GiR THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA HENRY RAND HATFIELD MEMORIAL COLLECTION PRESENTED BY FRIENDS IN THE ACCOUNTING PROFESSION i HENRY R. HATFIELD 2695 LE CONTE AVENUE BERKELEY CALIFORNIA u^ Rowe's Bookkeeping and Accountancy Complete Text Presenting the art of bookkeeping in accordance with the principles of modern accountancy By HARRY M. ROWE, Ph.D. Author of "Commercial and Industrial Bookkeeping,," "Business and Office Practice," "Business Bookkeeping and Practice," Etc. SCRIPT BY C. P. ZANER BALTIMORE THE H. M. ROWE COMPANY EDUCATIONAL PUBLISHERS COLORS USED IN THE RULINGS IN THIS BOOK AND ACCOMPANYING BLANK BOOKS. Science has determined that the combination of colors least trying to the eye are neutral shades of brown and green, and that the most trying are red and blue. For this reason the brown and green colors used in the rulings in this book and the blunk books accompanying it have been substituted for the red and blue usually found in books of this character. Copyright 1910 Copyright 1911 Copyright 1918 BY Harry M. Rowe Entered in Stationers' Hall London, 1910 Entered in Stationers' Hall London, 1911 BY Harbt M. Rowe Copyright protects a'.l the copyrightable com- ponent parts of this work and prohibits all unlaw- ful use of Its composition, illu^^trations, methods, etc. Infringers will be punished to the full extent of the law. HF5G1S R& /f/8 PREFACE "Bookkeeping and Accountancy" is intended to impart a training in the art of bookkeeping that is based upon the fundamental principk's of accountancy. It is intended for students of the age usually found in commercial schools, public and private, who are ready to begin a study of the subject. The completion of the full course of stud}^ provided will not only qualify for a high degree of proficiency in the art of bookkeeping, but it will also lead up to a very thorough understanding of the general principles and practices of accountancy. While for many years I have closely followed the development of account- ancy as a science, particularly in its economic relations, I am no longer a prac- ticing accountant, therefore, I have presented accountancy in this work as I have found it, particularly as reflected in the practical experience of many eminent accountants with whom I have consulted. My principal task has been to simplify the presentation of accountancy so that it may be understood by the average commercial student, and to prepare book- keeping sets in various lines of business that would illustrate the application of its principles. I have found that in reclassifying accounts to conform with the theory and practice of accountancy, the art of bookkeeping has been made easier to learn and easier to teach, rather than more difficult. True science simplifies any subject of which it treats, and accountancy is the true science of bookkeeping. Five distinct subjects are included: — the fundamental and elementary prin- ciples of accountancy, the art of bookkeeping as applied in various lines of business, business methods and practices, and office methods and practices. The following are some of the features of particular interest: 1. For students who are beginning, teachers can have their choice of (1) the account, or skeleton ledger method, (2) the theory method, using transactions stated in the form of memorandums, or (3) the illustrated theprj' method, in which the business papers received and issued are used in connection with the printed text, either for purely illustrative purposes, or as data from which records are to be made in the various books. The "Subject matter is the same, except that it is presented in different order in each method. 2. The transactions are classified and entered in the books in which they properly belong, from the start. Purchases, sales, notes and acceptances, cash receipts and payments, etc., are entered directly in their respective books, from which the proper accounts in the ledger are debited and credited. 3. Various price lists are provided with each set, which may be used, if desired. fwif^i i PQc; IV PREFACE 4. The transactions of each set are confined to those usually found in the particular line of business illustrated. All unnecessary and unbusinesslike trans- actions are omitted. 5. The transactions of each set and the accounts growing out of them are classified according to the principles and rules of modern accountancy. 6. The business methods commonly followed in the various fines of business illustrated in the different sets are fully explained in connection with the transac- tions to which they apply. 7. The trading and profit and loss statements, statements of resources and liabilities, and the other statements, analysis sheets, etc., required in connection with each set conform strictly to the estabUshed forms of these statements em- ployed by accountants. 8. The business papers and forms are selections from the best lithography produced, many of them showing unique and practical ideas in design and arrange- ment to facilitate and safeguard business transactions. 9. Ledger closings, the gouping of accounts, the use of controlling accounts, the analysis of accounts, and the preparation of various supplementary and sup- porting statements are given special attention and thorough treatment. 10. Manufacturing accounts and statements, corporation accounts, the voucher system of accounts, branch store, agency, and other special accounts are fully explained and illustrated. 11. Cost accounting, cost records and systems are given ample treatment for the elementary student. 12. The principles, rules and practices of accountancy are fully set forth throughout the text and its accompanying budgets. 13. Supplementary drills, that feature which proved to be so valuable in my older bookkeeping publications, are provided wherever needed. I wish to acknowledge the valuable services rendered in the preparation of manuscript and the reading of the proof by my good friend, B. P. Leister, C. P. A., a former pupil, who was for many years a most successful teacher of the commer- cial branches, and who is now in full practice as a certified pubfic accountant. I also wish to acknowledge my obligation to the many other accountants who have assisted me in various ways in the preparation of this book, and who have responded so freely to my requests for suggestions and criticisms. The Author. Baltimore, Md June 10, 1910. CONTENTS Definitions 1 Accounts 3 Debiting and Crediting Accounts 4 Classification of Debit and Credit Items 5 Personal Accounts 5 Ownership Accounts 16 Proprietor's and Partner's Capital Accounts 17 Relationship Between the Owner and the Business 2! Proprietor s and Partner's Personal Accounts 22 Notes Receivable and Notes Payable 24 Notes Receivable Account 25 Notes Payable Account 31 Cash Account •^' Merchandise Accounts 42 Principal and Subsidiary Trading Accounts 42 Purchases Account— A Principal Trading Account 43 Sales Account— A Principal Trading Account 49 Inventory Accounts 53 Subsidiary Trading Accounts 56 Freight 56 "Freight In" Account 57 Warehouse Accounts 58 Warehouse Supplies Account 58 Warehouse Labor Account 60 Rebates and Allowances 62 Merchandise Discounts 63 Purchase Discounts Account 64 Sales Discounts Account 66 The Trading Statement 69 Profit and Loss Accounts 79 Current Expenses and Incomes: Use and Service Accounts 81 Selling Expense Accounts 84 Outgoing Freight, Express Drayage, etc 85 Delivery Expense A ccount 87 Administration Expense Account 88 General Expense Accounts 91 Insurance Account 94 Insurance Expense Account 98 Interest and Discount Account 100 Pioperty Investment Expense and Income Accounts 104 Real Estate 166 The Investment Account— Real Estate 106 Real Estate Expense and Income Accounts 108 Vl CONTENTS Property Investment Expense and Income Acc-ounts— Continued Furniture and Fixtures Account 112 Repairs and Renewals Account 114 Delivery Equipment Account 117 Profit and Loss Statement 118 Distribution of Undivided Profits 127 Journalizing, Posting, Checking Trial Balances, etc 130 Trial Balances, Inventories, Statements, etc 131 Closing the Books, Statements, etc 137 Combined Trading and Profit and Loss Statement 142 Statement of Resources and Liabilities 145 Analysis Sheets 147 Explanation of Other Accounts 154 Shipments and Consignments 154 Shipment Accounts 155 Consignment Accounts 157 Commission Accounts 160 . Branch Store Accounts 161 Briefer Explanations of Accounts 164 Business Papers ^^^ Account Books 1^6 Cash Book 187 Purchases Book 187 Sales Book ^ 187 Notes and Acceptance Books ■ ■ ■ • • • 188 The Journal— Other Books— The Ledger ,189 Closing the Ledger • 1^" Errors in Trial Balances 1"^ Corporations 1^^ Difference Between Partnerships and Corporations 195 Corporation Accounts ' ■ ' Muaufacturing Accounts 200 Cost Accounting 202 Advantages of a Cost System 209 Wage Systems -12 Distribution of Indirect Expenses 213 The Department Method of Manufacturing Accounts 221 Cost Method of Manufacturing Accounts 223 Manufacturing Statements 2^" Forms of Cost Records, Reports, etc 254 The Voucher System 257 BOOKKEEPING AND ACCOUNTANCY 1. Bookkeeping. The art of classifying and recording business transactions and facts systematically is called bookkeeping. 2. Accountancy is that branch of practical science which treats of the methods of classifying and recording business transactions and accounts so that the facts they exhibit shall be shown in tlunr proper relations, expressed in terms that will most fully provide the information necessary to successful business and financial administration. 3. A business transaction is an exchange of something for something between persons; that is, one person receives something of value from another for which he gives something of equivalent value in exchange. 4. Value is represented in anything that has worth, purchasing power, or utility such as property, merchandise, money, uses, and services. 5. As to the time of transfer by each party, transactions are of two kinds, completed and inieompleted. 6. A completed transaction is one in which the exchange of value is made by both parties at the same time. 7. An uncompleted transaction is one in which the transfer is made by one party but not by the other, the transfer by the second party being made at some future time. Such a transfer is said to be "on account." 8. An uncompleted transaction is completed when the transfer by the second party i.: -^lade to the first, the transfer by the first party having been made at some previous time. Such a transfer is said to be "on account." 9. During the interval of time between the transfer by the first party and th3 transfer in payment by the second party, which interval of time is known as the "term of credit," the second party oives or is in debt to the first party and the first party trusts or gives credit to the second party, therefore, — £ BOOKKEEPING AND ACCOUNTANCY 10. A debtor is one who owe^ or is in debt or has been trusted, and the amount he owes is known as a debit in the account kept with him bj^ the creditor. He is the receiver of something of value for which he does not at that time give value. 11. A creditor is one who isowed or has given credit or trust, and the amount that is owed to him is known as a credit in the account kept with him b}- the debtor. He is the giver of value for which he does not at that time receive value. 12. An important distinction. The words "debtor" and "creditor" refer 07ily to persons, and, in the sense of owing or being owed, debit and credit can only be used in connection with personal accounts. Debit and credit as applied to all other ac- counts are used only as convenient terms to designate which side of the account is referred to, and do not imply that the things represented by these accounts owe or are owed. 13. Things represented by impersonal accounts, cannot owe or be owed, although some writers erroneously personify them so as to apply the principles of debit and credit relating to personal accounts. This, can never be done, however, without violating the simplest principles of logic and reason. Merchandise could not owe or be owed, since it belongs to the owner and is in his possession. Merchandise accounts show the costs of purchases and the returns from sales. Likewise cash is in the possession of the owner, and cash account shows receipts on one side and pay- ments on the other. The various expense items show what the expenses of the busi- ness cost, i.e., the outlays necessary to earn the incomes of the business as shown in the various income accounts. The only reason for using the terms "Dr." and "Cr." to designate the two sides of impersonal accounts is because they are the most convenient and the briefest terms that can be used. 14. A creditor trusts or gives credit to a debtor because of an expressed or im- pUed pro77iise or contract on the part of the debtor to pay the creditor at some future time. When expressed, the promise or contract maybe made orally, i.e., "byword of mouth," or in writing. When in writing it becomes a "written promise to pay," and is usually in the form of a promissory note or of an acceptance. 15. An oral promise or contract to pay may afterwards be changed into a written promise or contract to pay, in the form of a promissory note, accepted draft, or other written obhgation. LEDGER ACCOUNTS ACCOUNTS. 16. An account is a record of one or more items relating to the same person or thing, kept under an appropriate heading or title. It is the custom to place the debit items on the left-hand side and the credit items on the right-hand side of the accounts in the ledger. Accounts show similar items arranged in the most conveni- ent form for arithmetical solution and analysis. They are divided into several classes depending upon their purpose and the results they show. The following is the standard form of a ledger account. LEDGER ACCOUNTS. Year Day' Explanation Pag^,\ DoUars Cenm Year Day Explanation Page Dollars Cenit U Mnrhth I {When used, but fre- of ■ ■ ■ " ' ; {When used, but fre- of ^ quently omitted) book quently omitted) boon con- L ta in- tain- Ing orig- orig- ■ i-nklj^- ; entry \entryi^ i 1 1 17. The Ledger is the book of accounts. The debit and credit items arising from the various kinds of transactions are transferred from the different books in which the transactions are classified and recorded to the proper accounts in the led- ger. These books are the cash book, sales book, purchase book, journal, notes re- ceivable and notes payable books, and such other books as may be required, de- pending upon the nature and extent of the business. These are known as hooks of origirial entry. 17a. A GRAPHIC ILLUSTRATION OF THE COURSE OF TRANSACTIONS, AND THE RE- LATIONS OF BUSINESS AND TEACHING TO THE SUBJECTS OF BOOKKEEPING AND ACCOUNTING. /3US/A^£S^ ^ 00/<-/<'£:£/='/A/G AOCOL//yrAA/C r ^ N- \ 1 3AIA/VCS3. \ CI: 1 1 1 / /A/ST/?ucr/o/v \^ \ /A/:5r/?UCT70/V \ ( y / Cash'Dook - \ /> 5tate:m£:a/t3 - ■ > \ ' / l^Z?0^^^s> 'J -^ Pf?/L 1.5 •, ^ ■ ///K/?Z Y3/3 ^ N, //YST/^UCT/OAf /?£ v/ e: w^ >K >u Ci 03/ A/ a- i ^ • , ^ 4 BOOKKEEPING AND Af'COUNTANCY DEBITING AND CREDITING ACCOUNTS 18. To determine what accounts are to be debited and what accounts are to be credited in any transaction we apply the laws of debits and credits which are expressed in rides of^ bookkeeping. They are derived from the customs and practices of lousiness men, and conform with the principles of accountancy. 19. A law is a statement of a principle. It is a rule of action. 20. In every transaction there are one or more debit items and one or more credit items. 21. Debit and credit items are of three kinds, (a) those relating to jjcrsonal accounts, (b) those relating to accounts with cash, notes, acceptances, and other mediums of exchange, and (c) those relating to accounts with property, with uses, with services, with allowances, with expenses, and with incomes and revenues. 22. Debit and credit items relating to accounts with persons invariably show that each person debited is the receiver of something of value without at that time giving value in return, and that each person credited is the giver of something of value without at that time receiving value in return. C^IO and 11.) Such items usually relate to "uncompleted transactions." C:? and 8.) 22a. Remember that the "receiver" is the 226. Remember that the "giver" is the party who receives something of value party who gives something of value to from us loithoul at that iijne giving vol- us without at that time receiving value in ue in return. return. 23. Debit and credit items relating to accounts with cash, notes, acceptances and other mediums of exchange, invariably show that each account is debited for the face value of ichat is received (or redeemed), and that each account is credited for the face value of ivhat is given (paid, issued, or Darted with). The principal accounts -of this kind are cash account, notes receivable account and notes payable account. 24. Debit and credit items relating to accounts with property, 'uses, services, alloivances, expenses, incomes, etc., invariably show that each account is debited for the cost of what is represented by the account, and that each account is credited for returns from what is represented by the account. The principal accounts of this kind are those relating to the purchase and sale of merchandise, real estate and buildings, stocks and bonds, furniture, fixtures, and other forms of property and in- vestments of capital, and those showing the expense? and incomes such as in- terest,' discount, commission, merchandise discounts, freight and express charges, rent, insurance, taxes, wages, salaries, and all other accounts showing the sources of the losses and the gains of the business. DETERMINING DEBITS AND CREDITS CLASSIFICATION OF DEBIT AND CREDIT ITEMS. 25. Notice that in debiting accounts as stated in the preceding paragra- plis, 22, 23 and 24, in every instance in debiting a personal account the receiver is debited; in debiting cash, notes receivable and notes payable ac- counts, they are debited for what is received; and in debiting all other ac- counts tiiey are debited for the cost of something of value received. 26. Notice that in crediting accounts as stated in the preceding paragraphs 22, 23 and 24, in every instance in crediting a personal account the giver is credited; in crediting cash, notes re- ceivable and notes payable accounts, they are credited for wJiat is given; and in crediting all other accounts they are credited for the returns from something of value given. 27. From the classification of items, a.s given iu paragraphs 25 and 26, the following simple rule for debiting and crediting the proper accounts for all items growing out of the current transactions of business is derived. GENERAL RULE FOR DEBITING AND CREDITING ACCOUNTS. 28. Debit tJie Receiver, ivhatisreceived, 29. Credit the Giver, what is given, and and that which costs value. that which returns value. 30, The various applications of this general rule to all kinds of business trans- actions will be shown under the different accounts, explained on tlie following pages. PERSONAL ACCOUNTS. 31. These are accounts with individuals, firms, and corporations (persons), which are required in "uncompleted transactions, "or those transactions "in which the transfer is made at that iimehy one party but not by the other." (^7 and S) Such transactions are said to be "on account." 32. The object is to ascertain what ofJicrs owe to us on account or 7r}uit we owe to others on account "during the interval of time between the transfer l)y the first party and the transfer in payment l).y the second party." (^:9) During the "inter- val of time," if a personal account shows an amount owing to us, it is a resource (^461) ; if it shows an amount ouing to others, it is a liahility. (![462) BOOKKEEPING AND ACCOUNTANCY Rule for Debiting and Crediting Personal Accounts. 33. Debit the receiver: credit the giver. 34a Debit the receiver in the proper 346. Credit the giver in the proper account, account. 35. The various applications of the rule for debiting and crediting personal ac- counts are as follows: {NoI to he memorized. To be used only as called for.) 36. b. d. Dehii persons in their accounts, For the amount they owe us at the begin- ning of business. For all goods or property sold to them on account. For all money paid or loaned to them on account, or paid by us to others at their request. For all goods, etc., we return to them for which we have previously credited them. For all notes made by us (notes pay- able) and given to them on account. For notes and acceptances of others (notes receivable) transferred by us to them on account. For all drafts drawn by them and accep- ted or paid by us on account. For our drafts or orders on others drawn (or indorsed) by us in their favor on account. For discounts or other allowances made to us on account. For "shortage," "damage," or "over- charge" claims they allow to us on goods for which we have previously credited them. For freight or express charges paid by us when goods are purchased from them f. o. b. delivery point, or when goods are sold to them f. o. b. shipping point. For the amount "thrown off" a debt when they agree to accept a part of what we owe them in full satisfaction of the debt. 37. 38 Observe that in every instance the party debited is the receiver of some- thing of value from us without at that time giving value in return: hence the rule. Credit persons in their accounts, For the amount we owe them at the beginning of business. For all goods or property bought from them on account. For all checks, money or other cash re- ceived from them on account, or paid by them to others at our request. For all goods, etc., they return to us for which we have previously debited them. For all notes made by them and given to us (notes receivable) on account. For notes and acceptances of others (including our own notes, etc.,) trans- ferred by them to us on account. f" For drafts drawn on them by us on ac- count. For their drafts on others drawn (or endorsed) by them in our favor on account. For discounts or other allowances made to them on account. For "shortage" "damage," or "over- charge" claims allowed to them on goods for which they have previously been debited. For freight or express charges when paid by them on goods purchased from them f. o. b. shipping point, or when goods are sold to them f. o. b. delivery paint. For the amount lost by us when we agree to accept a part of what they owe us in full satisfaction of the debt, or when the account is uncoUectable. 39 Observe that in every instance the party credited is the giver of something of value to us without at that time receiv- ing value in return: hence the rule. PERSONAL ACCOUNTS 7 Note to the teacher and student: The various applications stated under each account are not to be memorized, but are intended to assist the student in apply- ing the rule. As they are applied to transactions, they should be carefully studied until their relation to the rule is clearly understood. 