated at $100 each, or $50,000 for all. The four part-
ners formed a corporation, transferred the property to it,
and issued capital stock in payment for the property to the
amount of $50,000, and this stock was divided equally
among them. To provide for current expenses, each in-
corporator paid in a certain sum, which was treated as a
current loan and placed to his credit. As farms were sold,
the proceeds were used in making roads and other improve-
ments, and after a few months it was found possible to sell
the farms at prices ranging from $600 to $750 each.
124
REAL ESTATE ACCOUNTS
It will readily be seen that the conditions in this case
differ radically from those previously considered, and that
the results of this difference are far-reaching. So far as
the company is concerned, the cost of the land equals the
amount of capital stock issued. The partners, however,
sold the land to the corporation and received $50,000 worth
of stock in exchange, thereby realizing a profit of $35,000
on the transaction. In preparing their returns for the fed-
eral income tax, it would be necessary for each partner to
report his individual share of this gain.
92. Anticipated Profits
The foregoing illustration is not given as an example
to be followed, but merely to illustrate the complications
which may arise. In fact, the wisdom of anticipating profits
in this way is doubtful, and such a method should not be
generally followed. Even in the instance given, although
in the form of a corporation, it was for most practical pur-
poses a partnership, and the same results could have been
obtained if the company had been capitalized for the cost
of the land and the improvements made or contemplated.
But the main object of the company, besides the avoidance
of individual liability in warranting titles and in various
other ways, was to obscure or hide from the public the
original cost of the land.
CHAPTER XIV
PROFITS FROM RENTS
93. Rent
For the accountant, rent means a compensation payable
at some stated time or times for the possession and use of
(but not the title to) property for a definite period.
This definition must sometimes be developed further,
for the term is not infrequently used in a somewhat lax
manner to mean more than payment for the use of property.
In some forms of contract for sale on instalments, the agree-
ment is called a "lease" and the periodic payments are re-
ferred to as "rent," although, if the transaction is com-
pleted, they really form a part of the purchase price. These
questions are discussed under the head of "Contracts" in
Chapter XVII.
Again, the word "rent" is sometimes used to indicate
the consideration given for mining rights, which is in the
nature of a royalty, for it pays not for the use or hire of
the material mined, but for the material itself, which be-
comes the property of the lessee on such payment being
made or agreed upon. A somewhat similar use of the word
is occasionally found in connection with hire purchase agree-
ments.
The particular kind of rent considered in the present
volume is covered by the first definition given above, and
by the every-day, non-technical use of the word, meaning
the amount a tenant pays to his landlord for the right to
use and occupy land, including in most cases a dwelling or
factory, or other improvements on the land. Such rent
125
I2 6 REAL ESTATE ACCOUNTS
constitutes the return which an owner receives for the use
or hire of his property, whether it be land, building, ma-
chinery, or any other property, real or personal.
94. Leases
The amount, duration of occupancy, time of payment,
and other particulars, are frequently set forth in a lease.
In a very large number of cases, however, no such paper
is drawn and the agreement is merely a verbal one, as in
the case of small dwellings and tenements, where the rent
is paid at short intervals, as a week or a month, and where
the arrangement may be terminated on short notice by
either the landlord or the tenant.
In a general way it may be said that the purpose of a
lease, beyond stating the terms to be observed by the par-
ties, is the protection of both the landlord and the tenant.
The landlord is protected because the tenant agrees to make
stipulated payments in a definite manner, and such agree-
ments can usually be enforced through the courts, although
the method of procedure and the practical value of the
remedy vary with the locality. The tenant is protected be-
cause he is assured if he fulfils his part of the contract
of the use of definite property for a definite period at a
definite price.
The law and the practice regarding leases vary in each
country and in each of our states. It would be useless to
attempt to follow these variations further than to remivid
the accountant that it is a part of his duty to familiarize him-
self with all local requirements as to leases.
While it is not the duty of an accountant to act as ap-
praiser, it is his duty to see that leases are drawn and exe-
cuted in conformity with statutory requirements. This is
especially true in the United States, where owners of real
estate, when leasing their property, frequently rely upon
PROFITS FROM RENTS 127
printed forms, of more or less excellence, bought by the
dozen from the nearest stationer, dispensing with the ser-
vices of a legal adviser until they find themselves at the
court-house door.
95. Gross Rent and Net Rent
In real estate records, the expressions "gross rent" and
"net rent" frequently occur, corresponding in general to
the "gross profits" and "net profits" of a mercantile enter-
prise, but too often used in a vague and indefinite sense.
The term "gross rent" properly designates the total
amount received by the owner from the tenant or lessee for
the use of certain property. In order to obtain this gross
rent, however, the owner is frequently obliged to make cer-
tain outlays, and the difference between the gross rent and
these necessary outlays constitutes the "net rent."
The exact nature of these outlays cannot be given, for
they vary according to local laws, the nature of the property,
and the terms of the agreement. The necessary outlays in
the United States usually include taxes, insurance, and
repairs.
In apartment or office buildings the following expenses
must usually be added : light, water, heat, power, and wages.
The essential point is to include all the necessary ex-
penditures, in order to obtain the net rent.
96. Net Rent and Net Returns
Strictly speaking, the other closely related charges, such
as interest and depreciation, do not affect net rent, although
they must be included when considering net returns. The
fact that an owner is obliged to pay interest on money which
he has borrowed on a mortgage secured by a piece of prop-
erty, in no way affects the net rents; for the existence of
the mortgage does not of necessity affect the value of the
I2 g REAL ESTATE ACCOUNTS
property, though it may materially affect the returns ob-
tained by a purchaser on the amount which he has to pay
for the property.
As a simple example, take an office building worth
$200,000, yielding gross rents of $16,000 a year, and form-
ing the security for a mortgage of $100,000, bearing inter-
est at the rate of 6% per annum. The gross earnings of
$16,000 are entirely independent of the mortgage and con-
stitute 8% of the value. In order to buy the property,
however, a purchaser need invest in cash only $100,000
and assume the existing mortgage. The result is that he
receives gross rentals of $16,000
From which he pays interest at 6% on $100,000. . 6,000
Leaving a gross return of $10,000
which is a gross return of 10% on the investment, although
the gross rent is only 8% on the value.
In other instances, e.g., where the land is occupied by
buildings not commensurate with its value, the rate of in-
terest may exceed the percentage of gross rentals, and the
result obtained will be opposite to that shown in the above
example. The principle, however, remains unchanged.
It is impossible to do more than indicate the factors
which must be considered in determining the net rents, as
in practice they depend largely upon local values and con-
ditions.
97. When Should Rents Be Entered?
No mention of provision for entering rents on the books
of account until those rents are collected has yet been made,
and no one general rule governing the proper procedure can
be stated. The course to be followed is to be determined
by (i) the laws governing each case, and (2) the class of
tenant.
PROFITS FROM RENTS 1 29
In England, for example, it is the general practice to
credit the property and debit the tenant with rent as it
falls due, and to credit the tenant when payment is made.
In that country the law provides the landlord with such
means of enforcing his claims that he is usually reasonably
sure of making his collections.
On the other hand, in our own Southern States, the laws
concerning delinquent tenants are less severe, and home-
stead exemptions are usual. Further, a large amount of
rental property is occupied by colored people of somewhat
migratory habits, and the flitting tenant is as common as
the flitting cardinal-bird, and quite as elusive. In such
cases it is misleading and a waste of labor to follow the
above procedure, and frequently the cash actually collected
is the only asset. Rent remaining unpaid is not only un-
collected, but uncollectible, and its inclusion in a profit and
loss account may lead to a similar inclusion of other equally
worthless and fictitious assets.
These conditions have naturally brought about the gen-
eral plan of making rent payable in advance, usually by
monthly instalments. Such being the case, circumstances
must govern procedure. It should not be forgotten, how-
ever, that even if rent is not charged against the tenant here
as it is in England, there should always be a rent ledger
so kept as to enable a concern to determine quickly all ar-
rears which may be due. When preparing financial state-
ments, the amount of such arrears may properly be shown
in a footnote.
98. Rents from Mines and Similar Sources
The treatment of rentals from mines pertains to the ac-
counts of mining companies rather than to those of a real
estate concern, and need not be considered in great detail
at this time. As has already been stated, the periodic pay-
REAL ESTATE ACCOUNTS
ments are not, strictly speaking, rents, but are a considera-
tion for something pertaining to the natural land, which
may be the coal or other mineral deposits under the sur-
face, or the natural product of the soil above the surface,
as in the case of timber lands; or the removing of certain
parts of that product, as in the case of turpentine and rosin,
tapping for maple syrup, cutting camphor trees, etc.
The value of all such lands is composed of (i) the
value of the deposit or growth; (2) the residual value of
the land after such deposit or growth is removed.
Inasmuch as the rents or royalties paid in these cases
are the consideration given for the outright purchase and
consumption of principal, they should not be credited, in
the first instance, to Profits, but to Real Estate. When they
become equal to the cost of the property, all further rents
may properly be credited to Profits.
99. Treatment of Mining Rents
Beyond the suggestions already given, it is difficult to
generalize in the matter of rents from mines and similar
returns, for each instance must be worked out for itself,
the residual value being so variable. For example, deep
mining does not affect the value of the land for agricultural
purposes; while quarrying, clay working, and other varie-
ties of open mines leave the land in such form as to render
it useless for any subsequent purpose.
For an example of the consumption of growth on the
land, consider the yellow pine forests of the Southern and
Southwestern States. Here there are three distinct ele-
ments of value appealing to three distinct classes of in-
vestors, viz.:
i. The turpentine rights, which cover only the "box-
ing" of the timber and are useful only to naval
stores operators.
PROFITS FROM RENTS 131
2. The trees themselves, which, after having been
"boxed," retain their value for logging 1 purposes.
3. The naked land, which in many cases is more valu-
able for agricultural purposes after the turpen-
tine and logs are removed than it was before.
In such an instance, the total cost of the land may be
apportioned to these three divisions without difficulty, for
such land is almost invariably surveyed and examined by
experts before purchase. If the rent obtained for turpen-
tine rights exceeds the portion of the cost assigned to tur-
pentine, such excess is profit; if it falls short, the deficit
may be regarded as a loss, or, under some circumstances,
may be added to the cost of the land and timber. The same
principle is followed with the logging payments, and the
naked land is left with its proper proportion of the cost.
CHAPTER XV
PROFITS FROM ENHANCEMENT OF VALUE
AND FROM MISCELLANEOUS SOURCES
PROFITS FROM ENHANCEMENT OF VALUE
100. Increased Value of Mineral Lands
In the case of mining rights, there frequently arises a
need for reappraisals on account of fresh deposits being
found, or on account of improved facilities becoming avail-
able, which render possible or profitable the working of
deposits not included in the original valuations. Such in-
creases should, of course, be shown in the accounts, but
the matter of revaluations must be approached in a conserva-
tive and fair-minded manner. These increases are fre-
quently somewhat problematical, and any doubtful portion
of the increase should be shown, not in the general Property
account, but in a special reserve account opened for the
purpose and finally disposed of either as a gain or as a loss,
as the circumstances may determine.
101. Enhanced Real Estate Values
By this is meant an increase in the market price of real
estate not sold but still owned by a concern. When con-
sidering this source of profit, the manager should clearly
recognize the distinction between property owned and
offered for sale by a real estate concern, and the real estate
owned by a mercantile or manufacturing concern, consisting
of warehouses or factories necessary for the conduct of
business, but not, in the ordinary sense of the term, for sale.
132
PROFITS FROM ENHANCEMENT OF VALUE 133
It must not be forgotten that an enhanced valuation
merely means that those making that valuation are of the
opinion, or have the faith, that such values could be realized.
There is yet to be found a better definition of faith than that
which has been accepted for nearly two thousand years
"the substance of things hoped for, the evidence of things
not seen." This indicates with singular accuracy the proper
course to follow ; the increase in values is something hoped
for and believed in, but not realized. At the same time, it
may be fair to show some evidence of this hope by a proper
entry on the balance sheet.
The proper place for anticipated profits to appear is in a
prospectus, a document whose very name indicates that it
describes the good things which are expected to come. On
the other hand, a balance sheet states conditions existing at
a given moment which has already passed. While it may
be a matter of regret that the statements of the balance
sheet do not always fulfil the predictions of the prospectus,
it is of importance to the stockholders that any such dis-
crepancies in values be exhibited clearly, and if it is neces-
sary to anticipate profits in order to hide such discrepancies,
the investment is liable to prove a failure.
102. Fluctuations in Real Estate Values
When considering the wisdom of placing on the books
any values of real estate other than the cost price, it must
be remembered that, while real estate is among the most
stable of assets inasmuch as it seldom entirely disappears,
it is peculiarly sensitive to fluctuations in its selling value.
Its very immobility is one cause of this, for neighboring
improvements or changes which are beyond the control of
its owner may cause its value to vary considerably.
Again, real estate is not a necessity of life in the same
sense as food products or clothing, and the real estate mar-
134
REAL ESTATE ACCOUNTS
ket is one of the first to suffer in times of depression or
panic, fluctuating to a degree equalled only by those articles
which are obvious luxuries. Such times of panic are the
very occasions when it may be necessary to realize on assets,
and this realization will undoubtedly puncture any inflation
which may exist.
103. Bank Practice
An example, or rather a series of examples, which may
be instructive for too optimistic a management, may be
found in the treatment of real estate by banks and trust
companies throughout the country, which for the most part
do not show their real estate assets at any figure above cost,
and, owing to liberal allowances for depreciation, frequently
show them below cost.
The policy proper to a bank may differ, of course, from
that of the ordinary business firm, but it is only natural for
a banker from whom a concern borrows, to apply with
more or less stringency the rule that "what is sauce for the
goose, is sauce for the gander."
104. Accounting Treatment
The question of entering on the books of account actual
or supposed increases in value of real estate before they are
realized, is one which accountants are frequently forced to
consider. It is obvious that no such increase of assets should
be allowed on mere hearsay evidence, or on the personal
opinion of an individual.
In those cases where the claim for an enhanced value is
supported by the report of properly qualified appraisers, or
by a bona fide offer of purchase, it is sometimes considered
advisable to show this increase on the balance sheet, where
it may be the proper foundation for an increase in a line of
credit or in the Surplus account, or possibly it may warrant
PROFITS FROM ENHANCEMENT OF VALUE 135
the issuance of a stock dividend. It can seldom, if ever, be
properly included in Profit and Loss account, and it cannot
afford a proper basis for the declaration of a cash dividend ;
for, in the case of a mercantile or manufacturing concern,
land is usually held incidentally, as it were, and its increase
in value is not profit arising out of the operation of the
business. Such a profit would be the proper basis for
dividends, but an increase in real estate values would
not ordinarily be so unless these profits were actually
realized.
As an argument for making entries showing enhanced
values, it is sometimes stated that property carried on the
books at a certain figure is covered by a mortgage securing
an amount greater than its original cost. Even if such were
the case, it merely shows that another person had faith in
the concern and loaned money to it, accepting the property
as security. The concern did not realize on the value and
its treasury did not receive it.
105. Rights of Stockholders
It may be suggested, in connection with increased real
estate values, that there is another point of view to be con-
sidered that of the stockholders, for whom the officers of
the company are, in fact, trustees.
Let us assume that a manufacturing concern has for a
long period owned its land and buildings, and has increased
its business to such a point that no further increase can be
made unless additional capital, either fixed or floating, is
provided. During this period of success, the land has in-
creased in market price to such an extent that it would now
form ample security for a loan of sufficient size to obviate
the necessity for a further issue of capital stock, although its
cost price as shown on the ledger does not indicate this.
It will generally be conceded that in such an instance
136
REAL ESTATE ACCOUNTS
the directors might be derelict in their duties if they failed
to avail themselves of this appreciated value; and having
availed themselves of it, the appreciation should appear in
the accounts. If they failed to show it, there would exist
something very nearly akin to that bone of contention, a
"secret reserve" a matter not for discussion here.
106. Effect of Enhanced Real Estate Values on Rent
Charges
There is another aspect of the above conditions which
is too frequently overlooked, and which can be made clear
by an example. A mercantile concern paid $60,000 for the
building in which it transacted its business. Owing to im-
provements in surrounding properties, the actual value of
this building increased in the course of three years to $150,-
ooo, evidenced by an offer for the property at that figure.
It had been the custom of this concern to make a rent charge
based on 8% of the cost of the property, or $4,800 a year.
As soon as it is possible to obtain a higher price for the
property, this basis of calculation becomes erroneous, for
when the value of $150,000 was reached, the concern was
paying (on the same basis) a rental of $12,000 a year
which might be far in excess of what the business war-
ranted.
It is evident that if property can be sold for $150,000,
that sum is tied up in it, and that amount fixes the proper
rent charge. The wisdom of paying such a rent depends,
on the one hand, upon the earning capacity of the business,
and, on the other hand, upon the contingency of such further
increase in value as will refund the excessive rent. At the
same time, as soon as a concern relies upon increases of
real estate values for its profits, it is to some extent engaging
in real estate business as well as in that for which it was
created.
PROFITS FROM ENHANCEMENT OF VALUE 137
107. Summary
The entire question as to the treatment of profits from
enhanced real estate values not yet realized may be sum-
marized as follows:
1. In the case of a real estate concern whose chief asset
is its real estate, such appreciation should not be added to
the cost price.
2. In the case of a concern engaged in some other kind
of business, it may, under some circumstances and with
proper restrictions, be permissible or even necessary to show
such appreciation, but it should be stated so clearly that no
one will be deceived as to the nature of the profit.
3. In the latter case, such profits should never be shown
in the Profit and Loss account as arising from the operation
of the business, but should be carried to a Reserve and
Surplus account.
PROFITS FROM MISCELLANEOUS SOURCES
108. Profits from Money Borrowed on Real Estate
Profits from money borrowed on real estate and re-
invested do not necessarily affect the accounts of a real
estate concern as such, for the money so borrowed may be
invested in any enterprise or security. No discussion of
such profits, therefore, is necessary here.
109. Operation of Manufacturing Properties
It is a common occurrence for a real estate concern to
find itself the owner, by sale or exchange, or more often by
foreclosure proceedings, of certain properties whose values
can be maintained only by operation. In a general way,
such properties may be divided into two classes, viz.: (i)
manufacturing or mining, (2) agricultural. The distinction
here made is perhaps an artificial one, for the difference in
j^g REAL ESTATE ACCOUNTS
treatment depends less upon the nature of the business than
upon the amount of detail involved.
In operating any property of the first class, be it a
factory, mill, coal mine, brick-yard, or other enterprise in-
volving numerous expenditures and detailed accounts, a
separate set of books should be opened, such as would be
required were the business owned by strangers.
The accounts of the real estate concern should show in
one account the principal invested, and in the other account
the cash advanced to or received from the business. At the
close of each fiscal period the books of the business should
be closed in a proper manner, inventories taken, balance
sheet and accompanying statements prepared, and adjust-
ments made to the Principal account if there have been
changes in value. The final profit should be carried into the
general Profit and Loss account. The point to be emphasized
is that in all such cases the general books of the real estate
concern should be kept free from all details of operation.
1 10. Operation of Agricultural Properties
Agricultural properties, such as farms, orchards, and
plantations, do not, as a rule, involve so many details. Such
properties are usually placed under the management of a
superintendent skilled in that particular branch of work.
The payments are comparatively few, consisting of monthly
pay-rolls, bills for fertilizers, tools, etc., and the receipts
consist of annual returns from the crops. Under these cir-
cumstances, all the business may be carried on the general
books of the concern, and, if necessary, a sub-ledger con-
taining the account of each piece of property so operated
may be opened.
As an example, let us consider the case of a large con-
cern which had loaned considerable sums secured by mort-
gages on orchards and, owing to bad seasons, was obliged
PROFITS FROM MISCELLANEOUS SOURCES
139
to foreclose on a number of them. It was necessary either
to maintain the orchards or lose the chief value of the
property, which lay in the trees rather than in the land and
improvements.
This concern engaged a traveling superintendent, who
installed a resident farmer in charge of each orchard, this
latter approving all expenditures. These were charged
monthly, through a special column in the cash book, to
"Care of Orchards," and each item was posted to the account
of the particular orchard concerned, which was opened in
an "orchard" sub-ledger, the superintendent's expenses being
prorated among all the properties in his charge. All receipts
were treated in a similar manner.
The result was that the general ledger always showed
the totals of the orchards as a whole, while the sub-ledger
showed the result of each orchard. The general ledger
enabled an annual analysis to be made, showing the total
amounts expended respectively for management, labor, re-
pairs, fertilizer, picking, and tools.
In such accounts care must always be exercised to see
that the items charged to repairs and improvements are
properly distributed. The distribution of these charges
must be governed by the principles laid down in Chapter X.
in. Operation of Orchards Increase in Value
Owing to risks incident to all agricultural enterprises,
the greatest conservatism must be observed in bringing on
the books any enhanced values on account of the growth
of trees, for the trees themselves may be destroyed at any
time by pests, drouth, cold, or by some enemy yet un-
discovered. The safe course, therefore, is to write such
enhanced values on the books when they are realized by a
sale of the property, observing the rule laid down elsewhere
that Property account shall represent actual cost of land
140
REAL ESTATE ACCOUNTS
and improvements. Clearing new land and planting. new
trees are examples of improvements, but new trees planted
in place of those which have died are renewals, not better-
ments.
112. Showing Profit on Annual Statements
Instead of closing the operating accounts each year, it is
sometimes wiser to carry forward the balance from year
to year, particularly in the case of a young orchard not yet
in bearing. These totals may appear separately in the bal-
ance sheet in some manner which shows so clearly the nature
of the asset that no one can be misled. While such a course
increases the amount of the asset on the books, it represents
actual expenditures, and is quite distinct from an increase
based on an estimated enhancement in value.
A common difficulty in preparing annual statements
showing the exact conditions arises from nature's indiffer-
ence to fiscal years. Peaches will ripen in early summer,
apples in the fall, and oranges in the winter ; so that, when-
ever a balance sheet is taken, there is a probability that
there will still be on the trees some unpicked or unripened
crop on which it is extremely difficult to place a value. The
Income account is, however, entitled to such credits when
they exist, and a conservative estimate of any ungathered
crops should be included in the account.
113. Profits from Crops Other than Fruit
Profits from crops other than fruit so seldom affect real
estate concerns that only a reference to them is necessary.
Land and development companies are sometimes brought in
touch with these profits in connection with demonstration
farms and colonies, in which event special accounts are
usually kept by those in charge of the farm work, rather than
by the real estate office.
CHAPTER XVI
TIME SALES MORTGAGES
114. Time Sales
It is probably true that cash sales the simple exchange
of real estate for currency form a very small proportion
of the vast number of transfers of real estate which take
place annually in the United States.
This being so, the sales for some consideration other
than currency constitute the great bulk of the realty sales of
the country and are of sufficient importance to require
special consideration. Such transactions are variously
named, as sales on the instalment plan, sales on deferred
payments, etc., etc. For the sake of simplicity, it is pro-
posed to consider them under the generic title of "Time
Sales." It may be that this expression cannot be found in
the dictionaries, but it is commonly used by those dealing
in real estate, and is descriptive and appropriate. In this
book, therefore, the expression "Time Sales" is used to
include all those transactions in which time is allowed to
complete the payment of the consideration.
115. Classes of Time Sales
Time sales may be divided into the following classes:
1. Sales where the vendor conveys title, a part of the
purchase money being secured by a mortgage
made by the purchaser to the vendor.
2. Transactions in which the vendor agrees to convey
title to the purchaser upon certain stipulated con-
ditions being fulfilled. The forms for such agree-
141
I4 2 REAL ESTATE ACCOUNTS
ments are numberless, but for the sake of brevity
they will all be classed here under the term
contracts.
3. The purchase of an option on real estate.
4. The placing of deeds, etc., in escrow, to be delivered
when certain specified conditions have been
complied with.
116. Mortgages
From an accountant's standpoint, the term "mortgage"
may be defined as the pledging of property, frequently real
estate, as security for the repayment of a specified sum of
money at a specified time, together with interest thereon
calculated at a specified rate and payable at a specified time
and place. If the condition be complied with by the maker
of the mortgage the mortgagor the pledge becomes void.
The forms of mortgages and the laws governing them
vary so greatly in the various states that only such general
features of mortgages can be considered here as bear
directly on accounts. As a rule, the form of a mortgage is
that of a deed conveying the fee simple, but there is always
preserved to the mortgagor an "equity of redemption" ; and
before considering mortgaged land as having become the
property of the mortgagee, the accountant must satisfy him-
self that this equity of redemption has in some legal manner
been foreclosed, forfeited, cancelled, or surrendered. This
is usually all that an accountant need ascertain on this ques-
tion, for matters beyond this belong rather to the legal than
to the accounting profession. An outline of the entries
necessary to bring mortgages into the accounts is given in
Chapters XII and XIII.
Minor modifications in the form of a mortgage may
appear, according to the ideas of the attorney drawing the
document. None of these modifications affect the account-
TIME SALES MORTGAGES 143
ant, whose principal interest is centered upon the debt which
is secured by a mortgage and which represents the considera-
tion to be shown on the books of account.
In order to perform his duties properly, however, an
auditor must be familiar with the general and local require-
ments governing the particular mortgage which he is
examining, and he should be able to say whether or not the
legal requirements have been complied with.
The principal legal requirements may be stated as
follows:
1. The correct description of the mortgagor as to
name, residence, and civil condition.
2. The proper description of the mortgagee.
3. The proper insertion of dates wherever necessary.
4. An accurate and sufficient description of the prop-
erty covered.
5. The witnessing and the execution of the document
in accordance with statutory requirements.
6. The proper recording of the document when that is
necessary.
7. An examination of the notes accompanying the
mortgage, to see that they are properly dated
and executed and conform to the body of the
mortgage.
117. Mortgage Notes
The form of mortgage is purely a legal matter and needs
but little consideration here. The notes secured by the
mortgage are, however, an entirely different matter and
require discussion in some detail, for it is with them that the
accountant is chiefly concerned. Generally speaking, these
notes may be divided into two classes : ( i ) interest-bearing,
(2) non-interest bearing.
144
REAL ESTATE ACCOUNTS
$ Jacksonville, Fla. 191. .
after date, without grace, for value received,
the undersigned promise. . to pay to the order of
Dollars ($ ) together
with interest thereon at the rate of per centum per annum until
maturity, said interest being payable
according to the tenor of interest coupon notes of
Dollars ($ )
each, attached hereto and bearing even date herewith, both principal
and interest coupons payable at
in United States gold coin of the
present standard of weight and fineness or its equivalent.
Each maker and indorser waives the right of exemption under the
Constitution and laws of Florida, and each maker and indorser waives
demand protest and notice of maturity, non-payment or protest, and
all requirements necessary to hold each of them liable as makers and
indorsers.
It is further agreed that the undersigned shall pay all cost of
collection, including a reasonable attorney's fee, on failure to pay this
note, or any interest coupon, at maturity. This note shall bear interest
at the rate of Ten (10) per centum per annum, from the date of
maturity until paid.
This note, and also the interest coupons attached, are to be con-
strued according to the laws of the State of Florida, where they are
executed, and are secured by a mortgage on real estate, executed
under even date herewith to the payee of this note.
Upon failure to pay any interest coupon on this note, when due,
or if any of the conditions and requirements in said mortgage deed
be not complied with, this note, at the option of the holder, shall
become due and payable.
Form 42. Mortgage Note Interest-Bearing
TIME SALES MORTGAGES 145
1. There are, of course, many varieties in the forms of
notes in each class, but the note shown in Form 42* illus-
trates the essentials of the interest-bearing note.
In some instances, the words "on or before" are inserted
at the beginning of the note. This gives the maker the
right to pay in full at any time, and if such an addition is
made to the note, care should be taken to see that it is shown
on the records in the books. Attached to this note are the
necessary coupons (Form 43). Attention is called to the
size of this coupon (approximately 3/^X5 inches), which
in practice is much more convenient than the small coupons
generally used. Each coupon is securely attached to the
body of the note, and is torn off along the perforated line
as it becomes due.
2. It will be seen that the note shown in Form 44, if
paid at maturity, bears no interest. It is used when it is
desired to have a definite number of notes, each for a fixed
amount, the total of the series being equal to the principal
and interest of the loan.
It is important that the exact amount of each of these
notes should be approved by the accountant before they are
signed. The calculations involved are somewhat complicated
--as are most calculations involving deferred payments
for the reason that each payment is composed of and reduces
both principal and interest, the amount by which each is
reduced varying with each note; i.e., the portion applicable
to principal increases, and the portion representing interest
decreases, with each successive payment.
This form of mortgage note is similar to that employed
by building and loan societies, most of which draw up tables
for their own use showing the amount of principal remain-
ing unpaid at the end of each year or other period. If the
note is not paid at maturity, it is usual to provide for the
Prepared for use in Florida by Frank R. Fleming, Esq., of the Florida Bar.
I4 6 REAL ESTATE ACCOUNTS
No. of Coupon Jacksonville, Fla 191
On this day of , A.D. 191 . .
without grace, the undersigned promise., to pay to the order of
Dollars ($ )
in United States gold coin of the present standard of weight and
fineness or its equivalent, at
for interest due on that day according to the tenor of a principal note of
Dollars ($ )
of even date herewith. This coupon bears interest at the rate of
Ten (10) per centum per annum from maturity until paid. Value
received.
Form 43. Mortgage Coupon
191..
months after date I promise to pay
to the order of at
the sum of $ with interest after maturity at the
rate of per cent per annum.
Value received.
This note is secured by mortgage on real estate and is subject to
the conditions therein contained.
Form 44. Mortgage Note Non-Interest Bearing
TIME SALES MORTGAGES 147
payment of a penalty, either by naming a fixed sum or by a
statement that the note shall bear interest after maturity.
Many forms of mortgage note contain a clause to the
following effect: "This note is secured by a mortgage on
real estate and is subject to the conditions therein con-
tained."
Attention is called to the words in italics, for such a
qualification might seriously affect the negotiability of the
instrument a matter of importance to the accountant, and
one which should be considered by the attorney responsible
for the drafting of the papers.
While in New York and a few other states it is cus-
tomary to use a bond instead of a note, it is believed that the
note is used in by far the greater part of the United States.
In either event the points to be covered are similar, and
local usage will determine the form to be used.
1 1 8. The Instalment Mortgage
There are certain points peculiar to this form of mort-
gage which are used as arguments for and against its adop-
tion. Arguments in favor of this form are as follows:
1. The security is in a definite form, and as each pay-
ment is made, its value increases in proportion to the amount
of the debt.
2. It enables the purchaser to buy on terms as easy as
under a contract, and at the same time gives the vendor a
security which he can easily hypothecate (or use as col-
lateral for temporary loans, or for more permanent loans,
such as debentures, etc.) to greater advantage than a
contract.
3. Once the terms are agreed upon, there is no further
calculation of interest to be made.
4. Under the laws of most states, the mortgage notes
I4 8 REAL ESTATE ACCOUNTS
can be made to bear interest after maturity without render-
ing the vendor guilty of usury.
The arguments usually urged against this form of mort-
gage are the following:
1. The vendor receives his principal in instalments and
may have difficulty in quickly reinvesting such small sums.
2. The difficulty in determining a fair settlement if the
purchaser makes payments in advance, or if he anticipates
the payment of the entire amount.
3. The difficulty in arriving at the proper amount of
each monthly payment, or if that is fixed, in ascertaining
the number of such payments.
The first objection applies equally to all sales where
partial payments are made periodically. The answer to it
is that such a plan greatly enlarges the number of possible
purchasers.
The second and third objections are more formidable
in theory than in practice. An elementary knowledge of
mathematics will render possible the solution of the two
problems involved.
The advantages of this method of sale are so obvious
that they need not be enlarged upon. The system should
be more generally used. Possibly its lack of popularity has
been caused by its similarity to what is usually known as
the "building and loan plan," which is much disliked in
some quarters. Such prejudice should not receive serious
consideration.
119. Annuity Tables
Reference to good annuity tables* will usually solve the
questions which arise in connection with instalment mort-
Stubbins* Annuity Tables will be found advantageous in this connection from
the fact that they show monthly payments something which few, if any, of the
other tables do.
TIME SALES MORTGAGES 149
gages, i.e.: being given the purchase price and the rate of
interest
1. How many payments of a stated sum are necessary
to liquidate principal and interest? Or,
2. The number of payments being agreed upon, what
should be the amount of each payment?
As a rule, a concern sells on a fairly uniform basis. For
instance, it will accept in payment for sales, say, 120 monthly
payments of $i 1.12 each, for each $1,000 of purchase money
with interest at 6% per annum. In such cases a table can
easily be constructed showing the division of each payment
into principal and interest, so that at any time the amount
of principal paid in can be determined.
For example, reference to the table shows that 120
monthly payments of $11.12 will pay off a principal debt of
$ 1,000 with interest at 6% per annum. The interest for
the first month on $1,000 is $5, and the principal included
in the first payment is therefore: $11.12 $5.00 = $6.12.
The interest for the second month is to be computed on
$1,000 $6.12 = $993.88, and amounts to $4.97; the
principal included in the second payment is therefore: $11.12
$4.97 = $6. 1 5.
The rule for the construction of such tables is as follows:
Having found the amount of principal contained in the first
payment, multiply this by i plus the ratio of interest for
one month. At the rate of 6% per annum, the monthly
rate would be .005. If the principal part of the first pay-
ment is $6.12, the amount of the principal in the second pay-
ment will be found by multiplying this amount by 1.005,
the same process being repeated until the table is com-
pleted.
The amount of principal included in any given number
of payments may also be found by reference to annuity
REAL ESTATE ACCOUNTS
tables or by algebra, these amounts being in geometric pro-
gression. The table will appear as follows:
Principal
Payment
Amount
Interest
Principal
Unpaid
I
$11.12
$5.00
$6.12
$993.88
2
II. 12
4-97
6-15
98773
3
II. 12
4-94
6.18
981.55
4
II. 12
4.91
6.21
975-34
5
II. 12
4.88
6.24
969.10
1 20. Change of Ownership
In connection with sales secured by mortgage, one point
is sometimes overlooked which is usually covered in con-
tracts that is, the transfer of the property by the mort-
gagor, and the consequent change of debtor.
Where concerns handle a large number of purchase
money mortgages, much inconvenience is caused by transfers
where the mortgage is assumed by a third party without
the knowledge of the mortgagee, who is put to unnecessary
trouble in finding the person who actually pays the coupons
as they fall due. This difficulty can be guarded against by
the insertion in the mortgage of a clause obligating the
mortgagor to notify the mortgagee of any change of owner-
ship, the wording of such clause depending upon the form
of the mortgage itself.
121. Foreclosures
In all business dealings in mortgages, there sometimes
arises the necessity of instituting foreclosure proceedings or
taking some other steps to acquire the mortgaged property.
Occasionally such proceedings require considerable time for
their completion, owing to delays in legal processes, to the
difficulty in communicating with parties interested, or for
various other reasons.
In these cases, it is sometimes wise to transfer such
TIME SALES MORTGAGES 151
mortgages from "Mortgages Receivable" to "Mortgages in
Settlement," for by so doing the former account will always
represent mortgages in good standing. The transfer is made
by a journal entry of the following form:
Mortgages in Settlement $
To Mortgages Receivable $
To transfer mortgage No in course of
settlement.
If the value of the property is equal to, or greater than,
the principal and interest and charges, these latter should
be included in the journal entry; otherwise they should be
written off to Profit and Loss.
Occasionally instances occur where the value of the
mortgaged property is less than the amount of the mortgage,
through an original overestimate or through depreciation
from some cause. In such cases, if the settlement is likely
to be protracted or, as sometimes happens, it is desired to
retain the lien of the mortgage rather than to acquire title,
it may be advisable to write off the loss immediately,
instead of continuing to show a fictitious asset.*
For example, if a mortgage for $5,000 should fall in
arrears and it is decided to foreclose, the value of the prop-
erty on the best estimates obtainable being only $3,000, the
following would be the proper entry:
Mortgages in Settlement. $3,ooo
Mortgage Deficiency Account 2,000
To Mortgages Receivable $5,ooo
For mortgage No in settlement, the
estimated value being $3,000.
The Mortgage Deficiency account is usually written off
by a debit entry against Surplus, Reserve, or Profit and
Loss, as the occasion may require.
Some accountants hold that nothing should be charged off to Profit and Loss
until sale or settlement has been made.
CHAPTER XVII
122. Simple Form of Contract
The term "contract" is used in this book to cover the
great variety of forms of agreement which are given to
purchasers, or prospective purchasers, of real estate, and
which are known as leases, conditional contracts of sale,
bonds for title, agreements, contracts, etc. In this chapter
the words "contract," "agreement," and "lease" are all used
to describe an agreement providing for sale on the instal-
ment plan.
Perhaps the simplest form of such agreement is one
which gives the prospective purchaser the right to occupy
certain described lands for a specified time, and also the
right to buy those lands during that time at a specified price,
provided he makes the required payments. These payments
may consist merely of interest at the current rate on the
amount of the purchase price, the vendor agreeing that, if
all conditions are complied with (including the payment of
the purchasing price), he will, at any time during the life
of the lease, deliver a deed to the purchaser, conveying good
title.
There are many varieties of contracts more elaborate
than this, but all of them observe the principle that, upon
the conditions specified being carried out by the purchaser,
the vendor will convey title to him. The periodic payments
may vary to any extent, the usual minimum, as in the case
above mentioned, being merely interest on the principal.
152
TIME SALES CONTRACTS 153
123. Conditions Applying to Contracts
The following points affecting the business side of con-
tract sales are of interest to the accountant:
1. It is usual to state clearly when payments are to be
made.