40. Transactions Illustrating the Various Applications of the Rule (33) for Debiting and Crediting Personal Accounts. Transactions with R. J. Maclean & Co., 912 Wabash Ave., Chicago, 111. (The paragraph numbers in brackets refer to the various applications of the rule for debit- ing and crediting personal accounts.) Jan. 1. They owe us on account, at the beginning of business, $112.50. (^36a) — Jan. 3. Sold them merchandise on account, $975. (^366) — Jan. 5. Re- ceived cash on account $100. (1I37o) — Jan. 6. Bought merchandise on account, $318.50. (37n) - - Jan. 7. Paid them cash to apply on bill of Jan. 6, $56.50. (^36c) Jan. 7. They returned for credit goods ordered by mistake on Jan. 3, amounting to $7.75. (^37p) Jan. 9. Received their note at 30 days to apply on bill of Jan. 3, $125. (1[37g) — Jan. 10. We returned to them for credit goods purchased Jan. 6, amounting to $12.60. {^SQd) — Jan. 11. We gave them our note at 60 days, on account of bill purchased Jan. 6, $50. (^36e) — Jan. 11. Received from them, to apply on account, Jones & Co's note, which they transferred to us by endorsement, for $37.50. (1[37r) — Jan. 12. We have drawn a draft at 10-days sight on them on account, in favor of Charles Adams, for $75. (^37s) — Jan. 13. Received from them, to apply on account, their draft at 5 days sight on Alex. King & Co., Cleveland, O., drawn in our favor, for $91.61. (^S7t) — Jan. 14. We accepted their draft at 10 days' sight drawn on us, to apply on account of bill purchased Jan. 6, in favor of Harris Grocery Co., for $23.46. (^3Qg). On the same day we transferred to them, by endorsement, to apply on account of the same purchase, A. S. Baird & Co.'s note in our favor for $45. (^36/) — Jan. 16. They report short weight in flour sold them of Jan. 3, am.ounting to $4.50, which \ve allow. (%S7v) — Jan. 16. We prepaid freight charges on goods sold to them on Jan. 3, for their account, $2.20. (1I36A;) — Jan. 17. We allow them a discount of 1% on bill purchased Jan. 3, $9.75. (^37u) — Jan. 17. They allow us a discount of 2% on bill of Jan. 6, $6. 33. (1[36i) — Jan. 19. They have allowed us an overcharge claim which we made on their bill of Jan. 6, for $2.41. (^36j) - - Jan. 19. We drew a draft at' 5 days' sight in their favor, in full for their bill of Jan. 6, on H. S. Gray & Sons, for $120.20. (^36/i) — Jan. 20. They forwarded us a receipted freight bill for $1.65, which was paid by them on goods shipped Jan. 3, which were to be shipped f. o. b, delivery point. (^37w;) — JaN. 21. They have offered to give us a check of $110 in full payment of the amount owed us on account, Jan. 1, which we have accepted. (^37o). - - The amount lost is $2.50. (^37a:) - - Jan. 30. Received from them, on account, John G. Taylor's acceptance for $150 (^37r) and their check for $75 (1f37o). What is the balance of account January 31? BOOKKEEPING AND ACCOUNTANCY EXERCISE. Prepare a ledger account for the above transactions on ledger paper, as (// you do not have ledger paper, rule the form of a ledger page on blank 40u follows: paper. ^ (1) Read and study each transaction carefuU}-. (2) Read the special application, for each transaction, of the rule for debiting and crediting personal accounts, indicated by the paragraph number. (3) Apply the rule (33) and make the proper debit or credit entries in the account, as shown in the illustration (1). When completed, submit for approval. Illustration 1. /2 (2 9^^^y^^^yV~s^ 9/^ Z^C'a.^^i.A.^ (Z^jL£^ ly C,A<.(>a,^^^>fie£^ /'7 f^L ay) / / Z. ro /oo V—. — - i 3 / ^UJj-) cf7J- if (. .3/^ k^- i 7 x^ JTL rJ ■- 7 7 7^- f- ly /I 1 1 i ^ /zs ; // i^ jro // "^ ^7 so f^ 2.3 ^£, 1 /^ 7-^. /i/- ^S f^ 9/ i- 1 ; iL Z zo iL ^ so V7 , l> 9 ? f? ? M- — ^^ Z v/ zo ^ L^ tfl-fi \ ■ / zo zo z/ //& ' J y V . « 7-/ z so 30 /s/ \ JO /A 40&. The illustration shows the ledger account as it appears at the end of the month, January 31, with the figures in the posting columns omitted. The small figures showing the footings of each column and the balance of the account, S299.44, are pencil figures, written when the account is footed, preparatory to tak- ing the trial balance. If it is desired to close the account for either of the reasons stated in ^44, the account would be ruled and footed, as shown in illustration 2. (1145) Illustration 2. /^ f z ^7\ zc / C5- ^^ *f9¥f 7 zo J] 2./ / / O 1 1 ! 1 *t at. X o z/ Z so ■ - ■ ■ n ^^ 4S^ ^= — MT^' ^ 30 TzYfy 2.-3 J i> ^3\ /g S s- 'or 466. Explanation. The items of August 12, 16 and 25 are for purchases which were paid in one amount September 5, at which time the red hnes were ruled under the balancing items. The pencil footing on the credit side shows the balance of the account September 30. This is an account payable. (^50) It illustrates the class of accounts described in ^456. Illustration 5 J^&^T^'-t.^fl^-er^'ty'^)'^*^^'^^ C2^. J P^zc/^,-^ ^y ^7 30 „ ?9z^^ /2. XL " Z^ „ JJ.U 2. J7/ •J^r t^^i y/^f - 2-/ (> 4^' 3/ ^aj\ (2)&^,\/v J2 v/\ ??2a,' o / V/ V/ 'C- 3f ^0' / O i, ZO ,./.; cc y /so /CO /^ 46c. Explanation An examination of the entries i n this account in the order of their dates will explain the rulings shown. It is an account receivable and illustrates the practice of many bookkeepers. It will be noticed that when all items balance above a given point they are ruled out, as shown by those marked "a," ''6" and "c," whether they are on the same line or not. The letters also showthe method of indicat- ing canceling items. The balance is found by taking the difference between the two sides of the accouni, as shown in the small pencil figures in the left hand ex- planation column. 12 bookkeeping and accountancy Exercises in Personal Accounts. 47. Prepare the ledger accounts for the following examples, applying the rule (^33) to each transaction. If you do not have ledger paper, rule the form of a ledger on blank paper. Enter the amount first, then the date. As each entry is made, insert the paragraph number and letter of the particular application of the rule for debiting and crediting personal accounts (^36 and ^37) which applies, as shown in brackets for the first two items in illustration 1. Rule out the items that balance on each side of the account as the balancing entries are made. When the examples are completed, present them for approval. (1.) Transactions with Robert G. Burns. April 1. Sold him merchandise on account, $45. (1I36&) April 4. Sold him merchandise on account, $16. April 10. Received cash from him for bill sold April 1, $45. {Rule out balancing items ($45) on each side of the account as shown in the illustration S.) — April 13. Sold him merchandise on account, $21. April 18. Sold him merchandise on account, $73. April 19. Re- ceived cash for bill sold April 4, $16. {Rule out balancing items.) April 24. Sold him merchandise on account, $15. April 25. Received cash from him for bill sold April 18, $73. April 27. Received cash from him for bill sold April 13, $21. {Ride out balancing items.) April 28. Sold him merchandise on account, $18. What is the balance shown by the account? What method of paying bills is shown by this account? (1145a) (2.) Transactions with Miller Brothers. May 1. We owe them on account, at the beginning of business, $115.25. May 3. Bought goods from them on account, $73.12. May 4. Paid them cash in full of account to date, $188.37. {Rule out the balancing items on the same line.) May 6. Bought goods from them on account, $87.50. May 8. Bought goods from them on account, $17.94. May 9. Gave them our note at 30 days in payment of bills of May 6 and 8, $105.44. {Rule out balancing items.) - - May 12. Bought goods from them on account, $236.20. - - May 14. Bought goods on account, $36.12. May 15. Returned goods included in bill purchased May 12, $13.75. - - May 16. Bought goods from them on account $327.45. - - May 17. Paid them in full for bills of May 12 and 14, $258.57 {Rule out balancing items.) May 17. Paid freight on goods purchased May 16, which were to be prepaid to delivery point by Miller Brothers, $4.50. What is the balance shown by the account, and who owes the balance, we or Miller Brothers? What method of paying bills is shown by this account? (^45&) Does this account show a resource or a liability? ("[42) Is this an account receivable or an account payable? (1150) (3.) Transactions with Murphy & Morgan. June 1. Sold them goods on account, $256.95. June 3. Received cash ^o apply on bill of June 1, $150. June 4. Received cash in full for bill of June ;', $106.95. {Rule out balancing items.) June 6. Sold them goods on account $342.36. June IC. They returned goods amounting to $7.80. June 11, Received their note in our favor at 30 days in part payment of bill of June 6, $180. EXERCISES IN PERSONAL ACCOUNTS 13 June 12. The> transferred to us, on account, a note made by Marshall & Com- pany, in their favor for $100. June 12. Received cash in full of bill of June 6, $54.56. {Ride out balancing items.) June 24. Sold them goods on account, $96.36. — June 29. We allowed then an overcharge claim on goods sold on June 24, $3.60. - - June 30. Sold them merchandise on account, $23.50. June 30. Received cash in full for bill sold June 24, $92.70. (Rule out canceling items. It will he necessary to rule on different lines.) (1[46c) What is the balance shown by the account? What metnod in the payment of bills is shown by this account? (1[45c) Is it an account receivable or an account payable? (1[49.) (4) Transactions with Williams & Reynolds. Jan. 1. At the beginning of business they owe us on account, $78.50. We owe them for an unpaid coal bill, $14.50. Jan. 4. Sold them goods on account, $668.70. Jan. 5. They return us goods amounting to $10.25. J\n. 8. Bought from them on account goods amounting to $463.61. Jan. 9. Received Hall & Go's acceptance in their favor, which they have transferred to us on account, $55.30. Jan. 10. We allow their claim of $1.36 for an overcharge on goods sold them Jan. 4. Jan, 10. Accepted their draft at 10 days' sight, on account of bill of Jan. 8, $165. Jan. 12. Allowed them a discount of 1% on bill sold them Jan. 4, $6.69. Jan. 14. We transferred to them, on account of bill of Jan. 8, F. C. Archer's acceptance in our favor, $132.50. Jan. 15. We made draft on Miller Brothers, in their favor, on account of bill of Jan. 8, for $100. Jan. 15. They allowed us a discount on bill purchased Jan. 8, $9.37. — Jan. 17. We paid them balance due on bill purchased Jan. 8, $56.74. {The items canceling the bill purchased Jan. 8 may be indicated in the account, as instructed in *^\Jt.Oc and *\Jf.6c.) — Jan. 18. Received cash in payment of amount due us Jan. 1, $78.50. {Check canceling items as instructed for the preceding transaction.) Jan. 19. Received their draft on Perkins Brothers, in our favor, on account, $350. Jan. 19. Paid them in settlement of coal bill owed to them Jan. 1, $14.50. {Check canceling items.) (^40cand46c) Jan. 21. They desire to settle their account. What is the balance shown by the account? Is this an account receivable, an account payable, or a mixed account? (1151) As it stands, Jan. 21, to which group does it belong? (5) Transactions with Rodney, Gates & Go. (Note that these are our transactions with them, not theirs with us.) Sept. 1. Bought merchandise on account, $128.15. Sept. 3. Bought merchandise on account, $216.45. Sept. 4. By paying cash, we are entitled to a discount of 2% on bill of Sept. 1, $2.56. (1[36i) We paid them the balance in cash, $125.59. (1[36c) {Check canceling items as instructed in 1[40c in this and other transactions in this account.) Sept. 10. Bought merchandise on account, $33.62. - - Sept. 12. Bought merchandise, $92.18. - - Sept. 14. Deducted 2% discount on bill of Sept. 12, $1.84. Paid balance of the bill in cash, $90.34. {Check canceling items.) — Sept. 15. Accepted draft at 30 days in payment Df bill of Sept 10, for $33.62. Sept. 17. We are allowed an overcharge claim on bill of Sept. 3 for $4. 16. We give our note at 60 days for the balance, $212.29. - - Sept. 20. We have paid a freight bill on goods received Sept. 3, which should have been prepaid by Rodney, Gates & Go., $9.41. What is the balance shown by the 14 BOOKKEEPING AND ACCOUNTANCY account? Is it a resource or a liability? What method was followed in the payment of bills in this account? As it stands, is it an account receivable or an account payable? Ordinarily, to which group of accounts would it belong? (6) Transactions with Morrell Mfg. Co. Nov. 1. Sold them a milling machine, on account, $340. - - Nov. 20. Bought from them 1 Acme forge, $72.50. Nov. 21, Paid them cash in full for the Acme forge, $69.60, they allowing us a 4% discount on the bill, or $2.90. {Check canceling items.) Nov. 26. Received their draft on King's Sons, drawn in their favor and endorsed by them to us, in payment of bill sold Nov. 1, $340. Nov. 29. Received cash from them as a deposit, in part payment of 1 "Hanover " lathe No. 3, not yet dehvered to them, $150. - - Nov. 30. Shipped them 1 No. 3 "Hanover" lathe, as per contract, $490. What is the balance of the account? To what class of accounts does this account belong? (7) Transactions with S. R. Brown. Dec. 10. Loaned him cash, $75, which he returned in payments as follovrs: Dec. 20, $10; Dec. 23, $20; Dec. 27, $30; Dec. 30, $10. Does the balance of the account show a resource or a liability? How does the account differ from an ordi- nary account receivable or account payable? (1[51) Grouping Personal Accounts. 48. For accounting purposes, and particularly to provide a convenient ar- rangement of the accounts in the ledger, personal accounts are divided into two groups known as accounts receivable and accounts payable. 49. Accounts receivable are the accounts with persons to whom we sell, and usually show debit balances (if any) which are resources or assets. The sum of those balances shows the amount owing from accounts receivable, which should be included as a resource item in the statement ^! resources and habilities. (Illus- tration 93) Illustbation 6. Notice that the sum of these balances equals the balance shown by the accounts receivable account. (1[54) PERSONAL ACCOUNTS 15 50. Accounts payable are the accounts with persons from whom we buy, and usually show^ credit balances (if any) which are liabilities. The sum of these balances shows the total amount owing on accounts payable, which should be in- cluded as a liability item in the statement of resources and liabilities. (Illus- tration 93.) Illdstration 7. ■^^^-^.--^^^e^ jZez-^-z^ t^c-ifz^-i^ 3/, / (^ 2^^2=l^i^jAJ'^J.'^-^^^¥-^^ -r J?^^.^^^?y.'>J^A, :^ y -t^>4-g^>?^--?-Z^i^>-z-g7'^K-^^li-7 r- r-j-e? /■3^ (> fj6> 2Z¥.? 1^_ V-^>^^ X2, Notice that the sum of these balances equals the balance shown by the accounts payable account. (^54.) 51. Personal accounts showing transactions outside of those usually relating to the purchase and sale of goods, which cannot properly be classed with either ac- counts receivable or accounts payable, are not infrequent. These are sometimes called mixed accounts, and usually appear as separate items, or in a separate group, in the trial balance. They may show either resources or liabilities, which in either case should be included in the statement of resources and habilities. Again, goods may be purchased from and sold to the same party, and the account would, there- fore, possess the characteristics of both an account receivable and an account payable. It is not unusual for separate accounts to be kept with the same per- son, one for purchases and one for sales, and in some systems of bookkeeping it is necessary. 52. When all the accounts of a business are kept in one ledger, it is pref- erable to group the accounts receivable in one section of the ledger and the accounts payable in another section of the ledger, reserving a third section for the general accounts. 53. When separate ledgers are kept for any one or more of these groups, they are usually designated as the sales or customers ledger for accounts receivable, the purchase ledger for accounts payable, and the general ledger for the general accounts. Where a private ledger is kept, it should contain the capital accounts of the owners and any other accounts which it is desired to keep private. 54. When separate purchase and sales ledgers are kept, it is customary to keep a controlling account for each ledger in the general ledger, to which is posted the totals of special columns in the various books of original entry in which are entered the items affecting the accounts in each ledger. The sum of the balances 16 BOOKKEEPING AND ACCOUNTANCY in either ledger must equal the balance sho-wTi by the controlling account in the general ledger. (For fuller description, read 1[566) 54a. Illustrations 8 and 9 show the controUing accounts in the general ledger footed, closed, and the balances brought down. These accounts are usually closed at the end of each fiscal period when the books are closed. It is from these accounts that the balances shown in the trial balance (11483) are taken. Illustbation 8 C^sAc, / /^z^siJ-i^i^^ /vr '^'^ 3 Ci^V XO Ilucstration 9. CC'C^£>&ii.<^'Z^i-ci^^»'t^ ^^g^t^<»>t.^X^ (j^ PUJ^Jir^^ . Jj_?U^j2,Z.^2-iZkZ^ /l^-^ 'T /■5-ao /oo 4tX^ C ooo I a. U^COfJ 3/ \^yt,t^aZy'Ya^ /"g^^^^ l Tz^J-j&z^luZiid. <2- / oa a ^^J. ?i^'/32U^i:cta^ /g'CO f ^ fo /i>fof ^6, 636. The illustration shows the account as it appears at the end of the month. The figures are omitted from the posting columns. The small pencil figures show- ing the footings of each column and the balance of the account are written when the account is footed preparatory to taking the trial balance. The account is balanced, ruled, and the balance brought down after the net profit for the year and the balance shown by the proprietor's personal account are posted from the clos- ing entries in the journal. 20 BOOKKEEPING AND ACCOUNTANCY To Close Proprietor's or Partner's Capital Account. G4. The object is to ascertain the amount of his net capital or net insolvency at a certain date. 65. The difference between the two sides of a capital account, after the net profit or the net loss of the proprietor or partner and any other accounts affecting it have been closed into it, shows the proprietor's or partner's net capital or net insolvency, (a) net capital when the credit side is the larger, (b) net insolvency when the debit Oide is the larger. In either case they should be shown in a sep- arate section of the statement of resources and liabilities, which is the last section of that statement. 66. To close. — After the net profit or the net loss is posted from the closing entry in the journal, if the credit side is the larger, enter on the debit side in red ink, (1) the amount of the difference, (2) the date of closing, and (3) the words "Net Capital" or "Balance." Then rule the account as shown in illustration 10, and bring down the balance (in black ink) on the opposite side, entering the date of the next business day. (See second closing.) 67. // the debit side is the larger, enter the difference on the credit side using the words "Net Insolvency" or "Balance." After the account is ruled and footed the amount is brought down on the debit side of the account. Exercises in Proprietor's and Partner's Capital Accounts. 68. Prepare ledger accounts for the following examples. As each entry is made, insert the paragraph number and letter of the particular application of the rule for debiting and crediting capital accounts which applies. Foot, balance and rule up the accounts and bring down the balance when so instructed. (1) Capital account of Henry B. Walters. Jan. 1. He invested $5,000. (^62/) - - July 1. He invested $2,000. -- Oct. 1. He drew out $800. (1f61fe). What was the balance shown by his account at the close of the year, Dec. 31, at the time of taking the trial balance? Dec. 31. When the profit and loss statement was made out for the year's business, it was found that his net gain was $1,275. (1f62j) What was his net capital? Show the account ruled and closed, as illustrated in example. (2) Capital account of George Henderson. Jan. 1. He invested $10,000. Jan. 1. He owed to others to be paid from the funds of the business, $1,150. Feb. 1. He invested an additional $3,000. April 1. He withdrew from his investment, $1,000. July 1. He pur- THB OWNER AND THE BUSINESS 21 chased a warehouse and lot for his business, for which he paid from his private funds as an additional investment of capital, $4,000. (1I62A) Dec. 31. At the close of the year's business his profit and loss statement showed a net profit lor the year of $4,250. (1[62j) What was his net capital at the beginning of the aecond year's business? (3) Capital account of Charles E. Ford, Partner Jan. 1. He invested $26,700. He owed on notes, which were assumed by the firm, $1,700. June 10. He purchased an automobile, for which the firm's check was giyen, to be deducted from his capital, $1,600. June 30. His net loss for the half year, as shown by the profit and loss statement, was $790. Prepare the account showing his net capital June 30, with the account properly ruled and footed. July 15. He paid from his private funds the firm's note for $3,000 as an additional investment. Sept. 1. He Mathdrew from his capital invest- ed, $1,000. Dec. 31. His net gain was shown to be $7,450. Show his net capital Jan. 1, with the account properly footed and ruled. THE RELATIONSHIP BETWEEN THE OWNER AND THE BUSINESS. 69. Many authors have adopted the plan of personifying the business, whether it be the business of an individual, a firm, or a corporation, not only in formulating rules for capital accounts, such as " Credit the proprietor for what tJie business receives," but for the general accounts as well; hence we see such rules as "Debit what the business receives," "Credit what the business disposes of," "Debit cash for all cash the business receives, " "Debit expense for all expenses of the business, " etc. These and many similar statements set up the theory that a business is an active personality with power to receive and dispose of — to do or not to do; but this theory is illogical and untenable, because a business is merely the creation of the parties who own, control, manage, and conduct it, whether they are real or fictitious (corporate) persons. It has power of itself to do nothing. It could not exist without an owner. Only the owner can sue or be sued. Therefore, this theory is not recognized in this work. 69a. The only purely personal relation established in connection with any business is between the owner (represented in the real or fictitious persons conduct- ing it) and the persons who deal with the owner, which is the usual relation of debtor and creditor. (^11 and ^12.) 696. There is, however, a semi-personal relation established between the owner and the business itself, but it is a relation between the owner and something which is not or could not be a debtor or a creditor. While the owner is credited in his capital account for what he puts into the business, the business does not become in- debted to him in any way, nor is his investment considered as a liability of the business, because he owns the business and its success or failure rests with him. If he with- draws from the capital, he is debited in his capital account, not that he owes anything, but because he, as the owner, is charged back with something that he form- erly put into the business or that he has earned in conducting the business. The same is true of the owner in a corporation, although the earnings pass to the stock- holders through a dividend instead of through the capital account. 22 BOOKKEEPING AND ACCOUNTANCY PROPRIETOR'S AND PARTNER'S PERSONAL ACCOUNTS 70. The personal account of a proprietor or partner is treated like any other persona] account. It is indicated by adding the word "Personal" in the heading. It is opened for the purpose of keeping incidental items, such as withdrawals on account of salary, etc., separate from the items entered in the more permanent capital account. 71. The personal account of a proprietor or partner is debited (a) for all sums withdrawn for private use which are not to be deducted from the capital investment, (6) for any personal debts paid or to be paid from the funds of the business, (c) for all sums collected from customers and retained by the proprietor or partner. It is credited (d) for any sums paid in subject to immediate withdrawal, (e) for any debts of the business paid from private funds which are not to apply on the capital investment and (/) for such part of the net gain as is to be withdrawn as salary or otherwise. 