2. The purchaser usually agrees to pay all taxes and
assessments accruing after a specified date.
3. Restrictions are often imposed as to maintaining
present buildings thereon and as to the uses to which they
may be put.
4. All buildings are usually kept in repair by the pur-
chaser.
5. The purchaser is usually required to maintain insur-
ance in favor of the vendor, for an amount mentioned in the
agreement.
6. The purchaser is prohibited from assigning the con-
tract without the written consent of the vendor.
7. The purchaser agrees not to allow any encumbrance
or liens to be placed against the property.
8. It is generally stated that failure to make any re-
quired payment when due, subjects the entire agreement to
cancellation, either immediately, or after a specified time,
such as thirty, sixty, or ninety days.
9. The vendor usually has the right to pay any assess-
ments, etc., which may be overdue, and to charge them to
the purchaser or to use them as grounds for cancelling the
contract.
10. In event of any legal proceedings being necessary,
the agreement is chargeable with all the expenses connected
therewith, including court costs, attorney's fees, and, where
required, an abstract of title.
n. All payments on account of the contract must be
made to the vendor or to some party who is the authorized
representative of the vendor.
154
REAL ESTATE ACCOUNTS
12. The official address of the purchaser is usually
given, and a provision inserted that notice mailed by the
vendor to him at that address shall be considered a proper
notice of any delinquencies, etc.
13. It is provided that no delay on the part of the
vendor in. exercising any of his technical rights under the
agreement shall be construed to be a waiver of any of his
rights thereunder.
14. The agreement is usually executed in duplicate by
both parties, each retaining one copy.
In examining such contracts, it is the duty of the ac-
countant to see that the description of the property is cor-
rect and in conformity with that shown on the books of
account, and that all particulars are properly entered in the
contracts ledger.
124. Precision as to Amount of Sale
Another point which calls for care is a definite state-
ment of the total amount of the sale. For example, the
agreement may be granted for a nominal consideration of
$100, and may provide that, on the payment of $1,000 by
the purchaser, title will be conveyed to him. These two
amounts usually appear in different parts of the agreement,
and there is frequently some doubt as to whether the origi-
nal $100 is to be included in the $1,000 or added to it. It
is advisable, therefore, that the clause stating the amount
of the consideration be clearly stated, as follows:
"The lessor convenants and agrees to and with the lessee that,
if the lessee shall, during said term, well and truly pay the rent
hereby reserved, including the taxes and other payments for which
he is liable, and fully and promptly perform and carry out each
and every, the convenants and undertakings on his part, and if,
during the term of this lease, the lessee shall have paid the lessor
the full sum of Dollars,
exclusive of the sum named as the consideration of this instrument,
TIME SALES CONTRACTS 155
with interest at the rate of per cent per annum on the
unpaid portion of said purchase price, as hereinbefore provided,
then and in that event the lessor shall convey or cause to be
conveyed to the lessee a good and sufficient title in fee to the lands
herein described."
The consideration for the agreement is, of course, the
first payment on the purchase.
125. Pass-Book Contracts
There is one variety of contract which for convenience
may be called the "pass-book contract," in which the con-
tract is printed on the first pages of a book similar to a bank
pass-book, the description being inserted with a pen, and
the agreement duly executed. Following this agreement
there are blank pages on which to enter each payment as
it is made by the purchaser. This form of book is gen-
erally used in handling comparatively small subdivisions,
where the general description may be printed in, the only
variation being the number of the lot or block covered by
each contract.
It is possible that this form of agreement was devised
by a banker who had been accustomed to handle savings
bank accounts. Theoretically, it has many advantages, for
it provides for a complete record of all payments made.
In practice, however, it has many disadvantages, for these
books are frequently lost, and, still more frequently, the
purchasers make payment of an instalment without the
book. In many instances the purchasers of some one tract
are scattered over the entire United States, and even over
the world, and it is then impracticable, of course, to present
the book when each payment is made. The value of the
book depends upon its containing each and every payment,
and confusion is caused by any omissions.
Another method somewhat similar to the pass-book plan
I5 6 REAL ESTATE ACCOUNTS
is to draw a lease or agreement in some standard form
and make provision on the back thereof for entering pay-
ments made by the purchaser, but the objections mentioned
above apply equally to this form.
126. Cancellation of Contracts
It is well for the owner of any property to inform him-
self as to the practice of the courts in regard to the can-
celling of contracts. In the case of a time sale secured by
mortgage, the deed to the purchaser and the mortgage given
by him to the vendor are, of course, both recorded, and the
agreement can be cancelled only by legal proceedings, or
by the purchaser giving to the original vendor volun-
tarily or for a consideration something in the nature of a
quitclaim deed to the property. The case may be somewhat
different with time sales under contract. It frequently
happens that such contracts are not acknowledged, and
therefore cannot be placed on record; or, in case they are
acknowledged and could be recorded, the purchaser may
not care to avail himself of this right. In such instances
there is nothing on record to show that the sale has been
made. In this connection it may be contended that the
contract in itself is sufficient evidence of the purchase; yet
it is true in many instances that a contract, if properly
recorded, is a stronger guarantee than a contract which has
not gone through this formality.
The effect of recording varies in different states, and
nothing more can be said here beyond the suggestion that
those interested should acquaint themselves with the laws
prevailing in their particular state.
Probably the original reason for calling such contracts
"leases" was the hope that, in case of a delinquent pur-
chaser, resort might be had to something in the nature of a
delinquent tenant act, and that the tenant could be evicted
TIME SALES CONTRACTS 157
by the simple proceedings applicable to an ordinary tenant
who has not paid his rent.
As a general rule, however, the courts have held that
under such agreements, when the purchaser has made pay-
ments he has acquired an equity of redemption of which
he cannot be deprived without legal proceedings similar to
those required for the foreclosure of a mortgage. This
condition prevails generally, despite the many efforts of
able lawyers to draw up an agreement which would enable
the owner to regain possession of his property without ex-
pense or delay.
In practice this fact is frequently disregarded. In a
large number of contract sales, the property sold is unim-
proved and the purchaser does not take possession of it,
does not fence it, or take any other steps to show that he
has an interest in it. He may make a few payments at the
beginning of the contract and then get tired of the transac-
tion. Very frequently he does not attempt to exercise any
rights he may have, and, after a reasonable time, say a few
months, the owner may regard the contract as closed with-
out taking any legal proceedings. In many instances he
merely notifies the purchaser that the contract will be or
has been cancelled, closes out the purchase account on his
books, and replaces the lot on his selling list. It is astonish-
ing to discover how frequently this is done and in how few
instances any trouble arises to the vendor through such
action.
In the process of cancelling a contract through legal
proceedings, a condition may arise which, though some-
what peculiar and not infrequently overlooked, has a direct
bearing upon the form of contract and the form of the
account. It becomes of importance only in instances where
the purchaser places every possible obstacle in the way of
the owner who endeavors to obtain his rights, and it is
REAL ESTATE ACCOUNTS
therefore necessary for him to take advantage of every
point in his favor. The point is that, time being the es-
sence of such contracts, if a purchaser fail to make his pay-
ments as called for by the terms of the contract, the entire
principal sum (and not merely those payments which are
in arrears) becomes due and payable.
Under such circumstances, it is sometimes wise for the
owner to enter suit for the entire purchase price, and by
so doing place upon the purchaser the burden of proving
each and every payment he has made thus adding very
materially to the difficulty of the defense. In some states
such a procedure would not be allowable, and the suit must
be brought for the balance of the purchase price, the amount
being verified under oath. In any event it is important
carefully to consider the exact terms of each contract in
which the concern is interested, whether a buying or a
selling contract.
127. Comparative Advantages of Mortgages and Contracts
The owners of real estate, particularly of subdivision
property, are frequently in doubt as to the best method of
selling, and especially as to the relative advantages of sell-
ing under mortgages and under contracts, and the legal
aspect of this question should be discussed with the owners'
attorneys. The best attorneys, however, sometimes fail to
realize the practical conditions. The main difference be-
tween a mortgage and a contract is that, in the case of a
mortgage, the purchaser obligates himself to make certain
payments at certain times, and gives his note or notes to
that effect. Should he fail to comply with these conditions,
proceedings may be brought against him ; and if he continues
in his failure to make payments, judgment against him will
probably be secured. The value of this judgment depends
entirely upon the financial standing of the purchaser, and,
TIME SALES CONTRACTS 159
in the case of subdivision business, the responsibility of
many of the purchasers is so doubtful that a judgment is
of little or no value.
On the other hand, under many forms of contract the
purchaser is not obligated to continue the payments. In
other words, if he fails to comply with the conditions of
the contract, he loses what he has put into the property,
but the vendor cannot obtain a judgment against him or
in any way compel him to pay the balance.
Under these conditions, it is obvious that it is much
easier for a sales department to handle a sale of property
under contract than under mortgage, although such insti-
tutions as trust companies, or others lending moneys on
security, have a strong preference for mortgages, based
of course upon the personal obligation carried by the
mortgage.
128. Contract Statements
The advisability of sending out regular statements of
account to purchasers under contracts must be left to the
judgment of the vendor. The sending of such statements
to those who are in arrears might in some cases tend to
weaken the position of the vendor should he desire to can-
cel the contract. The best practice is to inform each pur-
chaser that he may have a complete statement of his ac-
count whenever he asks for it, and to make a memorandum
on his ledger account each time such a statement is ren-
dered.
129. Contract Accounts
It will be seen that the general contracts ledger shown
in Form n (20) provides for one account only for each
contract, this account receiving all entries relating to prin-
cipal, interest, and other charges.
REAL ESTATE ACCOUNTS
This is more convenient than an attempt to separate the
two kinds of entries, as provided for on the mortgages re-
ceivable ledger (Form 8, 18). The reason is that in most
cases the contract provides for a minimum payment each
month, or other fixed period, and for the calculation of
interest periodically. Under such conditions, each payment
might be regarded as being composed of principal and in-
terest, as in the case of building and loan mortgages de-
scribed in 117.
Such contracts, however, have been construed by some
courts to mean, under the above conditions, that the pay-
ments made in any six months are to be applied first to
the liquidation of the interest calculated at the end of that
six months on balance remaining, and then to carry any
other charges, such as taxes, etc., the final balance to be
applied against the principal. It will be seen that the keep-
ing of an account in such form is complicated and consists
of the following steps :
1. Charging the Principal account with principal
amount at the time the sale is made.
2. Crediting the Income account with monthly pay-
ments.
3. Charging the Income account with charges paid
during the six months.
4. Charging the Income account with interest for six
months.
5. Closing the Income account every six months ; and
if the balance is a credit, transferring it to the
credit of the Principal account, but if a debit,
carrying it forward to the Income account for
the next period.
The following example will illustrate these entries where
the balance of Income account is a credit :
TIME SALES CONTRACTS 161
Jan. I
Feb. i
Principal
Cash
Principal
Dr. Cr.
. $1,000.00
Income
Dr. Cr.
$20.00
Mar. I
H
20.00
Apr. i
H
2O.OO
" 10
Insurance Paid
$4^.00
May i
Cash
20.00
June i
20.00
" 30
*
20.00
Interest 27.90
30 Balance of Income
account transferred
to Principal account $47.10 47.10
$120.00 $120.00
Such details greatly add to the labor of bookkeeping
where a large number of accounts are involved, and, as a
matter of fact, in practice the purchaser usually wishes to
know merely the total balance remaining unpaid.
Let it be assumed that the above pro forma account
complies with strict legal requirements, and is such as would
be called for in the event of legal proceedings being brought
to cancel the contract. But such contracts are made for the
purpose of effecting sales, and not for the promotion of
litigation ; and the number of contracts taken to court forms
a very small proportion of the number issued. Under these
circumstances, it is best to keep the entire account as pro-
vided in the general contracts ledger of Form n ( 20),
and, when litigation ensues, to make up the account in the
second and more detailed manner.
Little attention need be given to the argument that, un-
der such practice, the account as rendered in court would
differ from the ledger account, for the reason that the ledger
is not a book of original entry, but merely a convenient
REAL ESTATE ACCOUNTS
method of collecting and arranging entries originating in
other books. In such a case the contract itself would form
the basis of any argument, and the cash book would show
all receipts thereon.
The general subject of interest on contracts is discussed
in Chapter XIX.
CHAPTER XVIII
OPTIONS
130. Nature of an Option
An option, as understood in connection with real estate,
is an agreement which conveys the exclusive right to pur-
chase a definite piece of property for a stipulated price
within a specified time. In other words, the term "option"
is used to "express the privilege given to conclude a bar-
gain at some future time at a price agreed upon."
THE ALPHA LAND COMPANY
NOCATEE, GEORGIA
Option No 191 ..
Received of
The sum of Dollars
FOR AN OPTION for 30 days at $
on
At expiration of this option it can be renewed for 30 days upon
payment of $ , and so on, month by month. It is under-
stood that you acquire no interest in the property until the option pay-
ments shall aggregate the sum of $ and this option is
forfeited should you fail to renew it month by month as herein pro-
vided. When a total of $ has been so paid, THE ALPHA
LAND COMPANY will give a lease to the property; and when you have
complied with all the terms of said lease, it will give a deed conveying
all its right, title and interest in and to the lot. . . hereinabove described.
THE ALPHA LAND COMPANY,
$ B
(This receipt made in duplicate)
Form 45. Option
NOTE: When required, provisions as to roadways, building restric-
tions, etc., may be included in the option.
163
REAL ESTATE ACCOUNTS
Options were originally employed in cases where the
purchaser desired time in which to raise the purchase money,
to complete an investigation, to confer with partners, or for
some similar reason. Of late years, however, they have
been used in some instances by the owners of subdivision
properties as a preliminary to a regular contract. The plan
is useful where the purchaser does not wish to make the
full first payment required for a contract, and the vendor
does not desire to draw up regular papers until such pay-
ment is made.
If this plan is applied to a rent-producing house which
the holder of the option is allowed to occupy during the
life of his option, care must be taken to see that the rent is
properly treated in the accounts. If the rights under the
option are exercised, the rent, under the usual arrangement,
will form a part of the purchase price. If the option is
allowed to lapse, the monthly payments remain as rent. In
such cases, the simplest plan is to enter these receipts as
rent, and, when a contract is given, to transfer the total of
such payments from Rent account to Contracts account.
Form 45 is a typical form of option and is self-explanatory.
131. Accounting Treatment of Options
The bookkeeping entries, save as to rent-producing
properties, should credit "Options" with option payments
ns they are received; and if the number of such transactions
Warrants it, a sub-ledger should be opened for individual
accounts of option holders. The commission ledger (Form
12, 21 ) provides for agents' commissions in such cases.
In the event of an option being allowed to lapse, the
amounts paid in should be credited direct to Profits ac-
count; and in the event of an option being exercised, the
consideration therefor having been paid, the amount so paid
is transferred to the credit of Real Estate, Contracts, or
OPTIONS 165
other appropriate account. In no case does any liability
attach to the purchaser, but the vendor obligates himself
to give title, or some form of guaranty for title, upon the
conditions being fulfilled.
132. Refusals
An option differs in the last point above mentioned from
what is generally known as a "refusal." This may be de-
scribed as a promise made by the owner to give the holder
the first choice on a certain property; a promise that the
owner will not dispose of the property to another party
until the holder of the refusal has been notified. This latter
is usually allowed a short time after notice, say twenty-
four hours, in which to close or relinquish the bargain. Re-
fusals are usually given without any consideration, for the
paper carries with it but a slight obligation, and in practice
it is found that the existence of a refusal often stimulates
other purchasers. If any consideration does pass, it is en-
tered on the books as in the case of options.
133. Deeds in Escrow
Signing, sealing, and delivery are all essential to a deed.
It is sometimes desired that delivery be not made until
some future date, or until certain conditions have been per-
formed. In such cases the deed is placed in escrow; that
is, it is handed over to a third party to be held by him
until the requirements are fulfilled, and these are usually
committed to writing and deposited with the deed.
In such cases all entries, except those showing receipt
of the consideration, are made in the records as if the
transaction were consummated, for all papers have been exe-
cuted; but a notation giving the particulars of the escrow
is made on the real estate ledger. If the escrow is broken,
such entries are cancelled. If it is carried out, the con-
sideration is then entered on the books.
CHAPTER XIX
INTEREST
134. Mortgage Interest
Mortgage interest is that accruing upon the unpaid por-
tions of the purchase money represented by notes secured
by mortgages or provided for in a contract. The simplest
form in which interest on mortgages appears is shown in the
mortgage coupon of Form 43 ( 117).
In connection with interest on mortgage notes, two
separate and distinct facts must be noted: first, that the in-
terest becomes due at a fixed time, and second, that this
interest is paid to the holder of the mortgage. Revenue
account is therefore entitled to be credited when the interest
falls due, but the mortgagor is not credited until he makes
the payment, and it is a well-known fact that interest on
mortgages is not always paid promptly.
In order to record these two phases of the transaction,
it is necessary to open in the general ledger two accounts
which may be designated as follows :
1. Mortgage Interest Receivable
2. Overdue Mortgage Interest Receivable
All interest as it accrues, i.e., as it becomes fully earned,
is credited to the first, and debited to the second, of these
accounts ; and when that interest is paid, it is credited from
the cash book to the second account.
A method for recording such items is described in 47.
In practice, such entries may be made at the beginning of
each month in the following form :
166
INTEREST !6/
Overdue Mortgage Interest Receivable $245
To Mortgage Interest Receivable $245
For interest falling due in the month of ,
as follows:
Mortgage 82, Jones, due Jan. 10 $50
97, Smith, " " 15 75
105, Robinson, " " 30 120
$245
The account "Mortgage Interest Receivable" is thus
composed entirely of credit items, the total amount being
carried to Profit and Loss upon the closing of the books
( 212, 213).
As will be seen, this account is an income account show-
ing the total interest of this class earned. It is therefore
a matter of importance to see that a proper record is kept
of all such interest coming due, and for this purpose a
mortgage interest register similar to Form 39 (47) is pro-
vided. In this record each mortgage should be entered as
it is received and the interest be entered in the proper
columns to indicate the months in which it falls due. On
the first of each month, the record is examined to see that
the last mortgages received are entered ; the items appear-
ing to accrue during the ensuing month are checked to
prove their correctness, and to determine whether or not
all payments of, or reductions in, principal have been al-
lowed when calculating the interest due. The column is
then added, and the total forms the basis of the journal
entry shown above.
The Overdue Mortgage Interest Receivable account con-
tains debit entries corresponding to the above-mentioned
credits, and credit entries showing all interest actually paid,
the balance being the interest accrued but unpaid, which ap-
pears in the balance sheet as an asset. However, it is held
: 68 REAL ESTATE ACCOUNTS
by some accountants, that wherever a balance sheet and a
profit and loss statement are made up, all interest accrued
should be computed and placed on the books.
135. Interest Adjustments
It frequently happens that interest on mortgages, al-
ready charged, is either reduced or cancelled, and in such
cases debit items are brought into the Mortgage Interest
Receivable account by the following entry:
Mortgage Interest Receivable $
To Overdue Mortgage Interest Receiv-
able $
To cancel (or reduce) interest charged on
mortgage No $
As explained in 18, all entries made in the general
ledger to the Overdue Mortgage Interest Receivable ac-
count should also be posted to the sub-ledgers.
A slight variation from the form of note and coupon
in Forms 42, 43 ( 117) must be made when the princi-
pal is divided into a number of equal parts due at equal
intervals, each part being represented by a note in which
there is included interest computed to the date of that
note.
For example, a mortgage is given to secure $3,000, pay-
able in three equal instalments due at intervals of one year,
bearing interest at the rate of 6% per annum. The notes
maturing, respectively, one, two, and three years from date
are as follows :
$ 1,000 + interest on $3,000 for I year = $1,180
1,000 + " " 2,000 " i " = 1,120
1,000 -f- " " 1,000 " i " = i ,060
$3,360
INTEREST T 69
The foregoing indicates the method of entering such
notes, care being taken to set forth the fact that $3,000 is
principal and $360 is interest.
136. Unearned Interest
We now come to the second class of mortgage interest,
where interest on the entire mortgage is calculated at the
beginning, added to the principal, and the sum divided into
a number of equal parts. This method is similar to that
frequently used by building and loan associations. It is
important to ascertain the exact amount of each of the items,
principal and interest, which compose the total amount rep-
resented by the notes. The various methods of doing this
will be considered later. The general form of entry is as
follows :
Mortgages Receivable $
To Real Estate $
" Unearned Interest..
It will be seen that Mortgages Receivable account is
debited with the total of principal and interest, for the rea-
son that these are represented by definite notes, or some-
times by an obligation to make a specified number of pay-
ments, the actual execution of the notes being dispensed
with on account of the labor involved, in which case the
text of the mortgage is changed to correspond.
The discussion in Chapter XX of real estate profits ac-
tually earned, emphasizes the importance of keeping each
class of transaction distinct. With this in view, it is ad-
visable to place by itself all such interest as that now being
dealt with, and to keep it distinct and in a separate account
from ordinary Mortgage Interest and from Interest and
Discount. The name "Unearned Interest" is suggested for
this account as being both appropriate and explanatory.
J--Q REAL ESTATE ACCOUNTS
137. Unearned Interest Methods of Calculating
There are three methods of calculating this "unearned"
interest :
1. By a rough averaging of the time, i.e., the life, of
the mortgage.
2. By reference to tables.
3. By mathematical calculation.
The first is a rough-and-ready plan which is frequently
adopted but which is not accurate. It is based upon an
average of the interest, and, instead of charging interest
at the nominal rate for the entire period, it is charged at
that rate for one-half the period, and this amount is added
to the principal. The sum is then divided by the number
of payments to be made.
For example, what would be the amount of each monthly
payment in order to pay off $1,000 in ten years, interest
at 6% ?
The simple interest for half the period, i.e., 5 years at
6% per annum = 30% of the principal ; the number of
payments is 120.
30% of $1,000 = $300
$1,000 + $300
= $10.833, the monthly payment
For the second method, there are published numerous
tables showing present values of annuities, and most of the
problems occurring in practice may be solved by their use.
As rules are always attached to each set of such tables,
showing the manner of using them, this need not be dis-
cussed here. Most tables in use, however, are based on
quarterly, half-yearly, or annual payments, and it is fre-
quently necessary to base calculations upgn. monthly pay-
INTEREST i;i
ments, in which case special tables must be used.* Before
tables can be used we must know whether the interest is to
be charged half-yearly or monthly, and if the latter,
whether each monthly payment is to be made on the first
or the last day of each month.
The third method of determining the monthly payments
by mathematical calculation involves the use of complicated
formulae, and sometimes logarithms matters beyond the
scope of the present work. The results obtained coincide
with those given by any reliable tables; but by means of
formulae it is, of course, possible to answer any question
which may arise, whereas the tables can only be used for
those questions in which occur certain definite periods.
Taking the example just given, the tables or the mathe-
matical calculations give us the following results :
1. If interest be reckoned on half-yearly balances,
ignoring the fact that a payment has been
made each month $11.23
2. If each payment be made on the last of the
month, and interest be allowed thereon.... 11.12
3. If payments be made on the first of each month,
and interest be allowed thereon 11.01
It will be seen that, by using different methods the re-
sults may vary as much as 39 cents on each payment (i.e.,
$11.23 $ I 0-84), or a total of $46.80 on the principal.
If real estate dealers realized more fully the existence and
amount of these differences, they would undoubtedly take
the necessary trouble to have accurate calculations made.
As a matter of fact, under the first method, the seller does
not receive the percentage which he thinks he is getting,
i.e., 6% in the instance given.
*See Stubbins' "Tables of Present Value of Annuities," an English work.
REAL ESTATE ACCOUNTS
138. Unearned Interest Alternative Methods of Calcu-
lating
While the method of calculating interest above outlined
is correct, it is extremely inconvenient in an office where
there are many contracts involving such interest calcula-
tions, and various attempts have been made to simplify mat-
ters. One plan consists in calculating the interest half-
yearly on fixed dates, these dates being the same in all con-
tracts of one class. This reduces the work of the book-
keeper, inasmuch as it brings all such interest calculations
at two stated times each year instead of scattering them
through every month of the year.
Another plan which has been adopted with some success
is to calculate the interest every six months on the balance
then unpaid. This is convenient for the bookkeeper, as it
enables him to take his monthly trial balance and simply
calculate the interest on each amount shown thereon. An
example of such a calculation is given in 139.
The effect of this method of calculating the interest is
far-reaching more so than would appear at first sight.
For instance, if a purchaser made a substantial payment
on the last day of the half year, he would, under the above
arrangement, save half a year's interest on that payment;
and the result to the vendor is that, instead of realizing
an 8% interest, he realizes perhaps 7 l /2%. There is still
another aspect to be considered. If a purchaser does not
make any payments for a year or two, and interest is
added on the outstanding balance each half year, he is, of
course, being charged compound interest, which is illegal
in many states.
A third method, which yields results sufficiently ac-
curate for all practical purposes, assuming that payments
are made regularly, is to calculate the interest, say, April
I and October i of each year, on the balances remaining
INTEREST 173
unpaid at the middle of the half-year (in this case, on Janu-
ary i and July i). This is definite, simple, and accurate,
and might well be generally adopted.
In any event, it is economical and convenient to ar-
range for all interest to fall due at fixed periods in the man-
ner indicated, and it also tends greatly toward correctness.
139. Unearned Interest Various Examples
In order to compare the results obtained by the differ-
ent methods of calculating interest, let us take the example
of a contract for $5,000 dated January i and payable in
monthly instalments of $100 each, interest being charged
each half-year at the rate of 6% per annum on the balances
remaining unpaid from time to time. Let us suppose the
$100 is paid on each of the following dates :
January 30
February 15
March 15
April 10
May 20
June 30
July 30
August 15
September 15
October 10
November 20
December 31
If interest is calculated when each payment is made,
the figures will be as follows :
Jan. I Principal $5,000.00
June 30 Deduct six payments 600.00
$4,400.00
Add interest on $5,000 $150.00
Less interest on $100 for:
5 mos. o days (Jan. 30 to June 30)
4 " 15 " Feb. 15 " " "
3 " 15 " Mar. 15 "
2 " 20 " Apr. 10 " "
I " 10 " May 20 " " "
17 mos 8.50 141.50
$4,541.50
Dec. 31 Deduct six payments 600.00
$3,941.50
174 REAL ESTATE ACCOUNTS
Add interest:
For six months on $4,541.50 at 6%.. . $136.24
Less interest on payments as above. 8.50 127.74
Balance at end of year $3,813.76
If the interest is calculated on the balances remaining
unpaid at the end of each half-year, the result will be:
Jan. I Principal due $5,000.00
June 30 Deduct six payments 600.00
$4,400.00
Add interest for six months on $4,400 at 6%.... 132.00
$4,532.00
Dec. 31 Deduct six payments 600.00
$3,932.00
Add interest for six months on $3,932 at 6%... 117.96
Balance at end of the year $4,049.96
If no payments are made, the figures would be:
Jan. I Principal $5,000.00
June 30 Interest for six months 150.00
$5,150.00
Dec. 31 Interest for six months 154-5
Balance at end of the year $5,304.50
Here the interest is compounded, which, under the laws
of some states, is illegal. In such cases, the proper calcu-
lation, figuring simple interest, would be as follows:
Jan. I Principal $5,000.00
June 30 Interest for six mpnths 150.00
Dec. 31 Interest for six months 150.00
Balance at end of the year $5,300.00
INTEREST
175
If interest is charged on the "average balances," the
figures would be as follows :
Jan. I Principal $5,000.00
June 30 Deduct six payments 600.00
$4,400.00
Add interest on balance of March 31, viz.: $4,700 141.00
$4,541.00
Dec. 31 Deduct six payments 600.00
$3,041.00
Add interest on balance of September 30, viz.:
$4,241 127-23
Balance at end of the year $4,068.23
It must be remembered that, in all the examples, the
differences will rapidly increase as time progresses.
140. Unearned Interest Phraseology of Interest Clause
It is most important to express definitely and clearly
the method of calculating interest on unpaid balances, but
many forms of contract are ambiguous in this respect. For
instance, they usually contain a clause similar to the follow-
ing: "with interest at the rate of per cent per annum
on the unpaid portion of said purchase money." It is also
common to specify whether this interest shall be calculated
quarterly, half-yearly, or on certain specified dates.
The uncertainty is due to the use of the expression
"unpaid portion of said purchase money," the exact in-
terpretation of which probably depends upon the laws of
the locality in which the contract is executed. In many
states it will be interpreted to mean that, estimating on half-
yearly periods, a calculation must be made at the time of
each payment. In other words, when the purchaser makes
a payment, the vendor must calculate the interest to that
date, add this to the existing principal, and credit the pay-
ment made.
It is believed that under most of the existing laws the
ambiguity of contracts in regard to interest could be re-
moved by the following phrasing: "Interest shall be cal-
culated half-yearly on the first day of and the first
day of upon the balances remaining unpaid," or "In-
terest shall be payable half-yearly on the first day of
and the first day of and on being so calculated shall
be added to the principal." The exact wording of this
modifying phrase must be left to the attorney of the con-
cern, for it will depend not only upon the wishes of the
vendor, but also upon the laws under which he is living.
141. Unearned Interest Journal Entries
The form of mortgage under discussion necessitates a
form of journal entry that will meet special conditions, in-
asmuch as it should show the principal and all the interest,
both being included in the amount of the mortgage. This
interest, however, is not yet earned, and will not be earned
in full until the final payment is made on the mortgage.
Under these circumstances it is plainly improper to carry
this interest into Mortgage Receivable Interest account,
which is periodically closed out into Profit and Loss ac-
count. It must be carried separately in an account which
may be called Unearned Interest account.
For example, a purchaser buys from a vendor for $1,000
a piece of property which is to be paid for in 120 monthly
payments, interest being at 6% per annum, calculated half-
yearly. As was shown in 137, the amount of each of
these notes should be $11.23, an< ^ tne I2 notes would ag-
gregate $1,347.60. Omitting all entries regarding profit
on the transaction (which have already been described in
INTEREST 177
Chapter XIII), the journal entry would have the following
form:
Mortgages Receivable $1,347.60
To Property Account $1,000.00
" Unearned Interest 347-6o
142. Interest Accrued Not Due
When preparing a balance sheet and other accompany-
ing statements, it is frequently proper to show thereon
items for interest accrued but not due, in order to arrive at
the actual condition of the business on the date of the bal-
ance sheet. This accrued interest is the amount which has
accrued on each item since the last entry of overdue in-
terest.
While the amount should be calculated accurately, and
not merely estimated, it is not always advisable to enter
it on the books, as any such entry may lead to complica-
tions in the following year, for the reason that the numer-
ous items of accrued interest fall due at different periods
and it is necessary to determine each month (for possibly
the eleven months following the balance sheet) the amount
which has become due, and this amount is to be credited to
interest accrued instead of to interest overdue.
This is one reason why many real estate concerns have
found it best not to take into the balance sheet interest ac-
crued but not due. The consequent inaccuracies are re-
duced in amount if interest is made payable quarterly, and
also if the last day of the fiscal year be selected as one of
the regular dates for calculating interest, as suggested
in 138.
CHAPTER XX
EARNED PROFITS AND BOOK PROFITS
143. Book Profits
So far, the consideration of profits from sale of real
property has been confined to the methods of bringing them
on the books of account. The present chapter will consider
how much of these "book profits" has been actually earned
and therefore may be distributed to the stockholders as divi-
dends. It is proposed to discuss this question in detail, but
only so far as it relates to gross profits, that is, to the
difference between the cost of the property and its selling
price.
If the methods described in the preceding chapters have
been followed, the profits will appear in the general ledger
in one or more accounts, each of which is distinguished by
the word "Gain" appearing in the name of the account, as
"Gain on Sales," "Hillbrook Gains," etc. The profits re-
main in these accounts until it is desired to close the accounts
and ascertain the profits for any given period. The only
exception to this rule is in the case of cash sales, where the
gains are carried directly to "Profits" ( 82), and of those
time sales which have been cancelled and the gains carried
to "Cancellation Profits" ( 153).
144. Gains Distinguished from Earned Profits
The distinction between gains and earned profit can be
made clearer by the use of a concrete example, which will
also afford a comparison of the various methods of dealing
with profits. Assume that a corporation has acquired a
178
EARNED PROFITS AND BOOK PROFITS
179
tract of land at a total cost of $60,000, and that by means
of advertising, exploiting, development, and a general en-
hancement of values, it has been able to sell this tract for
$180,000, thus gaining $120,000. If the sale were made
for cash, the following entries would appear on the debit
side of the cash book'
Real Estate ; $6o,oco
Profits 120,000
At the closing of the books, the Profits account is
credited directly to the Profit and Loss account, the balance
of which account may then be available for the payment
of dividends.
Suppose that the transaction is a time sale, that a
nominal cash consideration is inserted in the deed of con-
veyance, and that payment is to be made in five instalments
as follows:
No. Amount
1 $24,000
2 30,000
3 36,000
4 42,000
5 48,000
$180,000
Any considerations regarding interest are omitted here,
as this subject has been treated in Chapter XIX.
It is obviously improper to carry to the Profit and Loss
account the entire profit of $"120,000 when the first instal-
ment is paid, as only 24/180 of the entire price has been
paid in. If this were done, the entire profit of $120,000
might be paid out in dividends or be declared payable as
such, while, as a matter of fact, the other four instalments
might not be paid at all and the vendor be obliged to take
REAL ESTATE ACCOUNTS
back the property. In such case which is not unknown
the transaction would stalJfc on the books as follows :
Original cost $60,000
Dividends declared 120,000 $180,000
Less first instalment 24,000
Balance remaining unpaid $156,000
If the sale was not carried out, the unearned profit, hav-
ing been used for the payment of dividends, must be written
off to something. The only practicable disposition is to
charge it to the cost of property, or to charge it back to
Profit and Loss in the next statement. The latter is the
better plan, as the former would involve the inflation of
Real Estate account by $96,000.
It may be argued that the purchaser could be forced to
make good any losses incurred through his failure to com-
plete his purchase. This may or may not be true, depend-
ing, first, upon the nature of the agreement under which
the sale was made, and second, upon the ability of the pur-
chaser to pay. If the property were sold on some form of
contract, there might be no obligation on the part of the
purchaser to pay the entire price. If the unpaid portion
of the price were secured by mortgage, recourse to the
courts might result in a judgment the value of which would
depend entirely upon the resources of the mortgagor. But
aside from such contingencies, it must be noted that in
dealing with real estate securities the common practice, and
the safe and proper one, is to depend on the value of the
physical security and not upon the financial standing of a
mortgagor. Therein lies the safety of such securities, and
therein is also found the favor with which mortgages are
regarded by conservative investors. When a real estate
EARNED PROFITS AND BOOK PROFITS igl
corporation departs from this principle in its transactions,
it justly forfeits the confidence of the public.
145. Rule for Calculating Earned Profits
Admitting that all the profit is not earned until all the
payments are made, it follows that the profits are earned in
proportion as the payments are made. In other words, the
earned profit bears the same ratio to the total book profit as
the payments made bear to the total selling price.
In our example, therefore, the profits would be earned
as follows:
Corresponding
No.
Instalments
Earned Profits
i
$24,000
$16,000
2
30,000
20,000
3
36,000
24,000
4
42,000
28,000
5
48,000
32,000
$180,000 $120,000
The rule for calculating the earned profits may be
formulated in the following manner:
Payments made
X total gain = earned profits
Total selling price
It is evident that the total profits divided by the total
selling price gives the ratio of profit to be deducted from
each instalment payment as actually earned profit; e.g.,
when the above transaction is completed, the total profit
thereon is $120,000, which, divided by the total selling
price, $180,000, shows the ratio of profit to be 663/3%.
Therefore, on the first payment of $24,000, the earned or
realized profit would be 66 2 /$% of this sum, or $16,000.
It may be argued that the course indicated is too con-
REAL ESTATE ACCOUNTS
servative, and that, when a considerable portion of the price
has been paid, say one-half, it is safe to assume that all
profits accruing from the transaction are already earned
on the ground that the security is worth double the amount
of the unpaid purchase money. In the case of a sale under
contract, this assumption is not justified, on account of the
absence of any obligation on the part of the purchaser to
pay the full amount. In the case of a mortgage, it is ad-
mitted that, in certain instances, it may be safe so to regard
the matter; for instance, in the case of a dwelling, office
building, or other property available for a large variety of
purchasers or users, on which half of a reasonable purchase
price has been paid. Such conditions, however, are fre-
quently absent from large transactions, where the actual
considerations may be based on possible profits to be derived
by a purchaser, as in the case of a development company ; or
where the transaction is of such magnitude, or the property
concerned of such a nature, that the number of possible
purchasers or users is materially restricted.
146. Anticipation of Earned Profits
In order to show the possible dangers arising from re-
garding as earned all the profits resulting from a sale when
only a part (say one-half) of the selling price has actually
been paid in, the example already given may be taken. In
this, on the completion of the third payment one-half of the
price has been paid. If no further payments should be made,
there would remain unpaid $90,000, of which $60,000 would
be unearned profits. These profits, it is assumed, have been
anticipated and, together with the $60,000 actually earned,
have been carried to the Profit and Loss account. The
transaction being cancelled, it is necessary to write off the
unpaid balance, which will ordinarily be to the Real Estate
account, as already suggested ; and the property which was
EARNED PROFITS AND BOOK PROFITS 183
purchased originally for $60,000 now stands on the books
at a valuation of $90,000. If this operation were repeated
several times, it becomes evident that the book value of the
property would equal or exceed the selling price of $180,000.