71g. The balances shown by the proprietor's or partner's personal or capital accounts are not to be included with accounts receivable or accounts payable, which include only those with outside parties. (1[49 and 1f50) 72. The difference shows the balance owed to or by the proprietor or partner, the same as any other personal account, and the account is closed in the same man- ner. When the account is to be closed into the proprietor's or partner's capital account, it must be done by a separate journal entry. (1[72a) 72a. The final disposition of a balance shown by a proprietor's personal ac- count is determined entirely by the wishes of the individual or by agreement between partners. When such an account is not credited with any stated salary and is charged with sums withdrawn from time to time, it is not unusual for the account to be closed by debiting the capital account and crediting the personal account for the amount necessary to balance the personal account, which must be done by separate journal entry; or should the personal account show a credit balance which it is desired to add to the capital investment, the personal account may be debited and the capital account credited for the amount to close, 726. Transactions Illustrating the Various Applications of the Rule FOR Debiting and Crediting the Proprietor's and Partner's Personal Accounts. Personal account of L. A. Raymond. The following sums were paid by Mr. Raymond for his personal account: --Jan. 5. He paid his gas bill, $7.50. (!I716) - - Jan. 10. He paid his life insurance premium, $47.52. — Jan. 16. He paid his grocery bill, $31.40. — Jan. 21. He withdrew cash, $75. (1I71o) --Jan. 25. He paid his house rent, $35. - - Jan. 31. He paid his electric light bill, $3.58. EXERCISES IN OWNERS' PERSONAL ACCOUNTS 23 72c. Prepare a ledger account for the above transactions, as instructed in 1[63a. Illustration 11. C:^(^2^^^;j^7^^:Z:^7:Z::^:^_-^S^^^c^^>2^^^1. _Oayny.\ T 3 / , £^L^.£^.S-^££- o jWo Jkx^,3/\jQx ^UZit^y'Zui> Illustration 14. An Accepted Draft — Acceptance \Cm7ie W6-l/ie^, ^4-7/^ .yjp^- ''>w^-A^^y-^ — -pr^ ^c^.r'1-^.,-^r^^.--r^r^^'^.^e^r'^l'-^^. >^- /y S^i% JL^-<:22=3-iA -^ MEDIUMS OF EXCHANGE — NOTES AND DRAFTS 25 76. They both show a condition of indebtedness, notes receivable correspond- ing with accounts receivable (1149) and notes payable corresponding with accounts payable (1[50). The principal difference between a note receivable or a note payable and a personal account is that the one is a written promise to pay, and the other is an oral or implied promise to pay. (1[14) 77. Notes and acceptances are generally received and issued in settlement of personal accounts, thus changing an oral promise to a written promise, which is in fact a written contract. 77a. If A owes B on account and afterwards A gives B his note or acceptance in settlement, while the record of A's indebtedness in B's books is transferred from A's personal account to the notes receivable account, A's indebtedness to B remains just the same, except that in some states and under some circumstances the written promise (note or acceptance) may be more binding upon A. 78. The principal advantage of notes and acceptances is that they are negotiable, that is, they are transferable from one person to another, which lends to them the characteristics of mediums of exchange, and greatly increases their useful- ness in the transaction of business. 79. Because of their negotiability, notes and acceptances are frequently bought and sold, are discounted at bank to raise funds, are transferred "on account, " and are sometimes given as security for loans or for debts. NOTES RECEIVABLE ACCOUNT. 80. Notes receivable account is one of the class in which items relating to mediums of exchange are recorded. (^21, ^23, ^78) 81. Notes receivable consist of notes and accepted drafts (acceptances) the value of which we are to receive when due. 82. The object of the account is to show (a) the amount of notes and accept- ances received from others, (6) the amount of these notes and acceptances which have been redeemed and returned (given back) to those who issued them, or which have been disposed of to others, and (c) the amount of notes and acceptances on hand, at any date, which is a resource. _82a. "On hand" includes all notes and acceptances sent to banks for col- lection, or in attorney's hands for collection. All notes receivable are considered "on hand" until actual payment has been received. Any note receivable that cannot be collected is a loss. 83. All items must first appear on the debit side of this account before they can appear on the credit side, because others' obhgations to pay must be received before they can be given back to those who issued them. 26 BOOKKEEPING AND ACCOUNTANCY Rule for Debiting and Crediting Notes Receivable Account. 84. Debit what is received: credit what is given. 84a. Debit notes receivable (at face value) for notes and acceptances of others received. 846. Credit notes receivable (at face value) for notes and acceptances of others given. 85. The various applications of the rule for debiting and crediting notes receivable are as follows: 86. Debit notes receivable account (a< /ace value), — a. For all notes and acceptances of others invested in the business. b. For all notes and acceptances received which are made or drawn in our favor. c. For all notes and acceptances made pay- able to others and transferred to us by- endorsement or otherwise. d. For all time drafts drawn by ourselves in our own favor, when received after acceptance. 88. Observe that in every instance notes receivable account is debited for the amount of notes and acceptances of others received; hence the rule. 87. Credit notes receivable account {at face value), — e. For all notes and acceptances we hold against others when paid and returned (given back) to them. /. For all notes and acceptances of others which we sell or have discounted. g. For all notes and acceptances which we transfer to others "on account" or for any purpose, by endorsement or other- wise. h. Foi all part payments received on others' notes and acceptances. 89. Observe that in every instance notes receivable account is credited for the amount of notes and acceptances of others given (paid, redeemed, or dis- posed of); hence the rule. 90. Transactions Illustrating the Various Applications of the Rule (T[84) FOR Debiting and Crediting Notes Receivable Account. Jan. 1. Arthur Gordon's note, due on Jan. 15, was invested in the business, $500. (1[86a) • Jan. 4. Received Richardson & Co's note, at 20 days, for $450 (^866.) Jan. 6. Received Moore & Nevin's acceptance in our favor, at 15 days, on account, $375. (^866.) Jan. 15. R. S. Wiley has transferred to us by endorsement, to apply on account, Dane & Ritchie's note, due Feb. 15, for $220.10 (•[[SGc) Jan. 15. Received cash in payment of Arthur Gordon's note invested Jan. 1, $500. (l[87e.) Jan. 17. Received our draft on F. B. Moore, drawn in our own favor at 30 days' sight, for $360.75, which he has returned to us after acceptance (^86(7.) - - Jan. 19. Received R. N. Willis' note at 60 days on account, $900. Jan. 21. Received cash payment of Moore & Nevin's accep- tance of Jan. 6, due today, $375. (1[87e) Jan. 23. Received King Mfg. Co's acceptance at 60 days, on account, $302.14. Jan. 24. Received cash in payment of Richardson & Co.'s note received Jan. 4, due today, $450. Jan. 25. Transferred to M. F. Marshall, F. B. Moore's acceptance in our favor, received Jan. 17, ou account, $360.75. {'^S7g) - - Jan. 26. We had R. N. Willis' MEDIUMS OF EXCHANGE — NOTES RECEIVABLE ACCOUNT 27 note for $900, received Jan. 19, discounted at bank, receiving credit for the proceeds. (!i87/) Jan. 30. Received Arthur Gordon's note at GO days, on account, $377.76. Jan. 31. Received Moore & Nevin's acceptance at 30 daj^s, on account, $200. Jan. 31. Received from King Mfg. Company, in part pay- ment of their acceptance received Jan. 23, $200. (^87/i) What is the balance shown by the account January 31? EXERCISES. 90a. Prepare a ledger account for the above transactions on ledger paper, as follows : (1) Read and study each transaction carefully. (2) Read the special application, for each transaction, of the rule for debiting and crediting notes receivable account indicated by the paragraph number. (3) Apply the rule (^84) and make the proper debit and credit entries in the account, as shown in illustration 15 and submit for approval. Illustration 15. 2Z^2^^^-^^^C,€id;-ty"tZyCHf£^ / / / / / / / 210/0 a- 3 6> ys J~ -T^-c-e~^ 2 /fs/ \ &7 f¥, //v Z^"/"/ 2 2-,. -2./ 7^// 2^ 127. Transactions Illustrating the Various Applications of the Rulb (Tfl2) FOR Debiting and Crediting Cash Account. F. A. Raymond's cash transactions are as follows: Jan. 1. He invested cash, $5,000. (11123a) Jan. 3. He paid Sharp & Co.'s coal bill, $16. (11124c) - - Jan. 4. He paid John Ward for bill of Dec. 26, $496.75. Jan. 5. He received cash from R. J. Maclean & Co. on account, $100 (1[1236) JAn. 6. *He paid cash for blank books and stationery, $21.50 (1[124c) Jan. 8. He received cash from H. B. Wilson, for billof Jan. 2, $361.02 Jan. 9. He received cash from Jamison & Fox, to apply on bill of Jan. 4, $75. Jan. 10. He paid freight bill on goods purchased, in cash, $7.66. Jan. 11. He received cash in payment of Dennis Bros, note, $212.50; he also receivedcashinpaymentof interest on the same, $2.13. Jan. 12. Hereceived cash for cashsales of goods, $17.65. On the same day he paid for stamped envelopes $3 20 Jan. 14. He received cash of Archer & Lane, for bill of Jan. 8, $427.38. - - Jan. 15. He paid W. J. Brown for his bill of Jan. 4, $987.50. - - Jan. 19. He received cash from White & Gates Co., in full of account, $19.31. Jan. 19. He paid his note in favor of Gill & Co., $350, and interest on the same $1.75. Jan. 21. He received cashfrom Jamison & Fox, infull for bill of Jan. 4, $67.94. Jan. 25. He received payment of Archer & Go's note, $114.22. Jan. 27. He paid cash to Waters & Smith, for bill of Dec. 27, $2,491.48. - - Jan. 27. He received cash from A. M. Peters on account, $200. Jan. 30. He paid rent for January, $125. Jan. 30. He borrowed on his note at 30 days, $500. Jan. 31. He paid salesmen's salaries in cash, $80; warehouse labor, $22.10; and he withdrew for his personal use, $50. What should be the balance of cash on hand Jan. 31? *"Ad. Expense" is the abbreviation for administration expense. THE CASH ACCOUNT 39 ^' \/2. 3/ 13/ L// \.7 /3£^i'T-i'^.-£'t^-!'-^%.d^i^a^Cc.^y-t.£', '-y ^0 L MSZ. M=^ I27a. Prepare a cash book account for the above transactions on journal paper, as follows: (1) Read and study each transaction carefully. (2) Read the special application for each transaction of the rule for debiting or crediting cash account, indicated by the paragraph number. (3) Study carefully the information contained in paragraphs ^128 to ^128c following illustration 21. (4) Apply the rule (1[121) and make the proper debit and credit entries in the cash book, as shown in illustration 21, referring to the illustration to determine the proper accounts to be named in connection with each debit and credit item. When completed, submit for approval. 128. The cash book in addition to the columns for the date, the posting figures, and the amount of each item shown in an ordinary account, contains two additional columns on each side — one for the name of the opposite, or contra, account affected, and another for an explanation of the item. 128a. All items of cash received and entered on the debit (left) side of the cash book are posted to the credit side of the ledger account named. 1286. All items of cash paid out and entered on the credit (right) side of the cash book are posted to the debit side of the ledger account named. 128c. The cash book may and usually does contain a number of columns that greatly reduce the work of the booklceeper, facilitate posting, and guard against errors. Their use also assists in the analysis of receipts and payments, which is of great value in an audit. The use of special colums is explained elsewhere in this work. 40 BOOKKEEPING AND ACCOUNTANCY To Close Cash Account. 129. The difference (if any) between the two sides of the cash account will alwaj's show a debit balance which should equal the amount of cash on hand, which is a resource that should be included in the statement of resources and liabilities. The credit side of the account can neve^ be the larger since it is impossible to pay out more cash than is received. 129a. The credit side may be made the larger by "overchecking" on the bank, but this is a violation of banking rules, and the account should never be closed showing an overdraft. 1296. It sometimes happens that a bank account will show an over-draft caused by checks which are issued to parties residing at a distance and which conse- quently ,will not reach the bank on which they are drawn foi paj-ment for a consider- able time. In such cases the cash account will show a credit balance. 130. To close. Find the difference. Then enter on the credit side in red ink (1) the amount of the difference, (2) the date and (3) the word "Balance." Then rule and foot the account as show^l in illustration 21 and bring down the balance on the opposite side (in black ink), entering the date of the next business day- Exercises in Cash Accounts. 131. Prepare cash book accounts for the following examples, applj'ing the rule (^121) in each transaction. The w^ords in italics in each transaction indicate the names of the accounts affected (•[128). Be careful to make the explanation complete. After the entries are made, balance, rule and foot each example, and bring the balance down on the opposite side- When completed, present for approval. 1. G. R. Oilman's receipts and payments of cash are as follows: April 1. G. i2. Gt7man invests $3,000. April 3, He paid /f. Z). Pogfe, for bill of March 26, SI 15.25. — April 4. He received from Charles Clark, on account, $35. April 5. He paid coal bill of April 3, $16, which is a general expense. April 8. He received cash from H. M. Brown for bill sold ]\Iarch 6, $76.40. April 9. He paid John M. Ward in full of account, $36.85. April 10. He received from cash sales, $22.50. April 15. He paid McClellan & Co. for office books and stationery, which is an administration expense, $26.70. April 21. He received cash in payment of WiUiam Gray's note, which affects notes receivable account, $314.32. April 23. He received from Reynolds Bros, for bill sold Feb. 26, $50. April 26. He received from Sharp & Co. in full of account to date, $36.12. April 26. He paid for cleaning the office windows, which is a general expense, $1.15. April 29. He received from B. F. Cole for bill of April 15, $116.45. April 30. He received from cash saZes, $135.35. April 30. Hepaidfor stamps, $3; pencils, ?2; telegrams, $5; salary of bookkeeper. $50; which are administration expenses^ TRADING ACCOUNTS — MERCHANDISE 41 What is the balance of cash which should be on hand or in bank, April 30? If $2,500 has been deposited in bank, how much should be in the cash drawer? 2. The following transactions are taken from the books of H.C.Shepard& Co. Sept. 1. H. C. Shepard invested $6,000; M. A. Shepard, $1,000. - - Sept 3. Purchases for cash were $61.75. Sept. 4. Cash sales were $42.85. Sept. 6. Cash sales were $36.70. Sept. 7. Paid Hennj Smith, on account, $200. Sept. 8. Received from William Wright, for bill of July 6, $212.35. Sept. 10. Paid for insurance on stock, which is a general expense, $48; received from T^. 5. Page, for bill of Sept. 5, $137.25. - - Sept. 11. Received payment for H. M. Jones' note {notes receivable) $200. Sept 11. Paid cash for advertising bill, which is a sales expense, $13.50. Sept. 12. Paid cash for bill heads, which is an administration expense, $6. Sept. 13. Paid note {notes paijahle) due today at bank, $250. Sept. 16. Received from James Harris, cash for bill of August 15, $457.19. Sept. 18. Paid Henry Wilson for bills of Sept. 7 and 13, $498.20. What were the total receipts of cash, the total payments, and the balance on hand? If all cash received was deposited in bank, and all payments made by check what should be the balance of cash in bank? 131a. Find the results for the following transactions arithmetically, placing the receipts in one column and the payments in another. It is unnecessary to pre- pare a cash book form. 1. Jan. 1. Levi Price and John G. Price each invested $2,000. - - 2. Advanced WilHam Brown for traveUng expenses, $50. - - 4. Received from William H.Walker for bill of Jan. 3, $353 .09. - - 6. Paid C. W. Perkins for bill of Dec. 27, $651. 75 ; also paid for books and stationery, $23.50. 8. Received from D.H.Gordon, on account, $250. 9. PaidFrankMorrison, onaccount of billof Jan.3,$540. 12. Received from John Mitchell, to apply on account, $150. 15. Paid rent for Jan. ,$60. 17. Received from F. P. Draper, in payment of bills of Dec. 26 and Jan. 3, $343.12. --18. Paid G. B. Dean & Co., for billof Jan. 17, $542. -- 19. Received from C. T. Richardson, in full of account to Jan. 12, $197.23. - -25. Levi Price withdrew $60 for personal use, and John G. Price withdrew $100 for per- sonal use. 26. Received from Frank Young, in payment of his note, due to- day, $100. - - 27. Paid John Safer, in full of account, $614.21. - - 31. Cash sales, $161.27. - - 31. Paid for janitor service, $15; coal bill, $7.50; salaries of bookkeeper, $45, stenographer, .$36. What should be the balance of cash on hand January 31? If all sums received were deposited, except cash sales of January 31, and all payments made by check except those of January 31, how much cash should be in the cash drawer and how much in bank? 2. Jan. 1. Joseph Franklin invested $5,000. 2. Bought two tons of coal for cash, $13. 2. Received from Willis Bros., in payment of bill of Dec. 26, $362.50. - - 3. W. B. Weeks paid his note due today, $300; and interest, $3.00 42 BOOKKEEPING AND ACCOUNTANCY - - 4. Paid Wells & Eay for their bill of Dec. 27, $259.17. - - 4. Paid for printing letter heads and envelopes, $12. 4. Cash sales, $21.36. - - 5. Bought merchandise for cash, $86.15 - - 7. Received from Harry Arnold, payment in full of accomit, $388.09. 9. Bought new desk from Keeler & Co., $45. - - 9. Paid Ratcliffe Co., for boxes, $32.15. - -10. Cash sales, $17.14; also received from A. G. Osgood, in paj-ment of bill of Jan. 3, $185.17. - - 11. Paid incoming freight and express bills, $38.56. 12. Bought two horses, wagon and harness, complete, from Adams Bros., for $350. 13. Paid for hay $6; straw, $3.50. 13. Received from R. A. Walters, in full of account, $218.60; also received payment of Dilworth Bros, note, due today, $468.18; and interest, $7.02. 15. Cash sales, $17.05. 15. Received from Russell Bros., on account, $100. 18. Paid interest on note at bank, $15. 18. Paid for repairson wagon, $4.50. 20. Cash sales. $14.85. — 21. Received from John Richards, on account, $45. — 22. Paid gas bill, $10.85; also advertising bill, $8.20. - - 25. Received from C. C. Miller, in full of account, $147.18. - - 28. Paid George Cromwell for invoice of Jan. 13, $412.11 31. Cash sales, $114.16 31. Paid rent of building, $100; clerk hire, $100; postage, $5; sundry expenses, $3.12. What should be the balance of cash on hand? If J was in the cash drawer and § in bank, what was the amount in bank? J^IERCHANDISE ACCOUNTS. 132. Merchandise is a general name given to any commodity that is bought for the purpose of selling it at a profit. (^21c, ^24) 133. As the principal profit of a mercantile or trading business is derived from the buying and selling of merchandise, those accounts in which are recorded the various items entering into the cost of the goods purchased and the various items affecting the returns from the goods sold are of first importance, as they provide the data from which the gross profd from sales is determined. These are kno',^■n as trading accounts. From them the trading statement is made up. (^233) This statement is one of the most important statements made in connection vrith book- keeping or accounting. It supplies. information that is necessary to an economical and profitable administration of a business. 133a. NoTK : A comparison of the results shown by the various accounts relating to the buy- ing and selling of merchandise, from year to year, makes possible an analysis of the business, particularly of the sources of profit and of loss, that is invaluable in building it up and strength- ening the weak spots, cutting off an expense here, increasing a profit there. This is a necessity in profitable business managemenL. PRINCIP.\L AND SUBSIDIARY TRADING ACCOUNTS 134. The accounts in which are recorded the items relating to the purchase and sale of goods are divided into two classes — principal accounts and subsidiary accounts. PURCHASES — PRINCIPAL TRADING ACCOUNT 43 135. The principal accounts are the purchases account, the sales account and the inventory account. 136. These three accounts correspond with the three principal operations incidental to conducting a mercantile business, namely: purchasing merchandise, selling merchandise (which are more or less continuous operations) and the taking of the inventory at the time of closing the books, which operation occurs at the close of each fiscal period for which the business is conducted, generally once a year; therefore, the purchases and the sales accounts are continuing accounts, while the inventory account receives entries only at the closing of the ledger for the fiscal period. 137. There are a number of different items such as freight, express and drayaga charges, allowances and rebates, and other items, varying in different lines of busi- ness, which relate to the purcnases and sales accounts, and contribute to increasing and diminishing both the cost of purchases and the returns (proceeds) from sales. Several of these items are usuallv entered directly into the purchases and sales, accounts (11151,11152, 11153,11164,^165, ^[166) while others are entered in special, or subsidiary, accounts which are fully explained under the proper heading. (11176) 138. The subdivision of the accounts relating to the purchase and sale of mer- chandise into tne principle and subsidiary accounts illustrates an important princi- ple of accountancy, which is that each account should shoio hut one specific thing or result; and it follows, therefore, that a separate account should be opened and kept for each particular item of information which it is desired that the books should show or that should appear in the trading statement . 139. This method has an important educational advantage because it permits the one particular purpose of an account to be fully explained so that it may be clearly understood by the student. It has an equally important practical advantage in supplying the data to make intelligent comparisons between the results shown by the various accounts for different fiscal periods. PURCHASES ACCOUNT— A PRINCIPAL TRADING ACCOUNT 140. The object of the purchases account is to show the cost of purchases for the fiscal period covered in the account. "Purchases" includes only thosegoods bought to be sold. The debit side of the account shows the cost of goods pur- chased, (gross purchases) from which is deducted the value of any goods returned, of rebates, allowances, and of other items that have the effect of decreasing the cost of purchases, these items appearing on the credit or contra side of the account. 141. The cost of purchases in wholesale and jobbing businesses includes not only the invoice price of the goods, but also the cost of any freight, express, drayage or other charges on the goods, of commissions for buying, and of all other expenses 44 BOOKKEEPING AND ACCOUNTANCY necessary until the goods are ready for delivery to the local customer, or are on board cars for shipment. In retail businesses, department stores, etc., when the goods are ready for sale (i. e. are placed on the shelves or in show cases in stockroom) the costs end and the selling expenses begin. Rule for Debiting and Crediting Purchases Accounts. 142. Debit for costs: credit for returns. 