Further, if such a course were followed, it is obvious that,
through a series of dummy sales, a fraudulent management
could inflate to any amount the book valuation of the real
estate holdings.
Other reasons, also, commend the practice of making
earned profit dependent upon, and in proportion to, the
part of the selling price actually paid in. It is not so much
the duty of directors to pay out as dividends every cent as
soon as it is apparently earned, as it is to safeguard the
credit and stability of the company which they serve ; .and
this is most effectively accomplished by creating a reserve
for the protection of the future ; this reserve will also serve
to maintain the market value of the capital stock. Prudent
management, a strong reserve, and a conservative method
of handling profits go much further toward winning and
retaining public confidence than the occasional payment of
large dividends.
Moreover, as has been seen in the case of time sales
under contracts, it is manifestly improper to consider all the
profits as earned before the transaction is closed. It is very
desirable to treat uniformly as to profits, accounts which
are so similar as the two classes of time sales known as
"mortgages" and "contracts."
147. Equity as a Basis for the Calculation of Profits
The following case occurred in actual practice, and is
given here because it illustrates an apparent divergence from
the rules suggested.
John Doe owned a house which cost him $8,000, and on
which there was a mortgage of $4,500, thus leaving him
1 84
REAL ESTATE ACCOUNTS
an equity of $3,500. He sold the house to Richard Roe for
$9,000, of which $3,000 was payable in cash. The existing
first mortgage of $4,500 was assumed, and a second mort-
gage for $1,500, payable in one year, was accepted by Doe.
In this case, it is not the total price of $9,000 which
would form a basis for calculation, but rather the price
obtained for the equity of John Doe, viz., $4,500. Of this
equity, $3,000 being paid in cash, two-thirds of the profit of
$1,000 would be realized immediately, and the remaining
one-third would be realized upon the payment of the second
mortgage of $1,500.
CHAPTER XXI
CANCELLATIONS OF TIME SALES
148. Time Sales and Cancellations
In every business where payments are made on an instal
ment plan, it is inevitable that there should be a certain
number of lapses ; and the real estate business is no exception
to this rule. If such a business is properly conducted and
the accounts carefully watched, these lapses should result in
profits to the concern, although these profits will evidently
be less than if the sales had been completed. Indirect or
subsequent profits arising out of the resale of the property
involved are, of course, treated as new business. In other
words, each cancellation profit leads to an immediate reduc-
tion of the "Gain on Sales" (the reserve profits), and to an
immediate but smaller addition to the earned profits.
149. Amount of First Payment
The amount of the first payment, except in special cases,
such as unimproved, suburban, and subdivision properties,
should usually be a fixed percentage of the purchase price,
and sufficient to cover several monthly instalments. No
uniform rule as to its amount can be laid down, but several
large concerns doing business in the Southern States require
10% of the purchase price to be paid in before contracts
will be executed. The rule is based on the belief that, if a
purchaser cannot now, or in the immediate future, pay this
10%, he probably will be unable to meet regularly the future
payments. The system has yielded excellent results, and has
led to the use of options, such as shown in 130, which
185
REAL ESTATE ACCOUNTS
are available when a desirable purchaser requires a little
time in which to make the first payment.
150. Payments in Arrears
It is even more difficult to give any general rule regu-
lating the amount of time to be allowed delinquents. No
banker would arbitrarily decide that all his loans and dis-
counts should receive 90 days' extension and no more. Ill-
ness or loss of work may cause a good customer to fall in
arrears for a time; or a purchaser may spend money in
improvements on the property, which would otherwise have
been applied on the periodic instalments. Each case must
be carefully considered on its merits, for in deciding such
questions, not only the value of any particular piece of
property must be considered, but also the reputation of the
purchaser.
On the one hand, arrears should not be allowed to
accumulate to such an extent that a surrender of the prop-
erty would result in loss; on the other hand, it is unwise
for a concern to avail itself of every technicality in order to
foreclose at the earliest date legally possible, for such a
reputation is thereby earned as will tend to drive away
prospective customers.
To a concern selling on the instalment plan, a reputation
for generous dealing is a valuable asset. It should be re-
membered that, even if arrears are allowed to run for a
time after a considerable number of payments have been
made, interest also is usually running, and though there w r ill
be a reduction in present cash receipts, the final profits will
in no way suffer.
In cases where arrears have accrued and doubt exists as
to the final disposition of the contract, it is good policy to
omit the calculation of interest while this condition con-
tinues. This avoids the creation of a possibly fictitious asset,
CANCELLATIONS OF TIME SALES 187
for when interest is included in these contract accounts, it
becomes technically an asset and increases the amount of
"Contracts" on the balance sheet. Should normal payments
be resumed, it is a simple matter to add all interest so
omitted.
151. Accounting Treatment of Cancellations
Let us assume that it is desired to cancel a contract, the
original amount of which was $3,600, $900 being profit and
the payments amounting in all to $400; i.e., the original
amount of $3,600 has been reduced by $400 after debiting
interest and all charges. For the sake of simplicity, this
reduction in balance is regarded as the amount paid in, as
in practice, of course, it is only the reduction on the debt
which affects the profits earned.
The original profit would be credited to Gain on Sales
account, and reference to the annual analytical sheets of
that account ( 269), or to the sub-ledger if similar to that
of Form 15 ( 23), will show that at the closing of the
books $80 of profit had been earned and $820 remained
in the Gain account. Three figures have then been deter-
mined, viz. :
1. Cost of the property, $3,600 $900 = $2,700.
2. Balance remaining in Gain account, $900 $80 =
$820.
3. Balance due on the contract, $3,200.
And there is still to be determined
4. Cancellation profits.
It is required to debit Real Estate with the property re-
acquired, and Gain on Sales with the amount remaining
therein; and to credit Contracts with the balance to be
extinguished, and Cancellation Profits with the earned profit
not yet written off to Profit and Loss account.
REAL ESTATE ACCOUNTS
Since the debits are $3,520 ($2,700 -+- $820), and the
credit is $3,200, the remaining credit must be $320. The
journal entry, therefore, is as follows:
Property Account $2,700
Gain en Sales 820
To Contracts $3,200
" Cancellation Profits 320
To cancel contract No
By means of these entries, the Gain on Sales account is
kept "clean" and all amounts relating to this transaction are
eliminated. This is a matter of importance, especially in the
case of subdivision contracts. (See 181.)
152. Erroneous Cancellation Entries
This matter is discussed in some detail for the reason
that many bookkeepers make incorrect entries when closing
out contract accounts, usually reasoning as follows:
The contract balance is $3,200, the property is worth
$2,700, and the original gain was $900 ; therefore the entry
is the following:
Real Estate $2,700
Gain on Sales 900
To Contracts $3,200
" Profits 400
The fact that a part of this profit has already been carried
to Profit and Loss is overlooked.
Another erroneous form is as follows:
Real Estate $2,700
Gain on Sales (Originally $900)
(Cash paid in 400) 500
To Contracts $3,200
CANCELLATIONS OF TIME SALES
I8 9
In each of these cases, it will be seen that an amount is
left in Gain on Sales account which is unaccounted for; in
the first instance, $80, and in the second, $320 (i.e., $900
$80 $500).
153. Cancellation Profits Account
It will be seen that the correct entry calls for a new
account, "Cancellation Profits," which is intended to re-
ceive the forfeited profits from all classes of time sales which
may be cancelled during the year. It is extremely useful to
have such an account, showing at a glance all cancellations,
for the total of these should always be found at each closing
of the books and be included in a schedule, in order that the
management may have accurate information as to the ratio
of such cancellations to the gross sales. In entering items
to this account in the ledger, it is convenient to make
additional memorandum entries showing the total amount
of the sales affected by the cancellation profits, in some such
way as the following:
CANCELLATION PROFITS
(Credit side of ledger account)
Total
Cancelled
Profits
Monthly
Totals
1917
Jan. 10
Contracts (general)
$4 200.00
$80000
20
Kingslake
2,200.00
7=^0.00
Si.S'iO.oo
Feb. 20
Ladore .,
1. 200.00
240.00
From the above figures, it is easy at any time to make
an analysis showing the various classes of sales which have
been cancelled and the total amount of each.
The principles here laid down for the treatment of con-
tracts apply equally to mortgages. Care should be taken
190
REAL ESTATE ACCOUNTS
to consider the reduction of the principal debt; and any
charges standing in the Income account should be balanced
by charging them to the appropriate nominal account, viz.,
Mortgage Interest Receivable, Taxes, Insurance, etc.
The above remarks apply to general contracts, the details
of subdivision properties being considered in the next
chapter. For the sake of convenience, however, the can-
cellation of subdivision time sales is discussed here.
154. Cancellation of Subdivision Sales
In the case of subdivision sales, the same principles apply,
but the data is secured in a different manner.
Take for example a lot in Eureka Gardens subdivision
sold for $240, yielding a profit of $120. Assume that $30
was paid in cash, of which $15 was carried to Profit at the
last closing of the books. It is now desired to cancel this
contract, and the journal entry will consist of four items,
viz.:
Eureka Gardens Purchase $120
Eureka Gardens Gains 105
To Eureka Gardens Contracts $210
" Cancellation Profits 15
In explanation of this entry, it may be said that the
cost of a Eureka Gardens lot and the balance of the contract
are fixed amounts, viz., $120 and $210 respectively. The
subdivision ledger shows that $15 has been carried to Profit
and Loss account, leaving $15 for Cancellation Profits. The
total of the fixed credit entries is therefore $225, and the
remaining debit entry must therefore be $105.
The same result may be approximately arrived at by
ascertaining the ratio between the collections and the selling
price at the time the books were last closed, and assuming
that the corresponding percentage of total credits up to
CANCELLATIONS OF TIME SALES 191
the end of the last fiscal period has already been carried into
Profit and Loss. If this amount is deducted from the same
percentage of the total cash received, the difference will be
the amount now to be carried to Cancellation Profits.
It is, of course, evident that, if we were to carry to Can-
cellation Profits the entire amount paid in, we should be
carrying far too much and be anticipating profits, as would
appear from the final payments when the whole subdivision
was sold out and paid for.
CHAPTER XXII
SUBDIVISION, DEVELOPMENT, AND SUBURBAN
PROPERTIES
155. Acquirement
While subdivision properties may be acquired in the
usual manner by a deed of conveyance paid for by cash or
by a mortgage payable, the method employed sometimes is
quite different. The concern selling on contract may itself
be buying under a contract, or it may have merely a selling
contract, the title remaining in the owner and the concern
acting as an agent. Examples of these methods are shown
in detail in 200, 204, 232, and 250.
156. Release of Lots from Encumbrances
When the concern does not own an unencumbered title,
it is usual to make some definite arrangement under which
the owner agrees to convey, or the mortgagee to release,
such lots as are paid for in full by the customers of the
concern. Otherwise, it might be necessary for a purchaser
to await the completion of the concern's contract, or the
payment in full of its mortgages, before he could receive an
unencumbered title.
The terms under which such deeds to lots are issued vary
greatly. Sometimes the deed is given only when the pro-
portion of the purchase price applicable to that lot is paid
to the owner in full, such amounts being, of course, credited
to the concern and deducted from the total amount to be
paid by it for the entire tract. Sometimes the owner or the
mortgagee agrees to convey or release a part of the land
192
SUBDIVISION PROPERTIES
193
proportionate to the payments made. In the case of selling
contracts, the owner usually requires that he shall receive
the full price for any specific lot he is required to deed during
the active life of the contract. Whatever the terms and con-
ditions may be, it is important that the accountant inform
himself of them from the original agreement or from a
complete copy thereof, in order to open appropriate accounts
and make all proper entries.
157. Cost Price of Property
Other points of importance are the ascertainment of the
cost price and the making of some definite provision for
changes in this cost. The cost price of the land should
include the purchase price, legal expenses of acquirement,
and interest.
In regard to interest, it is logical and permissible to
compute this item from the time of acquirement up to the
time the land is put on the market* Such a charge is
similar to that allowed by law where a company is con-
structing a railroad, and in other similar cases ; for the con-
cern is frequently required to make many improvements
to the property before it can be turned over to the sales
department.
The cost price of the land should also include the cost of
surveying, platting, etc., the cost of clearing, and the cost
of roads, fences, ditches, etc.
158. Cost Per Lot
If these improvements are completed at the time the
sales begin, the face of the books will show the total cost,
and this can be apportioned to each lot. Where lots are
fairly uniform, this may be done by dividing the total
amount by the total number of lots, and making minor
*See Chapter XI for discussion of interest as part of cost.
194
REAL ESTATE ACCOUNTS
adjustments for lots of irregular size. If the lots are
irregular throughout, the cost should be apportioned
according to area.
In fixing the cost per lot, there is sometimes a tendency
to charge those lots likely to bring the highest prices with
the highest cost. This is not good practice ; for the reasons
given above, the cost of any lot should be determined solely
by its area, except where special expenditures have been
made for improvement purposes.
159. Cost Price When Improvements Are Incomplete
Unfortunately for the accountant, it is often decided to
place lots on the market before all the contemplated improve-
ments have been completed. In such cases the books will
show a certain cost price when the sales commence, and this
book price will increase continuously until the improvements
are completed; in fact, the cost price is subject to monthly,
weekly, and even daily changes.
This undesirable situation may be avoided by estimating
in advance the cost of all improvements contemplated, and
by adding to this a fair margin of safety. This amount
should then be credited to an improvement reserve account,
and debited to the cost price; charging all proper expendi-
tures, as they occur, against this improvement reserve. The
estimate does not involve or determine expenditures, and
any excess which may remain can properly be credited to
Gain account, for this account would have been propor-
tionately greater had these improvements not been added to
the cost.
160. "Constant Cost Price"
If the above plan is followed, a fixed cost price is obtain-
able, which should remain in force until the books are closed,
when it can be verified or changed if necessary. The
SUBDIVISION PROPERTIES 195
realized profits depend on this price; and, especially if the
profits are determined by averaging all outstanding con-
tracts, it is very advantageous to have as few changes as
possible in the conditions.
for Subdivision properties is a comparatively.
recent necessity, and few text-books even touch on it. It
has been suggested r.oqgntly by one eminent authority that
the cost price should be recalculated each month; but it is
believed that the plan here suggested is more scientific and
more convenient. It would add a considerable burden to
the bookkeeper of a concern handling constantly between
twenty and thirty different subdivisions, if he had to calcu-
late costs afresh each month. In practice it is found best
to keep the cost price constant until the end of the fiscal
period. At that time the improvement reserve account may
be either increased or wiped out, according to the circum-
stances.
161. Comparison of Cost Finding Methods \ A/y A
It should be clearly understood that the frequent re-
vision of the cost price of lots is not an inaccurate method,
for the final results of the two methods are identical. This /
can best be shown by the calculations in the following /
simple example:
Suppose that of twelve lots composing a small subdivi-/
sion and each originally costing $360, one is sold each month
during the year, and during that year improvements havje
been made continuously in such amounts that the cost of
each unsold lot has increased $10 a month up to $480 at the
last sale. In each case the selling price was $600, and each
contract paid regularly $24 a month for every month of /its
existence, no "first payment" being demanded.
Calculated on the fixed price plan, the figures woulq be
as follows:
REAL ESTATE ACCOUNTS
Total sales, 12 lots at $600 $7,200
Total cost :
Purchase price, 12 lots at $360 $4,320
Add improvements (n X Io ) + ( Io X IO ) +
(9 X I0 ) etc - = 66 X I0 = 660 4,980
Total gain $2,220
Total amount paid in, 78 payments at $24 each 1,872
Calculated on varying cost price, the figures are :
Total sales, as above $7,200
Total amount paid in, as above 1,872
Gain :
i lot at $240
I " " 230
i " " 220
I " " 210
I " " 200
I " " IQO
I " " 180
I " " 170
I " " 1 60
I " " ISO
I " " 140
I " " 130 2,220
162. Check on Unsold Lots
In the case of journal entries relating to the opening or
cancelling of contracts, a valuable check on the unsold lots
may be obtained by the following simple means:
1. Rule a special column on each side of the general
ledger account, showing the cost of the property; and when
the opening debit entry is made, insert in the special column
on the debit side the total number of lots acquired.
2. Use similar special columns in the journal when
making journal entries affecting sales or cancellations of
SUBDIVISION PROPERTIES 197
these lots, and also in the cash book when entering cash
sales which are not journalized. Post the total of each of
these special columns to the proper special column in the
general ledger. The difference between the totals of the
two ledger columns will then always show the number of
lots unsold a valuable figure which can be checked with
the unsold lots as shown by the tickler and plats.
163. Subdivision Property Expenses
Among the expenses incidental to the development of a
large subdivision propertY>/ charges will frequently be found
for such items as "steaaJMiLt Jar tranopontmg li ygPH l iHB | ep/ >
^HC > etc. In such cases, it is proper to carry the actual
1. JL /
cost of these items as assets, writing off proper amounts for
depreciation. There is no doubt that it is better thus to
eliminate these items from the Expense account and to carry
them under separate accounts, the name of each of which
indicates its purpose. The cost of operating and maintain-
ing such ventures should, of course, always be charged to
the Operating account.
164. Advertising Expense
There is still another class of expense which calls for
special treatment and which may be called "Advertising
Expense." It consists of sums spent for newspaper and
pamphlet advertisements, pictures, circulars, postage, etc.,
which, in the case of a large subdivision, soon become
considerable.
Such items may be properly charged off directly to Profit
and Loss, or they may be kept in an account by themselves
and treated like the organization expenses of a new com-
pany. In the latter case there should be written off each
year, either a fixed fraction of the whole sum, or an amount
jcjg REAL ESTATE ACCOUNTS
proportionate to the sales for the period. Such an arrange-
ment, honestly carried out, is proper and just to all con-
cerned. For instance, considerable sums in advertising
might be spent in the last part of a fiscal period, while no
sales might be reported until the following period, and if
the whole expense (from which no benefit has yet accrued)
is charged off, it might unnecessarily, or even unfairly,
impair the dividend. At the same time, all such accounts
should receive a careful scrutiny and should never be
allowed to run beyond their allotted term.
Expenditures for current advertising and selling of any
subdivision may properly be kept by themselves, and at the
end of a fixed period be carried direct to Profit and Loss.
165. Advances to Settlers
Arrangements are sometimes made, in connection with
subdivision properties, to advance to the settlers actually on
the ground the cost of certain improvements. In one par-
ticular case in the writer's experience, the owners had made
numerous sales through an agent who, it subsequently trans-
pired, had been guilty of false representations. He had,
in this way, induced a number of settlers to come to the
locality and invest considerable sums; in fact, some had
invested all their available means. Under such conditions
the owners, though not legally responsible, felt that both
justice and policy obliged them to assist the settlers who,
through misrepresentation, had been induced to purchase
their land.
A commissary was established in the midst of the colony,
and placed in charge of a manager who was authorized to
make specific advances to the settlers, of seeds, plants, and
the requisite tools and fertilizers in proportion to their
needs, as single men, married men without children, and
married men with children.
SUBDIVISION PROPERTIES
199
o
200 REAL ESTATE ACCOUNTS
In order that the main office might be kept informed of
these matters without being encumbered with detail, the
manager was instructed to open an account with each settler
and to charge him with all goods supplied under the above-
mentioned instructions. At the end of each month he sub-
mitted a statement, which, as it may serve as a basis for
similar reports and records elsewhere, is given here
(Form 46).
This statement gives the commissary credit for the ad-
vances, charged at the usual current prices, and enables the
storekeeper to make up his periodical profit and loss account
in the usual way ; the totals of these advances being charged
to the individual settlers in the general books each month.
As crops ripened, the manager marketed them, and credited
the returns to the owner, as indicated in Form 46.
CHAPTER XXIII
EARNED PROFITS ON SUBDIVISION, DEVELOP-
MENT, AND SUBURBAN PROPERTIES
1 66. Determination of Earned Profits
While the principle upon which earned profits on sub-
division sales are determined is simple (See 144, 145),
difficulties often arise in practice. For instance, it frequently
happens that a tract of land is divided into hundreds, or
even thousands, of subdivisions either farms or lots and
the number of purchasers also runs into the hundreds or
thousands, each purchaser necessarily having his own ac-
count in a sub-ledger. Under such conditions, the payments
are usually small, sometimes as low as one dollar a month,
which makes it impracticable to compute the earned profit
on each payment or on each contract, unless there has been
adopted some method similar to that described in 174. If
such a method were adopted, profits would be arrived at by
basing calculations on totals and averaging the results. For
this the following facts are necessary: (i) cost price; (2)
selling price; (3) profit, i.e., selling price less cost price;
(4) payments actually made. Having these we can readily
solve the equation :
Payments made
.. X total gam = earned profits
Total purchase price
The question then is, how best to obtain these figures,
as they seldom appear on the face of the books found in real
estate offices,
20 1
202 REAL ESTATE ACCOUNTS
167. The Cost Price
The cost price is discussed in Chapters X and XI. This
price, however, is not necessarily uniform throughout an
entire tract. Owing to their situation, some parts sell for a
higher price. Sometimes one concern may sell out a division
for another company, transferring outstanding contracts at
their face value or at some figure based thereon. There
will be no profit from these contracts to the buyer, and, in
the event of cancellation, the cost price of the lot will be
the amount paid for the contract. Or again, it may be
advantageous to redivide a subdivision on account of differ-
ences in the sizes of the lots, the quality of the soil, and
other similar variations.
These instances show that causes other than improve-
ments may produce a variety of cost prices for the lots in
one subdivision. In a case of this kind it is well to have
different "series" of accounts for the subdivision affected,
in order to keep together lots having the same cost price.
The reason for this will be apparent when we come to the
calculation of earned profits.
168. The Selling Price
The average selling price is more difficult to determine,
for it seldom happens that all the lots are sold at the same
price. Corner lots and the larger lots command a higher
price than others. Moreover, if the development of a par-
ticular tract has been successful, prices advance from time
to time and a late purchaser may have to pay a higher price.
It may also happen that one purchaser will buy a number
of lots and thereby obtain a reduction from the current
schedule.
Under such circumstances, the actual average selling
price of the lots covered by the open contracts should be
J
EARNED PROFITS 2O -j
obtained by listing the original amount of all the open
contracts, and dividing this total by the number of lots
included in those contracts.
169. The Average Profit
The average profit is the difference between the average,
selling price and the average cost, and is represented by the
following formula:
Original amount of contracts
average cost average profit
Number of lots in contracts p er \ o ^ p er \ ^
170. Amount of Payments Actually Made
The amount paid on any one series of outstanding con-
tracts may not be readily ascertained from the balance of
the general ledger account, which includes cancellations as
well as payments upon contracts which have been fully paid
up and closed.
In order to obtain this necessary figure, a list of the
balances in the sub-ledger is taken off on an adding machine.
To facilitate checking, it is convenient to use blank paper of
journal size instead of the usual strips, showing a total at
the end of each letter (i.e., each alphabetical division) and
putting only two columns on a page; the totals under the
various letters being then listed in order to obtain the
grand total.
After this has been done, the list is put through the add-
ing machine again, and the original amounts of these same
contracts are added in a similar manner. The lists are then
checked back, and at the same time there is inserted the
number of lots covered by each contract, and, when the
checking is completed, the total of these is obtained. The
following example will show more clearly the appearance
of such sheets:
204
REAL ESTATE ACCOUNTS
Original
Price
$150.00
250.00
$400.00
No. of
Lots
I
2
Balance
Feb. 28, 1917
$125.00
232.50
$357-50
D
$300.00
2
$275.00
300.00
2
270.00
300.00
2
270.00
500.00
4
340.00
$1,400.00
10
$1,155.00
$300.00
2
$200.00
150.00
I
125.00
125.00
I
1 2O.OO
$575-oo
$505.00
We have now all the information necessary to solve the
equation in 169, viz:
1 . Payments made are found by subtracting the balance
of open contracts from the original amount of those
contracts.
2. The original amount of the contracts is taken from
the machine list.
3. The number of lots also is taken from the machine
list.
4. The average profit is found by subtracting the cost
price (which is an established figure) from the average
selling price, obtained by dividing the amount of the original
sales by the number of lots in those sales.
EARNED PROFITS
205
171. Reserve Profit Account
There is, however, a modification of this method of
averaging profits which is preferable. In practice, the
auditor may be unable to check every small item in all the
accounts connected with these contracts; his time may be
limited, or his instructions may not include it. His chief
object is to see that a fair amount is carried to Profit and
Loss account, and also to see that no profit is anticipated ;
in other words, that a proper reserve is maintained for
uncompleted contracts.
This being the case, it is usually safer to calculate the
unearned profits to be retained in the Reserve Profit account,
and to carry all the surplus in the Gain account to Profit and
Loss; rather than to calculate the earned profits to be
carried to the Profit and Loss account. This calculation
is formulated as follows:
balances unpaid unearned
X total profit =
total selling price ' profits
If this plan is followed, the profit kept in reserve will
always be sufficient to care for all uncollected portions of
sales, and, even if no more payments be made, the Profit and
Loss account will not be disturbed.
172. Application of Rule
In order to prove the correctness of this rule, and also
to show more clearly the various details, refer to the illustra-
tion in 144 and 145, and assume that, instead of this
property being sold as a whole, it was subdivided into 5,000
lots or tracts which were sold on time, the sales being com-
pleted as before in five periods, and the payments made
regularly and deeds issued as the respective contracts were
paid up, as shown in column "X" of the following tabulated
2o6
REAL ESTATE ACCOUNTS
statement. In order to apply a double test, assume as a
second hypothesis that with the same sales and the same
collections payments were made with great irregularity
and that some purchasers paid in advance and obtained their
deeds, while others fell in arrears to such an extent that
their payments were almost negligible. These figures are
placed in column "Y."
The tract being divided into 5,000 lots and costing
$60,000, the average cost price is $12 per lot; and the total
selling price being $180,000, the average selling price is $36
per lot, yielding a profit of $24 a lot.
Lots
Sold
Collections
No. of Contracts
Paid in Full and
Deeds Given
"X"
"Y"
First period
2,000
1,250
1,250
500
$24,000
30,000
36,000
42,OOO
48,000
O
O
O
2,500
2,500
650
800
1,000
1,200
1,350
Second '
Third "
Fourth
Fifth "
""- .-i
f .OOO
$180.000 t;.ooo
^.000
In the following examples, the balances are worked out
in detail from the tabular statement just given, in order to
show exactly how these balances are arrived at. The
different letters used have the following significance:
(a) is the balance appearing on the ledger.
(b) is obtained by adding the original amounts of all
open contracts as explained in 170.
(c) is also obtained from the sub-ledger as detailed in
170-
(d) is the average profit per lot, obtained by reducing
the following formula :
Original amount of open contracts
Number of open contracts
cost per lot
so;
'At close of first period:
Balance of Gain Account (2,000 X $24) .............. Cr. $48,000.00
(a) Balance of Contracts (2,000 X $3^)
$24,000 = .............................. $48,000
(b) Original amount (2,000)^ $36) ........... $72,000
(c) Number of lots in open contracts = ...... 2,000
(d) Average profit per lot = ................. $24
Earned Profit = $48,000 1 - - - X 2 > 00 X$ 2 4f == Dn l6 . ooo - o
vp72,OOO J -
At close of second period:
Balance forward of Gain Account ................... Cr. $32,000.00
Add gain on 1,250 lots at $24 ........................ Cr. 30,000.00
Cr. $62,000.00
(a) $48,000 + (1,250 X $36) $30,000= ...... $63,000
(b) $72,000 + (1,250 X $30) = ............... $117,000
(c) 2,000-1-1,250= ........................ 3,250
(d) $24
Earned Profit = $62,000 -j - - '- X 3> 2 5 X$ 2 4 | = Dr - 20,000.00
v Ip 1 1 7,OOO J _^__-_^
At close of third period:
Balance forward of Gain Account .................... Cr. $42,000.00
Add gain on 1,250 lots at $24 ......................... Cr. 30,000.00
Cr. $72,000.00
(a) $63,000 -f- (1,250 X $36) $36,000 = ---- $72,000
(b) $117,000+ (1,250 X $36) = ........ ...... $162,000
(c) 3,250+ 1,250= ....................... 4,500
(d) $24
C ^R*7c? cwi "^
Earned Profit = $72,000 -\ - '. - V 4,500 V $24 \- = Dr. 24,000.00
L$i62,ooo --
At close of fourth period:
Balance forward of Gain Account ................... Cr. $48,000.00
Add gain on 500 lots at $24 .......................... Cr. 12,000.00
Cr. $60,000.00
(a) $72,000 + (500 X $36)
(b) $162,000 + (500 X $36) (2,5ooX$36)*= $90,000
(c) 4,500+500 2,500 = ................. 2,500
(d) $24
*Lots deeded.
208 REAL ESTATE ACCOUNTS
Earned Profit = $60,000 -j - X 2,500 X $ 2 4 f = Dr - 28,000.00
Cr. $32,000.00
At close of fifth period:
The earned profits must be:
48,000
180,000
- of $120,000 (total profits), which is $32,000.
EARNED PROFITS UNDER EXAMPLE "Y"
At close of first period:
Balance of Gain Account Cr. $48,000.00
(a) Balance of Contracts (2,000 y $36)
$24,000 = $48,000
(b) Original amount of open contracts (2,000
X $36) (650 X $36) = $48,600
(c) Number of lots on open contracts, 2,000
650 = 1,350
(d) Average profit per lot = $24
Earned Profit = $48,000 - ^X : .35 X $ 2 4\ = Dr - 16.000.00
At close of second period:
Balance forward of Gain Account Cr. $32,000.00
Add gain on 1,250 lots at $24 Cr. 30,000.00
Cr. $62,000.00
(a) $48,000 4- ( i, 250 X $36) $30,000= $63,000
(b) $48,600 + (1,250 X $36) (800 X $36) = .. $64,800
(c) 1,350-1-1,250 800 = i ,800
(d) $24
Earned Profit = $62,000 -\ ^ - X 1,800 X $ 2 4\ = Dr. 20,000.00
^$64,800 j
At close of third period:
Balance forward of Gain Account Cr. $42,000.00
Add gains 1,250 lots at $24 Cr. 30,000.00
Cr. $72,000.00
(a) $63,000 -f- (1,250 X $36) $36,000= $72,000
(b) $64,800 -(- (1,250 X $36) (1,000 X $36) = $73,8oo
(c) i ,800 -f- 1,250 1,000 = 2,050
Cd) $24
/$72 OOO ^
T ,-,__ _ -X 2 >5X$ 2 4f = Dr. 24,000.00
I $73,800 J
EARNED PROFITS
209
At close of fourth period:
Balance forward of Gain Account Cr. $48,000.00
Add gains 500 lots at $24 Cr. 12,000.00
Cr. $60,000.00
(a) $72,000 -f (500 X $36) $42,000 = $48,000
(b) $73,800 -j- (500 X $36) (1,200 X $36) =.. $48,600
(c) 2,050 + 5 1,200 = .... 1,350
(d) $24
Earned Profit =-. $60,000 -{ 4 >OO X J.35O X $ 2 4 f = Dr. 28,000 on
1448,600
Cr. $32,000 oo
At close of fifth period:
As in "X" = $32,000
By contrasting extreme results in the matter of advance
payments and payments in arrears, these two examples
afford an additional proof of the statement that earned
profits in any given case depend solely upon, and are pro-
portioned to, the cash actually paid in, together with other
credits, regardless of arrears or of advance payments.
173. Alternative Methods
It may be worth while, in passing, to mention a few
methods of calculating earned profits not based on the prin-
ciples above stated and to show the possible difficulties or
errors which may arise in relation to each.
1. It is sometimes attempted to apply the formula for
earned profits, as stated in 145, to the controlling account
in the general ledger, instead of to the balances taken from
the sub-ledgers. This is not to be recommended as it is
often difficult to get the proper figures from the controlling
account, owing to entries made in it relating to cancellations,
transfers, etc., and this difficulty is materially increased if
the accounts have been running for a number of years.
2. Another method is to use the following formula:
Profits in full onli /proportion of profits^ _
all lots deeded J Ion uncompleted salesj ~
2io REAL ESTATE ACCOUNTS
This method presents the difficulties mentioned in con-
nection with the preceding method, together with others
peculiar to itself. The chief source of error lies in the fact
that partial profits on any given lot are taken each period
as earned, and when the lot is finally paid for and a deed
given therefor, the entire profit is taken, including the partial
profits already taken an evident duplication of profits,
which leads toward disaster.
3. Another and more usual plan of calculating earned
profits is to employ the following formula:
Total receipts ,
Total sales
X balance of Gain account
The fallacy of this method is that the receipts and the
sales cover all the transactions relating to the open contracts
since the beginning of these contracts, while the balance of
the Gain account is being periodically diminished by the
profits regarded as earned. If sales have been made with
regularity, the results may be approximately correct ; if, on
the other hand, they have been irregular, serious error mav
creep in.
174. Special Subdivision Ledger
It is frequently difficult to ascertain the earned profits
from subdivision property, owing to the large number of
items and to the various causes explained above. Special
forms of ledger (Forms n, 15, 20, 23) have therefore
been devised, showing at all times the amount of profit
earned and unearned on each lot under sale.
It will be seen that the headings provide for all the
essential facts; the date of the contract and the original
amount of the ledger entry being shown above the money
column. The form also shows the method of making the
first entry, which would appear on the journal as follows:
EARNED PROFITS 211
Eureka Gardens Contracts $250
To Eureka Gardens Purchase $125
Gains 125
According to the terms of this contract, the payment is
$10 cash and $10 a month. In the "Debits" column is
entered the amount of $250 and in the "Reserve" column
$125. Heading the "Reserve" column there would also be
shown the figure "50," indicating that, of every dollar paid
in, 50 cents is "reserve," or unearned profits. It may be
noted that on these forms unearned profits are called "re-
serve," so that in case the customer should see the ledger
account (as he often wishes to do) his curiosity may not be
excited as to the amount of profit yielded by his purchase.
As succeeding payments are made, appropriate entries
are made in the "Reserve Realized" column. For instance,
each $10 appearing in the "Credits" column will show $5
in "Reserve Realized."
One important result of the use of such ledgers is that,
by adding all the entries in the "Reserve Realized" column
for any one month, the amount of earned profits from this
particular source during that month may be positively ascer-
tained, and this renders possible the preparation of accurate
monthly statements of actual earnings.
A further advantage appears at the end of the year, when
a trial balance of the entire ledger is taken off, showing the
balances due on contracts and the balances of "Reserve."
The difference between the totals of the "Reserve" and the
"Reserve Realized" columns shows the amount of unearned
profits which must remain in the Gain account. The sur-
plus in Gain account above that amount may, of course, be
safely carried to Profit and Loss.
It will sometimes happen that the reserve appropriation
cannot be accurately expressed in an even number of cents.
In such case, the reference figure shown at the head of the
212 REAL ESTATE ACCOUNTS
"Reserve" column should be the number of cents next below
the actual amount, omitting all fractions. For instance,
supposing the profits were $128 in the instance given above,
the exact figure would be 55.2; the .2 is omitted, and, in
order to keep the book in balance, the slight difference
(which in this case would be 50 cents) is entered on a
"balancing" account for the subdivision. The total amount
of such fractional entry is so small that it will be perfectly
safe to carry this balancing account and to write off a portion
each year, depending largely upon the ratio of total cash col-
lections for any period to total amount of contracts issued.
175. Use of Special Ledger
There is no difficulty in transferring to the special ledger
shown in Form n ( 20) or Form 15 ( 23) a set of
accounts which have been kept in ordinary ledger form,
the procedure being as follows:
A trial balance showing the balances of contracts out-
standing is taken off the old sub-ledger, and the following
fraction is worked out:
Balance of Gain account }< 100 Number of cents in each dollar
Balance due on contracts uncollected, which is un-
earned profits
Each of the debit balances on the trial balance is then
multiplied by this number of cents by means of a calculating
machine, and the amount of the profit is set against the
balance of the contract. The total of these being added, the
footings prove themselves, for the total balances multiplied
by the number of cents of unearned profits should equal the
total gain. In such cases a small amount is usually left over,
as it seldom happens that the fraction yields a whole num-
ber; and this sum is carried in the balancing account and
should be written off in the manner suggested above.
EARNED PROFITS 213
It will be seen that the extra labor of keeping the ledger
shown in Form 15 is slight, and is more than offset by the
accurate results obtained. Form 15 is especially designed
for those cases where no interest, taxes, or other charges are
made against the account in other words, where each pay-
ment applies directly and entirely to a reduction of the prin-
cipal ; while Form 1 1 is applicable to mortgages or contracts
where there are interest and other charges and it offers
equal advantages. The method of using the ledger shown
in Form 1 1 differs from that required in connection with
Form 15, inasmuch as in the former the "Reserve" columns
are affected only when a payment reduces the balance to
an amount smaller than it was when the last previous entry
was made in the "Reserve" columns. In other words, if a
purchaser makes payments covering interest, or any other
charge, such payments do not affect the reserve.
The ledgers shown in Forms 1 1 and 1 5 have been in use
for a number of years and the results obtained from them
are entirely satisfactory. They not only greatly reduce the
work of an auditor, but they do away with all the uncer-
tainties; giving positive, reliable figures instead of the
approximations obtained by the methods described in 1 68
et scq.
176. Holding Subdivision Properties
Subdivision properties are held under similar conditions
and subject to the same rules as any general property. The
only difference in treatment required is the frequent verifica-
tion of the plats or lists showing the unsold lots, and the
comparison thereof with the balance of the account show-
ing the cost price; for it is evident that the great number
of detailed sales found in any larger subdivision may easily
lead to errors unless a constant watch be kept.
I
CHAPTER XXIV
SELLING CONTRACTS
177. Definition of Selling Contract
A "selling contract" is an agreement between the owner
of land and an agent who undertakes the sale of his property.