142a. Debit purchases account for the costs of purchases and charges. 1426. Credit purchases account for goods returned by us, and rebates and allow- ances to us on purchases. 143. The various applications of the rule are as follows: b. 144. Debit purchases account, — a. For all merchandise purchased. For* incoming freight, express and dray- age, (^184) for duties, storage, and for other similar charges. For* purchasing agents' commissions salaries or expenses for buying goods. For boxing, packing and shipping mate- rial (*warehouse supplies) (1[192)shipping clerks' salaries, warehousemen's wages and expenses (*warehouse labor), and other similar supplies. (1[198) *Unless subsidiary accounts are kept. (11152, «1176) flf considered as an income from having eufficient capital to discount bills (^2206). 146. Observe that in every instance the purchases account is debited for some- thing that adds to or increases the cost of purchases: or whatever increases costs is a debit. 145. Credit purchases account, — • e. For all goods returned by us after having been purchased, and debited to pur- chases account. /. For all *rebates and allowances on pur- chases, such as shortage, damage or overcharge claims allowed on goods pur- chased when the full amount has been debited to purchases account, (^206) or for *any rebates or returns on freight, express or other charges paid. g. For goods taken from stock for private use or donation, ai cost price. h. For goods taken from stock to be ship- ped for sale on commission, or transfer- red to a branch store, when billed at cost price. X. For any returns from material or labor debited to this account. j. For t^.ash discounts allowed to us on purchases, vthen* purchase discounts are considered as decreasing the cost of pur- chases. 147. Observe that in every instance the purchases account is credited for some- thing that decreases or lowers the cost of purchases: or whatever decreases costs is a credit. 148. Transactions Illustrating the Various Applications of the Rule (H 142) FOR Debiting and Crediting Purchases Account F. A. Raymond's transactions affecting the purchases account are as follows: Jan. 5. He paid freight charges, $10.15. (!|1446) Jan.9. Hepaidacom- CLOSING PURCHASES ACCOUNT 45 mission of 1% and other expenses, amounting to $5.50, for goods purchased in New York through an agent. (^144c) Jan. 12. He was allowed a shortage claim, S2.20. (^145/) Jan. 14. He was allow^ed a rebate for an overcharge on freight paid, $1.60 (11145/) Jan. 16. He was allowed a credit for an overcharge on goods purchased, $18.40. (11145/) Jan. 18. He received an allowance for dam- aged goods purchased, $5.20. (If 145/) -- - Jan. 25. He returned goods which were foundto be unsalable, amounting to $40.18. (1|145e) Jan. 28. He paid freight, express and draj^age bills, amounting to $27.85. (1[1446, I1I8O.) - - Jan. 31. His purchase discounts for the month were shown to be $173.51. (1[145/) He paid salaries and wages for warehouse labor for the month, $120. (1[144d) He paid for boxes, packing and shipping material and other warehouse supphes for the month, $61.35. His total purchases for the month, as shown by the purchase book, were $3180.53 (1[144a) What is the net cost of the merchandise purchased? EXERCISE. 148a. Prepare a ledger account for the preceding transactions, as follows: (1) Read and study each transaction carefully, referring to the special applica- tion of the rule for debiting and crediting purchases account indicated by the para- graph numbers. (1I145gf, 1[145/iand 11145?;, will be illustrated in subsequent exercises.) (2) Apply the rule (1[142) and make the proper debit and credit entries in the purchases account, indicating in the explanation column the nature of each item, as shown in the illustration. When completed, submit for approval. Illustration 22. >^2oiyt^>A^ei.^L-£.^i^ /r 1486. The illustration shows the account as it appears January 31, with the fig- ures in the posting columns omitted. The small pencil figures show the footings, and also the balance of the account. This illustration shows the account as it ap- pears when all the various charges and allowances affecting purchases are entered in one account, consequently, the balance shows the net cost of merchandise purchased. (If 149a) The account is not ruled nor footed until after the closing journal entry is posted, when the account would appear, after it is closed, as shown in illustration 23. 46 BOOKKEEPING AND ACCOUNTANCY Illustration 23. ^^'iz^uA m-t^U.-iic^- ^fi/ci^ \s/ ^ityf<'^t,a-t^eyt'C-^t -tzA.4i<^ vjT p^i^g-t^gX^ <^Zz.g^,t.7^ g-g-«xg<4-^-^.z^ Z7 rjr\ ^' Ti / &> 07*^yL^.^A.-<;7yL-M ^ /f \^0 J/ yj?^fc^-e^>t^'TgV \2S . ^Z/L /-4=^^_ -m\k- '^t^lt.e^jK^ yeylliiT aZyU' \3/s-^ y/7_ 32Z'¥ 03 \32.2¥ 03 \\%d. Notice that the balance shown by this account differs from the balance shown by the preceding account. This is caused by the elimination of the three items of warehouse labor, warehouse supplies, and purchase discounts, which are shown in separate accounts and will appear as separate items in the trial balance. The l)alance of this account is the cne shown in the trial balance. (•[483). To Close Purchases Account. 149. The difference between the two sides of the purchases account always shows a debit balance, which should be included in the trading statement for the period. (1[242). (a) If all the various charges and allowances affecting purchases are entered directly into the purchases account, the balance shows the net cost of mer- chandise purchased. (^1486) (b) If subsidiary accounts are kept for accounts named in ^144dand 11145;, the balance shows the^rsf or prime cost of the goods purchased, (c) If subsidiary accounts are kept with all the various charges and allowances affecting purchases excepting items named in ^144a and 1I145e, the balance shows the net invoice cost of the goods purchased for the period. 150. To close. After the trading statement has been prepared, the pur- chases account is closed by a journal entry made up from the items appearing in the trial balance which affect the trading statement. When the closing item to the purchases account has been posted, which should balance the account, rule the closing lines in red ink, as shown in illustration 23, and enter the footings in black ink. EXERCISES IN PURCHASES ACCOUNTS 47 151. It is the best practice to enter the items coming under ^144a and 1[1446, i.e., for goods purchasecl per invoices and for transportation and other charges thereon, directlj^ into the purchases account. It is also the best practice to enter the items coming under If 145c, 11145^, ^145/z and If 145z, i.e., those items for goods re- turned, for goods taken from stock, and for rebates on transportation charges, direct in the purchases account. This practice is preferred for the reason that in pre- paring the trading statement these items can easily be separated one from the other in the ledger account, particularly if each item is designated in the explanation col- umn as entered. All the items included in ^144a to 1fl45i may be entered directly into the purchases account, particularly if the business is small. 152. Separate accounts for the items named in ^1446, 1fl44c, 1fl44c^, 11145/, ^145^' and If 145/, and other similar items relating to the purchases account may be kept when it is desired that they should appear separately in the trading statement and are so numerous as to make the method suggested in 1fl53 impracticable. All such accounts are known as subsidiary purchase accounts. 153. When it is desired to show separately in the trading statement any one or more of the items included in ^144a to ^145j, inclusive, whether entered in the principal purchase account or in subsidiary accounts, they may be separated on an analysis sheet to whatever extent is desired, at the time of preparing the trading statement. The analysis sheet is described in If 490. The analysis sheet is preferred by many accountants because by its use the number of accounts in the ledger may be greatly reduced, the trial balance shortened, and the opportunities for errors lessened. Exercises in Purchase Accounts. 154. Prepare ledger accounts, like the illustration 22, for the following exam- ples, applying the rule (If 142) for each transaction, following carefully the special instructions for each example. Indicate briefly in the explanation column the nature of each item. (1) Jan. 4. Paid freight and drayage on purchases, $157.13 (^1446) ; storage charged by railroad, $2.00. — Jan. 6. Received credit memorandum for defec- tive goods returned, $46. 17. (If 145/) — Jan. 8. Received credit memorandum for shortage in goods purchased, $12. 20. — Jan. 18. Merchandise was taken from stock for the private use of the proprietor, at cost, $6.70. - - Jan. 21. He donated goods to the Salvation Army, at cost price, amounting to $10. — Jan. 31. The Merchants' Transfer Co.'s bills for drayage for the month amount to $17.50. Ship- ping boxes were purchased to the amount of $42; nails, $1.00; salaries of warehouse- men and packers, $80; purchase discounts, $116.40. The total purchases for the month shown by the purchase book, were $2316.19. What is the net cost of the merchandise purchased for the month? (^149a) Show the account as it would appear Jan. 31, with the columns footed and the bal- ance shown in pencil. When approved, enter the difference on the smaller side un- der date of Jan. 31, writing "Trading % to close" in the explanation column, as shown in illustration 23, then rule and foot the account and present it for approval. 48 BOOKKEEPING AND ACCOUNTANCY (2) The folio wing items are shown in the purchases account under date of April 30: Purchases for the month, $16,936.17; freight and drayage inward, $116.24; purchasing agent's salary, one month, $125; traveling expenses to Boston, New York and Philadelphia, buying goods, $145.87; boxes and crates purchased for the month, $36.14; shipping clerks' salaries and warehousemen's wages, $120; credits received for goods returned, $45.16; rebates and allowances, $27.18; merchandise transferred to branch store, at cost, $269.14; received check from railroad company for $27.16 for overcharges on freight during the month; purchase discounts, $276.19. Prepare the account showing the net cost of merchandise purchased, with the account closed, ruled and footed as previously instructed. What is the net invoice cost of the goods purchased (^|149c)? the first or prime cost (^1496)? Remember that in keeping a set of books the closing entry, "April 30 Trading % to close," would not be made until posted from the journal. (1[150) 155. The results shown by accounts supplythe material of so many arithmetical problems, each one of which is solved by ordinary arithmetical processes. The facts or results shown by any account may be stated in the form of an ordinary pro- blem in arithmetic, as shown in the following examples and illustration. One of the principal functions of accounting is putting arithmetical results into the form of statements so that these results may be shown in their proper relations. Arithmetical Problems — Purchases Account. (1) During the month of May the purchases were $7019.76; freight inward, $217.86; storage and drayage, $56.17; lumber for boxes, $26.10; nails, $4.00; paper and twine, $2.60; shipping clerks' salaries, $96; warehousemen's wages,$18; y purchasing agent's salary, $125; traveling ex- -^^^^^kz2^ penses, $28.60; credit memorandum received for -g^^-^ 4l^^f^fkxi^ goods returned, $16.40; allowances for over- ■^l'^;/! ^/la^ charges on bills, $21.36; received for claim al- ^^'',1 z/'r^ lowed bj' railroad for goods damaged in transit, ^y!' ^ -^o'/ $8.60; merchandise sold to employes at cost, ^-"^ " 'jf,^^'^% $28.90; donation of goods to Orphans' Home, ^/' t^z.f,2,o $30; goods shipped to Babbitt & Co. on com- ' ^^ ;^ „ mission, at cost, $105.30; purchase discounts, ^ / ^//> f ^i4^c^<^^. «^-'-'-64. 7 7C4-SZ^c.*^a/r What was the net cost of the merchandise purchased for the month? Illustbation 25. SALES — A PRINCIPAL TRADING ACCOUNT A9 (2) Purchases for the month, $11613.20; freight, express and drayage charges, 3271.12; credit received for overcharge on freight bill, $13.97; duties on goods im- ported, $114.36; boxing, packing and shipping materials, $68.97; credit received for allowance caused by defective packing, $12.90; goods returned, $41.50; goods shipped for sale on commission, at cost, $3 12. 17; cash discounts allowed on purchases, $293.43. What is the net cost of the goods purchased for the month? (3) Total purchases for the year ending December 31, $87963.43; total cost of freight, express, drayage, duties, storage, and other charges for the year, $5537.36; goods taken from stock for private use, at cost pnce, $91.20; goods shipped for sale on commision, at cost price, $962.50; rebates on transportation charges, $31.12 What is the first, or prime, cost of the purchases for the year? (111496) What item in the above problem represents the net invoice cost of the goods purchased for the year? (11149a) (4) Purchases for month, per purchase book, $3167.19; incoming freight and drayage, $76. 18; duties and storage, $56. 12; commission for buying, $100; purchasing agent's expenses, $9.60; allowances and shortages, $34.20; shipments to Day & Co. at cost, $180 ; transferred goods to Richstreetbranchstore at cost, $236.17 ; the Trans- fer & Storage Company allows us a credit of $6.45 for overcharges and errors in their bills of this month; purchase discounts during the month, $196.14 ;salaries of boxers and packers, $95; lumber, $20; twine, $1.50; wrapping paper, $12; nails, $1.50; strap iron, $3; excelsior, $2.75. What is the net invoice cost, prime cost, and net cost of purchases for the month? (11149) SALES ACCOUNT— A PRINCIPAL TRADING ACCOUNT. 156. The object of the sales account is to show the returns from sales (proceeds) for the period covered by the account. The credit side of the account shows the gross sales, from which is deducted the value of any goods returned, of allowances, rebates, overcharges, and of any other items that have the effect of redwcwgZ/ie returns from sales, these items appearing on the debit or contra side of the account. 60 bookkeeping and accountancy Rule for Debiting and Crediting Sales Account. 157. Debit for costs: credit for returns. 157a. Debit sales account for goods returned 1576. Credit sales account for the gross to us, and for rebates and allowances sales of merchandise, to others on sales. 158. The various applications of the rule are as follows: 159. Debit sales account, — 160. Credit sales accounts, — a. For all goods returned to us after having d. For all merchandise sold. been sold and credited to sales account. e. For goods taken from stock to be ship- b. For all *rebates and allowances on sales, ped for sale on commission, when billed such as shortage, damage, or overcharge at selling price. claims allowed on goods sold when the full amount has been credited to the sales *Unless subsidiary accounts are kept. account. (1[210) (11176) c. Fort cash discounts allowed to others on flf considered an expense from not hav- sales when *sales discounts are con- ing sufficient capital. (^2266) sidered to be a reduction in return from sales. (11266) 161. Observe that in every instance the 162. Observe that in every instance the sales account is debited for something sales account is credited for something that diminishes or decreases the returns that adds to or increases the returns from from sales: or whatever decreases re- sales : or whatever increases returns is a turns is a debit. credit. 163. Transactions Illustrating the Various Applications of the Rule (11157) FOR Debiting and Crediting Sales Account F. A. Raymond's transactions affecting the sales account are as follows: Jan. 19. He allowed an overcharge claim of $7.56. (^1596) - - Jan. 21. He allowed for goods damaged by careless packing, $12.40. (1[1596) Jan. 25. He allowed a shortage claim of $15.18 lor goods which were omitted from the ship- ment by a mistake. ("[1596) Jan. 31. The total amount of goods returned for credit during the month was $64.13. (•[159a) The sales discounts for the month were shown to be $171.64. (1[159c) His total sales for the month, as shown by the sales book, were $7124.38. (1[160d) What were the net returns from the merchandise sold? (1164) exercise. i63a. Prepare a ledger account for the preceding transactions, as follows: (1) Study each transaction carefully, looking up the references indicated by the paragraph numbers. CLOSING SALES ACCOUNT 51 (2) Apply the rule (1[157) and make the proper debit and credit entries in the sales account, indicating in the explanation column the nature of each item, as shown in the illustration. Then foot the account, enter the difference on the lesser side with the explanation, "Trading % to close," rule the account, and bring down foot- ings. When completed, present for approval. Illustration 26. ^^iz/^Ay 163&. The illustration shows the accomit when all the various charges affecting sales are entered in one account, including sales discounts (11226) which are usu- ally entered in a separate account. The illustration below shows the account with this item omitted, which appears in a subsidiary account considered as a trading account (1[226a). The first illustration shows the account as it appears when the trial balance is taken, the balance in pencil figures being shown in the trial balance (^483). The second illustration shows the account after the closing entry has been posted and the account has been ruled and footed. Illustraiioa 'i1. ^(pfA' '-2^^ ^^\ /g* Ch^/i^.,A^eZy!t^ ty o^ryTJ, rA^l^ ^02:? ^ M yy>^ ^'^ To Close Sales Account. 164. The difference between the two sides of the sales account always shows a credit balance, which should be included in the trading statement for the period 52 BOOKKEEPING AND ACCOUNTANCY (^242). (a) K all the various charges and allowances affecting sales are entered di- rectly into the sales account, the balance shows the net returm from merchandise sold for the period, (6) If subsidiary accounts are kept with all the various charges and allowances affecting sales excepting items named in ^159a and ^160c?, the balance shows the net sales for the period. 165. To close. After the trading statement has been prepared, the sales ac- count is closed by a journal entry made up from the trading statement. When the closing item to the sales account has been posted, which should balance the account, rule the closing lines in red ink, as shown in illustrations 26* and 27, and enter the footings in black ink. 166. It is the best practice to enter the items coming under ^160c?, ^160e, and Tfl59a, being the items of goods sold and of goods returned, directly into the sales account, as these items, if they are required to appear as separate items in the trading statement, can easily be classified on an analysis sheet, particularly if each item is designated in the explanation column as entered. 167. Separate accounts ioT the items named in ^1596, l[159c, and other similar items relating to the sales account (excepting those named in ^166) may be kept when it is desired that they should appear separately in the trading statement. When kept, these are known as subsidiary sales accounts. Exercises in Sales Accounts 168. Prepare ledger accounts like illustration 26 for the following exam- ples, applying the rule (11157) for each transaction, indicating briefly in the expla- nation column the nature of each item. Include the entry "Trading % to close" which would be made from the closing journal entry in keeping a set of books. (1) June 7. Goods were returned, $78.25. June 11. Rebate was made for overcharge, $62.56. June 30. Total sales were $8619.71; cash discounts during the month $208.16. What are the net returns from merchandise sold? (2) July 10. Goodswere shipped on consignment at selling price, $367.19. July 21. Goods were returned, $116.42, and an allowance of $10 for an overcharge was made. July 27. Claim for damaged goods was allowed, $7.21. Sales discounts, $316.43; total sales, $9716.73. What were the net returns from sales? Arithmetical Problems — Sales Accounts. Find the results for the following problems (1[155) : INVENTOIiT ACCOUNTS 53 Illubtbahon 28. (1) During the month of August the sales on ^oA^jt^^m/ account were $2917.60; sales for cash, $216.45; goods -— — — shipped on consignment at selling price, $176.80; -^^^^ ^^^^g^ ^^,ycc goods returned, $75.40; allowances for overcharges, V7>c ^' ^>^' $17.40; allowance for goods damaged on account of j^/i!vo yJ'/oA'T^. defective boxing, $8.00; sales discounts, $213.40. i:'^'f t- • — -^^^<^^_^ (2) Sales on account for the month, $7916.70; cash sales, $219.67; sales account credited for undercharges on goods previously billed, $20; goods shipped on consign- ment atseUing price, $276.18. Of this shipment, goods were returned amounting to $176, there being no market for them at the point to which they were shipped. Goods returned, $27.16; various allowances and rebates, $38.40; sales discounts, $3.16. What are the net returns from sales? (3) Total sales, $4713.75; goods returned, $96.18. With separate accounts kept for items included in ^1596 and *I159c, what are the net sales for the month? (^1646) If there were rebates and allowances amounting to $84.12, and cash dis- counts amounting to $53, what were the net returns from sales? (^164) INVENTORY ACCOUNTS. 169. A merchandise inventory is a list of merchandise in stock or on hand at the end of any fiscal period taken at cost price, or if market price is less than cost, then at market price. The cost price of each article in an inventory is the invoice price plus a proportionate share of freight, express, and other charges and expenses necessary in placing the article in stock. These incidental charges should be and usually are figured in the marked cost price placed upon the article when it is received. They correspond with the debit items charged to the purchases and subsidiary accounts exclusive of the invoices. It is upon the marked cost price that the percentage of profit is added in fixing the selling price. When certain fixed discounts, such as trade discounts, are to be allowed, which are to be excluded from the percentage of profit, they are added to the selling price, in which case the price placed upon the goods is the marked selling price. 169a. Shop-worn goods, goods out of style or out of date, should be inventoried at cost, and the amount of the depreciation between the cost value and the estimated value should be listed separately. The total amount of the depreciation should be charged in the profit and loss statement as a separate item, otherwise the trading profit shown by the trading statement would be affected, which would thus disturb the average per cent of gross profit when the trading profit of one period is compared with that of another. 170. It should be remembered that a merchandise inventory should include only the value of goods on hand which were purchased to be sold at a profit, and that the inventory should not include the value of furniture and fixtures, office appliances, machinery, warehouse implements, boxing and packing materials, or any other 54 BOOKKEEPING AND ACCOUNTANCY property whatsoever except that included in the designation, "purchased to be sold at a profit." 171. The object of the merchandise inventory account is to show the value of the merchandise on hand at the end of any fiscal period. The inventory account shows a resource, which should be included in the statement of resources and liabilities for the period, and is, therefore, known as a resource or asset account. Rule for Debiting and Crediting Inventory Accounts. 172. Debit for the value of the inventory on hand at the end of any fiscal -period : credit for the inventory on hand at the close of the last -preceding fiscal period. I72a. Note that the inventory account is debited for the value of the inventory- on hand at the end of any fiscal period. 172b. Note that the inventory account is credited at the close of the next fiscal period for the inventory for which it was debited a< the the close of the last preced- ing fiscal period. 172c. Other inventories are described in 1(465. 173. Transactions Illustrating the Merchandise Inventory Account. The followng are monthly inventories covering a period of three months prior to January 31. Prepare a ledger account showing them properly debited and credited : October 31, $6842.19; November 30, $8716.42; December 31, $7516.45; Illustration 29. ^:ry\?2 ^ y^ T : ^-9-T . ^ >f7^^ 7^1 r (xf^A "A ^i-^"- IJl ^irV7., (f T^y^A^ J^ Jhfy, 3 / 1^//L ^?i r/^A ^f ys5-/(f Ldi !ty/(^.^? 173a. Notice that the account is debited for the inventory of October 31 on that date, and that the account is credited for the same inventory on November 30, one month later when the next inventory is taken, at which time the balancing items are ruled out as showTi; and that, therefore, the account will always show the value of the merchandise on hand ai the close of the last precedirig fiscal period. 174. The inventory of the last preceduig fiscal period, added to the cost of the purchases for the present fiscal period, less the inventory for the present fiscal period, gives the cost of the merchandise sold. (See trading statement, 1[242). INVENTORY ACCOUNTS 56 LLU8TRATION 30. INVEITTOEY DECEMBER 31, 19 2488 bu. Wheat .97 2413.36 5674 " Oats .51 2893.74 765 " Rye .83 634.95 2624 " Com .60 1574.40 7516.45 Exercises in Inventory Accounts. 175. Prepare accounts for the following transactions: (1) At the closing of the books, December 31, the inventory of goods on hand was $11360.50. At the next semi-annual closing, June 30, the inventory was $12448.37. - - Atthenextsemi-annualclosing, December 31, the inventory was $10991.71. What does the account show at that date? (2) In a business where quarterly inventories were taken, the inventory on March31wasS23741.49,onJune30, $64927,26, on September 30, $64417.71, and Qti December 31, $45516.85. Show the account as it would appear December 31. Arithmetical Problems — Inventory Accounts. Illustration 31. (1) The inventory at the close of the last preced- ing fiscal period was $2396.45. The net cost of merchandise purchased for the present fiscal period <^:^£:^££2?:^ is $14365.27. The inventorv at the close of the x^^^^y^i-C^^i^J^^T,-.^ present fiscal period is $2875.90 ^^ff^ff^t^^^ What is the cost of the merchandise sold during /■» ^i-ri i^6x^^^^nc^t^- the present fiscal period? (1[174) (2) The last preceding inventory was $96784.00. The total purchases for the fiscal period are $263712.37. - - The present inventory is $87979.12. What is the cost of the merchandise sold during the period? (3) The last preceding inventory was $61320. There were no purchases since. The present inventory is $9721.12 What is the cost of the merchandise sold? (4) The business was started at the beginning of the present fiscal period with no inventory on hand. Tne total purchases to date are $35712. The pres- ent inventory is $7420. What is the cost of the merchandise sold? 66 BOOKKEEPINQ AND ACCOUNTANCT SUBSIDIARY TRADING ACCOUNTS. 176. The subsidiary accounts include all accounts, other than the principal trading accounts, which contribute towards increasing or diminishing the gross trading profit. They are kept for the purpose of classifying, under separate heads, the various items affecting the purchases and sales accounts which would otherwise be entered directly into those accounts, so that they may be shown separately, if desired, in the trading statement. 177. Subsidiary accounts vary considerably in different Unes of business, de- pending upon the nature and extent of the business, the amount of detailed informa- tion desired, and, to some extent, upon the frequency with which similar items occur. 178. The usual disposition of subsidiary items is indicated in paragraphs 151, 152, 153, 166 and 167, although this arrangement may not be the best in all cases. In preparing a system of accounts for any line of business, the exact information required must first be determined and then the accounts must be so arranged as to provide that information. In the sets accompanying this text various arrangements of subsidiary items and accounts are illustrated, each being the one best adapted to give the information desired for the particular line of business illustrated. 179. All subsidiary items may be entered directly into the purchases and sales accounts, in which case it is necessary to separate them into classes or groups, under appropriate headings, on separate sheets or statements, before a detailed trading statement can be prepared. These areknown as analysis sheets or "exhibits" (11490) and they are attached to and accompany the trading statement. This method is particularly well suited to departmental accounts. FREIGHT. 180. Freight and express charges are the amounts paid for the transportation of goods by public carriers. Drayage and cartage charges represent the cost of hauling goods bet^ween the warehouse and shipping points. As understood by accountants, the term "freight" includes all freight, express, drayage, cartage, and other charges relating to the transportation of goods. 181. The terms on which goods are bought and sold, generally indicate which of the parties is to pay transportation charges. Goodsshipped"f. o. b." (free on board) means that the seller delivers the goods on board the cars, boat or ship, after which they are transported at the expense of the buyer. "Charges prepaid" generally means that the seller of goods shipped f . o. b. pays the freight or express charges at the point of shipment for the buyer, and that the buyer becomes indebted to the seller for the amount. Goods shipped " f . o. b. delivery point " means that the seller is to pay the carrying charges; if they are paid by the buyer the seller becomes in- debted to him for the amount. However, in any case it is a matter of agreement be- SUBSIDIARY TRADING ACCOUNTS 57 tween the parties when the sale is made as to who is to hear the expense of the transporta- tion charges. 182. There are two kinds of freight. Incoming freight (or " freight in ") relates to charges on goods purchased. Outgoing freight (or " freight out ") relates to charges on goods sold. 183. "Freight In" increases the cost of goods purchased and is generally charged direct to the purchases account, no separate account being kept, which is the best practice. "Freight" or "Freight Out" is the heading generally used where a sep- arate account is kept for freight charges on goods sold, which are selling expenses and do not relate to purchases account. (This account is treated in detail in TI278). "FREIGHT IN" ACCOUNT. 184. If for any reason a separate account for "freight in" is kept, it will show (1) the cost of freight, express and drayage charges paid on goods purchased (^1446), (2) the amount (if any) of these charges rebated and returned (over- charges, mistakes in rating, etc.) (^145z), and (3) from these the net increase of cost to the purchases account in the trading statement is ascertained, which is shown by the difference between the two sides of the account, which should always show a debit balance. Rule for Debiting and Crediting "Freight In" Account. 185. Debit for costs: credit for returns. 186. The various applications of the rule are as follows: 187. Debit freight in account. 188. Credit freight in account. a. For all freight, express or drayage charg- c. For all rebates or other returns on charg- es paid by us on incoming goods. (1(1446) es previously debited to this account. 6. For all freight, express and drayage (111452) bills paid by others for our account on d. For all freight or express bills paid by incoming goods. (111446) us for others which have been charged to this account. (1(145/) As this account is seldom kept, it is not illustrated. 189. The difference between the two sides of "Freight In" account shows a debit balance, which is added to the cost of purchases in the trading statement. 190. To close. After the trading statement has been prepared, this account is closed by a journal entry which is made up from the items appearing in the trading statement. When the closing item for this account has been posted, which should balance it, then rule the closing lines in red ink and enter the footings in black ink, as shown in other similar accounts. 58 BOOKKEEPING AND ACCOUNTANCY WAREHOUSE ACCOUNTS. 191. After goods are received there are two classes of items which enter into the cost of handling the goods while in our possession (i. e., up to the time they are ready for delivery to customers or on board cars) which add to the cost of purchases, (1) those showing the cost of boxes, cases, crates, packing materials, shipping tickets, and other items used in preparing the goods for shipment, and (2) those showing the cost of the labor employed. (^144d) Separate accounts are usually kept although both classes of items may be included in one account under the head- ing of "Warehouse Expense," in which case the details may be shown to whatever extent required on an analysis sheet, or they may be charged directly to pur- chases account. When separate accounts are kept they may be designated as warehouse siipplies and warehouse labor. WAREHOUSE SUPPLIES ACCOUNT. 192. The object of this account when kept (^152) is to show the cost of shipping materials of every description used in preparing the goods for market up to the time they are ready for delivery, which increases the cost of the merchandise sold in the trading statement. Rule for Debiting and Crediting Warehouse Supplies Account. 193. Debit the account for the cost of all materials used in preparing goods for market up to the time they are ready for delivery. (1|144ri) Credit the account /or a7iy deductions or rebates from the cost, or for the value of materials taken from the account. (•I145t) 194. Transactions Illustrating the Application of the Rule. (1) F. A. Raymond's transactions for the month of January affecting the ware- house supplies account were as follows : Jan. 6. He, purchased boxes amounting to $10.50. Jan. 9. Repurchased lumber for the making and repairing of boxes, $8.40. Jan. 10. He paid for nails, etc., $1.65. Jan. 15. He paid for wrapping paper, S6.40. Jan. 20. He purchased boxes for $22.40. Jan. 26. He purchased lumber amounting to $13.10. Jan. 27. He secured a rebate of $1.10 on bill for boxes purchased Jan. 20. What was the cost of the warehouse supplies for the month? (1) Trace each transaction in the illustration shown below. (2) Prepare a ledger account like the illustration, inserting the closing entry for the item $61.35, as shown in the illustration. Rule the account, foot and present for approval. WAKEHOUSE SUTi'LlES ACCOUNTS 59 Illustration 32, 194a. Remember that the closmg entry, "Trading % to close", on January 31, is inserted in the exercises merely to show the account closed. In keeping a s«t of books, this entry would not be made until it was posted from tke journal. (^|196). Naming the items debited and credited in the explanation column jissists in under- standing the account, and particularly in analyzing it, if such should l-e necessary. The names of the items are frequently omitted, l:owever, in subsidiary accounts. To Close Warehouse Supplies Account. 195. The difference between the two sides of this account will show a del)it l)al- auce, which is added to the cost of purchases in the trading statement. (^242) 196. To close. After the trading statement has been prepared, this account is closed by a journal entry which is made up from the items appearing in the trading statement. When the closing item for this account has been posted, which should balance it, then rule the closing lines in red ink, as shown in illustration 32, and enter the footings in black ink. 196a. Resource and liability inventories affecting this account are explained in 11465. Exercises in Warehouse Supplies Accounts. 197. Prepare ledger accounts like the illustration al>ove for the following exam- ples, applying the rule for each transaction, and present for approval. (1) The Egbert Grocery Co.'s transactions' affecting warehouse supplies account for April are as follows : April 3. Boxes, S116.19. --9. Barrels, 8.00. --11. Nails, $4.75. -- 14. Paper, $18.45. --15. Twine, $4.50. --18. Strap iron, $31.20. --24. Excelsior, $6.70. - - 29. Boxes sold to another merchant, $13.20. How much lias this account added to the cost of purchases for the month? (7133,1[149) 60 bookkeeping and accountancy Arithmetical Problems — Warehouse Account. (1) The Brown Mfg. Co. purchased the following warehouse supplies for the month : Boxes, S151.50; lumber, S34; nails, $3.50; crates, $10.20; wrapping paper $22.16; twine, $5.00; strap iron, $21.60; excelsior, $9.50. - - They sold boxes and barrels, $9.60; returned WTapping paper below grade, $12.50. To what extent has the cost of merchandise been increased? (2) The Acme Glass Co. purchased boxes, $216.50; lumber, $2619.84; freight on lumber, $54.26; nails, $34; packing hay, $116.40; straw, $71.20. - - They re- jeived from the sale of boxes, $15.20. They used of the lumber, for repairs 13 the building, $45.20. • What is the net cost of the warehouse supplies for the month? WAREHOUSE LABOR ACCOUNT 198. Labor in this connection means the wages of those employed in opening boxes, crates, or breaking large packages and putting them up into smaller ones, and such other duties as are required in filling the orders of customers or in putting goods in shape for the market. This account is usually kept to include the wages of shipping clerks, warehousemen, and all others employed in preparing and hand- ling the goods up to the time they are ready for delivery to customers or for ship- ment. 199. The object is to show the cost of the labor employed in preparing goods for sale while in our possession, which increases the cost of purchases in the trading statement. (Hi 52) Rule for Debiting and Crediting Warehouse Labor Account. 200. Debit the account for the cost of the labor employed, i. e., salaries or wages of boxers, packers, assorters, or other persons assorting goods or filling orders. (Tf 144d) Credit the account /or the value of any labor employed elsewhere. (Hl45i). 201. Transactions Illustrating the Application of the Rule. (1) F.A.Raymond paid wages of shipping clerks and warehousemen as fol- lows : Jan. 8. $28.50; Jan. 16, $29.75; Jan. 24, $32.60; Jan. 31, $33.65. - - Dur- ing the month one of the warehousemen was employed at various times in another department. His time was worth $4.50 WABEHOUSE LABOR ACCOUNTS 61 What was the cost of the warehouse labor for the month? (1) Trace each transaction in the illustration. (2) Prepare a ledger account, inserting the closing entry for the item, $120.00 as shown in the illustration. Rule the account, foot, and present for approval. ILLUSTRATION 33, 7/^ t£^/t.<^i< '.j^£y,,,,/a^ ^ ^ ye^-^^. \/ z? jro ^9 3/ ^■JTh ^y /(n Z'T 7^ ^ 3f fc^5«,2i«^ '/c^ti tlf^^ ' • /SIO 7M 3Z (oO 3/ / J ». S3 Us /X¥ so /X'V ^0 \ "~ To Close Warehouse Labor Account. 202. The difference between the two sides of this account will show a debit balance, which increases the cost of the goods purchased in the trading statement. 203. To close, read TI196 Exercises in Warehouse Labor Accounts. 204. Prepare ledger accounts for the following examples, applying the rule: (1) B. F. Hudson's pay-roll included wages of boxers, packers, shippers, markers, etc., as follows: January 31, $250; February 28, $311.45; March 31, $350; April 30, $320; May 31, $216.65; June 30, $234.17. - - Labor charged to this account amounting to $37.65 was employed elsewhere. How much was added to the cost of purchases for the half year? Arithmetical Problems — Warehouse Account. ( 1 ) The pay-roll of the Sun Mfg. Company shows wages of boxers and packers as follows: -January, $160; February, $175; March, $173.50; April, $119.75; May, $160.50; June, $148.75; July, $80; August, $87.50; September, $141.50; October, $137.50; November, $163; December, $121.50. The account was credited in April for $25, in September for $33, and in December for $16.50, being the wages of packers whose time was used for other purposes. What was the net cost of the warehouse labor for the year? g2 BOOKKEEPING AND ACCOUNTANCY REBATES AND ALLOWANCES 205. In the purchase and sale of goods, errors in price, in quantity, or in grade of goods frequently require adjusting entries. In some lines of business and under some circumstances the amounts of these adjustments should appear as separate items in the trading statement. These adjustmentsmay properly be entered directly in the purchase and sales accounts (^145/, ^1596), and if it is desired to show them separ-.tely on the trading statement, they may be classified on an analj'sis sheet. When there are a sufficient number of these items to justify it, separate rebate and allowance accounts may be kept with both purchases and sales. Purchase Rebates and Allowances Account. 206. The object is to group the rebate and allowance items on purchases under one heading in the ledger, instead of crediting them to purchases account and afterwards classifying them on an analysis sheet. Rule for Debiting and Crediting Purchase Rebates and Allowances Account. 207. Read ^145/. There are no debits to this account except for items wrong- fully credited to it. Note : As this account is in reality a part of the purchases account, which has already been explained and illustrated, no account is shown. 208. The difference between the two sides of the account will sliow a credit bal- ance, which should be shown as an item decreasing the cost of purchases in the trad- ing statement. (•[242) 209. To close, read ^196 Sales Rebates and Allowances Account. 210. This account is in every respect similar to the purchase rebates and allowances account, except that the items have the effect of reducing the returns Jrom sales. 211. The object is to group the rebate and allowance items on sales under one heading in the ledger instead of charging them direct to the sales account and after- wards classifying them on an analysis sheet. merchaxdise discount 63 Rule for Debiting and Crediting Sales Rebates and Allowances Account 212. Road ^[1596. There are no credits to this account except for items wrongfully charged to it. 213. The difference between the two sides of the account will show a debit balance, which should be shown as an item decreasing the returns from sales in the trading statement. MERCHANDISE DISCOUNTS. 214. A merchandise- discount is a percentage deducted from a bill for its prepayment within a certain specified time from its date, which time is prior to the full term of credit allowed on the bill. It is in reality the value of the use oftlte -money for the time a hill is paid before it icould otherwise be due, which is calculated as a cer- tain percentage of the bill, this percentage being deducted when payment is mad 3. 215. The prepayment of a bill less discount is optional with the purchaser and, therefore, no entry is made in the books of the seller until payment is received. It is optional with the seller to allow the discount on a bill that is not paid until after the expiration of the term of discount. The ''terms" of the bill generally indicate the full term of credit allowed on the bill and also the term of discount (if any), which is the limit of time from the date of the bill in which a discount may be deducted for its prepayment. 216. In practice, payment is usually made for the difference only between the face of the bill and the discount, but theoretically payment is made for the whole amount of the bill and the value of the discount is returned or paid back to the purchaser of the bill for the use of his money before it would otherwise have been paid. 217. Discounts are offered for the prepayment of bills, (a) to secure prompt payment of bills and consequently to secure the earlier use of money to carry on the business of the concern, and (6) to reduce the commercial risk in carrying the accounts of customers for a greater length of time. These discounts are known as purchase discounts and sales criscounts. 218. What disposition should be made of purchase and sales discounts ? (a) Do purchase discounts decrease the cost of purchases and thus increase the grosp trading profit, which would class them as trading profits to be shown in the trading statement, or (b) are they an income derived from having sufl&cient capital to discount bills, which would class them as a capital income to be shown in the profit and loss statement? 64 BOOKKEEPING AND ACCOUNTANCY vc) Do sales discounts decrease the returns from sales and thus decrease the gross trading profit, which would class them as trading losses to be shown in the trading statement, or (d) are they expenses incurred to secure the earlier use of money and to reduce the risk of carrying accounts to their full maturity, which would class them as a capital expense to be shown in the profit and loss statement? Th-^se are questions upon which there is considerable diversity of opinion among accountants, without much prospect of an early agreement as to which is the correct method of disposing of either. 219. In the absence of such agreement, all of these methods are illustrated in this work, so that either may be employed, de^^ending Upon the nature of the busi- ness and the wishes of the owner, which, after all, are important factors in determin- ing which method should be followed. PURCHASE DISCOUNTS ACCOUNT. 220. Purchase discounts are those which are allowed (or returned) to us for the payment of bills purchased. 220a. When purchase discounts are considered as decreasing the cost of pur- chases, they may be entered directly to the credit of purchases account (^145/, ^153) or a separate purchase discounts account may be kept, which is preferable. When so considered, purchase discounts account is classed as a subsidiary trading account, and the amount of the purchase discounts shown by it should appear in the trading statement as a deduction from the cost of purchases, which will increase the gross trading profit or decrease the gross trading loss shown by that statement 2206. When purchase discounts are considered as showing an income derived from having the capital available to prepay bills, a separate purchase discounts account should be kept, which is then classed as a profit and loss account, and the amount of the purchase discounts shown by it should appear as a profit in the profit and loss statement, as a separate item, which will increase the net profit or decrease the net loss shown by that statement. Rule fok Debiting and Crediting Purchase Discounts Account. 221. Credit Purchase Discounts account for all discounts on bills prepaid by us. 222. Observe that the account is credited for the returns to us for the use of money given in discounting our bills. Any debit items appearing in this account are simply offset items for credits to the account, for discounts which were not allowed to us. (11215) PURCHASE DISCOUNTS 65 223. Transactions Illustrating the Rule for Debiting and Crediting Purchase Discounts Accounts. F. A. Raymond's transactions affecting purchase discounts for January are as follows: Jan. 5. He was allowed a discount of $46.91 ; Jan. 1 ? "^27.8-i ; Jan. 19, $38.46 ; Jan. 27, $65.80. - - Jan. 20 he debited the account lo. $5.50, which he had deducted on a bill previously paid, which was not allowed. What were the total discounts on purchases for the month? (1) Trace each transaction in the illustration. The explanation column is left vacant, as all items are for discounts. (2) Prepare a ledger account like the illustration, inserting the closing entry "Trading a 'c to close," as shown in the illustration. (^225a). Illustration 34 A::^.cyi^€-^ .