Under such a contract the concern is therefore an agent,
usually acting under a special agreement and having clearly
defined rights, duties, and powers. The terms of such con-
tracts vary greatly, but as a rule they give an agent the
exclusive right for a definite time to sell, under stipulated
conditions.
Frequently the agent undertakes to bear all or part of
the expense of advertising, and sometimes that of develop-
ment also. The agreement usually prescribes the manner
in which the agent shall make payments to the owner, which
is generally on a percentage basis, such as $0% of the cash
collected monthly, or during some other stated period. The
selling contract, like other agency contracts, does not neces-
sarily oblige the agent to buy or to pay for the land until
he has sold 'it.
178. Classes of Selling Contracts
The following examples are given as typical selling con-
tracts:
I. A contract under which the agent undertakes to sell
certain described property, such as lots, at an average price
per lot, and to remit periodically to the owner a certain
portion of the cash receipts. All that the agent obtains
214
SELLING CONTRACTS
215
above the average price is his profit, with or without the
addition of any payments on cancelled contracts. In the
final settlement, he is obliged to pay only for such lots as
the owner may convey to purchasers. An example of this
class of contract is given in 200.
2. Contracts under which a number of lots, or similar
property, are placed in the hands of the agent, the lots having
varying prices specified in the agreement, but the other
conditions being similar to those of the first class.
3. Contracts under which the owner gives the agent
sole selling rights to property at a fixed price per acre, or
other unit of value, the agent undertaking all expense of
developing, improving, advertising, selling, demonstrating,
etc. In such cases the selling price is fixed in various ways;
sometimes it is left to the agent, or a minimum price is
stipulated. The method of paying the owner is set forth
in the contract, and there is occasionally a further agree-
ment that, after the owner has received the price per unit
agreed upon, and after all the expenses of developing, etc.,
mentioned above, have been repaid to the agent, the net
profits (if any), or the net profits above a named amount,
are to be divided between the owner and the agent on the
basis prescribed by the contract. An example of this kind
of contract is found in 204.
179. Treatment of Selling Contracts in the Accounts
Under all forms of selling contracts, the selling price of
lots sold is treated as an asset, and the payment due to the
owner as a liability, although the liability is contingent upon
the completion of the contract made with the purchaser.
For this reason it is advisable to show such liabilities in the
balance sheet as an item by themselves. (See 200, ac-
count No. 21, and 204, account No. 28.) The opening
journal entry is of the following form:
2i6 REAL ESTATE ACCOUNTS
Contracts $ .
To J. Doe, Owner
" Gain on Sales. .
As collections come in, payments are made to J. Doe,
owner, and debited to his account, the balance of which
shows the remaining amount due him for properties covered
by contracts. Care should be taken in drawing the balance
sheet to show that this class of liability is contingent upon
the contracts being completed.
Special conditions are frequently inserted in selling con-
tracts, and it is necessary in each case that the original
agreement between the owner and the agent be examined
by the accountant. Such agreements form a prolific source
of contention, and the greatest care should be taken to insure
the proper recording of all points likely to cause misunder-
standing, such as the land covered, the term of contract,
the method of payment, the sharing of commissions and
expenses, and the nature of any expense to be borne
exclusively by either party.
CHAPTER XXV
ANALYSIS OF A TYPICAL TRIAL BALANCE*
180. Clean Bookkeeping
Bookkeeping has been defined as "a systematic record
of business transactions in a form conveniently available
for reference with a view to ascertaining with the minimum
amount of trouble at any time :
1. The detailed particulars of the transaction under-
taken.
2. Its cumulative effect upon business and its financial
relations to others.
"The ideal of any system of bookkeeping is the maxi-
mum of record with the minimum of labor."
It is proper at this point to lay stress on the importance
of what may be called "clean" bookkeeping, by which is
meant not merely the absence of blots, erasures, and correc-
tions, but clean-cut, definite, and precise entries, so that each
item in the trial balance shows definitely some one thing.
Perhaps one of the most familiar examples of what is
not "clean" bookkeeping is the Merchandise account, for-
merly so often found in the ledgers of mercantile concerns,
in which the debits consisted of:
Purchases
Freight
Drayage
Goods sold and returned
Labor
*A bracketed number preceding a section heading indicates the number under
which the account discussed in that section appears in the trial balance shown on
pages 222-225.
217
2i8 REAL ESTATE ACCOUNTS
Allowances and discounts
Change in inventories
etc., etc.
and the credits included :
Sales
Goods bought but returned by the concern
Discounts and allowances
Inventories
etc., etc.
As the balance of such an account in itself meant noth-
ing, other accounts are now substituted, such as:
Purchase accounts, consisting of debit charges for
goods bought, the only credits being for goods re-
turned to creditors.
Sales accounts, into which are brought credit entries
for all sales, the only debits being goods returned
by customers.
Interest accounts, divided into (i) Interest and Dis-
count Paid, and (2) Interest and Discount Re-
ceived, etc., etc.
The balance of each of these accounts has a definite
meaning. In the purchase accounts and sales accounts, for
instance, the balances show respectively the actual net pur-
chases and sales of the period, a knowledge of which is es-
sential to good management. Such clean-cut accounts are
important to a real estate concern, especially to one doing
a large business in time sales. Attention has already been
called to this matter (Chapter XXI) in connection with
cancellation of contracts.
In like manner, the Real Estate account should be kept
"clean" and should be a debit account, the difference be-
tween the balance of this account and of "Sales" being, in
fact, a perpetual inventory of unsold property. The sales
ANALYSIS OF A TYPICAL TRIAL BALANCE
219
accounts should show the sales divided in such manner as
convenience may suggest ; "Commissions" should be divided
into "Commissions Earned" and "Commissions Paid."
It is possible that immense volumes of business may be
transacted in which commissions "earned" and "paid" are
equal. In such a case, the usual Commissions account, con-
taining commissions earned and commissions paid, would
show no balance, and the trial balance would therefore give
no direct indication of these transactions. Probably the
account as shown in the profit and loss statement would not,
unless analyzed, indicate the business really transacted.
These defects are remedied by a separation of the accounts,
and when this is done all statements taken from the books
show clearly the result of each set of transactions. The
same principle applies to "Interest Earned" and "Interest
Paid," "Options Granted" and "Options Bought," "Rents
Collected" and "Repairs." The keeping of such accounts
adds nothing to the labor, for in either case each item must
be posted once and once only. The advantage of this
method will be further exemplified in connection with the
preparation of monthly reports in Chapter XXVII.
181. A Typical Trial Balance
The trial balance shown on pages 222-225 brings in
examples of all the types of accounts usually required in
real estate accounting. . It affords a convenient basis for the
study of such accounts, by providing examples of the vari-
ous methods of calculating profits, and illustrating the dif-
ficulties or irregularities which may occur. This trial bal-
ance is based on one taken from the books of a concern
operating about thirty subdivision properties. The figures
are left practically as they were found in the course of audit-
ing, and the trial balance as given may therefore be con-
sidered an example from actual practice.
220 REAL ESTATE ACCOUNTS
The method of dissecting accounts on analysis paper, as
shown in connection with the trial balance, is familiar to
accountants and should be clear to any reader. The various
columns are introduced in order to simplify the prepara-
tion of proper schedules to accompany the balance sheet,
and also to prove all new entries made, especially those af-
fecting Profit and Loss, by checking the balance of the
account shown on the sheets against the account in the
ledger after all closing entries have been made.
The statement below is a summary of the trial balance
shown on pages 222 to 225. Its total is, naturally, less than
the total of the trial balance, as sundry accounts have been
closed or adjusted.
SUMMARY
Dr. Cr.
Profit and Loss $99,158.48 $152,170.49
Real Estate 779,356.89
Contracts 568,433.33
Profits in Reserve 361,790.37
Accounts Receivable 1,477.00
Accounts Payable 695.71
Balance Sheet Items 102,804.52 1,036,573.65
$1,551,230.22 $1,551,230.22
182. (i) Accounts Payable (Cr. $3,420)
If business is conducted on a cash basis and all current
accounts are paid immediately on approval, it may not be
necessary to carry the Accounts Payable account through-
out the year; but when a balance sheet is prepared, it is
proper to open such an account in which to enter all unpaid
current accounts payable. Payment of such accounts pay-
able should be made on regular days, weekly or monthly.
In either case, all such accounts as "Pay-rolls" should be
ANALYSIS OF A TYPICAL TRIAL BALANCE 2 2I
closed, if possible, a day or two before the pay day, e.g.,
Thursday evening if Saturday is pay day. This enables
the clerical force to make out the pay-rolls in time to have
them properly checked, distributed, entered, and vouched for
payment. The payment of accounts on other than regular
days should be discouraged, as it leads to the loss of much
valuable time.
183. (2) Advertising (Dr. $12,114.02)
This account should include all charges for newspaper
advertising, pamphlets, maps, and postage thereon, adver-
tising agents, etc. The total is carried to Profit and
Loss.
184. (3) Automobiles (Dr. $1,138.02)
This account is intended to represent the actual value
of motor cars owned by the concern. Three of the cars
being new, no depreciation was taken on them. A fourth
car had been reduced annually by 2$% of its original cost,
and it is believed this is a fair standard rate. All repairs
are charged to the Expense account direct; for if they were
charged to Automobiles account, the calculation of depre-
ciation , would be involved unnecessarily. Some conserva-
tive business men claim that the life of a motor is so uncer-
tain a quantity that the original cost of all cars should be
charged direct to Expense, but this is a rather extreme view
inasmuch as a second-hand car has an actual selling
value.
185. (4) Bills Payable (Cr. $81,340)
A schedule should be prepared showing the items com-
posing the total of this account, the due date of each note
and an indication of the purpose for which it was given,
e.g., "In payment for Barnes land," "Bank loan," etc.
222
REAL ESTATE ACCOUNTS
THE ALPHA
ANALYSIS OF TRIAL
H oi
Z,
TRIAL ]
BALANCE
PROFIT
& Loss
<*
DEBIT
CREDIT
DEBIT
CREDIT
1
Accounts Payable
$3,420.00
?,
Advertising
$12,114 02
$12,114 02
*
Automobiles
1,138.02
400.00
4
Bills Payable
81,340.00
S
Bills Receivable
1,250.00
75.00
6
Brick-yard Royalties
1,300.00
7
Building Green
1,250.00
8
Black
72 50
72 50
9
325.00
in
Cancellation Profits
3 400 00
$3,445.00
11
Capital Stock
305,000.00
}?,
Charity
37.00
37.00
13
Commissions Earned
5,220.00
5,220.00
14
Paid
8,325.00
8,325.66
15
Contracts
165 770 00
16
" Payable
8,002 40
17
Dawes Purchase
8,640 00
18
Directors' Meetings
185.00
185.00
IP
Dividends Unpaid
520.66
20
Eureka Gardens Contracts
2,460 00
21
" Purchase
1 375.00
22
Gains
1,330.00
23
40.00
40 00
24
Expense, General
12,440.00
12,440.00
25
Legal
1,522.00
1,522.00
?6
" Mortgage
548.50
27
Fairmount Contracts
1,915.00
?8
Purchase
1,200.00
29
1,200.00
30
5,795.00
31
88,045.84
17,857.32
32
1 827 42
33
5 378.00
34
1,056.80
395.20
35
985 00
36
Hilton, A B
130.00
37
10 000 00
38
711 28
711.28
39
283.75
40
9,840 00
9,840.00
41
" Paid
4,640.00
4,640.66
42
43
Mortgage Payable ....
11,120.00
120.66
11,120.00
44
2,400.00
2,400.66
45
1 178 10
46
3,529.82
1,400.08
47
925.00
48
61 799 88
49
1 272 11
50
106,902.00
51
83 370 60
52
751 90
53
461 40
461.40
54
55
30 506 00
56
38 840 00
57
25,470.00
io,066.66
58
4 229 04
59
1,580.00
60
10 56P 00
ANALYSIS OF A TYPICAL TRIAL BALANCE
223
LAND COMPANY
BALANCE DECEMBER 31, 1916
REAL
ESTATE
CONTRACTS
[PROFITS IN
1 RESERVE
ACCTS. || ACCTS. II
RECEIV. ''PAYABLE l| BALANCE SHEET ITEMS
DEBIT
DEBIT
CREDIT
DEBIT
CREDIT :! DEBIT
CREDIT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
$3,420.00
$738.02
81,340.00
1,175.00
$1,250.00
325.00
305,000.00
'.'.'.'.'.'.'. |l '.'.'. '.".'.'.""
$165,770.00
8,002.40
8,640.00
52U.OO
2,205.00
1,195.00
$1,210.00
548.50
1,915.00
1,200.00
1,200.00
5,795.00
70,188.52
1,827.42
5,378.00
1,452.00
985.00
$130.00
10,000.00
283.75
120.00
1,178.10
2,129.74
925.00
61,799.88
1,272.11
51,738.11
17,206.71
' 751.90
11,000.00
30,506.00
45,569.04
15,404.00
2,500.00
1,580.00
10,560.00
224
REAL ESTATE ACCOUNTS
THE ALPHA
ANALYSIS OF TRIAL
8
<*
ACCOUNTS
TRIAL BALANCE
PROFIT & Loss
DEBIT
CREDIT
DEBIT
CREDIT
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
Life Insurance
2,120.00
37,467.00
34,057.00
2,120.00
Malvern Hill Contracts
" Purchase
23,022.00
9,922.19
7.25
7.25
Manning, R
212.00
2,000.00
257,422.30
Mortgage Deficiency Account . .
Receivable
45,000.00
5,250.00
3,200.00
3,156.00
in Settlement
480.00
473.40
" Fixtures
5,200.00
" Held
3,400.00
18,842.00
Parkville Contracts
8,725.00
9,796.00
1.87
783.20
275.00
75.00
725.00
783.20
275.00
Petty Cash i
725.00
Profit & Loss !
75,405.10
8,242.10
Profits
8,242.10
1,158.98
1,576.00
587.42
3,402.00
85.00
473,130.13
" " Expense
85.00
Real Estate
5,780.00
5,780.00 ,
1,245.60
280.00
1 245 60
Rinders, T
525.33
210,418.52
.
23,805.00
212,814.00
23,805.00
'
239,657.65
72,388.65
95,580.00
32,850.00
' " Villa Contracts
32,640.00
5,019.86
29,550.00
19,560.00
32,805.00
4,750.00
11,000.00
4,750.00
72,000.00
422.00
472.00
472.00
6,250.00
750.00
398.63
308.15
11,283.00
Taxes
398.63
'
4,450.66
5,220.00
470.00
" " Townley, J. R. !
Treasury Stock j
22,000.00
120.00
7,990.40
$1,621,588.86
$1,621,588.86
$99,158.48
$152,170.49,
ANALYSIS OF A TYPICAL TRIAL BALANCE
225
LAND COMPANY
BALANCE DECEMBER 31, 1916
ESTATE
REAL
CONTRACTS
PROFITS IN
RESERVE
1 ACCTS.
1 RECEIV.
1 ACCTS.
1 PAYABLE
BALANCE
SHEET ITEMS
DEBIT
DEBIT
| CREDIT
I DEBIT
CREDIT
DEBIT
CREDIT
61
i
62
37,467.00
63
34 057.00
64
13,099.81
65
66
$212.00
67
2,000 00
68
257,422.30
69
45 000 00
70
5,250.00
71
2,720.00
72
2 682 60
73
5,200.00
74
3,400.00
75
8,837.6s
1
76
.'.'
3 950.00
77
4,564.18
78
79
80
75 00
81
82
|
75 405 10
83
84
1,158.98
85
694 87
86
3,402.00
87
88
465,580.13
89
90
91
13.71
92
525 33
93
210 418 52
94
95
212,814.00
96
167,269.00
97
107,580.00
98
32,850.00
99
27,620.14
100
35 550 00
101
23 365 00
102
103
104
72,000.00
105
422.00
106
107
108
750.00
109
110
308.15
111
11,283.00
112
4,450.00
113
5,220.00
114
470.00
115
22,000.00
116
120 00
117
7,990.40
$779,356.89
$568,433.33
$361,790.37
$1,477.00
$695.71
$102,804.52
$1,036,573.65
22 6 REAL ESTATE ACCOUNTS
1 86. (5) Bills Receivable (Dr. $1,250)
This account also should be accompanied by a schedule
similar to that mentioned above. Each item should be ex-
amined, and if any one appears to be of doubtful value, it
should be written off to Profit and Loss or to a "Suspense"
account. In the instance given, notes aggregating $75 were,
after consultation with the officers of the company, treated
as worthless.
187. (6) Brick-yard Royalties (Cr. $1,300)
This is a typical royalty account, a brick-yard having
leased a portion of certain property for the purpose of work-
ing a clay bed thereon, paying as rental a specified royalty
on every thousand bricks burned. Monthly statements have
been submitted showing the brick manufactured, and these,
checked against the brick-yard "inventories" and "sales"
records, are found to be correct.
As the working of this clay bed resulted in several large
excavations, the land worked over was rendered useless for
any other purpose. The royalties were therefore credited
to the property in question, thus reducing its "cost" and
providing for an increased profit when the salable part
should be disposed of. If the entire tract had been leased,
such royalties would have been credited in the above manner
until they equalled the book value of the land, and all
amounts in excess of that would be carried to Profits ac-
count.
* 188. (7) Building Green (Dr. $1,250)
This account shows the cost to date of a house which
the concern agreed to build for Mr. Green, the final cost
(not to exceed $1,500) to be charged to his "Contract."
The house not yet being completed, the amount spent stands
as an asset. Since this is an improvement to real estate,
ANALYSIS OF A TYPICAL TRIAL BALANCE
227
the amount thereof is carried in the "Real Estate" column
(58).
189. (8) Building Black (Dr. $72.50)
This account represents a house which it was agreed
should be built for Mr. Black for $2,500, that amount being
included in the mortgage which he has given, and which
was placed originally to the credit of this account. On com-
pletion the house is found to have cost $2,572.50, the excess
of $72.50 being a loss to the company.
This loss having been already incurred and the amount
(as is usual in such cases) being inconsiderable, it is charged
direct to Profit and Loss. It would have been equally cor-
rect to have charged it against Gain on Sales, but a great
number of such cross-entries would tend to obscure the
Gain on Sales account and it is better to charge such
amounts off direct.
.190. (9) Building Brown (Cr. $325)
This account is for a house to be built for Mr. Brown at
a cost of $2,000, which amount was charged to his contract
or mortgage account. The house is not yet completed, and
the unpaid balance of $325 appears among the liabilities.
191. (10) Cancellation Profits (Cr. $3,400)
This account has been credited during the past year with
all payments made on sales which have been cancelled. ( See
153.) These payments having been actually received, the
amount goes to the Profit and Loss account. The entry
described in 200 increases the original amount by $45.
192. (IT) Capital Stock (Cr. $305,000)
The balance of this account should be verified and proved
to be in accordance with the capital stock certificates out-
228 REAL ESTATE ACCOUNTS
standing. (See 296, also 251.) A list of stockholders
should be prepared by the auditor or secretary of the con-
cern for purposes of checking and comparison.
193. (12) Charity (Dr. $37)
The name explains the account, which shows all amounts
given to charity. The total is carried to Profit and Loss.
194. (13) Commissions Earned (Cr. $5,220)
(14) Commissions Paid (Dr. $8,325)
These accounts represent cash receipts and expenditures,
or their equivalents, received by the concern acting as broker,
or paid by the concern to agents \vho have sold its property.
It is far better to keep these in separate accounts (see
181), the balances being carried to Profit and Loss.
195- (15) Contracts (Dr. $165,770)
This account includes all general sales on the instalment
plan, exclusive of those secured by mortgage and of those
described as "subdivision" sales. The balance must agree
with the total of the Contracts accounts shown on the sub-
ledger ; and those contracts must be examined by the auditor
to make sure that all proper cancellations have been made
and that the total includes only "live" accounts.
196. ( 1 6) Contracts Payable (Cr. $8,002.40)
These are contracts made or assumed by the concern, for
which it is responsible. They usually represent the pur-
chase price on properties which have been acquired. If they
are numerous, a sub-ledger must be kept; but when com-
paratively few, the details of each can readily be "picked
out" from the Contracts Payable account in the general
ledger.
ANALYSIS OF A TYPICAL TRIAL BALANCE
229
J97- C 1 ?) Dawes Purchase (Dr. $8,640)
This account represents the purchase price of a tract
acquired from Mr. Dawes. The property is to be improved,
but the plans for this work are not yet complete, and, since
the matter is being held in suspense, the present account is
kept until a final disposition can be made. (For final dis-
position on such accounts, see 221.)
198. (18) Directors' Meetings (Dr. $185)
The principle of paying fees to directors for attending
meetings is spreading in this country, and if it is true that
a thing is worth just what is paid for it, the practice is a
good one. At all events, it tends to insure a better attend-
ance at such meetings, and for that reason is worthy of
adoption. The fees paid are, of course, chargeable direct
to Profit and Loss.
199. (19) Unpaid Dividends (Cr. $520)
Immediately after the close of the previous year, a divi-
dend was declared which amounted to $27,142, and this
amount was debited through the journal to Profit and Loss
and credited to "Unpaid Dividends." As the dividends were
paid the payments were charged from the cash book to this
account, the balance showing the amount remaining unpaid.
A list showing the amounts of all items included in this
balance and the names of those to whom they were due,
accompanied the annual report.
The payment of dividends in a corporation with a large
number of stockholders necessitates the drawing and en-
tering of a large number of checks. It is not necessary that
each of these should pass through the general cash book,
but if they do, a column headed "Dividends" should be pro-
vided. The usual method is to deposit in a special bank
account the amount required to pay dividends, either in
230
REAL ESTATE ACCOUNTS
one sum or smaller sums, as may be convenient, and to
issue against this account special checks marked "Dividend
Check." This renders the checking of this account a simple
matter and tends to "clean" accounts.
200. Eureka Gardens Accounts
(20) Contracts, Dr. $2,460
(21) Purchase, Cr. 1,375
(22) Gains, Cr. 1,330
(23) Expense, Dr. 40
These four accounts relate to a subdivision which is
being handled on a "selling contract" similar to that desig-
nated in 178 as No. i. The subdivision is a small one,
in which there appear to have been included eighteen lots
costing $90 each ($1,620 for all), and selling for a total of
$2,950, thus yielding a gain of $1,330. The collections
amount to $490, leaving due $2,460. Half the collections
($245) having been paid to the owners, there remains
$1,375 to be paid to them as collections are made from the
contract holders.
An examination of the contracts shows that those cover-
ing two lots, on which a total of $45 has been paid, are in
default and the purchasers have stated that they will pay
no more. These contracts were originally for $300. The
following entry is made :
Eureka Gardens Purchase $180
Eureka Gardens Gains 120
To Eureka Gardens Contracts $255
" Cancellation Profits 45
The item for expense being payable by the concern is
written off to Profit and Loss.
ANALYSIS OF A TYPICAL TRIAL BALANCE
231
201. (24) Expense, General (Dr. $12,440)
This account covers such items as:
Office rent
Telephones
Telegrams
Branch office rent and expenses
Motor car repairs
The items chargeable to this account are of great va-
riety. It is well in each case to have a detailed list made
and perhaps written on the head of the ledger account,
showing exactly what items are included. The preparation
of such a list is greatly simplified if a current analysis of
the account is kept on Form 41 (48).
202. (25) Expense, Legal (Dr. $1,522)
This account includes attorneys' fees, together with
recording and other legal fees which cannot properly be
charged to the various customers.
203. (26) Expense, Mortgage (Dr. $548.50)
This account shows all expenditures made on account of
mortgages receivable and chargeable against specific mort-
gages, being entered in the mortgages receivable sub-ledger
as charges to the income account of the various mortgages.
In this account are included such items as paving and other
liens, and very frequently attorneys' and court fees on mort-
gages in the course of foreclosure. The amount is carried
forward as an asset.
204. Fairmount Accounts
(27) Contracts, Dr. $1,915
(28) Purchase, Cr. 1,200
(29) Gains, Cr. 1,200
(30) Expense, Dr. 5,795
232
REAL ESTATE ACCOUNTS
These accounts relate to a tract handled under a selling
agreement of type No. 3 ( 178), covering 5,000 acres,
which has been divided into ten-acre lots. The concern is
to pay all the expense of advertising, etc., and remit to the
owner 50% of all collections until he has received $15 an
acre, when he will convey title to the concern.
This is a recent contract and the work done to date has
been for the most part surveying and developing the land.
At the present time, 8 lots have been sold for $2,400, of
which $485 has been collected. No payments have yet been
made to the owner, and the Purchase account therefore
stands credited with 80 acres at $15 an acre. Attention
may be called to the fact that under this agreement the
concern loses nothing through reduced acreage on account
of streets and roads, inasmuch as the owner is paid only
for the number of acres covered by the deeds he grants.
The whole transaction being so new, all the balances of
the Fairmount Contracts were carried forward into the
balance sheet, the expenses being carried in the "Real Es-
tate" column, as this money represents physical improve-
ments from which there is a reasonable prospect that the
concern will obtain a profit.
205. (31) Gain on Sales (Cr. $88,045.84)
The method of treating this account has been fully de-
scribed in Chapter XIII. On completing the calculations as
there indicated, it is found that of this total, $17,857.32 has
been earned since the last balance sheet, and is therefore to
be credited to Profit and Loss.
206. Grandville Accounts
(32) Contracts, Dr. $1,827.42
(33) Purchase, Dr. 5,378.00
(34) Gains, Cr. 1,056.80
ANALYSIS OF A TYPICAL TRIAL BALANCE
233
These accounts relate to a subdivision owned by the
concern, which was bought some years ago under a "Con-
tract Payable." Analysis of the sub-ledger shows that there
are 108 lots under sale and that the original amount of the
contracts was $7.607. The estimated book value of each
lot is $14. The average profit, therefore, was $56.43 a
lot (say $56), and the gain unearned and to be left in would
be:
1827
7607
X 108 X 56 = $i,452
or more than appears in the Gain on Sales account.
This led to a further investigation and it was found that
there remained unsold 348 lots, which cost $5,378, or $15.45
a lot. This increased price was caused by certain improve-
ments on the property, not considered when the gain on
sales was entered.
As the lots are selling for $100 to $150 each, it is evident
that a cost price of $15.45 is reasonable; and in order to
correct the errors, a charge of $395.20 is made against
Profit and Loss and credited to the Grandville Gains ac-
count, which is now correct.
Note that account No. 33 is in fact a real estate account,
the property being owned by the concern, and could with
propriety have been kept in the real estate ledger. The ac-
count was opened when the property was purchased, and is
kept because all employees familiar with the books have been
accustomed to regard this account as showing the value of
the unsold part of Grandville. Similar remarks apply to
No. 34, which, in fact, is a part of the general Gain on
Sales account.
207. (35) Handbook (Dr. $985)
This account represents the cost of an advertising work
published for free distribution. As few copies have yet left
234 REAL ESTATE ACCOUNTS
the office, the amount is allowed to remain in the balance
sheet.
208. (36) Hilton, A. B. (Dr. $130)
This account represents advances made to a salesman,
and is to be deducted from future commissions. It is typi-
cal of a number of accounts which appear in such trial bal-
ances. The account will be closed when these advances are
repaid.
209. (37) Improvements (Dr. $10,000)
This account is intended to contain all expenditures for
improvements as suggested in 58. As such disbursements
are made they are immediately posted in the property ledger
against the piece of property to which they refer. At the
closing of the books at the end of the fiscal period, the total
amount is charged to Real Estate, and until this time the
balance of the property ledger will equal the Real Estate
account plus the Improvements account. There are sev-
eral very distinct and important advantages (58) in keep-
ing these items in a separate account. In the first place, by
so doing the monthly report will show on its face all such
expenditures. This is always important information ai^is
essential where a fixed sum is to be spent annually on im-
provements. Furthermore, such an account provides auto-
matically a list of all properties so improved, for the main
facts are carried to the ledger accounts as follows :
June 15 Howard Co., Plumbing, No. 862 $346.50
210. (38) Fire Insurance, etc. (Dr. $711.28)
(39) Mortgage Insurance (Dr. $283.75)
The first of these accounts represents the amount paid
by the concern for insurance on its own property against
ANALYSIS OF A TYPICAL TRIAL BALANCE
235
fire and tornado and on rents. Insurance paid on con-
tracts should be charged direct to the various purchasers.
The second account represents cash paid by the concern for
insurance on mortgaged properties. The items composing
it are charged to the respective expense accounts in the
mortgages receivable ledger. It is an asset of the concern
and consequently should appear in its proper place on the
balance sheet.
When damages are collected for insurance other than
against fire, the accounts to be credited vary; but if the in-
surance is for rents, the amount paid by the insurance com-
pany is, of course, credited to Rent account. Damage to
buildings caused by fire or tornado is sometimes repaired by
the insurance companies, or an amount agreed upon may
be paid in cash. In the first case, no entry is required on
the books beyond a memorandum in the rent sub-ledger
stating the facts. In the second case, if repairs have been
made by the concern, the cost of them would naturally be
charged to Repairs account, and the amount received from
the insurance company should be credited to the same ac-
count.
In the event of total loss, where the property is owned
by the concern and is not involved in any time sale, the
insurance received is credited to Property account; but if
the property is subject to a time sale, it must be credited to
the account of the purchase, i.e., either to the contract or
to the principal of the mortgage. If any arrangement is
made with the purchaser to allow him the use of this money
for the purpose of rebuilding, all amounts so advanced
should be debited to the same account as received the
credit.
In cases where the number of total losses is large, it is
advisable to open a special insurance account, to which are
credited all amounts collected for losses.
236
REAL ESTATE ACCOUNTS
211. (40) Interest Earned (Cr. $9,840)
(41) Interest Paid (Dr. $4,640)
These accounts afford another example of the advis-
ability of keeping two ledger accounts for items not infre-
quently kept in one account. "Interest Earned" is credited
with the interest charged to the general contracts, and with
sundry interest which may be collected but which is not
chargeable to "Overdue Mortgage Interest Receivable."
The "Interest Paid" covers all interest paid by the con-
cern on loans, contracts payable, etc., with the exception of
interest on mortgages payable. By keeping two separate
accounts, the trial balance will always show how this im-
portant feature of the business is running.
212. (42) Mortgage Interest Payable (Dr. $11,120)
(43) Overdue Mortgage Interest Payable
(Cr. $120)
These two accounts receive all entries relating to interest
on mortgages payable, the form of entry appearing in 134.
Account No. 43 shows that there is overdue $120 of inter-
est, which is payable by the concern. The "Mortgage In-
terest Payable" is chargeable direct to the Profit and Loss
account, while the "Overdue Interest" appears in the bal-
ance sheet as a liability.
213. (44) Mortgage Interest Receivable (Cr. $2,400)
(45) Overdue Mortgage Interest Receivable
(Dr. $1,178.10)
These items are similar to, but in their nature the re-
verse of, accounts Nos. 42 and 43.
214. (46) Interest Unearned (Cr. $3,529.82)
This account is described in 136 et seq., and refers to
cases where interest is included in the principal of "Mort-
ANALYSIS OF A TYPICAL TRIAL BALANCE
237
gages Receivable" and "Contracts." The method of de-
termining the amount which has been really earned is simi-
lar to that applied to the Gain on Sales account (see Chap-
ter XX). In the case of the account appearing on the trial
balance, it was found that $1,400.08 had been earned, and
this amount is carried into the Profit and Loss account,
the remainder forming one item of the profits in reserve.
215. (47) Judgments (Dr. $925)
This account represents an amount due from a con-
tractor who failed to carry out his agreements. Suit was
instituted and a judgment obtained, which is of record and
which it is believed will ultimately produce the amount of
the debt.
216. Kingslake Accounts
(48) Contracts, Dr. $61,799.88
(49) Purchase (217), Dr. 1,272.11
(50) Gains (218), Cr. 106,902.00
(51) Expense ( 219), Dr. 83,370.60
(52) Lots ( 217), Dr. 75 T -90
(53) Commissions (220), Dr. 461.40
(54) Owner, Dr. 11,000.00
These accounts represent a rather complicated purchase
in which the concern bought a tract of about 12,000 acres,
a part of which was waste land, such as swamps, etc. The
tract was divided into ten-acre lots, and it was agreed that
half the gross receipts should go to the owner until he had
received $4 an acre, after which the concern was to reim-
burse itself for all expense incurred in connection with the
land; any further receipts to be divided, one-fourth going
to the owner and three-fourths to the concern. The tract
was developed several years prior to the taking of the pres-
ent trial balance and practically all of it was sold, the total
238 REAL ESTATE ACCOUNTS
available acreage being 7,500 acres; the remaining acreage
consisting of roads and unsalable land. An examination of
the Contracts account showed that all cancellations had been
made and that the balance represented "live" contracts.
217. (49) Kingslake Purchase (Dr. $1,272.11)
(52) Kingslake Lots (Dr. $751.90)
This account represents the cost of adjoining land which
the concern thought it wise to buy and for which it paid in
cash upon receiving a deed. As this land is included in the
general plat, it seemed most convenient to carry it in this
manner. Account No. 52, Kingslake Lots, is also a real es-
tate account and represents the cost of a number of resi-
dence lots which were platted from a part of this second
purchase. Both accounts Nos. 49 and 52 are therefore real
estate accounts and are carried out in that column.
218. (50) Kingslake Gains (Cr. $106,902)
It will be noticed that the gains are larger than the con-
tracts outstanding. This is accounted for by the fact that,
during previous periods, no part of the Gains account had
been carried to Profits, but was held in reserve on account
of the heavy expense account. This gain is therefore on
all sales made to this date, while the Contracts account has
been continuously reduced by the monthly payments of
purchasers. The method of determining and dividing these
gains is shown in 219.
219. (51) Kingslake Expense (Dr. $83,370.60)
The balance of this account was so large that it called
for special examination. It was found that all the items
were for expenditures covered by agreements, under which
they are repayable to the concern. In the case of one item
of $11,000, necessary to perfect the title, the vendor being
ANALYSIS OF A TYPICAL TRIAL BALANCE 239
short of funds, the concern had paid it under a separate
agreement that it was to be deducted from the purchase
price. As it was desired to dispose of the Expense account
as quickly as possible, the following journal entries were
made :
Kingslake Owner ........................ $11,000.00
To Kingslake Expense ............. $11,000.00
For cost of perfecting title, chargeable
to the owner.
Kingslake Gains ......................... $55,163.89
To Kingslake Expense ............. $55,163.89
To charge Gains account with items of
expense which prove to be uncollectible.
It will be seen that the above entry properly disposes of
the expense by reducing the profits on this tract. An
analysis was then made of the sub-ledger trial balance and
it was found that the original amount of outstanding con-
tracts, including 541 lots, was $132,901.50; and that the
average profit per lot was $205.66. The unearned "Gain
on Sales," therefore, in round figures was as follows :
X 54i X $205-66 = $51,738.1 1
$132,900
Therefore, $55,163.89 was earned ; and instead of carry-
ing this into Profit and Loss, it was deducted from the ex-
penses which were thereby reduced to $17,206.71, which
amount was allowed to stand as a real estate expenditure to
be deducted from next year's earned profits.
220. (53) Kingslake Commissions (Dr. $461.40)
This amount, being a part of the expenses chargeable
against the property, was written off to Profit and Loss
account.
240
REAL ESTATE ACCOUNTS
221. Lad ore Accounts
(55) Contracts, Dr. $30,506.00
(56) Purchase, Dr. 38,840.00
(57) Gains, Cr. 25,470.00
(58) Expense, Dr. 4,229.04
(59) Commissions (222), Cr. 1,580.00
(60) Town Lots ( 223), Dr. 10,560.00
This group of accounts shows the transactions relating
to a subdivision owned by the concern. It consists of five
separate purchases, each of which was originally carried in
the same manner as the Dawes account ( 197). Upon
closing the books, these were consolidated and it was found
that 693 acres had been bought at a total cost of $51,833.
These various purchases were surveyed, platted, and di-
vided into 567 lots of about one acre each, the difference
being accounted for by streets, parks, etc. A part of the
tract was subdivided into 181 city lots 50 X 100 feet, known
as "Ladore Townsite." The estimated cost of these lots was
$2,250, which was deducted from the total cost, leaving the
net cost of the one-acre lots at $49,583, or $87.45 a lot. In
calculating profits, etc., this in round figures is called $90.
The balance of Expense account, $4,229.04, was found
to cover cost of road-making and other permanent im-
provements. Further improvements were contemplated
which, it was estimated, would cost $2,500, making a total
sum of $6,729.04. As it was desired that the total cost of
these expenses should be added to the purchase price of the
land, the following journal entry was made:
Ladore Purchase $6,729.04
To Ladore Expense $6,729.04
This being posted to the Expense account, left a credit
balance of $2,500 as a reserve for future expenditures.
ANALYSIS OF A TYPICAL TRIAL BALANCE
241
These operations brought the cost up to $56,312.04, or
$99.32 a lot, which is called $100 when calculating profits.
An analysis of the sub-ledger shows that 185 lots were sold,
yielding an average profit of $102 per lot. As the original
amount of these sales was $37,370, the unearned profits are
as follows:
$30,506 x igs
$37,370
This amount deducted from the gain of $25,470 leaves
$10,066 to be carried to Profit and Loss.
222. (59) Ladore Commissions (Cr. $1,580)
These are commissions promised to agents who have
made time sales. The liability for them is therefore con-
tingent upon those sales being completed.
223. (60) Ladore Town Lots (Dr. $10,560)
At the beginning of the sale of Ladore lots, the concern
offered to give a townsite lot to each purchaser of an acre
lot. This arrangement is not uncommon and calls for
special entries on the books. The most convenient method
is to add the cost of the free lots to the cost of the purchased
lots and deduct the sum from the price paid by the purchaser.
It is important that the record of lots selected to be so
given away should be clearly marked on the plats; and, al-
though the deed is not given until all the purchase money is
paid, the records should be very clear in showing that these
lots are reserved and therefore cannot be included as an
asset. The form of journal entry would be as follows :
Ladore Contracts
To Ladore Purchase ..
Town Lots.
Gains .
242 REAL ESTATE ACCOUNTS
In addition to the 181 townsite lots above mentioned,
over 227 lots were purchased which had already been
platted, giving a total of 408 lots at a cost of $11,114,
which, in calculating profits, is figured at $30 a lot.
224. (6 1 ) Life Insurance (Dr. $2,120)
It has been the custom of late years with many owners,
especially in connection with subdivision properties, to guar-
antee that, in event of the decease of any purchaser during
the life of a contract, the owner will convey to the estate of
the deceased the property covered by the contract. This is
loosely described as "Life Insurance," although the account
actually represents the unpaid balances on contracts of pur-
chasers who have died since the books were last closed. The
entire amount is chargeable direct to Profit and Loss as an
expense, there being no advantage in complicating entries
by keeping a separate life insurance account for each sub-
division.
CHAPTER XXVI
ANALYSIS OF A TYPICAL TRIAL BALANCE
(Continued)
225. Malvern Hill Accounts
(62) Contracts, Dr. $37,467.00
(63) Purchase, Dr. 34,057.00
(64) Gains, Cr. 23,022.00
(65) Expense, Dr. 7.25
This group of accounts represents a subdivision which
was acquired in a manner different from any of those here-
tofore discussed. The Malvern Hill Land Company bought
a considerable tract which was platted into town lots and
placed on sale. A number of lots were sold and contracts
given, some of which were paid up and deeds given to the
purchasers. As some members of the Malvern Hill Com-
pany wished to retire, that company offered its entire hold-
ings, consisting of unsold lots and open contracts, to the
concern whose trial balance is under discussion, which
bought them for a lump sum. When analyzed, it is found
that the purchase price consisted of two items, one of which
was the aggregate balances of the open contracts bought,
and the other the cost of the unsold lots. As time went on,
a number of the original contracts were cancelled, and the
question arose as to whether the property thus acquired
should be taken back on the books at the balance of the
contract (which was really the cost price to the concern),
or whether they should be taken in at the average cost per
lot, the market value of one of these lots being the same
as that of an adjacent lot which had not been sold.
243
244
REAL ESTATE ACCOUNTS
It was decided that, in the case of a cancelled contract,
the land should be taken in at the balance remaining unpaid
on the contract, and this practice was continued for a year
or more. The auditors then pointed out the confusion which
was arising from having adjacent lots with widely diver-
gent cost prices, and, when the balance was prepared, a list
of all unsold lots was made. This showed that there were
1,392 of these lots and that they had cost $34,057.72, an
average of about $25 a lot. Instructions were accordingly
given that, in the event of any contract being cancelled,
whether made originally by the Malvern Hill Company or
by the concern, the entry therefor should be the following :
Malvern Hill Lots (cost price of a lot, $25)
Malvern Hill Gain
To Malvern Hill Contracts..
It will probably be admitted that in a contract of this
description where the number of lots is large, this is a safe
and conservative plan to follow, although objection may be
raised as to its technical accuracy. In this particular case
it was found that the amount of the contracts assumed by
the concern, of which the balances were $37,467, had
originally been $88,090 ; that they comprised 500 lots, which,
taken on at a cost of $25 each, would then show an average
profit of $150 per lot. These figures show that there are un-
earned profits amounting to $32,218, which is more than
the total amount left in the Gain on Sales account, the dis-
crepancy having been caused by the fact that many of
the lots were originally bought at the face value of the
contract.
226. Malvern Hill Determination of Profits
As the existing contracts were more than half paid up,
the question then arose as to what profit should be car-
ANALYSIS OF A TYPICAL TRIAL BALANCE
245
ried to Profit and Loss, and the following plan was adopted
as a compromise, recourse being had to the third method of
calculation described in 173. In this case the unearned
profit was represented by the following fraction:
- - X $ 2 3> 022 (balance of Gains account) = $9,790
$88,090
This would yield an unearned profit of $9,790 and an
earned profit of $13,229. From this amount there was de-
ducted 25% as a reserve, i.e., $3,307.25; and $9,922 was
carried to Profit and Loss. The selection of 25% as the
margin of safety was, of course, arbitrary, but the examples
given in 145 will show that it is a safe margin. Technical
objections may be raised as to the accuracy of this method,
and it may be claimed that the Gains account should have
been increased to bring it up to $32,218, the difference being
charged against Profit and Loss. However, inasmuch as
the contracts have been more than half paid, it was, in this
instance, considered more equitable to follow the plan out-
lined above.
227. (66) Manning, R. (Cr. $212)
Mr. Manning is a customer who owns a number of
houses from which the concern collects rent, making monthly
returns to him. $212 represents the net balance of rents
for the last month, which has not yet been paid to him,
and which is therefore carried among the accounts pay-
able.
228. (68) Mortgages Payable (Cr. $257,422.30)
(69) Mortgages Receivable (Dr. $45,000)
The nature of these accounts has been described in 52
and Chapter XVI and the details of the total are shown in
246 REAL ESTATE ACCOUNTS
a schedule accompanying the balance sheet, giving the fol-
lowing particulars of each mortgage :
Record number
Name of the holder
Property covered
Date due
Amount
229. (67) Mortgage Deficiency Account (Cr. $2,000)
(70) Mortgages in Settlement (Dr. $5,250)
These accounts represent mortgages receivable to the
amount of $5,250, which are in course of foreclosure and on
which it is expected that a loss of $2,000 will be sustained
(121).
230. (71) Office Furniture (Dr. $3,200)
(72) Office Fixtures (Dr. $3,156)
These accounts represent the actual cost of the articles
described, less an annual depreciation at the rate of 15%
on the outstanding balances. The amount of depreciation
is frequently a matter of argument between the owners and
the auditors. Where the item covers such articles as type-
writers, adding machines, etc., probably 25% would be a
fair proportion ; on the other hand, where the principal items
are solid fixtures, safes, etc., 15% seems to be a reasonable
amount.
2 3i- (73) Options Granted (Cr. $5,200)
(74) Options Held (Dr. $3,400)
"Options Granted" are described in 130. A state-
ment accompanies the balance sheet, giving the number,
name, property, and amount of each such option. Inas-
much as they have not yet been turned into contracts and
ANALYSIS OF A TYPICAL TRIAL BALANCE
247
charged to Real Estate, this amount is carried in the bal-
ance sheet as a separate liability.
"Options Held" are options on real estate obtained by
the concern and are included in the "Real Estate" column,
as it is expected that each of them will be exercised and that
the amount paid for the option will be deducted from the
purchase price to be paid for the respective properties. In
the event of any option lapsing, the amount paid therefor is
chargeable directly to Profit and Loss.
232. Parkville Accounts
(75) Contracts, Dr. $18,842.00
(76) Purchase, Cr. 8,725.00
(77) Gains, Cr. 9,796.00
(78) Expense, Dr. 783.20
(79) Commissions, Dr. 275.00
This group of accounts refers to a tract "which was
handled under a selling contract. The entire tract consisted
of 240 lots, to be sold at prices shown in a schedule at-
tached to the original agreement. The concern had the ex-
clusive sale, was to pay all expenses attached to the selling,
and was allowed to retain all profits made above the
schedule prcies.
The tract lay in a town several hundred miles from the
home office and the subdivision was therefore managed
through a local office, where detailed accounts of the con-
tracts and sales were well and accurately kept. Until a few
months before the date of this trial balance, no sub-ledgers
for these contracts had been kept in the main office; and
upon the auditors' comparing the balance of outstanding
contracts, as shown on the general ledger, with a special
report from the sub-office, it was found that the general
ledger balance was some $10,000 in excess of the sub-ledger
balance in the branch office. When the matter was investi-
248 REAL ESTATE ACCOUNTS
gated, it was found that a number of reports had failed to
reach the bookkeeper, and had therefore not been placed
upon the general ledger.
For several years past, the auditors had recommended
that a duplicate sub-ledger be kept in the main office, and
that weekly detailed reports be rendered from the branch
office to keep up this duplicate set of books, which could
then be compared periodically with the branch office books
and the accuracy of both insured. When this serious dis-
crepancy was discovered, the concern agreed to adopt their
auditors' suggestions, and since that time, such troubles
have not appeared. Upon closing the books it was necessary
to make the following journal entry:
Parkville Purchase $4,775.00
Parkville Gains 5>775-o
To Parkville Contracts $10,004.95
" Parkville Profits 545-Q5
This brought the balances of the outstanding contracts
down to $8,837.05. An analysis showed the original
amount of these contracts to have been $20,320, while the
original profit had been $10,495. The unearned profits were
therefore $4,564.18, which was slightly more than the
amount left in the Profits account. The difference of
$1.87 was then charged against the Profit and Loss
account.
It will be noted that the Purchase account is here a credit
account and represents a liability contingent upon the com-
pletion of the contracts by the purchasers.
233. (80) Petty Cash (Dr. $75)
The method of keeping petty cash is described in 14.
$75 was the amount originally placed in the hands of the
cashier.
ANALYSIS OF A TYPICAL TRIAL BALANCE
249
234. (81) Postage (Dr. $725)
This title explains itself, it being understood that this
amount is the current office postage and does not include
the amount paid for sending out circulars in quantity, which
should be charged to Advertising. It is an excellent prac-
tice to keep a mailing book, in which is entered each letter
mailed, with the date, name, and amount of postage. This
not only affords a check on the stamps, but gives a useful
record of letters sent to the mail ; also if the postage is to be
divided among different concerns, departments, or indi-
viduals, this book affords a ready means of doing so.
235. (82) Profit and Loss (Cr. $75,405.10)
The amount shown by this account is, of course, the
balance of Profit and Loss carried over from the last bal-
ance sheet. Some bookkeepers have a habit of making en-
tries in this account from time to time during the fiscal
period. This is not a good practice, the chief objection
being that it affords an opportunity to hide entries or to
distract notice therefrom. Any entry showing a loss or
gain should be posted to some active account included in the
"Earnings" or "Expense" schedule ( 82). Entries to
Profit and Loss during the fiscal period tend also to confuse
an analysis of the trial balance.
236. (83) Profits (Cr. $8,242.10)
The nature of this account and the method of keeping
it are explained in 82. As it represents profits already
earned, the entire amount is transferred to the credit of
Profit and Loss.
237. Prospect Park Accounts
(84) Contracts, Dr. $1,158.98
(85) Gains, Cr. 1,576.00
250
REAL ESTATE ACCOUNTS
(86) Purchase, Dr. 3,402.00
(87) Expense, Dr. 85.00
This group of accounts relates to subdivision property
owned by the concern, the value of the unsold part being
carried in the above Purchase account. At the time of
making this purchase, the concern agreed that one T. Rind-
ers (who participated in making the purchase) should have
one-third of the profits as they were realized. His part of
the account is treated more fully later under accounts Nos.
91, 92. The analysis of the sub-ledger shows that the open
contracts, on which the balances are $1,158.98, cover 14
lots, which were originally sold for $2,195 and which cost
the concern $63 each. From these figures, it is evident that
the average selling price was about $157, and the net profit
$94 per lot.
With these facts, the unearned profit is as follows :
^H X 14 X $94 = $694.87
$2,195
If we deduct this amount from the balance of the Gains
account ($1,576), it is found that the earned profits are
$881.13, of which two-thirds ($587.42) is credited to Profit
and Loss; one-third ($293.71) is credited to account No.
91 (Rinders, T.). $694.87 remains in the Reserve Profits.
The Expense account is carried to the debit of Profit and
Loss. The Purchase account is verified by ascertaining
that there remained unsold 54 lots, which, at $63 each,
amount to $3,402.
238. (88) Real Estate (Dr. $473,130.13)
This account represents (as explained in 64) the actual
cost of all real estate owned by the concern, except such
subdivision tracts as are carried in separate accounts as for
example, "Prospect Park Purchase." In making up the
ANALYSIS OF A TYPICAL TRIAL BALANCE
251
balance sheet, a schedule of this real estate should be pre-
pared giving the book number of each piece, sufficient de-
scription to identify it, and the value at which it is carried
on the books. It is to be noted that the amount shown in
the trial balance $473,130.13
is reduced in the balance sheet by the follow-
ing items :
Brick-yard Royalties (account No.
6) $1,300.00
Stumpage (account No. 107) .... 6,250.00 7,550.00
Leaving a balance in Real Estate of . . $465,580.13
239. (89) Rent Account (Cr. $5,780)
The Rent account is described in Chapter XIV. The
balance here shown represents the rents collected during the
period from properties owned by the concern, and is there-
fore to be credited to Profit and Loss.
240. (90) Repairs (Dr. $1,245.60)
This is an offset account to account No. 89, and repre-
sents the total amount spent by the concern on repairs to its
property during the period. The total amount is charged to
Profit and Loss. It is the practice of some offices to carry
the rent and repairs in one account in the ledger. The bal-
ance of such account will therefore show the net rents col-
lected. Experience has shown, however, that it is advan-
tageous to carry these accounts separately, as the monthly
trial balance will then exhibit the exact amount collected
and the exact amount spent. These separate amounts are
much more important than is the difference between them,
and the latter figure can very readily be obtained when the
separate balances are shown.
252
REAL ESTATE ACCOUNTS
241. (91) Rinders, T. (Dr. $280)
(92) Rinders, T., Reserve (Cr. $525.33)
These accounts are opened in connection with the Pros-
pect Park property, accounts Nos. 84 to 87. As stated, Mr.
Rinders is to be credited with one-third of the profits as
the concern makes them. It is shown above that the average
selling price was $157 and yielded an average gross profit
of $94. The form of journal entry bringing sales of this
property on the books, is as follows :
Prospect Park Contracts $157.00
To Prospect Park Purchase $63.00
" Gains 62.67
" Rinders, T., Reserve 3!-33
It will be seen that, by opening this Rinders' reserve
account, there is shown a liability of the concern for the
portion of the profits due him. Such entries had been made
in the past, and at the last closing of the books one-third
of the profits earned had been debited to this account, leav-
ing $525.33 still unearned. There is now charged to this
account the amount already shown as Rinders' share of the
unearned profits ($293.71), which is brought in by the
following entry :
Prospect Park Gains $293.71
To Rinders, T $293.71
For amount of unearned profits to date.
This entry will change the balance of account No. 91
into a credit account of $13.71, which is carried into "Ac-
counts Payable" column.
The principle of the above account is simple: The re-
serve account is credited with one-third of the profits as
each sale is made, and is debited with the same proportion
of the profits as they are earned. The balance, therefore,
ANALYSIS OF A TYPICAL TRIAL BALANCE
253
shows a liability to Mr. Rinders which is contingent upon
the contracts being carried out. As these profits are
realized, Rinders' personal account is credited with "Profits
Earned" and debited with the sundry cash advances made
to him from time to time ; the balance thus shows the cash
due or excess payment made him. If instead of merely an
interest in the profits, Rinders had also had an interest in
the title of the land, the procedure would have been some-
what different; e.g., if "Real Estate" showed the full value
of the lot, it would be necessary to open another credit ac-
count for Rinders as owner, crediting him with his interest,
and entries regarding the profits would probably be similar
to those indicated above.
242. (93) Robinson, J., Trustee (Cr. $210,418.52)
This is one of the various trust accounts so often found
on the books of real estate concerns. In this particular case
the concern had acquired a large number of properties, as-
suming the mortgages outstanding against them many
of w r hich were overdue. Mr. Robinson entered into an
agreement with the concern that, in order to facilitate the
financing of the concern, he would buy certain of these
mortgages at their face value with interest to the date of
his purchase, and would treat the total of the sum so spent
as one account, on which he would expect 6% interest,
payable half-yearly. All these mortgages had been entered
in the mortgages payable ledger as having been assumed by
the concern, and a notation was made on the account for
each mortgage bought by Mr. Robinson of the fact that it
was assigned to him, a journal entry being made as
follows:
Mortgages Payable $
Mortgage Interest Payable
To J. Robinson, Trustee $
254
REAL ESTATE ACCOUNTS
These remarks are, of course, applicable only to this par-
ticular form of trusteeship. Another common form is where
a trustee advances a certain amount of money, which is
credited to him and which is to be repaid out of the pro-
ceeds of the sale of certain lands. In such cases he should
be credited with the amounts advanced, and it is usually
well to open two accounts somewhat similar to Nos. 91 and
92, in one of which the trustee receives credit for the whole
amount, and in the other he is credited with the amounts
as they become payable to him and is charged with the
cash payments made on account thereof, the balance from
this latter account being transferred periodically to the first
account.
243. (94) Salaries (Dr. $23,805)
(106) Stationery and Printing (Dr. $472)
These accounts speak for themselves, and the entire bal-
ance in each case is carried direct to the debit of Profit and
Loss.
244. South Bay Accounts
(95) Farm Contracts, Dr. $212,814.00
(96) " Gains, Cr. 239,657.65
(97) " Purchase, Dr. 95,580.00
(98) Villa Contracts, Dr. 32,850.00
(99) " Gains, Cr. 32,640.00
(100) " Purchase, Dr. 29,550.00
(101) Front Purchase, Dr. 19,560.00
(102) Expense, Dr. 32,805.00
(103) Commissions, Dr. 4,750.00
(104) Reserve, Cr. 72,000.00
These accounts refer to a large tract of land purchased
by the concern some years before, consisting of farming
ANALYSIS OF A TYPICAL TRIAL BALANCE 255
country, a frontage along a main highway, and also a
valuable water frontage. The tract was therefore divided
into three distinct tracts, viz. :
1. South Bay Farms
2. Villa Sites
3. Water-Front
the original cost being divided pro rata on the basis of the
respective areas. For two or three years considerable sums
were spent for road-making, surveying, draining, and other
improvements, and these, as representing physical improve-
ments, had been added to the cost of the property up to
the time of the last balance sheet. The total amount so
expended was divided among the three subdivisions in pro-
portion to the amount of work done on each tract.
On the other hand, the water-front was not developed in
any way, although some improvements for making roads
through it were added to the original cost. As the final im-
provement of this tract was likely to require a great deal
of expensive work, such as bulkheading, and as the profits
from the South Bay tract a year ago had been considerable,
$72,000 was taken from the South Bay profits and held in
reserve for future improvements of the water-front, none
of this latter having been sold.
The contract accounts are carried into the "Contracts"
column, and the three purchase accounts are carried into
the "Real Estate" column.
The Expense account ($32,805) was considered care-
fully and, as the owners felt that the property was now
fairly well established, it was decided that about one-third
($11,000) should be charged direct to Profit and Loss and
that the remaining $2 1 ,805 should be distributed as follows :
To Farms Purchase $12,000
" Villa Site Purchase 6,000
" Water-Front 3,805
256 REAL ESTATE ACCOUNTS
The entire "Commissions" account (No. 103) was
charged to Profit and Loss.
The Farms "Gains" results were arrived at as follows:
The open contracts covered 699 farms, which had
yielded an average profit of $392.23, the total original sales
having been $344,069. These figures showed an unearned
profit of $167,269 (which amount is retained in the balance
sheet) and earned profits of $72,388.65.
The Villa contracts show that the open contracts in-
cluded 221 lots, which had yielded originally $34,196, the
original sales having been $40,671. These give the fol-
lowing figures:
X $34,i96 = $27,620.14
$40,671
which is kept in the reserve profits, leaving $5,019.86 to
be carried to Profit and Loss.
245. (105) Sperry, J. M. (Dr. $422)
These are advances made to a traveling agent, and can
be charged into Accounts Receivable.
246. (107) Stumpage (Cr. $6,250)
This account represents various sums collected during
the preceding period as stumpage on timber lands owned
by the concern, each item being credited on the real estate
ledger to the particular tract involved. The total amount
is now credited to Real Estate as being a reduction in the
cost of the land. If the value of the land had been divided
as indicated in 99, these collections would have been so
credited until they equalled the book value of the stumpage,
all amounts in excess thereof being credited to Profits
account.
ANALYSIS OF A TYPICAL TRIAL BALANCE
257
247. (108) Suspense (Dr. $750)
The uses to which a suspense account can properly be
put are many, and it is usually necessary to have such an
account on the books. In this particular instance the main
office had paid a draft for $750 made by the sub-office just
before the closing of the books, and the exact disposition
thereof had not been ascertained.
248. (109) Taxes (Dr. $398.63)
This account is carried direct to the debit of Profit and
Loss, as it represents taxes for a past period.
249. (no) Mortgage Taxes (Dr. $308.15)
This represents taxes paid for mortgagors by the con-
cern, and is carried among the assets on the balance sheet.
250. Torbay Heights Accounts
(in) Contracts, Dr. $11,283.00
(112) Purchase, Cr. 4,450.00
(113) Gains, Cr. 5,220.00
(114) Townley, J. R., Cr. 470.00
This is a small subdivision property which is handled
on a selling contract, the owner receiving $166.66 for each
lot ; 50% of gross receipts being paid to him from month
to month, the concern paying all expenses and the profits
on cancellations being divided equally between the owner
and the concern. In this case, Purchase account is credited
with $166 on each lot shown in the usual way, and each
month a journal entry is made in the following form :
Torbay Heights Purchase $
To Torbay Heights, J. R. Townley $
For 50% of the gross receipts during the
month of on this property.
258
REAL ESTATE ACCOUNTS
Mr. Townley's account is charged with cash payments
as they are made to him. The balance of the Purchase ac-
count is therefore a liability contingent on the completion
of the contracts, while Townley's account shows the actual
liability existing at any time, and which at the date of the
balance sheet amounted to $470, and is carried in the "Ac-
counts Payable" column.
There is one particular complication in this account
which does not appear upon its face. Among the open con-
tracts several are included which are really dead, but which
the concern has not cared to cancel inasmuch as the terms
of the original agreement have expired and they hope to
find some other purchasers and thus realize their profit.
The analysis of the sub-ledger shows that the balance
of the open contracts represents in all 60 lots, the average
selling price being $369.16, and the average profit $202.50.
The unearned profit is therefore as follows :
2 3 X 6o X $202.50 = $6,189.09
$22,150
It will be noticed that this is a larger amount than that
shown in the Gains account, but, in view of the fact that
there is a good prospect of the concern's re-selling the can-
celled contracts, this amount is allowed to remain in the
reserve, no part of it being carried to Gains.
251. (115) Treasury Stock (Dr. $22,000)
It had been the practice of this particular concern dur-
ing past years to accept its own capital stock in payment
for its real estate, and in this way it has recovered $22,000
of the stock originally issued. This amount is therefore
carried in its own account and appears on the balance sheet,
where it is deducted from the original issue of the stock.
ANALYSIS OF A TYPICAL TRIAL BALANCE
252. ( 1 16) Cash Superintendent (Dr. $120)
This account represents an amount of money for cur-
rent expenses, placed in the hands of the superintendent of
one of the subdivisions, the account on the general ledger
remaining unchanged from month to month. Such an ac-
count is best kept in a manner similar to that used for
petty cash ( 14), except that in this case there are likely
to be sundry receipts from other sources, such as the sale
of wood or old lumber, etc. The most convenient form of
record is the superintendent's cash book, described in 15.
253. (117) Cash in Bank (Dr. $7,990.40)
This account represents balances in several banks, which
have, of course, been verified by comparison of the cash
book with the respective bank pass-books. As no cash ac-
count is carried in the ledger ( 13), these balances are
brought direct from the cash book to the trial balance.
254. Preparation of Balance Sheet
Having now considered and classified all the items ap-
pearing on the trial balance, the preparation of the balance
sheet is a simple matter, provided its nature and purposes
are clearly understood. The balance sheet may be said to
consist of the figures obtained above, arranged in a logical
manner. There are, however, certain points in regard to
this arrangement which require some discussion and which
will therefore be taken up in Chapter XXVIII.
CHAPTER XXVII
THE TRIAL BALANCE AND MONTHLY STATE-
MENTS
255. The Purpose of a Monthly Trial Balance
All good bookkeepers take off frequent trial balances,
and many hours are sometimes occupied in the search for
small errors in posting, adding, or balancing. When this
trial balance is completed, what does it prove? There has
always been an impression, denied in words but admitted
in practice, that it proves the books to be correct. It goes
without saying that such proof cannot be so easily secured.
It is, in fact, only obtained by means of a complete audit,
and, very often, a still further examination and analysis
is required.
The proof afforded by a trial balance is merely nega-
tive. If the debits do not equal the credits, it is proof that
one or more errors exist. Their equality may be said to
prove nothing, for there could be errors without number
and, provided the total of the errors on each side were
equal, the books would still "be "in balance." It may there-
fore be said that the usual form of trial balance conveys
comparatively little information ; it shows a series of bal-
ances or results, but considerable further examination and
information are required before the true meaning of these
results can be obtained.
256. The Monthly Statement
These acknowledged facts show that a large amount of
labor is expended to obtain something of comparatively
260
MONTHLY STATEMENTS 26 1
small value, or, rather, something of which little practical
use is made. This condition prevails in so many well-con-
ducted offices as to indicate an ignorance of the proper use
to be made of the figures furnished in a trial balance, and
hence a waste of labor in this connection labor which
brings together quantities of material from which valuable
and helpful statements might be constructed, but which is
left unused.
The remedy for this condition may be found in the form
of statement described in the present chapter, which is now
coming into general use. It calls for no more labor than
the trial balance but yields results which are often invalu-
able. Such a statement differs from a mere trial balance
in two essentials :
1. The accounts, instead of forming one long list in the
order of ledger folios, are classified and grouped into
"profit-yielding" accounts, "sales" accounts, "expense" ac-
counts, etc., each particular group of accounts carrying its
own totals.
2. In addition to the balance of each account on the
date of the statement, there are shown in two separate
columns the total debits and the total credits which have
been posted to each account during the month, or other
period, covered by the statement.
The grouping enables the management to get a sys-
tematic and comprehensive idea of the entire business, while
the entry of debits and credits shows in brief the business
transacted since the last trial balance.
257. Advantages of the Monthly Statement
Inasmuch as such a statement shows all ledger balances,
it is a trial balance ; it is also much more, as \vill be seen
if we consider a few of the accounts shown in the state-
ment on pages 267 to 270.
2 62 REAL ESTATE ACCOUNTS
"Advertising" shows a debit balance of $12,1 14.02. The
monthly columns show that of this amount $783.03 has
been spent during the last month.
"Real Estate" with a debit balance of $483,130.13 is seen
to have increased (probably owing to purchases or can-
cellations) by $855, and has been decreased (probably by
sales) by $148.52. In such a case, a reference to the ledger
will quickly enable one to ascertain the exact cause.
"Bills payable" shows that there are outstanding notes
amounting to $81,340; that during the month $11,889.44
has been paid off and $10,000 has been borrowed.
"Contracts" account shows that new contracts to the
amount of $8,539.55 have been made during the month,
while $7,229.04 has been credited by cash allowances and
cancellations.
By grouping the accounts, we learn that our total net
expenses for the month have been $7,832.57 ($7,880.12
$47.55) and, for the period, $84,682.38.
The value of such information presented clearly and
regularly to a management, is so obvious that further com-
ment is unnecessary.
258. Method of Preparing the Monthly Statement.
On pages 267 to 271 the same trial balance is shown
as was analyzed in Chapters XXV and XXVI. To the figures
there shown have been added the total debit and total credit
appearing in each account during the last preceding month.
These totals are quickly obtained if the form of general
ledger shown in Form 7 ( 17) is used. The accounts are
grouped as follows:
A. General Accounts
B. Expense
C. Earnings
D. Real Estate
MONTHLY STATEMENTS
263
E. Selling Contracts
F. Contracts
G. Profits in Reserve
H. Summary
etc., etc.
An examination of each group of accounts shown in the
statement on pages 267 to 271, will show that it contains all
entries relating to that class, and the totals give the total
of such transactions. The grand total of the summary
agrees with the total of the trial balance given on pages
222 to 225. In practice, the bookkeeper usually has a num-
ber of blank forms typed in manifold, each one of these
manifolded forms containing all the accounts in one classi-
fication. When this is done the time required to take off
the monthly statement is not appreciably greater than that
required for the regular trial balance.
It is often said by managers of real estate concerns in-
terested in time sales, that it is impossible to show the
amount actually earned in any one year, especially if that
year be an early one in the history of the concern while the
expenses and development are still increasing and when
few sales have been completed. With monthly statements
such as are outlined above, and with proper treatment of
profits from time sales, it is possible to approximate very
closely not only the earnings of a year, but the earnings of
each month.
259. Determination of Earned Profits.
Let us consider the methods by which such results may
be obtained. It will be seen that all general expenses are
included under Group B. The figures are actual and require
no explanation. They include current expenses in con-
nection with subdivisions, e.g., Parkville expenses; while
those expenses pertaining to improving and developing
264 REAL ESTATE ACCOUNTS
specific tracts are included in Group D (Real Estate), and
regarded as an increase of investment. It is evident that
discretion must be used in such classification. The value of
these monthly estimates must, in fact, depend largely on
the judgment of those who prepare them. They are not
intended for publication, nor even for the stockholders, but
are prepared for the personal guidance of the executive
officers. Conservative lines should therefore be followed
in their construction, or otherwise, they may, instead of
guiding, actually mislead and deceive. Probably the best
results can be obtained if these statements are prepared by
the auditor of the concern, whose training and independent
viewpoint give him the advantage over the bookkeeper for
work of this kind.
Having ascertained the monthly expenses, how are the
profits to be determined ?
Group C gives the definite earnings which appear on the
face of the ledger and which require no further calculation.
Other profits consist of a certain proportion of the cash col-
lected from time sales of all classes, and the determination
of these profits calls for the exercise of judgment and for
some calculation.
It has been shown in 144 that the amount of the
profit earned depends solely upon the amount of cash col-
lected. This amount can be determined from the ledger
or the columnar cash book. The figures of Group J ( 270)
give these receipts for the month covered by the example.
Group K (271) is framed on the experience of a
number of years, during which it has been found that 46%
of the cash collections on time sales consist of earned
profits. This percentage will, of course, vary with each
business, and will reach as high as 46% only when a large
proportion of the sales consists of development properties.
In or^er to be quite on the safe side, only 45% of the cash
265
receipts shown in Group J is taken, and with this figure
Group K gives very closely the actual profit earned in the
month. If the special ledger (Form n, 20, or Form 15,
23) is used, this figure, instead of being estimated, will be
determined accurately.
In Group I are shown all sales made during the month,
with the gains thereon. This is not used in ascertaining
earned profits, but is useful as showing the business done;
e.g., a comparison of the net amount of new sales with the
cash collections in Group J will show whether the business
is growing or diminishing; while a comparison of these
figures month by month shows whether or not a satisfactory
standard is being maintained.
There are two other methods of calculating the pro-
portion of cash receipts representing earned profits, as
follows:
i. A comparison of the amount of outstanding con-
tracts of. any one class with the gains thereon will show the
ratio between collections and earned profits. For example :
Eureka Gardens Contracts =$2,460
Gains =$1,330
1,330 X 100
The fraction - -. represents the number of cents
2,460
in each dollar collected, which is earned profit.
The collections on each subdivision may, if desired, be
treated in this way, in which event Group F could be made
to include a column showing the ratio applicable in each
case; and the earned profits and their total could be sub-
stituted for figure $8,115.84 in Group K (271).
In the case of profits from general contracts and from
mortgages receivable, the profits as a whole are fairly uni-
form from year to year ; and as the general Gain on Sales
account is composed of gains from these two sources, very
2 66 REAL ESTATE ACCOUNTS
close figures can be obtained by a method similar to that
described above.
2. In the event that the subdivision sub-ledger of
Form 1 5 ( 23 ) is kept, no calculation is necessary beyond
mere addition or subtraction; for if the totals of the "Re-
serve Realized" columns be taken off on an adding machine
at the end of each month, the difference between the totals
for any two months gives at once the amount of profits
earned or realized.
260. Comparison of Monthly Statements
While each of these monthly statements is of value
per se, their value as a whole increases each month on ac-
count of the ready means they afford of observing the fluc-
tuations of the business and of making monthly compari-
sons. If made honestly, these monthly statements give re-
sults which may be relied upon. It may be argued, es-
pecially by those not accustomed to use them, that they
are in the nature of estimates. This objection, however,
does not affect their value for comparative purposes; for
if the statements for a series of months are drawn on the
same basis, it is evident they must show correctly the com-
parison between the business transacted in the respective
months.
By means of loose leaves in a "ring" binder, it is not
difficult to file these monthly statements in such a manner
as to afford a ready means of comparison, and also to dis-
pense with the monthly writing of the headings of the vari-
ous accounts. Under this plan the accounts are typed on
the right-hand side of sheets of the full width (say 8 X 14
inches) and the monthly figures may be written on sheets
5 X 14 inches, containing four money columns and hori-
zontal ruling to correspond with the full sheets, the typing
on which will be visible at all times.
MONTHLY STATEMENTS
261. A. General Accounts
267
MONTH'S BUSINESS
Acct.
Nos.
ACCOUNTS
BALANCES
Dr.
Cr.
i
3
4
5
ii
16
19
26
35
36
39
43
45
47
66
67
68
69
70
7i
72
80
82
9i
92
93
104
105
108
no
114
us
H7
Accounts Payable
Automobiles
Bills Payable
Bills Receivable
Capital Stock
Contracts Payable
Dividends Unpaid
Expense, Mortgage
Handbook
Hilton, A. B.
Insurance, Mortgage
Int. Overdue Mtge. Pay.
" Rec.
Judgments
Manning, R.
Mortgages Defic'y Acct.
Payable
Receivable
in Settlement
Office Furniture
" Fixtures
Petty Cash
Profit and Loss
Rinders, T.
" Reserve
Robinson, J., Trustee
So. Bay Reserve
Sperry, J. M.
Suspense
Taxes, Mortgage
Townley, J. R.
Treasury Stock
Cash
Dr.
\
I
Cr.
$3,420.00
$400.00
10,000.00
$1,138.02
$11,889.44
81,340.00
1,250.00
305,000.00
8,002,40
520.00
899.00
50.00
548.50
985.00
130.00
283.75
79.85
80.00
53.71
807.00
1 20.00
420.00
1,178.10
925.00
125.00
2I2.OO
2,OOO.OO
257,422.30
2,225.00
8,000.00
239.33
45,000.00
5,250.00
3,200.00
3,156.00
75-00
32.00
75,405.10
280.00
525.33
2IO,4l8.52
72,000.00
5,462.00
7,460.00
252.00
422.00
750.00
308.15
12.40
224.00
470.OO
22,000.00
8,110.40
8,111.40
9,895.27
$29,638.09
$37,079.31
$94,989-92
$1,016,855.65
268
REAL ESTATE ACCOUNTS
262. B. Expense
MONTH'S BUSINESS
Acct.
Nos.
ACCOUNTS
BALANCES
Dr.
$783-03
Cr.
2
12
14
18
23
24
25
38
4i
42
53
59
61
65
78
79
81
87
90
94
103
106
109
Advertising
Charity
Commissions Paid
Directors' Meetings
Eureka Gardens Expense
Expense, General
Legal
Insurance
Interest Paid
Mortgage Payable
Kingslake Commissions
Ladore Commissions
Life Insurance
Malvern Hill Expense'
Parkville Expense
Commissions
Postage
Prospect Park Expense
Repairs
Salaries
So. Bay Commissions
Stationery and Printing
Taxes
Dr.
$12,114.02
37-00
8,325.00
185.00
40.00
12,440.00
1,522.00
711.28
4,640.00
11,120.00
461.40
Cr.
164.50
70.00
1,316.97
91546
84.60
22.00
436.53
807.00
28.00
60.00
175-00
112.46
35-90
75.00
50.06
240.00
146.95
1,888.70
195-00
133.85
138.21
$20.00
15.00
9-50
$1,580.00
2,120.00
7-25
783-20
275-00
725.00
85.00
1,245.60
23,805.00
4,750.00
472.00
398.63
3-05
$7,880.12
$47-55
$86,262.38
$1,580.00
263. C. Earnings
MONTH'S BUSINESS
Acct.
Nos.
ACCOUNTS
BALANCES
Dr.
Cr.
$322.00
130.00
39-07
420.00
10
13
40
44
83
89
Cancellation Profits
Commissions Earned
Interest Earned
" Mortgage Receivable
Profits
Rents
Dr.
Cr.
$3,400.00
5,220.00
9,840.OO
2,400.00
8,242.IO
5,780.00
$168.75
804.00
$168.75
$1,715.07
$34.882.10
MONTHLY STATEMENTS
264. D. Real Estate
269
MONTH'S BUSINESS
Acct.
Nos.
ACCOUNTS
BALANCES
Dr.
Cr.
$105.00
6
7
8
9
17
30
33
49
51
52
56
58
60
63
73
74
86
88
97
IOO
101
102
107
Brickyard Royalties
Building, Green
Black
Brown
Dawes Purchase
Fairmount Expense
Grandville Purchase
Kingslake Purchase
Expense
" Lots
Ladore Purchase
Expense
" Town Lots
Malvern Hill Purchase
Options Granted
Held
Prospect Park Purchase
Real Estate
So. Bay Farm Purchase
" " Villa
Front
" " Expense
Stumpage
Dr.
Cr.
$1,300.00
$540.00
$1,250.00
72.50
416.00
8,640.00
680.00
325.00
8,640.00
5,795-00
5,378.oo
1,272.11
83,370.60
75L90
38,840.00
4,229.04
10,560.00
34,057.00
!