^i^i-r^c^ --?<. '? Exercises in Preparing Trading Statements 250. Prepare trading statements for the fcllowing trading accounts as they appear in the various trial balances shown, and present for approval. The first example is an exact duplication, in form, of the trading statement shown in illustra- tion 40, the only difference being in the amounts. These statements are pre- pared on ordinary journal paper, as shown in the illustration. 1. The section of A. W. Wilson's trial balance for December 31, 19 , con- taining the debit and credit items relating to trading accounts, is shown in the illustration below: Illdstration 43. J.f^3 /f (I'fg'/ /-z-.r ;J / / z £0^ v^ .^ 4/^ /C3 ZO J-/Z ^^ ^¥ Additional Information Required to Prepare the Trading Statement In the above illustration, only the balances of the purchases and sales accounts are shown, whereas to give full information in the trading statement regarding 76 BOOKKEEPING AhD ACCOUNTANCY purchases and sales, as shown in illuslration 40, reference must be made to the accounts in the ledger to obtain the amounts which must appear in the state- ment. (Read ^241) In the ledger purchases account is debited for total pur- chases, $3010.50; credited for goods returned, $19.14; for rebates and allowances, $28.17; total, $47.31 ; the difference ($3,010.50-$47.31) being the balance, $2963.19, showai in the trial balance. In the ledger, pales account is credited for gross sales, $6824.50; debited for goods returned, SI 2. 30; for rebates and allowances, $56.91; total, $69.21; the difference ($6824.50-$69.21) being the balance, $6755.29, shown in the trial balance. The inventory at the close of the present fiscal period, December 31, is $5147.96. From the figures shown in the trial balance, supplemented in the case of the purchase and sales accounts by those taken from the ledger, as given above, pre- pare a trading statement showing the gross trading profit. Then prepare two journal entries, — one which will open the trading account in the ledger (•;248), and one which will omit the trading account in the ledger (1[249), and present for approval. Suggestion. The purpose of the closing journal entry may be further illustrated by opening a ledger account for each of the trading accounts named in the section of the trial balance show^l in illustration 38 and then posting the amounts shown in the closing journal entry to these accounts, which will balance all of the Ipdger accounts excepting the inventory account, Avhich will show the amomit of the inventory at the close of the present fiscal period, and the profit and loss account which will show the gross trading profit. (2) Harvey & Son's trial balance shows the following trading accounts at the semi-annual closing of their books, June 30, 19 — . The inventory on that date was $29,336.45. Prepare a trading statement showing the gross trading profit, with the proper journal entry to close when a trading account is opened in the ledger. iLLUSTRATlON 44. ^_t,L/,-Cii,<.-<^-t<'-*-^^Z^ '/fO (3) The trading accounts showTi in the trial balance of Hope & Hemphill, taken December 31, 19 — , are as follows: Prepare the trading statement and the journal entry to close, omitting the trading account in the ledger. Note that separate accounts are kept for purchase and sales rebates and allow- ances, and that the balances sho\Mi by purchases and sales accounts, therefore, show total purchases and total sales. The inventory at the close of the present fiscal period is $8990.60. TRADING STATEMENTS 77 Illustration 45. -^r t 6.^....^ ; f^JS J^ 2Z3(>'^ ^y /■V^l-Ti? J^a -2i? /2ZO 3/C VjS- 2g 3^3 77 -?-?r|V^:l (4) The Chase Company's trial balance for the quarterly fiscal period ending September 30 showed the following accounts and balances: Prepare a trading statement showing the gross trading profit for the period, and a journal entry to close the trading accounts without opening a trading account in the ledger. The inventory was $49312.30. Illustration /l-t-C'^t<:,<^^L^c:2-t-«*o»^^/ " 4^ Oi:>-yrTy, ; — 3 lllh. Illustration 49 shows the account as it appears January 31, when footed preparatory to taking the trial balance. 273c. Illustration 50 shows the account as it appears after the profit and loss statement has been prepared and the journal entry, closing the profit and loss accounts, has been posted, at which time the accounts ruled and footed as shown 84 BOOKKEEPING AND ACCOUNTANCY IlI.I Ml U IIION /)0. V '^~it^yyt-!ytt.c^?-r-Le^ >2 7 1^3- 1- -- 1 r^ 3/S- XO S' CCc:Ci/'^/iZld,i^vz-^ ^f 3/ 0Cii£iJt*£^^ c>Al!4--e.<:-t^ C J 3/ 'S^4.,.^^AJ' /2 SO 3/ yg^^^io- V .-^W^-i.!^ r 3/ .<^!^?^^t^^:• 3IS:3 f 3/7 ■¥-£>\ J/7 ^O — [ To Close Selling Expense Accounts. 274. The object of these accounts is to show the net cost of the various expenses of the sales department and,incidentall3%the amount that is to be deducted from the gross selling profit, as shown by the trading statement, in order to ascertain the net selling profit, SiS shown by the profit and loss statement. 275. The difference between the two sides of a sales expense account shows the 7iet cost of making sales for the period, which is a loss that should be shown as a separate item (or items) in the profit and loss statement. 276. To close. After the profit and loss statement has been prepared, the sales expense accounts are closed by a journal entry made up from the profit and loss statement. When the closing item to each sales expense account has been posted, which should balance the account, rule the closing lines in red ink as shown in illustration 50, and enter the footings in black ink. 276a. in ^465. Resource and liability inventories affecting these accounts are explained Exercises in Sales Expense Accounts. 277. Prepare ledger accounts showing the account closed like illustration 50 for the following examples, applying the rule (11266) for each transaction. Indi- cate ])riefiy in the explanation column the nature of each item. (1) Dec. 31. The sales expenses of the Richards Grocery Conipan}-, for the year are as follows: Salesmen's salaries, $1500; il xlesmen's traveling expenses, $846.15; commission allowed to agents, $341.60; sample cases, $85; sample goods, $216.25; premiums, PROFIT AND LOSS ACCOUNTS 85 $180.67; advertising circulars, $218.90; newspaper advertising, $116.45; postage for mailing advertising matter, $190; printing order books, $60; wages of drivers delivering goods, $480; horse feed, $126.50; horse shoeing, $23.25; delivery wagon repairs, $31.75; branch office salaries, $720; wrapping paper and twine, $65. 30; wages of wrappers, $211.60; show-room rent. What is the net cost of the various expenses of the sales department for the year? (2) The selling expenses for the Jones Mercantile Company for the half year ending June 30 are as follows: Salesmen's salaries, $1200; traveling expenses, $618.26; sample cases, $45; sample goods, $185.30; premiums, $216.50; advertising, $175.16; order books, $25; wrapping paper, $45.60; delivery automobile supplies and repairs, $213.70; wages of chauffeurs, $600. The services of a salesman were used as a purchasing agent to the amount of $300. (1[2690 What is the net cost of the sales expenses for the period? Arithmetical Problems — Sales Expense Account. (1) The Ritter Grocery Company's selling expenses for the quarter ending September 30 are as follows: Salesmen's salaries, $900; salesmen's traveling expenses, $316.75; sample goods, $165; premiums, $137.50; printed matter for advertising, $111.60; postage $80; drivers' wages, $300; horse feed, $75; horse shoeing, $18; wagon repairs, $26.30. Sample goods were sold amounting to $57.50. The delivery wagon was used in hauling goods purchased to the amount of $78.75. Wrapping paper was used in re-casing goods purchased to the amount of $12. What is the net cost of the selling expenses for the period? (2) The Brown Shoe Company's sales expense accounts show the following footings for the fiscal year ending December 31: Salesmen's commissions %, debit, $1567.18; credit, $9.60. Sample goods %, debit, $216.40; credit, $21.50. Advertising, debit, $262.81. Delivery expense %, debit, $387.90. "Freight out" %, debit $86.50; credit, $4.12. What is the net cost of the selling expenses for the period? OUTGOING FREIGHT EXPRESS DRAYAGE, ETC. 278. "Freight" or "freight out" is the heading used where a separate account is kept for freight charges on goods sold, which is a selling expense. (1l268i) It 86 BOOKKEEPING AND ACCOUNTANCY includes all freight, express, drayage, cartage, and other charges incurred in the delivery of goods to the consignee by the consignor (i.e., the seller to the buyer) from the time the selling expenses begin, which in a wholesale or jobbing business is from the time ivheii the goods are made ready for delivery to the local customer, or on hoard cars for shipment, or inaretail business /rom the time the goods are ready for sale. 279. The object is to show (1) the cost of freight, express and drayage charges paid on goods sold, (2) the amount (if any) 'of these charges rebated and returned (overcharges from mistakes in rating, etc.), and (3) from these to determine the amount to be deducted from the gross profit on sales to ascertain the tiet profit on sales in the profit and loss statement, which is shown by the difference between the two sides of "Freight Out" account, which should always show a debit balance. 280. This is the only separate freight account usually kept, as freight on pur- chases is properly chargeable to that account, therefore, ' ' freight " account is generally- understood by accountants to relate only to freight outward. This account can be omitted by debiting the items directly to sales expense account (Tf268i;) Rule for Debfting and Crediting "Freight Out" Account. 281. Debit for costs: credit for returns. The various applications are: 282. Debit freight out account, — a. For all freight, expres.s and drayage charges paid by us on goods delivered. to local customers and on goods after they are placed on board cars for ship- ment to out of town customers. b. For all freight, express and drayage bills paid by others for our account on outgoing goods. 284. Observe that in every instance the account is debited for the cost of charges. 283. Credit freight out account,— c. For all rebates or other returns on charges previously debited to this account. 285. Observe that in every instance the account is credited for any returriK. 286. The transactions for the items sIkjwu in the following account are not given, as they are all similar and easily distinguished from other selling expenses. Illustration 51. -^^'^^^t-^^^.jj^C^^ PROFIT AND LOSS ACCOUNTS 87 287. The difference between the two sides of "Freight Out" account will show the cost of freight, etc., on goods sold, which is a selling expense that should appear as an item in the "sales expense" section of the profit and loss statement. (Illustration 87) 287a. Note that the difference between the two sides of a " Freight In " account will show a debit balance, which should appear as an item increasiiig the cost of pur- chases in the trading statement. 288. To close. After the profit and loss statement has been prepared, this account is closed by a journal entry which is made up from the entries appearing in the profit and loss statement. When the closing item for this account has been posted, which should balance it, then rule the closing lines in red ink and enter the footings in black ink. 288a. As this account is in every respect similar to the sales expense account, shown in illustrations 49 and 50, separate exercises are not deemed necessary. 2886. Resource and hability inventories affecting this account are explained in 11465. DELIVERY EXPENSE ACCOUNT. 289. Delivery expense account is a separate account for a class of items that, if preferred, may be charged directly to sales expense account. (^268{/) It is kept to show the cost of maintaining and operating the "delivery equipment, " (1f428) such as costs of repairs and renewals of the equipment, feed supplies, drivers or chauffeurs' wages, gasoline and oil for automobiles, and all other items that enter into the cost of delivering goods. 290. The cost of delivering goods is a selling expense that should appear as an item in the "sales expense" section of the profit and loss statement, which is the reason for keeping a separate account for the items charged to it. 290a. Delivery expenses must not be confused with drayage charges. De- livery expenses include all charges on outgoing goods from the time the goods are ready for delivery to the local customer or on board cars for shipment, while drayage charges include all charges on incoyning goods from depots and wharfs up to the time the goods are ready for sale, which should be included in the cost of purchases in the trading statement. (11141, 111446, 1|146) 2906. When the same teams, automobiles, etc., are used for hauling the goods "received as well as the goods delivered, delivery expense may be charged for the whole amount during the fiscal period. At the end of the fiscal period these ex-penses should be pro rated. A better method is to pro rate the expenses monthly, because the division would likely be more nearly correct when made monthlj'' than when permitted to lie over until the end of the fiscal period. 88 BOOKKEEPING AND ACCOUNTANCY Rule for Debiting and Crediting Delivery Expense Account. 291. Debit delivery expense account for costs: credit for any returns from items charged to that account. 292. The various applications of the rule are as follows: 293. Debit delivery expense account, — a. For the cost of repairs and renewals of the delivery equipment. b. For current supplies consumed, such as feed and bedding for horses, gasoline and oil for automobiles, etc. c. For drivers' wages, bridge or ferry tolls, and for any other items that enter into the cost of delivering goods. 294. Credit delivery expense account, — d. For any returns from the sale of items previously charged to this account. e. For any returns or income for the use of the delivery equipment by others. /. For the proportion of these expenses which should be charged to the pur- chases account for drayage on incom- ing goods. 295. The difference between the two sides of a delivery expense account shows the net cost of delivery expense for the period, which is a loss that should be shown in the sales expense section of the profit and loss statement. 296. To close. After the profit and loss statement has been prepared, in which the results shown by this account should appear as a separate item in the sales expense section, it is closed by a journal entry made up from the profit and loss statement. When the closing item to the account has been posted, which should balance the account, rule the closing lines in red ink and enter the footings in black ink. 296a. in t465. Resource and liability inventories affecting this account are explained ADMINISTRATION EXPENSE ACCOUNT. 297. Administration expenses are the expenses incurred in the general manage- ment of a business considered as a whole, such as the salaries of officers and man- agers and of office help, the cost of office supplies, postage, stationery, travel- ing expenses, and such other miscellaneous expenditures as relate to the general management of the business. 297a. Salaries of officers and office help and traveling expenses represent the cost of services rendered. Postage represents the cost of a service rendered by the government. Office supplies, stationery, etc., represent the cost of materials wserf. 298. A single account under the head of "Administrative Expense " may be kept. If it is desired to show these expenses separately in the profit and loss state- ment, the items may be classified on an analysis sheet; or separate accounts with the various classes of items may be kept in the ledger, if preferred. profit and loss accounts 89 Rule for Debiting and Crediting Administrative Expense Accounts. 299. Debit administrative expense accounts for costs: credit for returns. 300. The various applications of the rule are as follows: 301. Debit an administrative expense 302. Credit the proper administrative account, under an appropriate title, — expense account, — a. For officers and managers' salaries. /. For any returns from the services or b. For salaries or wages of office help. materials charged to that account, c. For office supplies, stationery, postage, or for any overcharges or rebates on telephone and telegram charges. items charged. d. For traveling expenses of officers or employees of this department. e. For any miscellaneous expenses of the administration, such as legal expenses, directors' fees, etc. 303. Observe that in every instance 304. Observe that in every instance administrative expense accounts are administrative expense accounts are debited for the cost of services and credited for the returns from the cost materials used in that department. of any use, service or material charged to them. 305. Transactions Illustrating the Various Applications of the Rule (^299) FOR Debiting and Crediting Administrative Expense Accounts. Transactions for January affecting administrative expense account are as follows : Jan. 8. Paid for office supplies, S17.50. (1[301c) - - Jan. 12. Paid traveling expenses, $3.60. (llSOld) - - Jan. 16. Paid for legal advice, $10. (•[301e) - - Jan. 24. Paid for telegrams, $1.60. (^301c) - - Jan. 31. Paid salaries of office help, $100. (•i3016) - - Jan. 31. Paid manager's salary, $150. (11301a) Jan. 31. The services of one of the office clerks were loaned to the sales department to the amount of $7.70 (^302/). What was the cost of the administrative expenses for the month? (1|307) exercise 305a. Prepare a ledger account for the preceding transactions. (1) Before entering each transaction, refer to the special application of the rule indicated in the paragraph number. (2) Then make the proper debit and credit entries in the administrative expense account, applying the rule ^299. When completed, submit for approval. 90 BOOKKEEPING AND ACCOUNTANCY Illustration 52. (A^^s^^yyi^i'vr^i^d'^^l'tzZZ'iAe/ CL.^ ^ f9 i^r // so Gz^. J/ ^^ J Co 3/ jSt^yj^Y^Tii-c^ 7 7^ 27^ ~- /OO ^o /so z^x yo xt2 i 70 To Close Administrative Expense Accounts. 306. The object of administrative expense accounts is to show the net cost of the various expenses of the administration department. 307. The difference between the two sides of an administrative expense account is the net cost of the administrative expenses for the period covered in the account, which is a loss that should appear as a separate item (or items) in the profit and loss statement. 308. To close. After the profit and loss statement has been prepared, admin- istrative expense accounts are closed by a journal entry made up from the profit and loss statement. When the closing item to any administrative expense account has been posted, which should balance the account, rule the closing lines in red ink as shown in illustration 52 and enter the footings in black ink. 308a. Resource and liability inventories affecting these accounts are explained in 1465. Exercises in Administrative Expense Accounts. 309. Prepare ledger accounts showing the accounts closed like illustration 52 for the following examples, applying the rule (1299) for each transaction. No illustration is shown, as this account is in every way similar to the one shown in illustration 52. Indicate briefly in the explanation column the nature of each item. • (1) The Adams County Glass Company paid salary of manager, S3000; salary of bookkeeper and stenographer, S1200; stationery and office supplies, $157.10; postage, $122; telephone and telegrams, $71.05; directors' fees, $500; legal expenses, $200; extra office help, $150; traveling expenses of general officers, $346.18. They received a rebate on railroad ticket, $12.50. Received for use of our telephone for long distance calls by other people, $2.60. GENERAL EXPENSE ACCOUNTS 91 What was the net cost of administrative expenses for the year? (2) The Sun Mfg. Company's administrative expenses were as follows: Salaries of management, $5000; salaries of office help, $1800; stationery and office suppUes, $142.75; postage, $130; telephone and telegrams, $81.50; legal expenses, $50; miscellaneous traveling expenses, $86.19. What was the net cost? Arithmetical Problems — Administrative Expense Accounts. (1) The Jones & Brown Mfg. Company's expenses for the year were: Salary of manager, $4000; salaries of office help, $1600; stationery, $96.45; postage, $150; telegrams and telephone, $92.35; directors' fees, $700; legal expenses traveling expenses, $167.18. (2) The Midland Rolling Mill Company paid manager's salary, $2500; office help, $975; letter heads and envelopes, $60; postage, $72.30; telephone and tele- grams, $61.25; directors' fees, $250; attorneys' fees for collecting accounts, $75; traveling, $30; banquet for officers, $75. GENERAL EXPENSE ACCOUNTS. 310. An expense is the cost of any use or service from which no definite per- manent value is derived; the cost of anything that is used up in conducting a busi- ness. General expenses consist of all expense items which are not included in the sales, administrative, manufacturing or other special expense accounts, such as the cost of rent, fuel, light, taxes, insurance, and miscellaneous items of similar character. 311. A single account under the head of '' General Expense, " or " Expense, " may be kept, or separate accounts may be kept in the ledger with any one or more of the items, if desired. Insurance expense account ^340 is an example of a separate general expense account. If a single account is kept and it is desired to showtheitems separately in the profit and loss statement, they may be classified on an analysis sheet. 311a. A single account for all expense items, including selling, administra- tive, manufacturing, and all other special and general expenses, may be kept under the heading, "Expense," if it is not convenient or desirable to keep separate accounts for the different classes of expense items. This is frequently advisable in small concerns. Wlien the expense account is so kept, the items may be subdivided and classified to any extent desired, either monthly, quarterly, or annually, on analysis sheets (1(490) , which permits of the various statements being prepared showing as much detail as if separate accounts were kept in the ledger for each class of expense items. 92 BOOKKEEPING \ND ACCOUNTANCY 3116. It should be remembered that there is no other good reason for opening separate accounts for the different expense items than to show the cost of the various expenses separately in the trading and profit and loss statements. When detailed information regarding expenses is not necessary in the manage- ment of a business, it is a useless waste of time to classify expense items under numy accounts. Where the volume of business is of considerable size, however, separate accounts should be kept with selling, administrative, and general expenses. Rule for Debiting and Crediting General Expense Accounts. 312. Debit general expense accounts for costs: credit for returns. 313. The various applications of the rule are as follows: 314. Debit expense, under a general or 315. Credit expense, under a general or special heading, — special heading, — a. For rent, fuel and lighl, taxes, insurance h. For any returns from expense itema and other miscellaneous items of simi- charged to general expense accounts, lar character. 316. Observe that in every instance the 317. Observe that in every instance the account is debited for the cost of a use or account is credited for the returns from service received. a use or service previously charged to the account. 318. Separate accounts may be kept for any one or more of the items shown in italics in ^3 14a. 319. Transactions Illustrating the Various Applications of the Rule (11312) FOR Debiting and Crediting General Expense Accounts. The following are the general expenses paid for the month: exercise. Jan. 10. Coal, SI 1.50. (T314a) - - Jan. 14. Team License, S3. 75. - - Jan. 18. Letter Box, SI. 50.- - Jan. 31. Electric light, $3.81; rent, S90; rented space, sub-let, S25.00. (^3156). What are the total general expenses for the month? (1(322). 320. Prepare a ledger account for the preceding transaction like illustration 53, and present for approval. QENEliAL EXPENSE ACCOUNTS 93 Illdstbation 53. ^jS ^ym ^^^ C ^^'^gg^'^2---C<£-^ Pa^>^, 54 r:>l'Cy-yyi'UOO'y>'T^ -^ '^O /y^«.^^^.-»-^<^«^ S'Z SO ^^^^^tfefetf^ c^t-^b^ -.- ^Li-eA'ti^'^^ 7 ^0 ^^ f" 337. The difference shown by the insurance account is the current premium value of the unexpired policies on hand which should appear as a resource in tlie state- ment of resources and liabiUties. 338. To close. An insurance account is not usually closed unless it is desired to show the value of the premiums on unexpired policies in one item, when the difference should be entered in red ink, or when it is necessary to forward the account to another page. To close the account, first find the difference, then eiiter on the credit side in red ink, (a) the amount of the difference, (6) the date, and (c) the word, "Balance." Then rule and foot the account, as shown in illustration 54 and bring down the balance on the opposite side (in black ink), entering the date of the next business day. If it is necessary to forward the account to another page, instead of bringing the balance down, forward it to the opposite side of a new INSURANCE ACCOUNTS 97 page, entering the numl)er of the new page to which the account is transferred in tiie page column. In the new account in the page column enter the page from which the account was transferred. When all insurance policies have expired and have been charged off, this account will balance. Exercises in Insurance Accounts. 339. Prepare ledger accounts for the following, showing the accounts closed like illustration 54, bringing down the balance on the opposite side of the account, as instructed in ^338, and present for approval. (1) Jennings Brothers placed the following insurance on their stock: March 1, $8000, for one year at 1%, $80 (^333a) ; Aug 1, $6000, for one year at U':o,$75; Nov. 1, $1000, for one year at li% premium, $12.50. At the closeofthe fiscal year, December 31, the expired premium value on the policy of March 1, for ten months, at $6.66§ per month, is $60.07; on the policy of August 1, for five months, at $6.25permonth, $31.25 ;onthe policy of November 1, for two months, at $1.04 per month, $2.08; total, $100. («^3346) What is the premium value of the unexpired policies on hand? (11337) (2) Harris Carter placed insurance on his stock as follows: January 2, $5000; March 15, $2000; April 1, $3000. Each policy is for one year, and the premium is at the rate of 960 per $100. July 1, he canceled the policy of January 2 for the unex- pired time, receiving rebate, $20, being at the rate of 400 per $100 (![3346, *[f334c/). , What was the unexpired premium value of the policies in force at the end of the fiscal year, December 31, and what was the balance shown by the insurance account? (3) Johnson & Davis placed insurance on their stock as follows: Jan. 4, $4000; Feb. 28, $2000; March 25, $6000; July 7, $3000; Nov. 1, $2000; Nov. 1, $2000. Each policy is for one year from date, and the premium is at the rate of $1.08 per $100. They desire that the insurance account be credited monthly for the amount of the expired premium value, on these poUcies. What is the current premium value of the unexpired policies on hand Dec. 31? Note: To find the exact expired piemium value for less than a month, divide the amount for one month on the basis of thirty days. If exact value is not required, if less than one- half month, do not count; if one-half month or more, count as one month. 98 BOOKKEEPING AND ACCOUNTANCY INSURANCE EXPENSE ACCOUNT. {Expired Insurance Premiums.) 340. Insurance expense account is kept to show the amount of premiums which have expired during the month or other period represented in the account, which have, therefore, become an expense. The debit items to this account are contra to the credit items in the insurance account, i. e., this account is debited and insurance account is credited monthly, or for any other period, for the pro rata expired premium value of insurance policies. Insurance expense account is, there- fore, in a sense, a companion account of the insurance account. 341. Insurance expense is also debited with all assessments on mutual policies for premiums that are not paid until the expiration of policies, such as ''blanket" policies, etc. Rule for Debiting and Crediting Insurance Expense Account. 342. Debit insurance expense account for costs: credit for returns. 343. The various applications of the rule are as follows : 345. Credit insurance expense, — c. For any returns from payments on expired premiums charged to this account. 344. Debit insurance expense, monthly or at the close of the fiscal period, — a. For the expired premium value of insurance policies in force. b. For premiums paid on mutual policies, or for premiums not paid until expira- tion of policies. 346. Transactions Illustrating the Various Applications of the Rule (1(342) FOR Debiting and Crediting Insurance Expense Account. Jan. 31. As shown in the second transaction, 1336, the expired pr:>miuni value of the policy referred to for one month is $7.50. (T|344a) Illustsation 56. ?Z^^^;^.<7,->-i^ J^^JJl/A^ 22l,i.^,aji.a^&^£i!^ ^>iy^^L£^LZy ^Jh'^^d.t't^'l'^^sC^ CC^yyu&t^*-'!'*^ ^^^^rl^f-^^^ ^:^t^c/L,.^'X.^yi^^tf-/^.^Auij^ ■=&^iS-ti^^L_ /S.*^.i^i^:o^I«^_ ^^l^t^t^,£^\ C^t^l^tyiU^ /^ .yy>y^. _^aai£ /s\ ?Ha/r/s\ '/2. \ l/ii'/X INSURANCE EXPENSE ACCOUNT EXERCISE. 99 Prepare a ledger account showing the expired premium value of the policy for January, like illustration 55. Illustration 55. ^Z:i^-'>zJ^tycylytz^yTyC^ C^-'Z.^Le yj't^ii.-e^ — T^^ri Ct3^^^./t.e^j[,,uyjy%'n/t<£^_ '9 a'^ JL^\ J/[>gy<^/s^%zi^c.i^ s-=^ 347. To close. Insurance expense account shows the expired premium value of the insurance policies in force for the period covered in the account, which is a loss that should appear as a separate item in the profit and loss statement. See illus- trations 64 and 65. After the profit and loss statement has been prepared, this ac- count is closed by a journal entry made up from that statement. When the closing item to the account has been posted, which should balance the account, if more than one item appears on either side of the account, rule the closing lines in red ink and enter the footings in black ink as shown in illustration 54. If but a single item ap- pears on each side of the account, rule the closin-i" lines as shown in illustration 55, as there are no footings to be entered. 348. This account may be omitted from the ledger by chpTging the items to the general expense account. 349. Prepare ledger accounts showing the expired premium value on policies named in transactions 1, 2, and 3, 1[339, and present for approval. 350. The following is a simple form of an insurance record book, showing the monthly expiration of premiums. By omitting the columns for each month, this book may be similarly used to show the expired premium value on insurance poli- cies at the close of any fiscal year or period. 1 if::^,^^;^.^^;^^^^^-^ ^i.~,~--/ ^^ cJ^^ \Ma^\(iZ^ '■ yn^ \J>^'^^ Jlc<^y CUP 7f 21 13. 1 J or 1 li « b 2^ IJ\ - - 1 i - . .---^-... .-,- 1 1 1 i 1 100 BOOKKEEPING AND ACCOUNTANCY INTEREST AND DISCOUNT. 351. The use of money is interest. When the use of money is paid fur after the use is received, it is called interest; when the use is paid for before, it is received it is called discount. Discount is interest paid in advance. This is really the only differ- ence in the terms and for that reason a single account under the title of " Interest" is usually kept for both interest and discount. Separate accounts may be kept with "Interest " and with "Discount, " or they may be combined under the head of "In- terest & Discount, " or the interest derived from a particular source maybe kept in a separate account, as "Interest on Borrowed Capital," or "Interest on Loans." 351a. Illustration. If A borrows $100 from B f or one year at 6% interest, at the expiration of that time {after he has received the use or interest) he will return SlOO to B plus $6, or $106. The $100 is in payment of the loan. The $6 is in pay- ment for the use (interest) of $100 for one year. If the $6 is deducted from the $100 when the loan is made, it is then called discount, because it is paid in advance, or before the borrower has had the use of the money. 352. In a bookkeeping sense interest is understood to refer to money borrowed to increase the capital of the business or to money loaned from the surplus funds of the business. Interest on loans should be distinguished from discounts on pur- chases and sales. (1f214) 352a. Interest on partners^ capital is not, strictly speaking, an expense of con- ductingthe business and therefore shouldnot be debited to interest account. Instead it is generally treated as a direct charge to profit and loss account. Interest on part- ners' capital may be eliminated entirely from both the interest and the profit and loss accounts by considering the total interest due the partners as a liability of the firm, debiting each partner for his share and crediting each partner for the interest owed to him. 353. Interest is calculated on interest bearing notes from the date on which they begin to draw interest to the date they are due. Discount is calculated for the exact number of days from the date of discount to the date due. Interest bearing notes are discounted for the amount of the note, which is the face of the note plus the interest. The amount of the note less the discount equals the proceeds. On open accounts interest is calculated from the date on which the account (or items) is due until the date c i which it is paid. 354. A clear understanding of interest will be had in connection with any trans- action if the student will ask the question, " Do we receive the use of money borrowed or loaned, or do we give the use of it?" If we receive the use, it is a debit to interest account (^[28); if we give the use, it is a credit (1[29). 355. The use received or given must not be confused with the money received or paid. It is the use that is received or given, and the use is paid for in cash or otherwise like any other commodity. interest and discount Rule for Debiting and Crediting Interest Accounts. 356. Debit interest accounts for costs: credit for returns. 101 356ct. Debit interest .accounts for the cos^ of the use of money received. 3566. Credit interest accounts for the returns from the use of money given. 357. The various applications of the rule are as follows : 358. Debit interest, under the proper title,— a. For all interest accrued and owing to us from others on notes receivable, *bonds, accounts, or other claims at the beginning of business, which will be credited to this account when received. b. For the use of money (interest) received by us on our notes (notes pay.), accounts etc., and for which we pay or allow credit. c. For the use of money (discount) re- ceived by us on notes and time drafts that are diwcounted for us by others. d. For the use of money (discount) received by us, when others prepay their own notes or acceptances (notes rec.) in our favor. €. For the use of money received by us (discount) on notes and drafts we transfer to others before maturity, for purchases or on account. /. For accrued interest owing to others at the close of the fiscal period, as shown by the inventory of accrued interest -payable (^4086). g. For accrued interest owing to us at the cloi^e of the last preceding fiscal period, as shown by the inventory of accrued interest receivable. 359. Credit Interest, under the proper title,— h. For all interest accrued and owing to others on notes payable, *bonds ac- counts, etc., at the beginning of busi- ness, which will be debited to this account when paid. i. For the use of money (interest) given to others on their notes (notes rec.) accounts, etc., and for which they pay or give us credit. For the use of money (discount) given to others on their notes and acceptances that are discounted for them by us. For the use of money (discount) gi"en to others, when we prepay our own notes (notes pay.) in their favor. For the use of monej'- (discount) given to others on notes and di'afts thej'' transfer to us before maturity .ci' pur- chases or on account. For accrued interest owing to us at the close of the fiscal period, as sho..n by the inventory of accrued interest receiv- able (^468a). For accrued interest owing to others at the close of the last preceding fiscal period, as shown by the inventory of accrued interest payable. J- k. "Interest on bonds is generally recorded in a separate account, because it is always shown separately in the profit and loss statement. Interest on bonds should always be accrued monthly. 360. Observe that in every instance the account is debited for the cost of the use of money received. 361. Observe that in every instance the account is credited for the returns from the use of 7noney given. 102 BOOKKEEPING AND ACCOUNTANCY 362. Transactions Illustrating the Various Applications of the Rule (11356) FOR Debiting and Crediting Interest Accounts. Transactions for January affecting interest account are as follows : Jan. 1. Interest accrued and owing to us from others at the beginning of busi- ness, $9.17. (^358a) Jan. 1. Interest accrued and owing to others at the beginning of business, $3.47. (^359/i) Jan. 5. Paid for interest on a note maturing today, $3.65. (•|3586) Jan. 7. Our note was discounted at bank at 30 days, aniount of discount, $2.50. (1|358c) Jan. 9. Received payment fornoteinour favor, and also the interest amounting to $-1:. 12. (^359t) Jan. 10. A customer prepaid his note in our favor less discount to maturity, amount of discount, $1.17. (^358(i) Jan. 12. As an accommodation we discounted a friend's note for $250 at 30 days, amount of discount being $1.25. (^359j) Jan. 14. We prepaid our note in favor of B. A. Watson less dis- counttomaturity, amount of discount, $3.27. (^359^) Jan. 15. Hamilton& Company have transferred to us, on account, a note in their favor less dis- count to maturity, discount $5.66. (^359/) Jan. 17. We transferred to Mitchell Sons, on account, note in our favor less discount to maturity, the dis- count being $1.12. (!i358e) Jan. 31. An inventory of the interest which has accrued on our interest bearing notes in favor of others shows that w^e owe accrued interest payable, $12.44. (11358/) Jan. 31. An inventory of the accrued interest owing to us on notes in our favor shows that other= owe us acrued interest receivable amounting to $7.66. (1|359m) Jan. 31. The accrued interest owing to us at the close of the last preceding fiscal period for which this account was then credited was $8.94. {*^,d58g) Jan. 31. The accrued interest owing to others at the close of the last preceding fiscal period for which this account was debited was $6.56. (•[359n) What is the gain or loss from interest for January? (1[364) exercise 363. Prepare a ledger account for the preceding transactions like illustration 57, and present for approval. Illustration 57. T^r Ml ^7 JLL 11 ^=fiy?J^^^^ /^ /,/^- _^<2l4^ J X-S^ 3t ff LZ. /^ /S JJ. ,3J_ j^., ^y -.. Q^yi{ti oi^ J W/ 7 INTEREST AND DISCOUNT ACCOUNTS. 103 To Close Interest and Discount Accounts. 364. The difference between the two sides of an interest or a discount account shows the loss or gain — a loss when the debit side is the larger, a gain when the credit side is the larger. In either case it should appear as a separate item in the profit and loss statement. (Illustration 87) 365. To close — After the profit and loss statement has been prepared, interest and discount accounts are closed by a journal entry made up from the profit and loss statement. When the closing item to any interest or discount account has been posted, which should balance the account, rule the closing lines in red ink, as shown in illustration 57, and enter the footings in black ink. 365a. The method of disposing of inventories for accrued interest receivable and accrued interest payable is explained in ^468. Exercises in Interest and Discount Accounts. 366. Prepare ledger accounts for the following transactions, showing the ac- counts closed like illustration 57, applying the rule (^356) for each transaction. (1) Oct. 1. Paid for interest on our note due today at bank, $7.45. (^3586) Oct. 5. The bank discounted for us J. M. Robinson's acceptance in our favor, discount for 30 days, $4.58. (1[358c) Oct. 8. Samuel Walker paid his note in our favor with interest due today; the interest was $7.50. (^359i) - - Oct. 12. Frank Brown paid his overdue account including interest; interest for three months, $8.25. (^359i) Oct. 15. William Franklin transferred to us J. N. Scott's 30-day note less a discount of $2.54. (^359/) What does the difference of the account show — a loss or a gain and how much? (2) William Bond's transactions affecting interest and discount account for the month of April are as follows : April 2. He paid interest on an overdue account in favor of Johnson & Son, $3.47. April 5. James Richard prepaid his note in Bond's favor by agree- ment; the discount was $2.50. April 9. He transferred J. N.Brown's note in his favor to WiUiam Walker on account, less discount, $1.56. April 16. He received interest on William Brown's overdue account, $2.45. April 23. He paid Jiis note in favor of R. N. Bates, less a discount of $2.50. (T[359A;) - - April 30. He owed interest to others, which has accrued to date, on notes and open accounts, $12.45. (^358/). What is the result shown by his interest and discount account? 104 BOOKKEEPING AND ACCOUNTANCY (3) E. D. Vane & Company's transactions affecting interest and discount account for the year are as follows: Jan. 1. The accrued interest owing to them at the close of the last preceding fiscal period (December 31), as shown by the inventory of accrued interest receiv- able, was $215.12. (^358g) They owed interest to others at the close of the last fiscal period (December 31), as showai by the inventory of accrued inteiest payable, $14.65. (•{3597?) Feb. 5. They paid for the use of money borrowed on their notes, S341.90. (•ISSSb) March 31. They gave the use of money to their various customers on their notes and acceptances which they discounted, to the value of $74.12. (l|359j) April 30. The discount on notes and drafts v.-hich they transferred to others before maturity amounted to $18.25. (^ooSe) May 31. During the month they discounted for others various notes and acceptances, the discount on which amounted to $47.76. (^359j) June 30. They prepaid during the month three of their oavti notes, thereby saving a discount of $67.77. (^359A-) - - July 31. During the month two customers prepaid their notes, less discount to maturity; the amount of the discount was $18.50. (^358d) Aug. 31. During the month they had various notes, acceptances and time drafts discounted at bank, the discounts amounting to $33.71. (^358c) - - Sept. 30. The notes and acceptances of various customers were transferred to them before maturity for purchases and to apply on account; the discounts amounted to $84.76. {^3591) Dec. 31. At the close of the year they find they owe on accrued interest payable, $345.75 (^358/) and that others owe tliem on accrued interest receivable, $427.27 (^359»i)- What result is showai by the interest and discount account at the closing of the books? Arithmetical Problems — Interest Accounts. Dm-ing the month of November, C. F. Scharfe received and paid interest as follows : Interest on his notes receivable paid in cash, $25.75; discount on notes and acceptances discounted for others, $97.42; discount on his notes that were dis- counted for him by others, $3.50; interest received on money loaned to others, $84.50. What were his net returns from interest? PROPERTY INVESTMENT EXPENSE AND INCOME ACCOUNTS. 367. In connection with almost every business there is an investment of some part of the capital in various forms of property, such as real estate, furniture, fi.K- tures, horses, wagons, harness, machinery, tools, patterns, patent rights, etc., that INVESTMENT EXPENSE AND INCOME ACCOUNTS 105 are not included in and form no part of the special line of goods bought, sold or manu- factured, but which are necessary in carrying on the business. The accounts show- ing these investments are known as capital invesiment accounts. They show the amount of the capital of the concern invested in various kinds of property that is not immediately available for the payment of current debts or expenses. 368. Capital investment accounts should show only the cost value of the property represented in the account. Whenever anything is sold that has been charged to an investment account, an entry should be made which will credit the account for tlie original cost price of what is sold, the object being to have the account show at all times the original cost price of tlte property on hand. If the selling price is greater than the original cost, the difference or gain should be credited, directly to profit and loss account or it may be credited to a special account under a title that will indicate the source of the income. If the selling price is less than the original cost price, the difference should be debited to profit and loss account, unless a depreciation or other reserve fund has been set apart to meet the loss, when the account for that fund should be debited. Losses and gains from capital investment accounts should ap- pear as separate items in the profit and loss statement. 369. In addition to the investment in properties shovm by the investment accounts, various expenses are incurred in their maintenance and from many of them an income is returned; consequently a separate expense and income account should be kept with each investment, to show the cost of maintenance, expenses, etc., on one side and the income or returns from the investment on the other. 370. Expense and income accounts relating to investments should show only the gain or loss arising from the current use or employment of the property'-. Any gain or loss arising from an increase or decrease in the value of the property affects the investment account and should be disposed of as described in ^368. 371. Observe, therefore, that there are generally two accownte opened in connec- tion with the ownership of property — one showing the investtncnt in the property and the other showing the expenses of the property and the income from the property and, consequently, the gain or loss resulting from the investment. 372. It is sometimes difficult to determine whether items representing outlays affecting these accounts should l)e charged to the investment or to the expense and income account. The following are the rules usually observed by accountants: ' (a) All expenditures made on the property, whether for first cost or for improve- ment s, up to the tim^ the property is ready for use or becomes productive should be charged to the investment account 106 BOOKKEEPING AND ACCOUNTANCY (6) All sums expended on the property which increase the selling or rental value of the property should be charged to the investmefit account. (c) All sums expended to maintain the property at its present cost, seUing or rental value should be charged to the expense and income account. 373. As the method is the same for keeping the various investment expense and income accounts, only those for real estate will be explained and illustrated in detail. Briefer explanations of other similar accounts will follow. REAL ESTATE. 