173-75
..
40.00
200.00
240.00
90.00
489.40
380.00
5,200.00
400.00
3,400.00
3,402.09
483,130.13
95,580.00
29,550.00
19,560.00
32,805.00
855.00
148.52
1,223.20
28.02
682.00
6,250.00
$11,944.75
$3,386.14
$861,643.28
$13,075.00
265. E. Selling Contracts
MONTH'S
BUSINESS
Acct.
Nos.
ACCOUNTS
BALAN
CES
Dr.
Cr.
21
Eureka Gardens Purchase
Dr.
Cr.
$i ^7=; oo
28
Fairmount Purchase
1,200.00
76
Parkville "
8 725 oo
$195.62
112
Torbay Heights Purchase
4,450.00
$10=5.62
Si^.r^o.oo
270 REAL ESTATE ACCOUNTS
266. F. Contracts
MONTH'S BUSINESS
Acct.
Nos.
ACCOUNTS
BALANCES
Dr.
$8,539-55
Cr.
$7,229.04
80.00
IOO.OO
85.70
2,166.55
630.00
1,835.70
549.55
337.50
4,840.45
719.75
391.25
IS
20
27
32
48
55
62
75
84
95
98
in
Contracts General
Eureka Gardens
Fairmount
Grandville
Kingslake
Ladore
Malvern Hill
Parkville
Prospect Park
So. Bay Farms
" " Villas
Torbay Heights
Dr.
$165,770.00
2,460.00
1,915.00
1,827.42
61,799.88
30,506.00
37,467.00
18,842.00
1,158.08
212,814.00
32,850.00
11,283.00
Cr.
3,420.30
550.00
4,175-00
8,600.00
150.00
$25.434.85
$18.065.49
$578.603.28
267. G. Profits in Reserve
MONTH'S BUSINESS
Acct.
Nos.
ACCOUNTS
BALANCES
Dr.
Cr.
22
29
31
34
46
50
57
64
77
85
96
99
H3
Eureka Gardens Gains
Fairmount Gains
Gain on Sales
Grandville Gains
Interest Unearned
Kingslake Gains
Ladore Gains
Malvern Hill Gains
Parkville Gains
Prospect Park Gains
So. Bay Farms Gains
" " Villas Gains
Torbay Heights Gains
Dr.
Cr.
$1,330.00
1,200.00
88,045-84
1,056.80
3,529.82
106,902.00
25,470.00
23,022.00
9,796.00
1,576.00
239,657-65
32,640.00
5,220.00
$200.00
$3,140.00
290.60
2,260.00
350.00
3,685-60
183.18
S,376.8o
121.08
101.08
$865.76
$14.034.38
$530.446.11
MONTHLY STATEMENTS
268. H. Summary
271
MONTH'S
BUSINESS
BA
LANCES
Dr.
$29,638.09
7,880.12
1687=;
Cr.
$37,079.31
47-55
I 7m 07
General Accounts
Expense
Earnings
Dr.
$94,989-92
86,262.38
Cr.
$1,016,855.65
1,580.00
34 882 10
11,944-75
195.62
3,386.14
Real Estate
Selling Contracts
861,643.28
13,075.00
15.750.00
25.414.85
18,965.49
Contracts
578,693.28
865.76
14,934.38
Profits in Reserve
C7Q.446.il
$76,127.94
$76,127.94
$1,621,588.86
$1,621,588.86
269. I. Sales and Cancellations
Sales
New
Contracts
Contracts :
General $8,539-55
Kingslake 3,420.30
Ladore 550.00
Malvern Hill 4,175.00
South Bay Farms 8,600.00
" Villas 150.00
Profits
$3,140.00
2,260.00
350.00
3,685.60
5,376.8o
121.98
$25,434.85 $14,934.38
Cancellations
Contracts :
General $400.00 $290.00
Kingslake 340.30 200.60
South Bay Villas 190.00 101.98
$930.30 $682.58
272 REAL ESTATE ACCOUNTS
270. J. Cash Receipts for the Month
Contracts :
General $7,229.04
Cancelled 400.00 $6,829.04
Eureka Gardens 80.00
Fairmount loo.oo
Grandville 85.70
Kingslake $2,166.55
Cancelled 340.30 1,826.25
Ladore 630.00
Malvern Hill 1,835.70
Parkville 549-55
Prospect Park 337-5O
South Bay Farms 4,840.45
" Villas $71975
Cancelled 100.00 529.75
Torbay Heights 391.25
$18,035.19
271. K. Earned Profits Cash Receipts
It has been shown in 144 that earned profits vary
directly with, and depend solely upon, the cash receipts.
An analysis of the accounts of the concern for the previous
year shows that the earned profits on contracts were taken
as 45% of the cash receipts from those contracts.
The cash collections on contracts shown
above are $18,035.19
45% of this is $8,115.84
To this we add the earnings in "C" $1,715.07
168.75 1,546.32
Making total earnings $9,662.16
The expenses per "B" are $7,880.12
47-55 7.832.57
Leaving net earnings for the month $1,829.59
MONTHLY STATEMENTS
273
In the above examples it will be noticed that taxes,
insurance, and interest are included with the other expenses.
In some instances, where these amounts can be definitely
stated for the whole year, it is better to eliminate them
from the current expense account, transferring them to
Group A (General Accounts) ; and then, on Group K,
deduct one-twelfth of the annual amount of each of these
items. The wisdom of this course depends, of course, upon
individual circumstances.
CHAPTER XXVIII
THE BALANCE SHEET, THE ANNUAL
REPORT, AND SCHEDULES
272. Nature of the Balance Sheet
The term "balance sheet" is the sole reminder in modern
accountancy of what in former days was regarded as an
essential function, viz., that of "balancing" the accounts.
At the end of a fiscal period all the accounts remaining on
the ledger, after closing the profit and loss account, were
entered in the balancing account, and from it were opened
all the accounts for the succeeding period. In other words,
all accounts went in on one side and came out on the other
unaltered by a dot.
Of this practice only the name survives. It is mentioned
here to remind the reader that the word "balance" has two
entirely distinct meanings in the expressions "balance sheet"
and "trial balance," and to indicate the cause for that
distinction.
As we have seen, the trial balance is a list of ledger
balances. The balance sheet is a statement of the accounts
formerly passed through the balancing account. In practice
today, however, the balance sheet is not, strictly speaking,
a list of balances, but a statement compiled after all the
nominal accounts have been brought together in a profit
and loss account, or revenue account, and after all inven-
tories have been taken. The accounts still remaining on
the ledger show the "unfinished business" of the concern.
These balances are then put in the form of a statement of
assets and liabilities at a given moment, together with
274
THE BALANCE SHEET AND SCHEDULES
2/5
such reserve, surplus, or profit and loss accounts as bring
the two sides of the statement to an equality.
273. Continental and English Forms of Balance Sheet
The general form of balance sheet known as the Con-
tinental form (or, in Scotland, as the Scotch form), places
the assets on the left-hand and the liabilities on the right.
The English form reverses this, but is seldom used in this
country except in statements for use in England. The
difference between the two forms may possibly be traced
back to the balancing account, as it has been suggested that
under the English method the accounts are shown as taken
into the balancing account, while the Continental form
shows them after they have been taken out of that account.
It is more probable that the English practice has been
brought about solely by the income tax acts of Parliament,
which convey the impression that the forms of returns
prescribed were prepared by those who were authorities on
some subject other than that of accountancy.
Inasmuch as the Continental form of balance sheet is
in general use throughout the United States, it is followed
in this volume, especially as it appears more logical and
more convenient to show any one class of accounts on the
same side of the balance sheet and the trial balance.
274. Arrangement of Balance Sheet Items
The balance sheets of transportation companies, banks,
trust companies, insurance companies, etc., are regulated by
statute or by custom, and need not be considered here. In
all balance sheets, however, it is desirable that some
uniformity of purpose, if not of arrangement, be observed.
Many different orders of procedure have been laid down
for the items of the balance sheet and, unfortunately, there
is no Herald's College clothed with authority to decide
276 REAL ESTATE ACCOUNTS
which shall prevail. The form given on pages 278, 279 is
based upon those principles which appear to the writer to
be the most strongly founded.
Regarding the assets, which, as a rule, are of a more
varied nature than the liabilities, the weight of practice
prescribes that the arrangement be based either upon the
importance or the liquidity of the various items.
If we arrange in order of liquidity, "Cash" will head
the list ; yet there are few cases in which the cash appearing
on the balance sheet is important as compared with other
items. Similar conditions are likely to exist as to other
quick assets, as, for example, "Bills Receivable," the final
result being that if the items are marshalled in order of
liquidity, the more important items may be found scattered
throughout the statement instead of being brought together.
To obviate this, the order of importance is preferable and
is here adopted.
In doing so, however, it must not be forgotten that the
quick assets should be clearly shown by themselves, for it
is frequently in them that the banker may have his chief
or only interest. These can be shown as indicated on pages
278, 279, without interfering in any way with the main
arrangement.
275. Schedules Accompanying a Balance Sheet
It is evident that if all items were shown on the balance
sheet the very purpose of that sheet would be defeated, for
its conciseness would be lost. For this reason totals are
used, the details composing these totals being shown in
accompanying schedules, which must therefore be regarded
as part of the balance sheet. Such schedules include:
A. REAL ESTATE. The items of this schedule are
taken from the property ledger and show book number,
description, and book value (or cost).
THE BALANCE SHEET AND SCHEDULES
277
B. MORTGAGES RECEIVABLE. The items of this schedule
are taken from the sub-ledger, and show the book number
of each mortgage, and the name, due date, rate of interest,
amount, and book number of the property concerned. This
statement may also show in a separate column the total
charges of all kinds standing against each mortgage and
shown on the balance sheet given on pages 278 and 279.
C. CONTRACTS OUTSTANDING. This schedule is a list
of the balances of the sub-ledger. It may be well to show
the book number of each piece of property involved, and
any overdue items may be noted thereon.
D. BILLS RECEIVABLE. This schedule is taken from
the ledger or the bills receivable book, showing name of
make, due date, and amount.
E. SUNDRY DEBTORS. This schedule comprises all
those debtors appearing in the general ledger and in the
balance sheet ; names and amounts should be given, together
with a brief description of any items calling for special
remark.
F. CASH. This schedule consists of a list of bank bal-
ances when accounts are kept with several banks. As a
rule these details are shown on the balance sheet itself
rather than on a special sheet.
G. MORTGAGES PAYABLE
H. CONTRACTS PAYABLE
I. BILLS PAYABLE
J. SUNDRY CREDITORS
The schedules G-J should show items similar to those
in schedules B, C, D, and E.
276. Form of Balance Sheet
The balance sheet of the Alpha Land Company is shown
on the following pages. This is given complete, but is
followed by the same balance sheet in condensed form.
2 7 8
REAL ESTATE ACCOUNTS
THE ALPHA
BALANCE SHEET
Assets Sch.
Real Estate, at cost A $779,356.89
Less Options Granted 5,200.00 $774,156.89
Mortgages Receivable, Principal B $45,000.00
Mortgage Expenses B $548.50
Insurance B 283.75
" Interest B 1,178.10
" Taxes B 308.15 2,318.50
Total, Good Mortgages Receiv-
able $47,318.50
Mortgages in Settlement $5,250.00
Less Mortgage Deficiency Ac-
count 2,000.00 3,250.00
Contracts Outstanding C 568,433-33
Total Time Sales Outstanding,
Net 619,001.83
Bills Receivable D $1,175.00
Sundry Debtors E 1,477.00 2,652.00
Equipment :
Automobiles $738.02
Office Furniture 2,720.00
" Fixtures 2,682.60 6,140.62
Sundries :
Suspense Account $750.00
Handbook 985.00 i,735.oo
Cash:
Petty Cash $75.oo
Deposited with Bankers F 8,110.40 8,185.40
$1,411,871.74
THE BALANCE SHEET AND SCHEDULES
279
LAND COMPANY
DECEMBER 31, 1916
Liabilities Sch.
Capital Stock Issued $305,000.00
(Authorized $500,000)
Less Treasury Stock 22,000.00 $283,000.00
Robinson, J., Trustee $210,418.52
Mortgages Payable, Principal.. G 257,422.30
" " Interest . . 120.00
Contracts Payable unpaid pur-
chase money on properties in-
cluded in Real Estate Account H 8,002.40
Total "Real Estate" Liabilities.. $475,963.22
Bills Payable J $81,340.00
Sundry Creditors K 695.71
Unpaid Dividends 520.00
Accounts Payable 3,420.00
Total Current Liabilities 85,975.71
Purchase Contingent Liability
due only on completion of
sales included in Time Sales
Contract Account:
Eureka Gardens $1,195.00
Fairmount 1,200.00
Parkville 3,950.oo
Rinders, T 525-33
Torbay Heights 4,450.00 11,320.33
Total Liabilities, other than
Capital Stock 573,259-26
Total Liabilities "$856,259.26
Reserve and Undivided Profits :
Uncompleted Bldgs., Brown. $325.00
Commissions, Ladore 1,580.00
Expenses, Ladore 2,500.00
South Bay 72,000.00 $76,405.00
Reserve Profits L $361,790.37
Less due Kingslake owner... 11,000.00 350,790.37
Profit and Loss Account, bal-
ance brought forward $75,405.10
Profits for the period M 53,012.01 128,417.11
Total Reserve and Undivided
Profits 555,612.48
$1,411,871.74
280
REAL ESTATE ACCOUNTS
THE ALPHA LAND COMPANY
CONDENSED BALANCE SHEET DECEMBER 31, 1916
Assets
Real Estate Unsold $774,156.89
Mortgages and Con-
tracts 619,001.83
Bills Receivable i,i75-OO
Equipment 6,140.62
Sundry Debtors, etc 3,212.00
Cash 8,185.40
$1,411,871.74
Liabilities
Capital Stock Outstand-
ing $283,000.00
Mortgages and Con-
tracts Payable 475,963.22
Bills Payable 81,340.00
Sundry Creditors 4,115.71
Purchases (Contingent
Liability) 11,320.33
Dividends Unpaid 520.00
Total Liabilities $856,259.26
Reserve, Fees, Improve-
ments and Taxes.... 76,405.00
Profits in Reserve 350,790.37
Profit & Loss and Un-
divided Profits 128,417.11
$1,411,871.74
It has been said above that a balance sheet is not strictly
a collection of ledger balances, and several examples of
the fact are found in the form on pages 278, 279. For
example, the first item of "Real Estate" is reduced by the
sum received for options, which must be treated as purchase
money until the options expire. Other instances appear in
"Mortgages in Settlement" and "Capital Stock"; and in
each case it will be seen that a clearer statement is obtained
by the methods followed than if the various items had been
placed separately. It will also be seen that the sub-totals
of the balance sheet show clearly on the one side the total
real estate owned and the total unpaid balances on all
time sales; while, on the other side, they show the capital
stock liability, the current, the contingent, and the total
liabilities.
THE BALANCE SHEET AND SCHEDULES 2 8l
277. Schedules to Accompany Annual Report
We now come to another class of schedules, which,
though accompanying a balance sheet, are not so much a
part of it as of an annual report. The form of such a
report must vary with the nature and size of the business,
with various existing legal requirements (as is so fre-
quently the case in reports of English corporations), and
with the individuality of the person preparing it.
It goes without saying that a report must be truthful,
but truth is many-sided and may be expressed in different
ways. In describing the forms for an annual report, there-
fore, dogmatism as to details must be laid aside, and the
following suggestions are made merely to indicate the
general requirements of a complete report.
In considering this report it is assumed that the concern
reporting is a corporation in which many stockholders are
interested, and it is intended that the report shall be suffi-
ciently complete to enable the officers to answer any
legitimate questions which may be put at a stockholders'
meeting. Apart from this, however, a complete tabulation
of a year's results is of value on account of the minute
examination of each account which it compels, and which
often brings to light matters that have been omitted or over-
looked. In addition, a complete report has value in suc-
ceeding years as a convenient reference for purposes of
comparison; if well prepared, it almost obviates reference
to the books themselves.
The basis of the- report is, of course, the balance sheet
and its accompanying schedules. The report should give
any further explanations which may be advisable, should
give prominence to points requiring attention, and perhaps
contain suggestions for guidance in the future.
The schedules accompanying a report include such state-
ments as the following:
282 REAL ESTATE ACCOUNTS
Cash Receipts, classified by months and by sources.
Disbursements, classified by months and by distribu-
tions.
Sales, classified by months and by divisions ; e.g., cash,
mortgage, contract, etc.
Expense accounts of all kinds, analyzed by months.
These statements are particularly illuminating when, in
addition, they compare the figures for the current year with
those for preceding years.
The preparation of the report of the president or of the
directors does not lie with the accounting department, still
the report of that department should contain all such in-
formation as, in the judgment of the accountant, is neces-
sary to exhibit clearly the business. The duty of an account-
ant to make suggestions depends almost entirely upon the
nature of his engagement and the duties he has undertaken ;
these vary in the United States according to the wishes of
the particular board or of the individual officer through
whom the engagement is made.
CHAPTER XXIX
REAL ESTATE AUDITS
278. Real Estate Inventories
Before entering upon the details of auditing real estate
accounts, it is well to consider the points wherein such an
audit differs from that of a mercantile or manufacturing
concern. In a general way, the differences may be indi-
cated by the one word "inventories."
The duties of auditors in connection with the inven-
tories of the ordinary business concern are no safe guide in
the audit of a real estate concern, for the reason that, as a
rule, the manner of taking inventories is different. The
accounts corresponding to the usual inventories are those
which appear in the balance sheet under the heads of Real
Estate, Mortgages, Contracts, etc. ; and a real estate con-
cern when preparing its balance sheet does not send out a
stock clerk to list its holdings by actual count and measure-
ment, but depends upon the records in the office itself.
279. Verification of Real Estate Assets
In the last-named respect, a real estate audit resembles
that of a bank or a trust company; and it is evident that
any bank auditor would be guilty of grave dereliction of
duty if he failed to satisfy himself by minute investigation
that the securities and other assets (i.e., the inventories of
the institution) were as represented.
An important difference exists, however, between the
audit of real estate assets and the audit of the assets of a
bank. The verification of real estate assets must not only
283
284 REAL ESTATE ACCOUNTS
include proof that all the assets claimed are really held, but
should also show that no such asset is used illegitimately.
Stress is laid upon this latter point for two reasons :
1. The customs prevailing in the handling and record-
ing of real estate render the illegitimate use of
assets unusually easy.
2. Past experience has shown that this point has been
frequently overlooked by auditors and that such
oversight has resulted in grave losses to clients.
The frauds possible under existing conditions may re-
sult from carelessness and ignorance, but arise chiefly from
dishonesty on the part of those responsible ; and, while it is
not intended to attempt any catalogue of the frauds com-
mon or possible in real estate transactions, the illustrations
cited in the present chapter will indicate certain dangers
which exist.
In the case of financial securities, any change of owner-
ship, and more especially any hypothecation of such securi-
ties, usually requires the documents themselves to be placed
in the hands of the lender or of his representative. This
condition does not apply to real estate. An owner pledg-
ing a piece of property in any way usually retains posses-
sion of the documents showing his title to the property.
The possession of such papers does not therefore prove a
clear title, as does usually the possession of a bond. Again,
when mortgages are satisfied, a "satisfaction piece" is
usually given, and it is by no means an unknown thing for
the mortgagor not to insist upon the return of the original
mortgage. For these and similar reasons, it is of the first
importance that the auditor satisfy himself that all money
received from or on account of real estate is properly shown
on the cash book, mortgage books, and on the real estate
ledger itself.
REAL ESTATE AUDITS 285
280. Examination of Records
If further evidence of the nature and condition of titles
is required, it is usually practicable to have the proper
county or other official furnish periodical lists of all papers
recorded with him in which the name of the concern ap-
pears. Such a list would enable an auditor to verify almost
completely all transactions regarding the purchase and
mortgaging of property. The word "almost" is inserted
with intent, as, if fraud were deliberately planned, fictitious
changes of ownership might be arranged in order to pre-
vent the name of any mortgagor appearing on record twice.
This possibility, however, can be met by having the lists
prepared by an outside abstract company, and having them
cover all entries relating to lands in which the concern is
interested.
Contracts are frequently not recorded, and their veri-
fication is considered later in 290.
281. Mortgage Frauds
Another fraud frequently practiced is the multiplying of
mortgages on the same piece of property. This can be ef-
fectively guarded against by proper entries on the real es-
tate ledger, by the record of each mortgage, and by refer-
ence to the periodical lists of the above-mentioned record-
ing officials.
Cases have occurred in which books, records, and ac-
counts appeared to be in perfect order, and auditors there-
fore granted favorable certificates, which were, however,
based solely on the financial records and an accompanying
certificate. For each loan included in the assets there was
a mortgage technically correct in all details, but it was not
considered necessary to bring the financial transactions on
to the tract books or plat books, and, in the case of a large
business with some hundreds of mortgages outstanding,
2 86 REAL ESTATE ACCOUNTS
the auditors failed to discover that certain lands were cov-
ered by one, two, or even three mortgages.
282. Details of an Audit
The complete audit of such a concern as is represented
in the typical trial balance shown in Chapter XXV would
include a verification of the following classes of accounts:
Cash Receipts
Cash Disbursements
Real Estate Owned
Mortgages Receivable, Principal, and Interest
Contracts
Equipment
Sundry Debtors
Capital Stock
Treasury Stock
Trustees' Accounts
Mortgages Payable, Principal, and Interest
Contracts Payable
Bills Payable
Sundry Creditors
Purchase Accounts
Unpaid Dividends
Rents
Reserve Accounts
Reserve Profits
Profit and Loss Account
Branch Offices
Subdivisions :
(a) Earned Profits
(b) Profits in Reserve
(c) Cost of Unsold Lots
(d) Condition of Open Contracts
REAL ESTATE AUDITS
287
283. Methods of Conducting an Audit
Owing to the number of schedules, trial balances, calcu-
lations of earned profits, verification of subdivision prop-
erties, etc., the working sheets of an audit accumulate very
quickly if the concern is a large one, and it is important
that some means of quick reference be provided. The fol-
lowing method of audit is therefore suggested :
The ledger balances are entered on analysis paper bound
together in book form, and are numbered consecutively as
in the typical trial balance. All working sheets, whether
plain or ruled, should be of uniform size, say the regular
journal paper, and all adding machine work should be done
on such sheets, running several columns to the page, rather
than on the usual narrow machine paper which may result
in yards of unmanageable ribbon.
Each working sheet is numbered with the account num-
ber, and all sheets relating to that account are numbered
consecutively, the account number appearing to the left
of the sheet number. For example, the sheets relating
to Kingslake contracts, the account number of which is
48, would be numbered in proper order, 48-1, 48-2, etc.
On completion of the audit, all these sheets are arranged
in numerical order, bound together, and filed for reference.
284. Audit of Cash Receipts
The general cash receipts should be compared, item by
item, with the carbon copies of the receipts given to the
parties paying this cash, noting especially that each entry
has been credited in the appropriate column and that the
sources of the payments are correctly given; e.g., property
numbers, mortgage numbers, and contract numbers. This
comparison checks all receipts into the cash book. The
"Bank" column of the cash book should be checked with
the bank pass-books, and all additions should be verified.
2 88 REAL ESTATE ACCOUNTS
The total cash receipts must equal the total amount de-
posited in the banks, as stated in 13, and no variation,
however slight, should be allowed to pass until satisfac-
torily explained.
The further checking of receipts to their proper accounts
in the sub-ledgers will be discussed in 286 ct seq.
285. Audit of Cash Disbursements
As all disbursements are made by check, the returned
checks themselves afford satisfactory proof of the expendi-
ture of the various amounts shown. These checks should
be signed by both the cashier and the treasurer, or some
other officer who does not have the handling of the actual
currency. The distribution of these amounts demands con-
stant watchfulness on the part of the auditor, who should
also see that each check or voucher check, as the case may
be, is approved by the proper officers and supported by suf-
ficient vouchers.
The bank pass-books should be balanced at the close
of each month, and the balances compared with those of
the cash book. It is a good practice for the bookkeeper
invariably to show on the cash book itself each month the
reconciliations with the banks, in some such form as the
following :
Memo. :
Bank pass-book $7,102.45
Cash book balance $6,832.10
Add checks not presented :
No. 21 12 $110.06
2114 25.50
2116 104.25
2117 30.60 270.35
$7,102.45
REAL ESTATE AUDITS 289
The enforcement of this rule insures the accuracy of
the balances carried forward and saves auditors consid-
erable time in their work.
In some cases, such as special examinations and balance
sheet audits, the auditor should obtain a letter from the
bank verifying the pass-book balance.
286. Audit of Property Ledger
As already stated, the careful auditing of the property
ledger is a most important part of the auditor's work. He
is not responsible for the actual value of real estate, nor for
the validity of the titles thereto, nor is he called upon to
give any certificate thereon. He should, however, see that
the books show the actual cost of each piece to the concern,
and that all certificates required by the rules of the concern,
such as appraisers' valuations, attorneys' certificates of title,
etc., are in order. He should also see that the accompany-
ing papers of value, such as title policies, abstracts of title,
fire insurance policies, etc., have been duly received, or at
least that definite responsibility for them rests upon some
official.
It is important to see that properties covered by mort-
gages, especially mortgages receivable, are entered in their
proper places. This not only enables those in charge to care
for taxes on these properties, but enables the auditor to
satisfy himself that, so far as these records show, the mort-
gages are not duplicated.
The entry of contracts is equally important. If omitted,
such assets may be duplicated by inclusion in the Real Es-
tate account as well as in the Contracts account. In other
words, when any disposition is made of a piece of property,
whether by cash sale, time sale, exchange, option, or any
other method, that property should immediately be taken
out of the property ledger.
290
REAL ESTATE ACCOUNTS
287. Appraisals of Real Estate
It is not unusual to engage expert appraisers to value
lands, and these values are frequently shown on balance
sheets in memorandum form. The auditor should compare
such certificates with the property ledger, if he is to certify
that these valuations apply to the property shown on the
books he is auditing. It must always be borne in mind
that the only rule to follow, and one to which there are few
exceptions, is that which requires the books to show always
the actual cost of property. (See Chapter X.)
Should values appear to have depreciated, it is some-
times wise to open a depreciation account similar to the
Mortgage Depreciation account, in which to carry tem-
porarily the apparent depreciation. Should actual values
be known to be less than the book value so that there is no
reasonable hope of avoiding a loss, ordinary good manage-
ment would insist that the loss be allowed for on the books
either by charging the loss direct to Profit and Loss ac-
count, or through a Depreciation account, a portion of
which can be written off to Profit and Loss each fiscal pe-
riod.
288. Mortgages Receivable
The cash transactions affecting this account are checked
from the cash book, while the amount of the principal is
obtained from the report of sales, from the property ledger,
or from the journal.
It will frequently be found that some of the mortgages
are second mortgages, especially in cases where the original
first mortgage was given to enable the owner to complete
certain improvements, but was found insufficient in amount
so that a second mortgage was given for a further advance.
All such facts should be clearly noted on both of the sub-
ledger accounts relating to the property, the original mort-
REAL ESTATE AUDITS
291
gage being marked, "See Mortgage No for second
mortgage," and the second mortgage marked, "Second
mortgage to No " Both mortgages should be shown
on the property ledger.
A schedule of these mortgages should be prepared to
accompany the balance sheet, showing the number, name of
mortgagor, and unpaid balance of each, together with the
total of interest and charges; and this schedule should in-
dicate clearly all mortgages other than first mortgages. The
total must agree with the Mortgage Receivable account in
the general ledger, and the columns for charges must equal
the sum of the following accounts :
Overdue Mortgage Receivable Interest
Mortgage Insurance
Mortgage Expenses
Mortgage Taxes
The auditor should carefully examine each account and,
when necessary, show, either by footnotes or supplementary
schedules, all mortgages on which either principal or in-
terest is unduly in arrears.
289. Commission Accounts
These accounts, and especially Commissions Paid, need
careful examination. Commissions paid" usually arise from
sales of the concern's property by outside agents, and the
accounts should be so kept as to show clearly to whom each
item is paid and the book number of the property concerned.
It is convenient to carry this information into the ledger
entry in some such form as the following :
Jan. 13 Cash, J. Abbott, in full account Contract No. 475. . . $75
This makes it possible to ascertain quickly at any time
the total amount paid to any one person, or on any par-
2Q2
REAL ESTATE ACCOUNTS
ticular property or section. The payment of commissions
on time sales, where the commissions are paid as collections
proceed, can best be recorded in a commission ledger similar
to Form 12, 21.
Commissions received arise chiefly from three sources:
1. Sale by the concern of property owned by others.
2. Commissions on loans arranged.
3. Commissions on rents collected.
An examination of the "commission business register"
will quickly show if all earned commissions of Classes I
and 2 are accounted for, while an examination of the rent
records will afford a check or. items in Class 3.
290. Contracts
The general remarks under "Mortgages Receivable"
( 288) apply equally to "Contracts" kept in the contracts
sub-ledger, a similar schedule being prepared.
291. Auditing Subdivision Property
In the case of subdivision accounts, whenever a balance
sheet is drawn up, there should invariably be prepared a
detailed list showing lot and block numbers, or a correspond-
ing description, of the lots owned and unsold in each sub-
division.
The number of these unsold lots, multiplied by the cost
per lot, should equal the amount appearing in the Purchase
account, when each subdivision is carried by itself in the
general ledger, or the amount in the real estate ledger show-
ing the cost of the property on hand.
In none of the accounts is error more likely to occur
than here, and, if possible, the auditor should keep the lists
of subdivision properties in his own possession with his
working sheets.
REAL ESTATE AUDITS 293
292. Subdivision Sales
In the case of subdivision time sales where no interest
is charged, the directions of Chapters XXI and XXIII give
also the manner of auditing. If the special ledger (Form
: 5 2 3) is used, the balances shown can easily be veri-
fied by adding machine lists. It may be well to urge the
wisdom in all cases of calculating the unearned, i.e., the
"reserve" profits; of keeping them in the balance sheet,
and carrying to Profit and Loss only such surplus as the
Gain account may contain in excess thereof (171).
293. Subdivision Histories
In cases where a concern deals with a number of sub-
divisions, the auditor will find it convenient to use the sub-
division history described in 35 (Form 31), entering
thereon all the particulars as to the cost price, area, name
of vendor, size of lots, method of payment, terms of con-
tract, etc. ; and, at the close of his audit, entering thereon
the number of lots unsold and the book value thereof. These
sheets, when bound and kept from year to year, form a
convenient means of preserving information which is needed
each time an audit is made. The data should be obtained
from the original papers and not from any hearsay evidence,
as such contracts, especially of the nature of selling con-
tracts, involve a great many details which may not be
transcribed accurately from memory.
294. Equipment
Schedules of equipment should be prepared at the close
of each fiscal period, in order to satisfy the auditor that the
values are actually as represented. Depreciation should be
charged on all items appearing in this account, and should
usually average from 10 to 15% of the cost, except in the
case of motor cars, where 2$% is the lowest rate allowable.
294 REAL ESTATE ACCOUNTS
295. Sundry Debtors
These call for no special comment. A schedule of them
should accompany the balance sheet, and attention should
be called to any which are in arrears. Bad debts should,
of course, be written off in this as in any other business.
296. Capital Stock and Treasury Stock
The total certificates outstanding, as shown by the stock
certificate book and stock register, should agree with the
Capital Stock account, unless unpaid subscriptions exist.
The details of checking these accounts are the same as in
all other corporations and need not be enlarged upon here.
The existence of treasury stock should be proved, not by
certificates pasted in the book, but by new certificates which
should be filed with the other securities of the concern.
In the case of a company which habitually acquires
treasury stock by purchase or exchange, careful examina-
tion should be made of all entries relating to such transac-
tions; and it should never be forgotten that gains arising
from this source do not necessarily form a part of the
profits from the business of the company. In such transac-
tions the price is not always par, and confusion frequently
arises in this connection. The correct rule is that, what-
ever price is paid, Treasury Stock account should be debited
with the par value of the stock. The difference between
Capital Stock and Treasury Stock will then, and only then,
show the amount of capital stock outstanding and subject
to dividends. The profit or loss resulting from such op-
erations should be carried to a Reserve or Surplus account,
rather than to the Profit and Loss account.
297. Mortgages Payable, Contracts Payable, Bills Pay-
able, Sundry Creditors
The sub-ledgers for these credit accounts should be
REAL ESTATE AUDITS 295
treated in a manner similar to that followed in the case of
the corresponding debit accounts "Mortgages Re-
ceivable," etc. on the other side of the balance sheet,
and schedules of each should appear in, or accompany, the
balance sheet. In addition to this, the amounts due might
be verified by writing to the respective holders, in the same
manner as is usually adopted to verify the accounts payable
of a mercantile concern.
298. Purchase Accounts
As these represent amounts payable to owners of land
for property the concern has arranged to sell on time, they
need careful examination, for differences with the owners
frequently arise when the time comes for a final settlement.
It is a safe and excellent practice to verify each of these
accounts by application to the owners at the close of each
fiscal year.
299. Unpaid Dividends
If a separate bank account be kept for payment of divi-
dends, there should be no difficulty in ascertaining the
amount of dividends remaining unpaid, by comparing the
amount paid out with the total to be paid, as shown by the
list of stockholders. A schedule thereof should accompany
the balance sheet.
300. Rents and Repairs
The amount of detailed checking which these accounts
require depends largely upon the excellence of the internal
check in the office. The annual entry in the property ledger
of the gross rents received from each piece of property,
and the total amount expended for repairs thereon, affords
a rough indication as to the efficiency of this department,
in addition to simplifying a statement of the net returns.
296 REAL ESTATE ACCOUNTS
In the case of rental agencies, the fact should be proved
that all collections for clients are properly accounted for
and that such clients are charged with all amounts spent
on their behalf.
301. Reserve Accounts
These vary so greatly that no general directions can
be given. They should be shown on the balance sheet in
such manner as to indicate the nature or purpose of each
account ( 159).
302. Reserve Profits
The audit of this item varies according to the nature of
the account and the manner of keeping it. Unless a form
which is similar to Form 15 ( 23) is used, the profits in a
Gain on Sales account, including profits from all time sales,
whether on mortgage or contract, excluding subdivision
sales, can best be kept and verified by a plan such as is de-
scribed in 304. This method applies also to those sales
where interest and other charges are from time to time
debited to the Income account, and the amounts paid by
purchasers do not therefore represent the reduction of the
indebtedness, as a portion of such payments is first ap-
plicable to interest and expenses. The profit earned in these
cases depends not on the amounts paid in, but on the amount
by which the debt is reduced.
303. Profit and Loss Account
This account should not be disturbed between balance
sheet periods. Any items which may be written off be-
tween these periods can be shown more clearly by using
a Profits account as described in 82. A statement of the
Profit and Loss account for the year should, of course, ac-
company the balance sheet. The gains derived from rents,
REAL ESTATE AUDITS
297
sales, etc., should be grouped together, and the expenses
of selling and management should be treated in the same
manner. Such a statement can readily be arranged and
prepared from the column analysis, as suggested in Chap-
ter XXVII.
304. Auditing Time Sales
In order to facilitate the work of the auditor in obtain-
ing the amount of the gain on sales which may be carried
to Profit and Loss each year, the following plan has been
worked out and has been used in practice for the last six
or seven years. Analysis paper is taken, and the various
columns used are about as follows :
1. Mortgage Number, or Contract Number.
2. Name of Purchaser.
3. Original Amount of Gain.
4. A fraction made up as follows : The denominator
is the total amount of the original sale ; the nu-
merator is the amount by which the balance has
been reduced since the last examination.
5. Amount of Gain Realized, i.e., the amount of the
dollars and cents, obtained by multiplying the
original gain by the fraction in the preceding
column.
6. The Amount of Gain Unrealized at Close of Year
obtained by subtracting column 5 from column 3.
The Gain on Sales account in the general ledger is taken
and the details of each item found therein are entered in
columns I and 2. Column 3 is then added, and the total
should, of course, agree with the total credits of the Gain
account in the ledger.
The contract and mortgage ledgers are then taken and
each sale is examined and the fraction appearing in column
298
REAL ESTATE ACCOUNTS
4 is determined. It must be noted in this connection that
the numerator of the fraction does not necessarily agree
with the total amount of payments, for if items for taxes,
insurance, interest, or any other expense have been charged
to an account, the debt is, of course, reduced by the amount
of payments less such charges.. As has been said in 175,
it is this reduction, and not the amount of the total pay-
ments, which gives us the proportion which we are entitled
to carry to Profit and Loss.
The most convenient practice is to make up as many
such sheets as are necessary, to add each sheet inde-
pendently, proving columns 3, 5, and 6 against each other,
and adding a summary sheet on which the totals of all these
sheets appear and which gives the totals to be carried to
Profit and Loss. If the sheets of one year are kept, they
form a basis of the statement for the following year; and
in the second and succeeding years columns i, 2, and 3 are
used without rewriting. Reference to them in following
years is simplified if, as each item is paid, it is ruled out
across the entire page in colored ink.
If additional columns 7 and 8 are employed, the frac-
tion representing the amount earned for the second year
may be inserted in column 7, and in column 8 the same
item in dollars and cents.
Although the description of this method may seem long,
in practice it will be found that the fractions can be very
quickly determined and the entire sheet completed with com-
paratively little labor.
One special use of these sheets is to provide the book-
keeper or auditor with the amount of profit left as unearned
by any one contract should such contract be cancelled ; and
it saves considerable confusion, when drawing the journal
entry covering such cancellations, if reference is made to
these sheets and the exact amount of unearned profit ascer-
REAL ESTATE AUDITS
299
tainecl. It has been found that bookkeepers are usually dis-
posed to write off the amount originally credited, which,
of course, necessitates correcting entries and tends to ob-
scure an account.
305. Trustees' Accounts
The forms of these are so varied and so constantly in-
creasing that it is useless to attempt to give even a list of
them. It may be said in general that the details are usually
described in a document in the nature of a deed of trust,
a mortgage agreement, or the "holding" document of some
form of collateral security. Whatever the form may be,
the auditor should insist upon seeing the original document
or a reliable copy thereof, from which he can make an
analysis of all the particulars.
Upon such an analysis being made, the auditor should
see ( i ) that the accounts are so arranged as to show clearly
the transactions, especially any particular points involved,
and (2) that the terms of the agreement have been com-
plied with. This may involve an examination into the dis-
position of proceeds of sale of lands involved, the proper
entry of interest, the proper lodging of securities, etc.
CHAPTER XXX
306. Accounts for Office Buildings and Apartment
Houses
Proper accounting for modern office and apartment
buildings necessitates the maintenance of accounts which
show the receipts from each office, store, apartment, flat,
etc., and the total receipts from each building. As to re-
pairs, it is generally proper, in the case of apartment houses,
to apportion these to each unit; while in an office building
this may be unnecessary, although it is important that the
record show such details as repapering or repainting each
room. There are also fixed charges, such as taxes, insur-
ance, interest, and the operating charges for janitors, heat,
light, water, power, etc.
These accounts are usually best kept in a tabular ledger
similar to Form 16 ( 23), which, by the use of "short
leaves," can be so arranged that each folio will contain the
business for a year. The total cash receipts shown for each
month will agree with the total of a corresponding column
in the cash book. The debit accounts can be kept in the
usual simple form, separate accounts being opened for each
building, as :
Building A :
Taxes
Repairs
Insurance
Janitors
Elevators
\
300
AGENTS AND BROKERS
301
The general rules for the collection of rents apply here,
and all orders for material and repairs should be made out
on regular forms, a carbon copy of each being retained in
the office. With such a system, it is easy to prepare an
annual summary, using Form 47 for this purpose.
BUILDING A
REPORT FOR THE YEAR 191 . .
1 January
February
March
Etc.
REPAIRS
Painting Inside
Outside
" Roof
Plumbing
Carpenter
Elevators
Heating System
Lighting
Fixtures
Total
OPERATING EXPENSE
Janitor
Elevators
Light
Heat
Water
Etc., etc
"
Total
FIXED CHARGES
Taxes
Insurance
Etc., etc
Total
GRAND TOTAL
Form 47. Annual Report of Office Building
302 REAL ESTATE ACCOUNTS
307. Monthly Reports
The form of monthly report rendered by an agent to
his principal varies greatly. As a rule, where an owner
places several pieces of property in the hands of an agent,
Form 48 may be used. This statement should be accom-
panied by a receipt for each disbursement reported.
.AGENT.
DR. to
.OWNER
For ttw Month of
-
DC.
CR.
DO.
los
-. <u our c&buctvui
Meo
IS So
li>l\5o
111
-M+
TUt oudif 4oSauucxs
Form 48. Monthly Report of Rental Agent
308. Brokers' Records
The scope of the present work precludes any complete
treatment of real estate brokerage and the forms used
therein. Under the head of "Commissions" ( 309), a few
simple and effective rules are given as to the formal ac-
counts for sales and loans. It is only possible here to touch
on some points of general importance in the brokerage busi-
ness, which varies so greatly in scope and in character of
AGENTS AND BROKERS
303
property handled that the details of each case must be
worked out as a separate proposition.
The broker should keep accurate records of the proper-
ties he has for sale, and these should be so arranged that
any desired reference can be quickly made. For this pur-
pose, bound books, cards, and loose leaves have all been
pressed into service. Bound books are not elastic enough
for such temporary records, and cards present several dis-
advantages. A loose-leaf record is therefore the most
suitable. A small loose-leaf volume may easily be carried
while the broker is taking a customer to inspect various
properties, and the integrity of the record is not destroyed,
as it is in the case of a card system, from which cards are
withdrawn. Several copies of a leaf can be filled out at
one writing, and each may be on paper of a different color.
This feature is of great convenience, for a broker should
Form 49. Broker's Record
304
REAL ESTATE ACCOUNTS
have his properties listed by (i) owners, (2) localities,
(3) classification, i.e., dwellings, offices, etc.
Form 49 is convenient for such listing and is kept in
stock by different manufacturers. Form 50 is somewhat
similar and is suitable when cards are used. It is so simple
that, if desired, a rubber stamp may be used to imprint the
cards. Here, again, cards and inks of various colors may
be employed.
Another method of keeping track of properties is the
map and tack system. This consists of a large wall map
of the city or neighborhood in which the broker operates,
mounted preferably on a backing of soft wood, together
with a number of pins or small flags of various colors, one
color being used to indicate property for rent; another,
dwellings for sale ; etc. When a piece of property is listed,
a pin is stuck into the map at the proper place, and, if a
flag is attached, there is written on this the name of the
owner and the price, e.g.: "Allen, $4,500."
WANTS, BUY, RENT OR SELL
Price $
Terms
Rent
Location By . . .- 19. .
Building Story
Rooms, ist Floor 2nd 3rd
Size Lot Alley
Sewer Light in Street Light in House
Bath Closet Laundry Basement Cellar
Water Heat Barn
Remarks
Name
Date . . . Address
Form 50. Broker's Card Record
AGENTS AND BROKERS
305
The advantages of such a plan as a means of ready
reference are as obvious as the flags themselves. A disad-
vantage of this system is that the flags and pins could easily
be displaced by some irresponsible party in the office, thus
vitiating the entire system. It need not be said that a map
and tack arrangement does not enable the broker to dis-
pense entirely with a written record of the properties in
which he is interested.
309. Commissions
Bookkeeping for commissions consists in its simplest
form in merely recording, through the cash book, the com-
missions as collected. It is the custom, however, for brokers
engaged in this class of business to attend to other matters,
such as procuring abstracts of title, payment of taxes, etc.,
which involve the payment of money for purchasers. In
such cases, a detailed account of all transactions should ap-
pear on the books. Many items, such as arrears of taxes,
are easily overlooked, and the proper protection of client
and broker calls for a full record.
Let us assume that the concern arranges a loan of $5,000
from John Doe to Richard Roe, paying $42 for an abstract,
$50 for attorney's fees, $2.50 for recording fees, $80 for
taxes, $10 for appraiser's fee, and that it charges $5 for
drawing the papers and $100 as commission or brokerage.
The expenditures and charges made by the concern will
be entered on the cash book to "Doe-Roe Loan," and if
the amount of business warrants it, special columns will be
reserved on each side of the cash book for loans and sales.
John Doe pays the $5,000 to the concern. A small sub-
ledger (Form 13, 22) is opened for these brokerage
transactions, the record of both kinds being kept in one
book under separate indexes if desired.
On the general ledger all the above-mentioned items will
306
REAL ESTATE ACCOUNTS
be charged and credited to Loans account, either by indi-
vidual items or, in the case of a columnar cash book, by
monthly totals. The sub-ledger account will read as follows :
DOE-ROE LOAN
Abstract
. CB
$42 OO
John Doe $5,000.00
Attorney
...CB
50.0O
Recording
. . CB
2.50
Taxes
. CB
80 oo
Appraisers
.. CB
IO.OO
Drawing Papers.
Brokerage
.. J
5.00
IOO.OO
Paid R. Roe
.. CB
4 710. 50
$5,000.00
$5,000.00
The charges for drawing papers and for brokerage are
posted to the general ledger from the following journal
entry :
Loans $105
To Loan Brokerage $105
Fees in Doe-Roe loan"; commission, $100; drawing
papers, $5.
Such an account shows at once the payment of all
deductions for which the concern is accountable, and the
state of any transaction may be seen at any time. It also
shows clearly the profit from this particular class of busi-
ness. If Richard Roe has sold the property to John Doe,
the same entries might equally well appear, except that the
brokerage journal entry would read as follows :
. $..
Sales
To Sale Brokerage
Brokerage in Roe-Doe sale.
CHAPTER XXXI
REAL ESTATE ORGANIZATIONS
310. Abstract Companies
In some states there are so-called "abstract companies,"
whose business it is to keep abstracts of public records and
to prepare an abstract of title to any piece of property de-
sired. In other states, titles are insured by title guaranty
companies under "title policies." It is not proposed to dis-
cuss here the form of these abstracts or policies, or the
method of preparing them, but merely to consider the papers
after they reach the real estate concern.
The only safe rule is never to buy real estate without
some such abstract. It is the accountant's duty to see that
such a document accompanies the other papers when any
property is acquired. As these abstracts and policies rep-
resent money, and sometimes large sums, they should be
dealt with as carefully as cash. They are perhaps harder
to keep track of, more particularly because they are so fre-
quently borrowed by prospective purchasers or their agents
or attorneys.
An easy method of caring for abstracts is to number
each, as soon as received, with the real estate number of the
property covered, and then to keep them in numerical order
in a division of the safe or vault reserved for such purpose.
In this way any abstract can be found almost instantly.
As practically every purchaser, after receiving his deed,
borrows this abstract for examination, a record of abstracts
loaned from the office is a necessity. The following form,
which is kept in a small loose-leaf binder, has led to the sav-
307
308 REAL ESTATE ACCOUNTS
ing of large sums of money in the course of some years'
use. As many lines as necessary should be provided under
each heading.
DEED
ABSTRACT No.
papers
Sent to
For
Date
I hereby acknowledge receipt of the above-
mentioned papers and undertake to return same
to the ; or, when called upon to
do so by said Company, to provide at once new
copy of same prepared by the Abstract
Title and Security Company, at my own expense.
Form 51. Record of Abstracts Loaned
On the final disposition of a piece of property and the
delivery of deeds, etc., the abstract is usually delivered to
the purchaser, or the policy is indorsed in favor of the pur-
chaser. In such case there should be inserted in the abstract
file a slip of paper the same size as the folded abstract,
bearing the number of the abstract or policy so delivered
and showing the disposition thereof.
311. Leasehold Companies
There is a class of concerns differing from agencies,
sometimes known as leasehold companies, which rent from
owners office buildings and similar properties, and operate
them at their own risk and for their own profit. The ac-
counts of these companies will, of course, be on lines almost
identical with those of an agent.
REAL ESTATE ORGANIZATIONS
309
312. Building and Loan Societies
While the number of these societies is perhaps decreas-
ing, many are still in active business. The details con-
nected with their work, however, lie outside the limits of
the real estate office and of the present volume. In a gen-
eral way it may be said, that these companies depend upon
the interest and fees which they charge their borrowers,
the former being calculated by one of the methods described
in Chapter XIX.
The question of ascertaining the profits of such societies
is not a difficult one when proper tables are prepared to
facilitate the apportionment of receipts and outstanding
mortgages between the income and investment accounts.
The use of a columnar ledger or columnar journal fre-
quently results in a great saving of time, and yields clearer
results than do the more usual forms.
313. Cemeteries
As the business of a cemetery company or association
is based upon dealings with land, it seems appropriate that
the accounts of such concerns should be mentioned here.
In the case of a cemetery company organized for profit, few
difficulties are encountered. A tract of land is bought, sub-
divided, and sold, each sale yielding its profit, while the
expenses of maintenance and operation are chargeable
against the income. No difficulty should be experienced
in arriving at the results of the business for any given
period.
There are, however, springing into existence through-
out the country cemetery associations which are not or-
ganized for profit, but for the purpose of providing in per-
petuity a burial place. Such an association also provides
for the perpetual care and beautifying of the cemetery as
a whole, as well as for the proper maintenance of the in-
REAL ESTATE ACCOUNTS
dividual plots that may be placed in its care by the owners.
Any surplus is devoted to further improvements or placed
in a reserve, but in no case assumes the form of dividend or
profits.
In order to carry out such provisions, it is necessary to
establish separate trust funds, the income from each of
which is devoted to a specific purpose, such as general main-
tenance, general improvement, perpetual care of lots, etc.
To devise a system of accounts to cover these various
matters, and to provide as far as possible for the future so
that an auditor, fifty or a hundred years hence, may easily
trace the history of each trust fund established, is a matter
of unusual complexity and should be placed in the hands of
a competent accountant.
314. Cemetery Subdivision Accounts
Cemetery accounts dealing with land present a problem
very similar to that discussed in Chapters XXII and XXIII,
under "Subdivision Properties." As a rule, a tract of
acreage land is bought and occasionally the whole of this
is at once platted, improved, and developed, but, more gen-
erally, it is divided into sections which are developed one
at a time.
The cost of acquiring the entire tract should first be
obtained, and should include the purchase price and legal
expenses, together with such costs as fencing the entire
tract, surveying and platting it, and possibly also providing
for main roads, superintendent's dwelling, offices, and
greenhouses. This total cost might also include the cost
of any chapels or mortuaries erected; although, if special
charges are made for the use of these, it may be better to
keep them by themselves. Frequently, the cost should in-
clude an estimate of the expenses for general improvements
contemplated during the next few years.
REAL ESTATE ORGANIZATIONS
The cost of the whole being arrived at and charged to
Land account, it is, when necessary, apportioned either at
so many dollars per acre of the whole tract, or, if the entire
tract is divided into sections which are to be developed one
at a time, the total cost is apportioned to these various sec-
tions. The result of this is that the balance of the Land
account always shows the cost of the unplatted portion ; the
cost of each section as it is platted being transferred to
"Platted Land," or to "Section No. I," "Section No.
2," etc.
When one or more sections have been platted, the cost
of each section is divided among all the lots contained
therein, either by finding the average cost or by an ap-
praisement. Each lot is then treated as in subdivision prop-
erties. The time of payment is, however, usually shorter
than in the case of time sales, and there is a far greater
probability that all lots sold will be paid for a certainty
arising from the purpose to which the lots are put. This
being the case, it is quite frequently permissible for such
an association to regard the gain on each lot sold as
"realized," although the actual realization may be slightly
postponed.
In the case of cemetery associations not organized for
profit, it is frequently obligatory upon the management to
transfer a portion of the purchase price, or of the profit, to
some particular fund. For this reason, it saves many com-
plications if the gain be always regarded as "realized," and
in practice the lapses will usually be so few that no difficul-
ties will be experienced in charging back the profits in these
cases.
Especial care must be taken in differentiating "Capital
Expenditures" from those chargeable to Revenue account,
because it is usual for the same set of men to perform serv-
ices apparently of a similar nature but chargeable to en-
312
REAL ESTATE ACCOUNTS
tirely different funds. For instance, one gang on the same
day may:
1. Open or close a grave for a funeral.
2. Work on an individual lot taken care of for the
owner on a yearly basis.
3. Work on a similar lot which is under perpetual
care, owing to a trust fund having been formed
for the purpose.
4. Work on general flower beds or shrubbery.
5. Work on grading a new section about to be opened.
6. Work in greenhouses on growing plants.
Nos. i and 2 are chargeable to two different operating
accounts ; Nos. 3 and 4, probably to two different trust fund
income accounts ; No. 5, to the capital account for improve-
ments (a cost account) ; No. 6, to another operating ac-
count. It is not necessary to go further into details, how-
ever, as enough has been said to indicate the general
methods applicable to cemetery real estate accounts.
CHAPTER XXXII
DEPRECIATION
315. Depreciation of Realty
In real estate affairs, depreciation, properly so called,
applies to buildings or improvements only, and not to the
land itself. It is true that land values frequently decrease,
but such decrease is seldom brought about by natural
causes. Perhaps it is the result of a fictitious initial value,
as in the case of a punctured "boom" ; perhaps of a change
of fashion, which prevents the old-time rents from being
realized. These human causes, however, do not imply
change in the land itself, but merely show that the original
estimate of the value was excessive or that the demand has
diminished.
As the process of depreciation in the case of buildings
is constant and unavoidable, it must be dealt with in some
way. If no notice is taken of it, and the property is not
sold, the owner may be unconscious of it until a sale is at-
tempted or a fire occurs. Then he discovers that the pros-
pective purchaser or the insurance adjuster, as the case may
be, will deduct for depreciation some material amount from
what the owner considers the present, but which is really
the original, value of the property.
316. Nature of Depreciation
Depreciation is closely allied to the repairs, renewals,
improvements, and wear and tear, which have already been
considered. While repairs represent the re-establishment
of a diminished value arising from use, depreciation rep-
313
REAL ESTATE ACCOUNTS
resents a shrinkage in the value beyond that which can be
re-established by mere repairs.
Another characteristic feature of depreciation, and one
which prevents it from being a proper offset to any appre-
ciation of values, is the fact that it represents what has gone
and is already lost, whereas appreciation is a thing hoped
for believed in, but not yet realized. "A charge for de-
preciation has no relation to profits, and must be made
whether profit is being made or not; or, to express it in
other words, the true theory of depreciation requires the
replacement of the continuous waste of capital assets by the
capitalization of an equivalent amount of revenue."*
317. Systematic Treatment of Depreciation
The Interstate Commerce Commission has been one of
the most effective factors in the introduction of more scien-
tific accounting methods in this country. This is not be-
cause of its legal status or of its legal powers, but because
its rules are based on the collected experience of a large
number of trained men working on similar problems under
different and independent conditions. Perhaps no other ac-
counts have had the advantage of such experienced consid-
eration as those under the jurisdiction of the Commission
and probably no other set of accounting rules has such force
as those which it has laid down. The fixed practice of
charging depreciation runs through the accounts of all its
departments, and this practice based as it is on a funda-
mental principle, cannot fail to have a marked effect upon
the accounting practice of the American business world.
318. Percentage of Depreciation
It is impossible to adopt any fixed percentage of de-
preciation on a given class of buildings; for occupancy, con-
R. N. Carter, in The Accountant, March 7, 1908.
DEPRECIATION
315
struction, and locality play so large a part in determining
the amount. For example, a frame building in a dry, north-
ern climate will outlive, several times over, a building simi-
lar in all other respects but situated in the warm, damp
climate of some of the Gulf States. The difference in the
life of materials in different climates is demonstrated still
further by comparing yellow pine railway ties when laid
in New England and in Florida. Again, two similar and
adjacent buildings will depreciate very unequally if one is
occupied by a careful owner and the other by a careless
tenant.
319. Calculation of Depreciation
There are several distinct methods of calculating de-
preciation on the buildings ;
1. By dividing the cost of the building by the num-
ber of years it is expected to last, and writing
off each year an amount equal to the quotient,
or by writing off some fixed annual sum arrived
at after considering the facts of the particular
case.
2. By writing off each year a fixed percentage on the
diminishing values.
3. By writing off each year a fixed percentage on the
original cost.
4. By adding to the cost its annual interest at an
agreed rate, and at the same time writing off
each year an amount which will reduce the value
of the building to zero or to scrap value at the
end of a given term ; this is usually known as
the "annuity plan."
5. By periodic appraisals of the buildings.
6. By following some of the recognized tables of de-
preciation ; a method similar to 2.
REAL ESTATE ACCOUNTS
The second method is probably the one most generally
adopted, and mainly for two reasons :
First, it tends to equalize the charges of maintenance,
as the heaviest deductions are made at the beginning when
repairs are light, and diminish as the expense of repairs
grows heavier.
Second, the requisite data for its calculations can al-
ways be quickly and easily obtained.
Whatever method is selected, the chief difficulty lies in
determining the proper percentage to apply. Those in gen-
eral use vary from i l /2% for such buildings as stone
churches, to 10% for frame tenements. An average figure
would probably be about 5% for good frame buildings, and
2^/2% or 3% for brick, stone, or concrete structures. As
a matter of fact, this question can only be settled by that
which is the basis of good law and of good accountancy
common sense. It must not be forgotten that, while an in-
sufficient amount may cause an unexpected loss, an exces-
sive amount tends to create something in the nature of a
secret reserve.
320. Depreciation vs. Appreciation
It is probably true in the case of many land companies,
particularly those whose business is not chiefly in the older
and larger cities, that there is ever present the knowledge
that, while buildings may be depreciating, the land is ap-
preciating. This is true as to the holdings of the majority
of well-managed concerns, and the accountant has to show
good cause if he insists on writing down the value of build-
ings why he cannot agree to the writing up of the land.
The average business man usually agrees that losses
should be written off as soon as discovered and that no
profits should be entered until earned; yet, when the ac-
countant is not willing to regard appreciation of land as a
DEPRECIATION
317
proper offset to the depreciation of the improvement, the
owner often has the impression that he is being imposed
upon. He fails to realize that correct accountancy does
not deprive him of any profits, but merely guards him
against self-deception and against possible losses in case
values should depreciate, the final result, in any event, de-
pending upon the price actually obtained for the property
in question. In this connection it must be noted, however,
that the principles set forth above are not held by all
authorities. Some accountants believe that if a certain
price has been paid for a piece of improved real estate, no
depreciation should be shown unless the value decreases.
321. Depreciation on the Balance Sheet
When depreciation on buildings is taken on the books,
there are at least two methods of treatment, e.g. :
1. To reduce the amount of the Real Estate account
by the amount of the depreciation.
2. To open a depreciation account (not a "deprecia-
tion fund"), which is credited with the amount
of depreciation decided upon, the debit entry be-
ing made to Profit and Loss account when the
property is finally sold.
The second is by far the better plan, for it conforms
to the practice of having the Real Estate account show the
actual cost, and it shows plainly the amount to be written
off ; it is clean bookkeeping. In drawing up a balance sheet,
the amount of this depreciation should then show, not as a
liability, but as a deduction from Real Estate :
Real Estate Cost $185,000
Less Allowance for Depreciation on
Buildings 7>5
Net Real Estate $177,500
318 REAL ESTATE ACCOUNTS
322. Depreciation on Leasehold Property .
While the remarks already made apply to buildings on
freehold lands, it is evident that they apply with even
greater force to leasehold properties. Whether the leases
are long or short, the sum of the charges, (i) premium, if
any, paid for the lease, and (2) cost of buildings erected
which revert to the owner of the fee at the expiration of
the lease, may be treated as an asset at the beginning of
the lease, and should be reduced by equal periodic amounts
so that they disappear when the lease ends. In this case,
unlike that of freehold property, the value of the lease ap-
pearing on the books is reduced on the face of the ledger.
The question of depreciation has been discussed fully
and clearly by eminent writers both in England and in this
country, and the reader is referred to these authors should
he desire to pursue the subject further.*
CHAPTER XXXIII
INSURANCE RECORDS
323. Expiration Register and Card System
The accountant should be careful to keep a record of
the date on which each policy expires, and he should also
see that every building 1 in which the concern has any in-
terest is properly insured. The insurance records may be
kept in an "expiration register" specially prepared for the
purpose, or by means of a card system. A register such as
is used by many fire insurance agents can be bought already
ruled, the headings being self-explanatory.
The writer prefers a card system for this purpose, with
ruling as shown in Form 52, which has proved itself capable
of meeting all requirements. Under this system a card is
numbered for each building to be insured, the numbers cor-
responding with the numbers of the properties shown on
the property index and property ledger. As the insurance
is written, the cards are filled in and filed. When all the
cards are filled out, therefore, we know that every building
is insured.
An even better method is to have a duplicate record,
i.e., an original and a carbon copy. One set is then filed
in order of dates, and one set in alphabetical order of
owners.
Another set of cards is also made up and filed at the
same time for use as a tickler, this second set containing a
card for each month of the next one, three, or five years,
according to the terms for which policies are written. Each
card of this second set is headed with the name of its month,
319
320
REAL ESTATE ACCOUNTS
and as each card of the first set is written out, its number
is entered on that card of the second series which repre-
sents the month in which the particular policy expires. The
result of this is that if any card of the second series is taken
out, we have before us a list of all policies to be renewed in
the particular month represented by that card.
At the end of each month in which expirations occur, all
the new policies written during that month are checked
against the expiration card, in order to see that all renewals
have been properly made ; the particulars of the new policies
are entered on the proper cards in the first series, and the
property numbers of the new policies are also entered on
the cards of the second series for the months in which they
expire.
The policies themselves should be arranged according
to the months in which they expire. This takes but little
time and gives a check upon the expiration card. As each
policy is received, it should be examined to see that it is
correct as to date, amount, name of assured, and that it af-
No Property
House
Company
No.
Dated
Expires
Amount
Premium
Form 52. Insurance Card Record
INSURANCE RECORDS
321
fords proper protection for the mortgagee, if any. It will
be seen that the simple system here outlined contains merely
the records required by the assured. It is not intended as
a record for the insurance agent, which is necessarily some-
what more complicated.
324. Life Insurance in Connection with Time Sales
It is only within the past few years that life insurance
has become so closely connected with real estate as to war-
rant its mention in a work such as this. They sometimes,
however, come into contact at two points: first, in con-
nection with time sales, and second, in connection with
loans.
The simplest example of insurance in connection with
time sales is afforded by the transactions of those develop-
ment companies which offer to sell lots under an agreement
that the purchaser is required to pay "no interest, no taxes,"
and that, should the purchaser die during the life of the
contract, the property will be conveyed to his estate free of
all encumbrances.
Possibly some of these companies may effect insurance
on the lives of its purchasers on a plan similar to what is
known as "industrial insurance," or some special form of
policy under which the liability and the premiums diminish
year by year as the liability insured against decreases, this
form probably being the most economical policy obtainable.
In such cases, all premiums paid by the concern should be
charged to the expense of the particular subdivision, and
be charged against Profit and Loss at the closing of the
books.
It is, however, a more general custom for the concern to
carry this insurance itself; that is, to run the risks, and, if
a purchaser die, to give a deed of conveyance to his estate.
In these cases the best practice is to close the account of
322
REAL ESTATE ACCOUNTS
such a contract by a journal entry in the following general
form:
Life Insurance $
To Contracts $
To close Contract No. 121, John Doe, de-
ceased, conveyance of lot ...., blk ,
being made to his estate.
This entails the opening of a Life Insurance account in
the general ledger, to which all such accounts are charged,
showing in each case the subdivision concerned; and, on
the closing of the books, the balance of the account is closed
into Profit and Loss. This is clearer than carrying it as
an item in any general expense account, and far preferable.
325. Life Insurance in Connection with Mortgages
Payable
Certain life insurance companies have in recent years
inaugurated the practice of lending their surplus funds on
mortgages at a low rate of interest and free of brokerage,
on condition that the mortgagor take out with the lender
a life insurance policy, to such an amount that the annual
premiums will amount to, say, 5% of the amount of the
loan, and will undertake to maintain this during the life
of the loan. The policy may be taken out either on himself
or on others designated by him, and, in the event of the
death of one of the insured during the period of the loan,
the insurance is credited to the loan.
Such agreements must be carefully examined to de-
termine the proper disposition of moneys paid for
premiums. The interest payments are, of course, treated
like all other interest on mortgages payable. The premiums
may be charged to a Life Insurance account and carried
as an asset during the life of the loan. In event of the
INSURANCE RECORDS
323
death of one of the assured, the amount of insurance col-
lectable, less the premiums paid, may be debited to Mort-
gages Payable account and credited to a special surplus
account.
In the event that none of the assured dies and the mort-
gage is satisfied when due, the amounts paid as premiums
may remain as an asset if the policies are continued for the
benefit of the business, or if they have an exchange or sur-
render value equal in amount to these premiums. If, how-
ever, the policies have no such value, the premiums must
be written off to Profit and Loss. On this account, proper
arrangements should be made at the time the loan is en-
tered on the books, to avoid the possibility of having to
write off a considerable sum at the end of a few years.
CHAPTER XXXIV
RENT RECORDS; BUILDING ACCOUNTS
RENT RECORDS
326. Rentals
The work of the rent department is of such importance
in so many offices that a special consideration of its ac-
counts, in addition to the general discussion of rents in
Chapter XIV, is desirable.
Unless the number of buildings from which rent is to be
collected is very small, it is advisable to treat the business
of the rent department as distinct from that of the general
office, the rent records being contained in a separate set of
books consisting of a cash book, journal, and ledger, and
the current funds of the department being deposited in, and
disbursed from, a special and distinct bank account.
The basic principle of rent accounts, large or small, is
that the accounts deal not with the tenant, but with the
building. It is obvious that if the account of any one build-
ing is kept in the tenant's name, there may be frequent
changes in the title of what is practically one account. This
is especially true in connection with small tenement property
where tenants frequently move out, and even in, without
notice and between the weekly calls of the collector.
When a real estate office has only a few buildings to
look after, it may not be necessary to do more than to credit
collections to rents and expenditures to repairs, using per-
haps a column in the cash book for each class. This does
not show separately the earnings of each house, but this
324
RENT RECORDS
325
separate record may, when necessary, be kept in memoran-
dum form on loose-leaf ledger' sheets.
In those offices where there are sufficient houses to form
what may be called an agency, a complete set of books should
be installed. The advantage of this is two-fold : it keeps
separate rent money, part or all of which may belong to
clients, and it relieves the general books of a large quantity
of detail without adding to the labor required.
327. Records Used
The first record is the rent register (Form 32) de-
scribed in 37, and kept as therein indicated. Each house
taken in charge should at once be entered on this record,
and an account therefor immediately opened in the ledger.
The rent receipt book (Form 33) is described in 38.
The use of some such form should be insisted on.
The cash book is of the simplest form, and generally
only two columns on each side are required. On the debit
side, the first column is for the entry of each separate item ;
the other, for the entry of the total collections for the day,
which should also be the amount of the bank deposit on the
following day. The other side of the cash book is as simple.
Where rents are collected for a comparatively small
number of owners, or where it is desirable to keep apart
the collections and disbursements for one or more accounts,
a columnar cash book may be used, a column on each side
being devoted to one client. In this case the total bank de-
posit should also be the total of all the debit columns for
the day, i.e., the day's collections. This method is con-
venient where the owners do not number more than, say,
twenty, but a columnar book containing many more columns
than this becomes inconvenient to use.
Most of the items on the credit side will be weekly pay-
rolls or monthly bills, and each such item should be properly
326 REAL ESTATE ACCOUNTS
distributed before being entered on the cash book, the full
distribution being shown there, as this forms the basis of
charges against each building. Sometimes the rent accounts
contain a General Expense account, to which are charged
such items as salaries of collectors, maintenance of horses,
buggies, etc. Such an account, however, usually belongs in
the general ledger, where it shows the expenses incurred
in order to collect the rents or to earn the rent commissions
shown in credit accounts on the general ledger.
328. Repairs
In some offices where many buildings are cared for, the
amount of repair and building work demands a constant
force of workmen, usually under a foreman. This fre-
quently renders advisable the purchase of building materials
in quantity, which are stored in a yard. Under these con-
ditions, the rent ledger should contain a Yard account, to
which is charged all materials not bought for any particular
building. Each week the foreman should render a state-
ment of all supplies issued from the yard and this is
credited through a journal entry to Yard account and
debited to the buildings concerned at cost price, including
hauling, in a manner similar to that used in connection with
any properly conducted storeroom.
At the end of each fiscal period, an accurate inventory
should be taken of all material in the yard, and if this does
not agree with the balance in the Yard account, the differ-
ence is credited or debited to Rent account, and the Yard
account for the new year is opened for the amount of the
actual inventory. The rent ledger must also include a Gen-
eral Office account, which is charged with all moneys trans-
ferred from the Rent account.
Where it is the custom to have repairs made by outside
firms of plumbers, builders, etc., all orders for such work
RENT RECORDS
327
should be given on printed forms, a carbon copy of each
being retained in the office. These should be numbered
consecutively, and bound in the same manner as the receipt
books. A separate order should usually be made for re-
pairs on each house, and the contractor should be instructed
to render a bill in duplicate for work done on each house,
especially where rents are collected for other owners, so
that such bill may be attached to the monthly statement of
rents collected.
37.9. The Rent Ledger
From the rent cash book each item is posted to the rent
ledger. Several forms of rent ledger are' shown in Forms
36 to 38 ( 42, 43). There are also many other special
forms of this ledger which can be obtained from any good
stationer.
Where rents are collected for clients, the ledger account
of each house should show clearly the name of its owner.
All rent accounts can then be treated in precisely the same
manner, whether they. belong to the concern or to a client.
At the close of the month, a regular trial balance showing
the monthly debits and credits to each house, is taken from
the rent ledger, which book, if kept as above outlined, is
self-balancing. The trial balance would be similar to the
following :
18 State Street $50.00
22 " " $20.00 50.00
502 Main Street (Joe Doe) 15.00 40.00
45 King Street 14.00 80.00
80 Hospital Street (Richard Roe) 150.00
Etc., etc
General Account 845.00
$2,453.00 $2,453.00
328 REAL ESTATE ACCOUNTS
From this trial balance a summary may readily be pre-
pared, classifying the debits and credits applying to each
client and forming the basis of the monthly statement to be
rendered to each. Supposing that all collections are credited
on the general ledger as transferred to Rent Department,
the journal entry would be of the following form :
Rent Department $1,133
To Joe Doe $485
" Richard Roe 545
" Rent Commissions 103
The account with each client should be carried on the
general ledger, for it is a common thing for them to draw,
sometimes in advance, a fixed or varying monthly sum;
or it may be necessary to charge their accounts with sums
paid for insurance, taxes, etc., which pass only through the
general cash book.
330. Arrangement of Rent Ledger
The arrangement of the rent ledger depends upon the
conditions and upon the taste of the individual who arranges
it. If a bound ledger is used, all houses should be entered
in a simple register giving book number, address and name
of owner.
This forms an index for each house; and in case of
tenement or similar property, it affords a serial number
which may be stencilled or painted in some inconspicuous
place on each house, in order to enable a collector to identify
it at once. This is especially useful in the case of suburban
property where street numbers are sometimes indefinite.
If a loose-leaf form of ledger is used, the accounts may
be indexed (i) by streets; and (2) by owners.
If collectors bring in the rents, the arrangement by
streets is far more convenient, as it brings together in the
RENT RECORDS
329
ledger, houses in the same neighborhood which are likely
to appear together in the collectors' reports.
331. Rent Collectors
In many instances it is necessary to employ collectors.
As the salaries paid to collectors are usually not large
enough to attract men of high clerical training, and as the
work entails the entering of a large mass of items, it is
better for the concern and fairer to the collectors to provide
a system of reporting which shall be positive and not in-
volve unnecessary labor.
The use of the carbon receipt book is the first essential
(Form 33, 38). The collector, at the close of each day's
business, should himself prepare a statement of his total
collections (Form 35, 39).
It is incumbent on anyone handling the cash of another,
to render a statement, and a rent collector is no exception
to this rule. Attention is called to this point because in
many offices the preparation of this report is left to some
other clerk. This tends not only to misplace the responsi-
bility, but also leads to errors, for rent receipts are often
hurriedly written and difficult to read. As the reports
should show the name of each tenant, they should be type-
written, and it is a good practice to let the collector dictate
all such reports from his duplicate rent receipts to a
typist
When the report is made, the collections are added and
the report is turned over to the cashier, together with the
receipt book upon which it is based and the amount of cash
called for in the total. The cashier checks each receipt
against the statement, and, as he does so, he should mark
with a pen or rubber stamp the receipt itself to show that
it is accounted for. On proving the additions and checking
the total against the cash received, the cashier returns all
330 REAL ESTATE ACCOUNTS
unfilled receipt books to the collector, and files the com-
pleted receipt books in numerical order.
Particularly in the case of tenements where the rent is
paid weekly, it is necessary for the collector to know what
rent is payable. To furnish this information, Form 38
(43) was devised. It carries the records of a large num-
ber of houses in a very small book which easily fits the
pocket. It should be written up daily, or at frequent in-
tervals, from the rent ledger by the collector or the rent
bookkeeper.
332. Vacant Houses
It is of importance that the office should be immediately
informed of any renting premises which are vacant, and
each collector should make a report of these every day. It
is a common practice to keep a list of vacant houses on a
sheet or slate, and trust to no other record. If a large
number of houses are cared for, some precaution must be
taken to prevent the possibility of premises being over-
looked. This depends largely on the rent bookkeeper, who
should also act as a rental credit man. The board described
in 37, and originally designed from a hotel room board,
has been found very serviceable for this purpose.
BUILDING ACCOUNTS
333- Building Operations and Building Accounts
Building operations fall into two main classes: first,
where buildings for the improvement of property are
erected without having any particular purchaser in view;
second, where buildings are constructed for some definite
purchaser. In both cases, however, an account should be
opened in the ledger for each building erected, and to this
account should be charged the numerous payments that are
BUILDING ACCOUNTS
331
called for, the account being kept open until some time after
the building is completed, in order to satisfy the owner that
no liens have been or can be filed against the building.
If the building is of the first class mentioned above, the
total cost on completion is transferred to the Improvements
account by a simple journal entry such as follows:
Improvements $
To Buildings (No. and Street) $
For the total cost of the above building on
property No
When building for customers, the concern may perhaps
simply agree to erect the desired building, the customer
engaging to pay the price, the exact amount of which may
not be finally determined until the building is completed.
In such cases the Construction account is treated as is Im-
provement account in the entry just given.
On the other hand, a concern will frequently agree to
build a house for a customer for a certain amount and will
then make a contract with some builder, or erect the build-
ing itself, intending to obtain in either contingency a profit
on the building. In such cases the construction account is
credited and the purchaser debited with the price agreed
upon. Upon completion of the building, there is usually a
balance on one side of the ledger or the other; if it be a
credit balance, there is of course a profit, and vice versa.
This balance is then carried to the Profits account, the entry
in the ledger indicating that it is the profit from building
operations.
334. Building Operations Subdividing Costs
It is sometimes desired to analyze the cost of each build-
ing, especially for the purpose of comparing such costs with
the estimates. This can very readily be done by preparing
332 REAL ESTATE ACCOUNTS
some such schedule as follows, showing the various subdi-
visions into which it is desired to divide the work :
I. Masonry
2.. Carpenter work
3. Roofing and metal work
4. Plastering
5. Plumbing
6. Painting
7. Electric wiring
8. Electric fixtures
9. Mantels
10. Hardwood floors
11. General lumber
12. Mill work
13. Hardware
When the bills for these various items are approved,
it is indicated on the bill to which divisions the items are
chargeable, and when paid the bookkeeper makes the cash
book entries in a form similar to the following : "Building
Green House, paid J. Graham (No. 5) $75," the number
indicating that this charge pertains to plumbing.
When this item is posted to the ledger, the designating
number is also inserted. Upon the completion of the build-
ing it is then a very simple matter to group together all
those amounts indicated by the same number, and thus ob-
tain very quickly a complete analysis of the cost of the
building. This analysis may, if desired, be entered as a
memorandum on the ledger page. It will frequently happen
that one bill may be applicable to two or more divisions,
such as plumbing and roofing, in which case the cash book
entry must be divided to correspond.
CHAPTER XXXV
TAXES
335- Entering Tax Payments on the Books
The method of paying taxes varies so greatly that no
general rules can be given. In all cases, however, some
form of tax receipt is obtained. Sometimes such a receipt
bears full description of the lands; sometimes, if the list is
a long one, the collector attaches the list itself to the re-
ceipt form. When the official receipt reaches the owner, it
is immediately carefully checked against the tax list in order
to see that no improper changes or omissions have been
made, for any such errors can best be corrected immediately.
From these original tax receipts, entries are made in the
property ledgers showing the number of each receipt, the
amount of the assessment, and the amount of the tax. It
is found convenient and useful in practice to enter the as-
sessed value, for in some cases (for instance, wild lands)
these assessments are raised, and this fact may escape the
owner's attention, until he looks at his tax record in the
property ledger, when the increase at once becomes
apparent.
Tax receipts should be carefully preserved in files of
sufficient size to receive them without folding, and enable
quick reference to be made to them. The receipts for each
county are placed together, and the counties are arranged in
alphabetical order. It may be that some of the property
owned lies in small towns in various counties, and that these
towns also assess city taxes. In such cases, this property
should be placed at the end of the list for the county in
333
334
REAL ESTATE ACCOUNTS
which it is situated; for if it should be placed among the
regular lists, there is a possibility of the receipt being over-
looked.
It is a good practice to make a note in red ink on each
ledger sheet on which property subject to city taxes is en-
tered, similar to the following: "Pay City Taxes"; and
also to enter the dates upon which these taxes should be
paid, as these do not coincide with the dates of payment for
county taxes. The method followed for the payment of
the ordinary city taxes is exactly similar to that used for
the county taxes.
Probably the simplest way to enter tax payments on
the books is to charge to Taxes account each check as it is
given, and when the final tax receipt is received from the
collector, to pick out from it all those properties upon which
taxes have been paid which are covered by time sales and
which are payable by the purchasers. A list of these is
made, and a journal entry is put through the books in the
following form :
Contracts
To Taxes
For the following taxes for the year
Contract No Name
Amount .
The total of this is charged to the Contracts account in
the general ledger, and the various items to the individual
accounts in the sub-ledger. After crediting the Tax ac-
count with the above entries, the net balance is carried each
year direct to Profit and Loss, the reason for this being
discussed in 68. In the event of taxes having been paid
in advance, it may be proper to carry all such amounts as
an asset in the manner customary in connection with pre-
paid insurance.
TAXES
335
336. Mortgage Taxes
It is essential, of course, that a concern which has out-
standing a number of mortgages receivable should keep
itself acquainted with the facts as to the payment of the
taxes payable by the mortgagor, especially as it is often the
case that the mortgagor postpones such payments and they
DESCRIPTION OT LANDS If
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fall upon the concern. In order to care for these, separate
tax lists are made for each county and headed "Mortgage
Taxes," and these lists agree with the details given on
Form 53, except that the name of the mortgagor is given
against each description. As it is the custom in many states
to assess the property under the name of the owner, this
insertion facilitates reference on the part of the tax col-
lector.
336
REAL ESTATE ACCOUNTS
The safe practice is to make lists showing every piece
of mortgaged property, and to send them to the tax col-
lector a short time before the books are closed, asking him
to note all unpaid taxes thereon and to return this list to
the concern. When such taxes are paid they are, of course,
charged direct to "Mortgage Taxes" and should not go
through the regular tax accounts. It is to be noted, also,
that occasionally taxes include certain assessments for im-
provements, such as draining wild lands. Each such case
must be taken on its own merits, as it is possible that the
amounts paid for these assessments, although paid with
taxes, may properly be chargeable to Improvements.
337- Descriptions
Before leaving the subject of taxes, one other difficulty
should be mentioned, and that is the various descriptions of
the property used by the assessors and collectors. In the
case of an irregular piece of land the full description of
which by metes and bounds occupies many lines, or even
pages, it is manifestly impossible for the full description to
appear on the tax books. The assessor therefore seeks a
shorter description and defines the land by giving the book
and page on which is recorded a deed conveying the land
in question, as for instance, "Part of the Segui Grant, 100
acres in Section 37, T-3, S.R. 26 E., as recorded in Deed
Book B.2 p. 204."
When this entry is first put on the books, it is probably
correct, but as years go on and it is copied from roll to
roll, errors creep in and the book, or the page, or some num-
ber, is changed. Or, the property may be reconveyed, and
a new assessor may describe it properly under the book and
page in which the new deed is recorded. . Such variations
constantly occur and render difficult the reconcilement of
the returns made with the receipts obtained. To prevent
TAXES
337
this, reference to the records themselves or to an abstract of
title is frequently necessary, and even then it may be found
that the land has been assessed under both descriptions. In
such a case, proper steps should be taken to have one of
the assessments cancelled.
A reference to Form 22 ( 26) will show how these
mistakes may be minimized in practice; for on the front
of the page is given the full description, while on the back
thereof is given the description or descriptions used by the
assessors. This addition to the usual form has proved to be
of great service and its adoption is recommended. In the
same way, descriptions by county assessors frequently differ
from those of municipal assessors, and these differences
in the descriptions should always be clearly stated on the
form.
If proper attention be given and correct returns made,
such mistakes can be cured for future years, for almost in-
variably tax assessors are desirous of bringing their records
to as high a degree of accuracy as their opportunities will
permit.
338. Federal Income Tax
In those cases where the fiscal year of the concern ends
December 31, the annual return to be made in connection
with the income tax is easily prepared from the balance
sheet and its accompanying statements. In many instances
the fiscal year does not end on that date, and many con-
cerns have been put to considerable trouble to prepare an
accurate statement for the calendar year. If the accounts
have been kept as indicated herein, there is little difficulty
in compiling figures, especially if monthly statements have
been prepared as suggested in Chapter XXVII. In such
cases it is only necessary to add the total expenses for the
twelve months; the total profits and the other figures as
338 REAL ESTATE ACCOUNTS
to indebtedness can be supplied from the current trial
balance.
In cases where no monthly statements have been pre-
pared, the earnings can best be ascertained in the manner
indicated in 259. In this the total profits for the year,
such as rent, etc., are taken, and also the total collections
from contracts, while the profits thereon are estimated at
a percentage ascertained either from the balance sheets of
previous years or from an examination of the contracts
themselves. Such profits, of course, can always be ascer-
tained if we know the cost of the properties sold and the
amount of the selling price.
339- Distinction between "Gains" and "Profits"
The published decisions of the Treasury Department
up to this date require that all profits shown on the books
in any year must be treated as income during that year.
On the other hand, such profits as are lost through cancella-
tions are allowed to be charged off as losses in future years.
This includes, of course, gains derived from real estate sold
on time; and the fact that the books of land companies
usually show such gains as profits has necessitated, in many
cases, the payment of taxes on profits not received, not
earned. This ruling adds to the importance of a proper
treatment of such gains, and it is believed that the methods
described in Chapters XX, XXII, and XXIII will avoid
these unnecessary tax payments for book profits. "Gains"
should never be treated as profits, nor even be called
"profits," and therefore could not come under the existing
decisions as to profits. The term "profits" as used in this
work apply only to such profits as are fully earned.
CHAPTER XXXVI
FILING
340. Scope of Filing System
An important part of the work in a real estate office
is that connected with filing the various papers and docu-
ments relating to the business so that each may be found
without loss of time. A list of such papers would include :
deeds conveying property to the concern; abstracts of title
relating to the above, and attorney's certificates thereto;
title policies; mortgages receivable; contracts given by the
concern ; contracts assumed by the concern ; selling con-
tracts; options given and received; fire insurance policies;
tax receipts ; sundry agreements, leases, releases, etc.
All such papers should be kept in a vault or safe with
each class of documents numbered consecutively (abstracts
being given the same number as the piece of property to
which each relates) and filed in order; a record being kept
in proper books, as already suggested.
341. Consecutive Numbering
The advantages of using consecutive numbers in real
estate accounting are so great and so many that their adop-
tion is in many cases essential. Let us first consider the
instances where such numbers must be employed :
i. All receipts must be numbered consecutively, not
only for convenience of record, but also as a safeguard
against fraud. If several collectors (e.g., for rents) are
employed, it is often wise to have the receipt books num-
bered in different series, each series being distinguished by
330
340
REAL ESTATE ACCOUNTS
a different letter and each letter being assigned to one par-
ticular collector.
2. All checks, whether voucher checks or otherwise,
must be numbered, and if several banks are used, the checks
on each bank should be numbered consecutively.
3. All mortgages receivable should be consecutively
numbered, and this order usually affords the most con-
venient basis of arrangement for the mortgages receivable
ledger. This instance affords one of the exceptions to the
general rule that loose-leaf records should be arranged al-
phabetically.
4. Mortgages payable are treated in the same manner.
5. General contracts are usually arranged in order of
the serial numbers and also chronologically.
6. Properties when bought should receive "property
numbers" ( 25), for this affords by far the most con-
venient means of reference in all book and record entries
relating thereto.
In some offices where serial numbers are employed, a
letter of the alphabet is selected to indicate each series of
numbers. For example :
Mortgages receivable will be A-i, A-2, etc.
payable " " B-i, B-2, "
contracts " " C-i, C-2, "
The numbering of contracts on subdivision properties
is of especial advantage ; but in those cases where the num-
ber of purchasers in any one subdivision is large, it is
usually found convenient to arrange all sub-ledgers on a
strictly alphabetical basis, and to use indexes finely subdi-
vided, say 1 20 divisions to the alphabet.
All deeds of conveyance should be numbered serially.
Where subdivision property is dealt with, a special deed for
each division should be used, the name of the property and
FILING
341
the grantor being printed, and in such instances each sub-
division should have its own series of numbers.
Abstracts of title should bear the numbers of the real
estate to which they refer, and should be filed in this order
For renting purposes, where the list of houses remains
substantially the same, it is frequently convenient to give
each house, apartment, or flat a serial number. In the case
of small tenement property, this method is particularly val-
uable; and in cases where street numbers are lacking or
confused, if the serial number can be stencilled or painted
on some portion of the house, it gives the collector a double
check on the description, which is frequently useful.
342. Sundry Documents
These papers are perhaps the most difficult of all to
file in such a way that any particular one may be found
quickly when necessary. After trying several methods, the
writer has adopted the following plan, which fully serves
the desired ends :
Each paper to be filed is stamped with a serial number
and put in a manila envelope, which is stamped with the
same number. The envelopes are then filed in numerical
order, irrespective of the nature of the document.
A double card index is used, divided into two parts, each
of which is indexed alphabetically. One of these parts is
used for indexing the names of the parties mentioned in
the various documents, and the other part is used for in-
dexing the nature of the various papers filed, such as
"Agreements," "Bills of Sale," "Escrow Agreements,"
"Timber Leases," "Affidavits," etc.
Each paper as it is filed is entered in both parts of this
index; e.g., a bill of sale from James Young would be en-
tered on a card headed "Bills of Sale" and filed under "B"
in one part of the index, and would also be entered on an-
342
REAL ESTATE ACCOUNTS
other card under "Young, James" and filed under "Y" in
the other part of the index. Against the entry on each card
is shown the number stamped on the envelope in which
the paper is filed.
This system takes but little time, and by it a paper can
be quickly found if either the nature of the paper or the
name of any party making it is known.
343. Ticklers
In such a business as we have been considering, there
are payments of interest to be made each month, as well as
collections from mortgagors who are in arrears. In order
to insure all such collections receiving attention, a tickler
must be used, such, for example, as a bank cashier keeps.
There are so many forms of these, each of which fills its
purpose, that no description of any one seems necessary.
INDEX TO FORMS
(Figures in parentheses indicate form numbers.)
Abstracts loaned (51), 308
Account,
expense, analysis of (41), 88
general, monthly schedule, 267
subdivision, tabular ledger for
(16), 44
Agent, rental, monthly report of
(48), 302
Analysis of expense account (41),
88
Annual report of office building
(47), 301
B
Balance sheet, 278, 279
condensed, 280
Brokerage ledger (13), 41
Broker's record (49, 50), 303
Cancellations, monthly schedule,
271
Capital stock ledger (i), 14
Card insurance record (52), 320
Card property record (27, 28), 66
Cash,
petty, voucher (5), 25
receipts, monthly schedule, 272
Cash book,
general (3), 19
superintendent's (6), 26
Certificate of title (18), 47
City property ledger, English form
(26), 64
Collector, rent, report of (35), 79
Colony report (46), 199
Commissions, earned, ledger (13),
41
payable ledger (12), 40
Contracts,
general (u), 38
selling, monthly schedule, 269
Coupon, mortgage (43), 146
Customers, subdivision, ledger
(11, 14, 15, 16), 38, 42, 43, 44
D
Deeds,
issued, record (30), 70
received, record (23), 56
E
Earned profits, monthly schedule,
272
Earnings, monthly schedule, 268
English form,
city property ledger (26), 64
mortgage interest receivable
(40), 87
Expense,
account, analysis of (41), 88
monthly statement, 268
H
Histories, subdivision (31), 73
343
344
INDEX TO FORMS
Index, property (19), 48
Insurance card record (52), 320
Interest,
payable register, mortgage (39),
86
receivable, mortgage, English
form (40), 87
Interest-bearing mortgage note
(42), 144
Land, timber, record (22a, 22b),
54, 55
Ledger,
capital stock (i), 14
commissions earned (13), 41
commissions payable (12), 40
general (7), 29
mortgages payable (9, 10), 34,
35
mortgages receivable (8), 31
pocket rent (38), 84
property, English form (26), 64
rent, (36), 81
tabular (37), 82
subdivision customers (14, 15,
16), 42, 43, 44
Listing slip (24), 58
Loaned abstracts (51), 308
M
Monthly report of mortgage in-
terest receivable, 87
Monthly report of rental agent
(48), 302
Monthly schedules (see "Sched-
ules, monthly")
Mortgage,
coupon (43), 146
interest payable register (39).
86
interest receivable report, Eng-
lish form (40), 87
note,
interest-bearing (42), 144
non-interest bearing (44), 146
payable ledger (9, 10), 34, 35
receivable ledger (8), 31
N
Non-interest bearing mortgage
note (44), 146
Note, mortgage,
interest-bearing (42), 144
non-interest bearing (44), 146
Office building, annual report of
(47), 301
Option (45), 163
Petty cash voucher (5), 25
Pocket rent ledger (38), 84
Profits,
earned, monthly schedule, 272
in reserve, monthly schedule, 270
Property,
index (19), 48
ledger (213, 2ib), 50, 51
city, English form (26), 64
record, card (27, 28), 66
Real estate, monthly schedule, 269
Receipt book, general (2), 17
Receipts,
cash, monthly schedule, 272
rent (33), 77
Record,
broker's (49, 50), 303
deeds issued (30), 70
deeds received (23), 56
INDEX TO FORMS
345
Record Continued
insurance, card (52), 320
property, card (27, 28), 66
rent (32), 75
timber land (22a, 22b), 54, 55
Rent,
collector's report (35), 79
ledger (36), 81
pocket (38), 84
tabular (37), 82
receipts (33), 77
record (32), 75
report (34, 35, 47, 48), 78, 79,
301, 302
Report,
annual, of office building (47),
301
colony (46), 199
mortgage interest receivable, 87
rent (34, 35, 47, 48), 78, 79,
301, 302
rental agent,
annual (47), 301
monthly (48), 302
rent collector's (35), 79
sale (17), 46
Reserve, profits in, monthly sched-
ule, 270
Return, tax (53), 335
Sale,
report of (17), 46
Sales,
monthly schedule, 271
Schedules, monthly,
accounts general, 267
cancellations, 271
cash receipts, 272
contracts, selling, 269
earned profits, 272
earnings, 268
expense, 268
profits in reserve, 270
real estate, 269
sales, 271
summary, 271
Selling contracts, monthly sched-
ule, 269
Slip, listing (24), 58
Stock, capital, ledger (i), 14
Subdivision,
accounts, tabular ledger for
(16), 44
customers ledger (u, 14, 15,
16), 38, 42, 43, 44
histories (31), 73
tickler (29), 68
Superintendent's cash book (6),
26
Tabular rent ledger (37), 82
Tax return (53), 335
Tickler, subdivision (29), 68
Timber land record (22a, 22b), 54,
55
Title, certificate of (18), 47
Tract book (20), 49
Trial balance, 222-225
Voucher, petty cash (5), 25
GENERAL INDEX
Abstract companies, 307, 308
Accounts,
acquisition of real estate, 91
agents', 300-302
audit details, 286-299
balance sheet, 274
branch office, 247
brokers', 302-306
building, 324-331
cancellation of contracts, 187,
271
cash receipts, 272
contracts, 159, 215, 269-271
selling, 269
cost of improvements, 193
earnings, 201, 268, 272
expense, 268
general, monthly schedule, 267
increased value, 134
insurance, 319-323
payable, 220
real estate, monthly schedule,
269
rent records, 324-331
reserve profit, 205, 270
sales, 1 10, 271
summary, monthly schedule, 271
taxes, 333
trial balance, 217-259
Accrued interest, not due, 177
Acquirement of real estate, 90-95,
192
accounting procedure, 91
contracts payable, 95
cost of, 96
entries required, 92
methods of, 90
mortgages payable, 92
mortgagor, legal obligations of,
93
trusts and trustees, 95
Additions, defined, 99
Adjustments, interest, 168
Advances,
to salesman, account, 234
to settlers, 198-200
Advertising,
account, 221, 233
expense, 197, 233
Agents,
rental, 300-302
annual report, 301
monthly report, 302
selling contracts, 214
Agricultural properties,
operation of, profits, 138
Annual report,
rental agent, 302
schedules for, 281
Annuity, tables, 149
Apartment house accounts, 300
Appraisal of property, 122, 290
Appreciation, 316
Arrears, payments in, 186, 206
Assessments, 108
Assets, verification of, 283
Associations, real estate (See
"Real estate organizations")
Audits, 283-299
appraisal certificates, 290
assets, verification of, 283
bills payable, 294
cash disbursements, 288
347
GENERAL INDEX
Audits Continued
cash receipts, 287
commission accounts, 291
contracts payable, 204
dividends, unpaid, 295
equipment, 293
examination of records, 285
method of conducting, 287
mortgage frauds, 285
mortgages payable, 294
mortgages receivable, 290
profit and loss account, 296
property ledger, 289
purchase accounts, 295
rent and repairs, 295
reserve account, 296
reserve profits, 296
stock, capital and treasury, 294
subdivision property, 292
histories, 293
sales, 293
sundry creditors, 294
sundry debtors, 294
time sales, 297
trustees' accounts, 299
Automobiles account, 221
B
Balance sheet, 259, 274-282
arrangement of items, 275
Continental form of, 275
depreciation, showing of, 317
English form of, 275
form of, 278-280
nature of, 274
schedules accompanying, 276,
281
showing of interest on, 177
Banks, cash in (See "Cash")
Banks, treatment of real estate
values, 134
Betterment, defined, 99
Bills payable,
account, 221
audit of, 294
record, 85
Bills receivable,
account, 226
record, 85
Books, (See also "Records")
of account, general, 16-29
Borrowed money, profits from, 137
Branch offices, 247, 257
Brokers,
commissions, 40, 41, 305
ledger, 40, 41
records, 302-306
Building accounts, 226, 227, 330-332
costs, subdivision of, 331
Building and loan societies, 309
Calculation of profits, rule, 181
Cancellations,
accounts, 243
journal entry, 28
monthly schedule, 271
of contracts, 156, 158, 185-190
of subdivision sales, 190
of time sales, 185-190, 271
profits account, 189, 227
Capital stock,
account, 227
audit of, 294
Card record,
brokers', 304
insurance, 320
property, 5, 67
Carrying charges (See "Charges,
carrying")
Cash,
disbursements,
audit of, 288
in bank,
account, 259
audit of, 287
book, 16-18
monthly schedule, 272
GENERAL INDEX
349
Cash Continued
payment,
large, 119
small, 120
petty,
account, 248
receipts,
audit of, 287
monthly schedule, 272
superintendent's, account, 259
Cash book, 18-22
entries of newly acquired real
estate, 92
general, 18-22
petty, 23, 25, 248
rent, 79, 325
superintendent's, 25
Cemeteries,
associations, 309
subdivision accounts, 310
Certificate of title (See "Title")
Charges, carrying, 102-109 (See
also "Interest," "Taxes,"
Inventories," "Assessments,"
"Maintenance," "Deprecia-
tion")
Charity account, 228
City property record, 60, 62, 63
Clean bookkeeping, 217
Collector, rent,
ledger, 83
record, 83, 329
report of, 77-79, 329
Commissions,
accounts, audit of, 291
earned,
account, 228
accounting procedure, 305
ledger, 40, 41
payable,
account, 228, 239, 241, 247, 254
ledger, 39
Companies (See "Real estate or-
ganizations")
Concern, definition, 3
Continental form of balance sheet,
275
Contracts,
account, 228, 230, 231, 232, 237,
240, 243, 247, 250, 257
accounting procedure, 159-162
advantages of, compared with
mortgages, 159
amount of sale must be defi-
nitely stated, 154
cancellation of, 156-158, 185-190
accounting treatment, 187-191
conditions, 153-154
definition, 2
farm accounts, 254-256
ledger, 36
monthly schedule, 270
mortgages compared with, 158
pass-book, 155
payable, 2, 95
account, 228
audit of account, 294
payment, 203
amount of first, 185
in arrears, 186
statement of, 159
record, 72
sales on, 121
selling,
account, 257
accounting treatment, 215-
216, 230
classes of, 214
definition, 3, 214
monthly schedule, 269
simple, 152
statements of account, 159
surrender of, 114
villa, accounts, 254-256
water-front, accounts, 254-255
Corporate records, (Sec also
"Records")
minute book, n
350
GENERAL INDEX
Corporate records Continued
stock, 13
stock certificate book, 12
subscription ledger, 15
Costs,
acquirement of property, 90-97
basis of inventories, 104
building, 331
depreciation, effect on, 107
elements of, 96
holding, 96, 102-108
improvements, 97, 98
interest and, 103, 104, 105
investment, 97
maintenance, 96, 108
operating, 96, 108
price, 117
subdivisions, 193-195, 202
renewals, 98
repairs, 98, 99
revision of, 194
taxes, 102, 107
treatment of, 97
Coupon, mortgage, 146
Creditors' accounts, 294
Debtors, sundry, schedule of, 294
Deeds, 93
in escrow, 165
issued, record of, 70-72
received, record of, 56, 69
Deficiency account, mortgage, 246
Definitions, I, 2, 3, 99, 214
Delinquents, time allowed, 186
Depreciation, 313-318
balance sheet, showing on, 317
calculation of, 315, 316
costs affected by, 107
leasehold property, 318
nature of, 313
percentage of, 314
systematic treatment of, 314
vs. appreciation, 316
Descriptions of property, 336
Directors' meetings account, 229
Development property, 123 (See
"Subdivision property")
Dividends, unpaid, account, 229
audit of, 295
Documents, sundry, filing, 341
E
Earned profits (See "Profits,
earned")
Earnings, monthly schedule, 268
English form,
balance sheet, 275
mortgage interest receivable
report, 87, 89
property ledger, 65
Equipment, schedules of, 293
Equity, as basis for calculation of
profits, 183
Escrow, 165
Examination of records, 285
Exchange of properties, 121
Expense, 268
advertising, 221
analysis book, 89
general, account, 231
legal, 114
account, 231
monthly schedule, 268
mortgage, account, 231
subdivisions, 197
account, 230, 232, 237, 238,
240, 243, 247, 250, 254
Farm contracts (See "Contracts,
farm")
Federal income tax, 337
Field record, 65
Filing system, 339-342
consecutive numbering, 339
leases, 74, 341
GENERAL INDEX
351
Filing system Continued
scope of, 339
sundry documents, 341
ticklers, 342
Fire insurance (See "Insurance,
fire")
Fixed charges (See "Charges,
carrying")
Fluctuations in values, 133
Foreclosure, 150-151
Forfeiture for non-payment, 180
Frauds, 284, 285
Furniture and Fixtures account,
246
Gains (See also "Profits")
account, 118, 121, 187, 230, 232,
233, 237, 238, 240, 243, 247, 250
definition, 2
distinguished from earned profit,
179, 338
Gross and net rent, 127
H
Hidden profits, 123
Holding subdivision properties,
213
Improvements, 229, 255
account, 234
cost of, 97, 98
defined, 99
Income tax, 337
Increase in value,
accounting procedure, 134
Instalments, (See also "Time
sales")
judgments, 180
lapses, 185
mortgage, 147, 148
annuity tables, use of, 148-150
payments, on contracts, 203
statement, 159
Insurance,
fire,
account, 234
record, 85, 319
life,
account, 242
mortgages payable and, 322,
323
time sales and, 321
mortgage, account, 234
records, 319-323
expiration register, 319
Interest, 102, 105, 106, 236
accrued, not due, 177
adjustments, 168
and cost, 103, 104, 105
charges, treatment of, 106-107,
160
earned, account, 236
mortgage (See "Mortgages")
paid, account, 236
unearned, 169-177
account, 236
journal entries, 176
methods of calculating, 170-
175
phrasing of clause, 175
Inventories,
cost as basis for, 104
real estate, 283
Investment, cost of, 97
Journal, 27
Judgments, 150, 180
account, 237
Land notes, record, 85
Leasehold,
companies, 308
property, depreciation on, 318
352
GENERAL INDEX
Leases, 126
record of leases given, 74, 341
Ledger,
city properties, 60
commissions earned, 40, 41
commissions payable, 39
general contracts, 36
mortgages payable, 33
mortgages receivable, 30
property, audit of, 289
rent, 80-82, 327-329
collectors', pocket, 83
stock, 13
subdivision customers, 40-44,
210-213
special forms, 38, 43, 210-213,
265, 293
sub-ledgers, 30-44
subscription, 15
wild lands, 48
Legal expenses, 114, 231
Life insurance (See "Insurance,
life")
Listing slip, 58
Loose-leaf records, 5
Lots account, 238, 240, 241
M
Maintenance costs, 96, 108
Manufacturing properties,
operation of, profits, 137
Map and tack records, 304
Mineral lands, change in value, 132
Mines, rent from, 129
Minute book, n
Monthly statement (See "State-
ments, monthly")
Mortgages, 142
accounts, 294
assumed by purchaser, 118, 119
cancellation of contract, 156
change of ownership, 150
compared with contracts, 158
coupon form, 146
deficiency account, 246
defined, 143
foreclosure, 150-151, 180
frauds, 285
in settlement, 246
instalment, 147, 148
insurance, account, 234
interest payable,
account, 236
overdue account, 236
record, 86, 89
interest receivable, 166
account, 236
monthly report, 87, 89
overdue account, 236
record, 87, 89, 167
legal obligations of mortgagor,
93
ledgers, 30-36
life insurance, 322
notes,
interest-bearing, 144, 145
non-interest bearing, 145-147
ownership, change of, 150
payable, 33, 92
account, 245
audit of, 204
ledger, 33, 85
time sales and, 322, 323
payments secured by, 119
receivable, 290
account, 245
ledger, 30
taxes, 335
account, 257
transfer, 151
trustee, 253
unearned interest, 169
N
Net rent and net returns, 127,
128
Notes,
land, record, 85
GENERAL INDEX
353
Notes Continued
mortgage, 143-147
Numbering,
consecutive, in filing, 339
Office buildings accounts, 301
Officers, accounts for, 5
Operating costs, 96, 108
Options,
accounting treatment, 164, 246
deeds in escrow, 165
granted, account, 246
held, account, 246
nature of, 163
on rent-producing houses, 164
record, 73
refusal, different from, 165
Orchards, operation, of, 139
Ownership of mortgage, change
in, 150
Payments,
amount of first, 185
cash,
large, 119
small, 120
failure, 180, 237
in arrears, 186, 206
instalment, 203
methods of,
cash, in
cash and mortgage, 119
cash, note, and mortgage, 112
contract, 113
mortgage as part, 111-112
statement of, 159, 203, 204
taxes, entry of, 333
Petty cash,
account, 248
book, 23
voucher, 25
Plat book, 65, 69
Postage account, 249
Profit and loss account, 249
audit of, 296
Profits,
account, 118, 249
annual statement, 140
anticipated, 124
average, 203
book, 178
calculation of on equity basis,
183
cancellation, account, 227
defined, 2, 116
earned, 118, 201-213, 245, 249,
263, 272
anticipation of, 182, 183
distinguished from gain, 179,
338
monthly schedule, 272
rule for calculating, 181
subdivision properties, 201-213
equity, basis for calculating, 183
from enhancement of value,
132-137
accounting treatment, 134-135
bank practice for, 134
effect on rent charges, 136
fluctuations in, 133
mineral lands, 132
stockholders, rights of, 135
from operation of,
agricultural properties, 137
manufacturing properties, 137
orchards, 139
from rent, 125-131
gross rent and net rent, 127
net rent and net returns, 127
of mines and similar sources,
129-131
time for entering, 128, 129
from sales,
anticipated, 124
appraisal of property, 122
354
GENERAL INDEX
Profits Continued
from sales Continued
cash payment, 119
cost price, 117
development properties, 123
earned, 123
exchange of properties, 121
hidden, 123
mortgage assumed by pur-
chaser, 118
on contract, 121
selling price, 117
hidden, 123
in reserve,
monthly schedule, 270
time sales on subdivision
properties, ? 5
on borrowed money, 137
on subdivisions, 244
on value and investment, 109
reserve account, 205, 252
rule for calculating, 181
sources of, 116
unearned, 205, 212, 245
Property,
agricultural, 138
costs (See "Costs")
descriptions, 336
development of, 123 (See "Sub-
division property")
exchange of, 122
ledger,
audit of, 289
English form, 65
manufacturing, 137
orchards, 139
records, 45-73
city properties ledger, 60
contracts issued, 72
deeds issued, 70-72
deeds received, 56, 69
field record, 65
index, 45, 61
listing slip, 58
options granted, 73
plat book, 69
subdivision histories, 73
subdivision ticklers, 67
timber land, 54, 55
wild land ledger, 48
subdivision (See "Subdivision
property")
suburban (See "Subdivision
property")
Purchase account, 229, 230, 232,
233, 237, 238, 240, 247, 257
audit of, 295
R
Real estate,
accounts, monthly schedule, 269
acquisition of (See "Acquire-
ment of real estate")
organization, 307-312
abstract companies, 307
building and loan societies, 309
cemetery companies, 309
leasehold companies, 308
sales (See "Sales")
Receipts,
cash, 272
audit of, 287
book, 16-18
monthly schedule, 272
tax, 332
Records,
agents', 300-302
bills receivable and payable, 85
brokers', 302-306
cash book, 18
city property, 60, 62, 63
commission (See "Commis-
sions")
condensed, 9
corporate (See "Corporate rec-
ords")
expense account analysis book,
88,89
general receipt bock, 16
GENERAL INDEX
355
Records Continued
insurance (See "Insurance rec-
ords")
land notes, 85
list of, 6
loose-leaf and card, 5
map and tack, 304
mortgage interest, 86, 87, 89, 167
monthly, 87, 89
options, 73
property (See "Property rec-
ords")
rent (See "Rent records")
required, 4, 6
separate books, 8
timber land, 54, 55
use to officers, 4
Refusals, 165
Register, mortgage interest, 86, 89,
167
Renewals,
repairs, renewals, and improve-
ments, cost of, 98
Rent,
account, 251
audit of, 295
agent, 245, 300-302
enhanced value, effect on, 136
from mines and similar sources,
129-131
gross and net, 127
lease, 126
monthly returns, 245
net rent and net returns, 127,
128
payable to owners, account, 245
profits from (See "Profits
from rent")
records, 74-84, 128, 300-302, 324-
331
agents', 300
cash book, 79, 325
collections, 77-79, 83, 84, 329
house addresses, 74-76, 325
journal, 80
leases, 74
ledger, 80-83, 327-329
receipt book, 77, 325
register, 61, 74-76, 325
repairs, 326
vacant houses, 330
report of agent, 301, 302
report of collector, 77-79, 329
time for entering, 128, 129
Repairs, 97, 98, 295, 326
account, 251
audit of, 295
defined, 99
Report,
annual, schedules for, 281
mortgage interest receivable, 87
rent collector's, 77-79, 329
rental agent's, 301, 302
Reserve account, 254
Reserve profit account, 205, 252,
296
audit of, 296
Royalties, brick-yard, account, 226
Salaries account, 254
Sales, 110-115 (See also "Time
sales")
account, no, 271
amount of, must be definitely
stated, 154
auditing, 297
cancellations, 185, 271
entries, 111-114
final, no
gain on (See "Gains")
legal expenses of, 114
life insurance, 321
monthly schedule, 271
profits from (See "Profits")
report, 45, 46, 92, no
subdivision (See "Subdivision
property, sales")
356
GENERAL INDEX
Sales Continued
surrender of contract, 114
time (.See "Time sales")
Salesmen,
advances to, account, 234, 256
Schedules,
annual report, 281
balance sheet, 276, 281
monthly, 267-272
accounts, general, 267
cash receipts, 272
contracts, selling, 269
earned profits, 272
earnings, 268
expense, 268
profits in reserve, 270
real estate, 269
sales, 271
summary, 271
Selling contract (See "Contracts")
Selling price, 117, 202
Settlers, advances to, 198
Statements,
annual profits, 140
contracts, 159
instalment, 159
monthly, 260-273
advantages of, 261, 262
cash receipts schedule, 272
comparison of, 266
contracts schedule, 270
determination of earned prof-
its, 263-265
earnings schedule, 268
expense schedule, 268
general accounts schedule, 267
method of preparing, 262-263
profits in reserve schedule, 270
real estate schedule, 269
selling contracts schedule, 269
summary schedule, 271
of contract payments, 159
Stationery and printing account,
254
Stock,
capital, 227
audit of, 294
certificate book, 12
ledger, 13
record, 13
treasury account, 258,
audit of, 294
Stockholders, rights of, in case of
enhanced value, 135
Stumpage account, 256
Subdivision property, 192-200,
201-213, 231, 237, 239, 247, 249,
254, 257
accounts, 217-259, 310-312
acquirement, 192
advances to settlers, 198-200
auditing, 292, 293
average profit, 203
check on unsold lots, 106
cost price, 193, 194, 202
customers' ledger, 40-44, 210-213
earned profits, ascertaining
from, 210-213
special form of ledger, 38, 43,
210-213, 265, 293
defined, 2
expenses, 197, 238, 240
field record, 65
histories, 73
audit of, 293
holding, 213
plat books, 65, 69
profits on, 244
earned, 201-213 (See also
"Profits, earned")
release of lots from encum-
brances, 192
sales,
cancellation of, 190
selling price, 202
statement of payments, 203-
204
taxes, 107 (See also "Taxes")
GENERAL INDEX
357
Subdivision property Continued
ticklers, 65, 67
time sales, (See also "Time
sales")
profits in reserve, 205
unsold lots, 196
Sub-ledger (See "Ledger")
Subscription ledger, 15
Suburban property (See "Subdi-
vision property")
Summary of accounts, 271
Superintendent,
cash account, 259
cash book, 25
Suspense account, 257
Taxes, 102, 107, 333-342
account, 257
descriptions, detailed, 60, 336
federal income, 337
mortgage, 335
account, 257
payment, entry of, 333
subdivision, 107
Ticklers, 342
subdivision, 65, 67
Timberland record, 54, 55
Time sales, 2, no, 141, 154
audit of, 297
cancellations, 185-191
accounting treatment of, 187-
191
classes of, 141-142
contracts, 152-162 (See also
"Contracts")
defined, 2
life insurance and, 321
mortgages, 141-151 (See also
'"Mortgages")
subdivision,
profits in reserve, 205
Title,
certificate, 44, 47, 91
unencumbered, 192
Town lots, 238, 240, 241
Transfer of property, 150
Traveling salesmen's account, 256
Treasury stock, 258
audit of, 294
Trial balance,
analysis, 217-259
form, 222-225
purpose of, 260
schedules, 267-272 (See also
"Schedules, monthly")
Trust companies, 134
Trustees' account, 253, 299
Trusts and trustees, 95, 253
U
Unearned profits (See "Profits")
Unearned interest (See "Interest,
unearned")
Unpaid dividends account, 229
audit of, 295
Vacant houses, 330
Values, enhancement of, 132-137
(See also "Profits from en-
hancement of values")
Verification of assets, 283
Villa contracts (See "Contracts,
villa")
W
Water-front contracts (See "Con-
tracts, water-front")
Wild land ledger, 48
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