374. This is a general name that is applied to what is known as real property which consists of land, houses, etc. Accounts with each property should be kept under appropriate headings, as "House and lot, 96 North St.," or "18th Street Store Property," or "Elm Township Farm," with separate accounts for the invest- ment and for the expenses and incomes. 375. Not infrequently there is a considerable variation in the increase or de- crease of the value of land and the buildings thereon. Usually there is a gradual depreciation in buildings while there is a gradual increase in the value of land. The decrease in the value of the buildings should be taken account of annually, which would directly affect the current gains and losses of the business for the period, while the increase in the value of the land is seldom considered until the land is finally disposed of. For these reasons it is not unusualthat two accounts are kept — one with the land, under the title of " Real Estate," and the other with the structures or other property thereon, under the title of "Buildings." THE INVESTMENT ACCOUNT— REAL ESTATE A capital Investment Account Showing a Resource. 376. Real estate investment accoimts should be opened under appropriate headings followed by the word "Investment," as, "Real Estate Investment," or where separate accounts with each property are kept, "House and Lot 96 North St., — Investment." Such accounts are purely resource (asset) accounts. 377. The object is to show the cost of the investment, which includes (a) the first cost of the land or property purchased including the buildings or other improve- ments thereon, also the cost of surveying, examination of title, recording fees, com- missions etc., (&) cost of all permanent improvements which result in increasing the earning or rental value of the property, such as repairs, grading, side-walks, sewers, etc. and (c) cost of taxes, interest on mortages, or other items of cost up to the time the property becomes productive or is ready for use. INVESTMENT ACCOUNTS 107 Rule for Debiting and Crediting Real Estate Investment Accounts. 378. Debit real estate investment accounts for costs: credit for returns. 378a. Debit real estate investment accounts for costs. 3786. Credit real estate investnaent accounts at the cost price of the property sold or otherwise disposed of. (Read note.) 379. The various applications of the rale are as follows: 380. Debit the investment account, under its appropriate title, — • a. For the cost or appraised value of the ' property on hand at the beginning of business. 6. For all purchases of property, and for all additional costs to the property and improvements until it is ready for use or occupancy or becomes productive. c. For all permanent improvements made thereafter that will increase the perma- nent value of the property or the rental or other income from the investment. d.* For commissions on purchases of the property. 382. Observe that in every instance the ac- count is debited for the cost of the prop- erty represented by the total invest- ment. 381. Credit the investment account, under its appropriate title, — e. For all sales of the property at its cost value, i. e., for the original price charged to the account. Note : The returns or incomes from the property are shown in the expense and in- come account. *Commission on sales represents the cost of a particular service rendered for which it is the best practice to keep a separate com- mission account to which all such items should be debited. 383. Observe that in every instance the ac- count is credited for the original cost price of the property disposed of. 384. Transactions Illustrating the Various Applications of the Rule (^378) for Debiting and Crediting Real Estate Investment Accounis. (1) Illustrating the transactions and the account for property purchased to be used in connection with the business, i. e., in which the business is located. Jan. 1. Purchased property located at No. 9 W. Main St., consisting of a store building and two lots, $11,500. (*I380&) Jan. 5. Paid for permanent improvements on the property by enlarging rear entrance and building shipping platform, $450. (1[380c) Jan. 6. Paid for surveying, examination of title, and recording deed, etc., $63.75. (^377a, 3806) Jan. 12. Paid purchasing agent's commission (f%) $86.25. (^380(0 Jan. 25. Sold unoccupied lot adjoining the lot on which the building is situated for $3600, the cost value of which was $3000, the profit, $600, being retained by the proprietor. ( 1(381 e) What is the cost value of the property on hand at the close of the fiscal period, January 31? (11385) 108 BOOKKEEPIXG AND ACCOUNTANCY Prepare a ledger account like the following illustration. Illustration 5S ^jf2^Zl2?la^yX^ vi^yyi^ ( 1 //^OO a:: 7-r 1 ■ ■ J^^. < [ i/.S-iO v^^ ?/ '1 J7/0X7^ & 1 ^.? 7-5- /? 1 ?,f; 1 / 2/(?C 1 / 7 /c n ^. / z^^.^^.,.^^ ^c:^^--!.-^i.A^ fc^''Z<^^^^^^-gZ'g'z-^^:^.ig-^ fc>^5,22<, a^g.-g^^ — ^J->t ^U^A v8*^;i^^^i:^i^^jx^-^'_-.^*»i«'Tf^^^ 440a. Illustration 64 shows the simplest form of the profit and loss statemejit made up from the differences (balances) shown by the profit and loss accounts as they appear in the trial balance, without including any detailed information as to the various items constituting the amount shown. 4406. Illustration 65 shows the same statement, with the important items entering into the cost, selling expenses, administrative expenses, and general expen- ses given in detail. The items can be readily ascertained by referring to the saies expense, administrative expense, and general expense accounts, the amount on the statement being composed of one or more of the items given in the explanation columns of the accounts. 440c. To secure this detailed information in accounts containing any con- siderable number of items or extending over the usual fiscal period of one year, it will be necessary to separate them, for each account, on an analysis sheet, which is fully explained and illustrated in 1490. PROFIT AND LOSS STATEMENTS 121 Illustration 65. ^/^■^.a^-Z-/ 3fa C^ait^y^ <£ic^, y^c-; -'^■a-^e found in the same manner. (e) The total selling expense divided by the cost of the merchandise sold will give the percentage of the cost price which must be added to meet selling expenses. The percentage to be added to the cost price of the merchandise sold to meet administrative or any other expenses may be found in the same manner. These percentages are useful in fixing the selling prices of goods. Note. — These percentages must not be confused with the percentages on capital. To Close Ledger Accounts Shown in the Profit and Loss State- ment BY Separate Journal Entries. 446. When the profit and loss statement has been completed, a journal entry is prepared to close all the accounts in the ledger containing the amounts shown in the statement, the net profit or the net loss appearing as one or more items in the entry to balance it, which is transferred to the proper side of the undivided profits account in the ledger, or to such capital, reserve, surplus or other accounts as should receive the distribution of all or part of the profits or losses. 447. The purpose of closing the various accounts included in the profit and loss statement is to indicate the close of a biisiness period, and thus to eliminate them as open accounts in the ledger, preparatory to their receiving the entries of a new busi- ness period. This is the principal reason for closing any account in the ledger. Rule for Closing Profit and Loss Accounts. 448. Debit profit and loss accovnis showing credit balances. Credit profit and loss accounts showing debit balances. 124 BOOKKEEPING AND ACCOUNTANCY 448a. Illustration GG shows the correct journal entry to close the accounts in- cluded in the profit and loss statement when it is desired to open an undivided profits account (^450) in the ledger. Prepare this journal entry and present for approval. Illustration 66. J^l^'t^ ^^iyut^-'^ Jt/ffr/ y' 126 BOOKKEEPING AND ACCOUNTANCY (6) Analysis sheets made up from the sales expense and administrative expense accoimts show the following results: Selling expenses, — salesmen's salaries, $1600; traveling expenses, S954.50; advertising, $436; delivery expenses, $610; miscellaneous, $59.62. Total, $3660.12. Administrative expeyises, — officers' salaries, $4000; office help, $1400; office supplies, $415.25; miscellaneous, $318.31. Total, $6133.50. General expenses,— rent, $1800; miscellaneous, $138.27. Total, $1938.27. (c) Prepare a profit and loss statement, using illustration 65 as a model, and present for approval. (3) The Allen & Briscoe Company close their books annually, December 31. Instead of a single selling expense account, they kept separate accounts with sa/es- men's salaries and traveling expenses (•|268a-c), advertising (^268/), delivery expenses (^268(/), and freight (^268i). Other selling expense items are charged to the sales expense account. In like manner, instead of a single administrative expense account . they kept separate accounts with officers and clerks' salaries (^,f301a, 6), and office supplies and expenses (^301c), other items being charged directly to the adminis- trative expense account. At the time of closing, after the trading statement was prepared and the journal entry closing the trading accounts had been posted, with the gross trading profit carried to the credit of tne profit and loss account, the ledger contained the following accounts showing profits and losses. Observe that they include purchase discounts and sales discounts, which are considered by this company as profit and loss accounts. (^[218, 11219, ^2206, ^2256. ^[2266, 112316) Illustration 70. ^W.-'t-T'^^ .^y^l^^^L^^ ^^.yc-^.^n^.^k.t^ ^ .ULL JJ^ f J¥' _LL^A yy/ ^^ j^ Al. -l^- 3/;^: 7 J-/ f /2-CZ ^^ c. If it had been his intention to withdraw his net profits, then the best practice' would be to credit his personal account instead of his capital investment account, in which case the journal entry would be as follows: EXERCISES IN DISTRIBUTION OF PROFITS 12d Illustration 73. J/ (2) B. F. Wade & C. E. West are equal partners. Wade's personal account shows a debit balance of $650. West's personal account shows a debit balance ot $1000. Their net profit for the period, as shown by the undivided i)rofits account, is $3568, which is to be divided equally between them. Each partner's personal account is to be debited and credited with such an amount as will close it, the remainder to be credited to his investment account. The following is the journal entry to adjust: Illustration 74. _?/ (3) The profit and loss statement of the Stilson Machine Company shows net profits at the close of the fiscal year, December 31, of $8580.50, which has been transferred to the credit of undivided profits account. At a meeting of the board of directors, a dividend of 8% of the capital stock of $40,000 was declared, and it was directea that $5000 should be transferred to the surplus account as an addition to the working capital, the remainder, $386.50, to remain as undivided profits. The journal entry to adjust is as follows: Illustration 75. J/ (4) The profit and loss statement of M. G. Nilan shows a net profit of $3160. His personal account shows a debit balance of $156.45. He has instructed his bookkeeper to make a journal entry to balance this account, transferring the remainder to his capital investment account. Prepare the journal entry. 1 t rxo0 130 BOOKKEEPING AND ACCOUNTANCY (5) 0. P. Hamlin & F. W. Gay :*re partners in a business in which Mr, Hamlin has a two-thirds interest and Mr. Gay a one-third interest in- net profits amounting to $5630.10. JNIr. Hamlin's personal account is debited for S445. Mr. Gay's personal account is debited for $556. These accounts are to be credited with such parts of each partner's profits as will balance them, the remainder to be credited to their capital investment accounts. Prepare the proper journal entry to adjust. (6) The undivided profits account in the books of the M. R. Hale Company show a credit balance of $17319.75. A dividend of 6% has been declared on the capital stock of $50000. Of the remainder, $3000 has been set apart as a '' Reserve Fund for Depreciation," and $10000 as a surplus to increase the working capital of the business, the remainder, $1319.75, to remain to the credit of undivided profits account. What is the journal entry to adjust? JOURNALIZING, POSTING, CHECKING TRIAL BALANCES, ETC. 454. Journalizing is determining the proper accounts to be debited and credited for each transaction. This does not mean that all journal entries must be made in a journal. The proper accounts to be debited and credited are determined as the en- tries are made, whether in the cash book, sales book, purchase book, note books, journal, or any other book used as a posting medium. In a broad sense, journalizing is the classification of transactions. 454a. The proper accounts to be debited and credited are determined by applying the rules of bookkeeping. (1[18) These rules are set forth in detail in the various accounts illustrated in this text. 455. Posting is transferring to the ledger the debit and credit items from the different books in which entries are made. All debit items in the different books a''e posted to the debit side of the account named in the ledger and all credit items ar". posted to the credit side of the account named in the ledger. 455a. Boohs of original entry are those books which contain the original or firs*-; entries of transactions. All such books do not necessarily contain items to be posted to the ledger, as the items may first be transferred to some other book — for vnstance when notes receivable and payal)le are transferred from the note book to the journal before posting. Books containing items to be posted to the ledger are known as posting mediums. 456. Checking. There are different methods of checking accounts. A simple and effective method is to check each item in the ledger thus ( . ) with a pencil on the double line just to the left of the amount, and then to check the entry in the book from which it is posted thus (\/). The items are checked in the order in which they occur in the books from which they are posted. Other methods of checking win be described and illustrated in the various sets included in this work. TRIAL BALANCEa 131 TRIAL BALANCES, TNVENTORIES, STATEMENTS, ETC. 457. The system of double entry bookkeeping requires that the debits and credits of each transaction must he equalin amount, that where one account is debited for a given amount some other account is credited for an equal amount. It follows that if the debits and credits of each transaction are equal in amount, the total debits and credits, as exhibited in all the ledger accounts, must be equal in amount. This equality of debits and credits is not necessarily maintained by entering the same amounts on each side of the ledger, as one debit may equal the sum of a number of credits and vice versa. 458. Taking a trial balance means to hst or schedule the accounts in the ledger, or ledgers, remaining open at the end of a certain specified day, giving the name and the debit or credit balance of each account, and showing an equal aggregate sum of debits and credits. Accounts are usually entered in the trial balance in the order in which they occur in the ledger. If the debit side of the account is the larger, the difference is placed in the debit column of the trial balance, and vice versa. 458a. If the total debits and credits shown by the footings of the trial balance are equal, it proves only that all debit items have been posted to the debit side of the ledger, and that all credit items have been posted to the credit side of the ledger; but it does not prove that each account in the ledger is correct, as errors may have been made in journalizing or in posting to the wrong account in the ledger, which would not disturb the equality of debits and credits. Such errors are usually found by checking or when the monthly statements of account, which are usually issued to all debtors and received from all creditors, are compared with the accounts of the party receiving them. Accounts that balance should be omitted from the trial balance. 4586. Trial balances should be taken monthly or quarterly, preferably monthly. 459. The object of taking a trial balance is two-fold, first to ascertain whether or not the debits and credits in the ledger are equal, and second to ascertain the results shown by each account, and from these results as shown by the final trial bal- ance for the fiscal period to prepare the various statements exhibiting the condition of the business at the close of the fiscal period. 460. Each account shows one of four different results, namely, a resource, a liability, a loss, or a gain. They may be divided into two general classes, those showing resources and liabilities and those showing losses and gains. A single ac- count should never show more than one result in the trial balance. Losses and gains are usually referred to as profits and losses. Profits and losses have already been described. (^251) 132 BOOKKEEPING AND ACCOUNTANCY 460a. Occasionally an account will snow an exception to the foregoing rule. Offsetting accounts, such as reserve and contingent accounts, show results that are somewliat different. These accounts and their uses will be fully explained in a separate chapter. 461. A resource (or asset) is anything of value belonging to a person, firm or corporation, such as cash, property, or debts owed by others. Resources refer to money or other j^roperty that can be readily converted into current funds to meet the payment of bills in a going concern. Assets refer more particularly to the prop- erty of a deceased person, or to the property of an insolvent or bankrupt which is applicable to the payment of his debts or liabilities. 461a. Current resources are those that pass more or less continuously in the course of business, constituting the working capital, particularly those that are available to meet current obligations, such as cash, notes and accounts receivable, etc.; fixed resources are those represented in more permanent investments, such as real estate, dchvery equipment, furniture and fixtures, etc. Fixed resources are closely identified with capital investment accounts. 462. A liability is a debt owing by a person, firm or corporation. 462a. Current liabilities are those that are to be met from current funds. 463. The final trial balance at the close of the fiscal period should not be taken until (a) all the transactions which properly belong to that period have been en- tered in the bocks and included in the results shown by the various accounts, and (b) all viventories, not only of merchandise but also of other property on hand and of accrued debts owing to us and to others not shown on the books, have been pre- pared. 464. Inventories. The merchandise inventory is a statement or schedule of merchandise on hand or in stock. This inventory is fully described in ^169-|[175 inclusive, and is the only inventory to be included in the principal inventory ac- count, which is a trading account and affects the trading statement. \ 465. Other inventories consist of (a) all mat(U'ial, supplies or other property on hand that has been charged to a trading or a profit and loss account, which has not been used up or otherwise disposed of in the fiscal period in which it was purchased, and (6) of interest, taxes, rents, commissions, or other expenses and incomes ichich have accrued at the close of the fiscal period, but which are not entered on the books and frequently are not due. For this reason this class of inventories are known as non-ledger inventories. 465a. Real estate, stocks, bonds, machinery, furniture, fixtures, materials and supplies which are included in the various ledger accounts showing the original cost of the property on hand, may l)e inventoried when there is a considerable increase or decrease between the original cost value and the present market or selling value of the property, if it is desired to include such property at its present value in a statement of the resources of a bn^iness. INVENTORIES 133 465&. When property on hand is inventoried above or below its original cost value, the difference, if a loss, should be debited to a "reserve for depreciation" account; if a gain, to a "reserve for appreciation" account. An owner, if an indi- vidual, can do as he pleases in regard to increasing or decreasing the inventory value of the property, so can partners providing they agree, but it should be noted that a corporation cannot declare a dividend legally from a profit of this kind unless the property is sold and the profit actually realized. 466. The object of taking inventories of property included in the cost of pur- chases (the merchandise inventory) and of materials and supphes (trading and profit and loss accounts) is to eliminate from the accounts representing these costs those items which do not enter into the costof the goods sold or of the materials and supplies used up during the fiscal period in which they were purchased. The object of taking non-ledger inventories (^[465) is just the opposite, the purpose being to include them in the accounts they affect which already appear in the ledger without them, so that in both instances the total resources and liabilities, losses and gains, net profits and losses, etc., may be accurately ascertained and shown in the various statements made up at the close of the fiscal period. 466a. All inventories affecting profit and loss accounts should be avoided as far as possible by holding tlie books open until all items belonging to the fiscal period represented are e^itered in the usual way and included in the final trial balance taken preparatory to making up the various statements. Every bookkeeper or accountant who has had any extended experience knows, however, that this is almost impossible in a business of any magnitude, and that for many such items the easiest method to dispose of them is to treat them as inventories. 467. All inventories of property on hand or of debts owing to us are resources; all debts owing to others are liahilities. 468. Non- ledger resource and liability inventories relate principally to profit and loss accounts showing expenses and incomes. When an expense account is sub- divided into separate accounts, each item in the inventory affects the account in which it was originally charged. 468a. Resource inventories affecting profit and loss accounts consist of (1) the cost value of any material, supplies, or other property on hand (not used up) at the close of the fiscal period, which was charged to a profit and loss account, (2) the unexpired value of any use or service at the close of the fiscal period which was charged to a profit and loss account ('[461) and (3) accrued interest, rent, and commissions, etc., owing from others and not entered at the close of the fiscal period. 4686. Liability inventories affecting profit and loss accounts consist of (1) unpaid salaries, commissions, traveling expenses, wages, freight, express or drayage bills, rent, or any other unpaid expense incurred in and not paid or entered at the close of the fiscal period, and (2) accrued interest, rent, taxes, commissions, etc. owing +0 others and not entered at the close of the fiscal period. 134 BOOKKEEPING AND ACCOUNTANCY 468c. Separate accounts should be kept, one for sundry resource inventories in which all such inventories may be grouped, the account affected being indicated in the explanation column, and another for sundry liability inventories, the different accounts affected being similarly indicated. Separate accounts for each inventory taken can be opened, if it is so desired Rules for Debiting and Crediting Resource Inventories Affecting Profit and Loss Accounts. 469. Debit, by journal entry, sundry re- source inventories under one or separ- ate headings, at the close of each fiscal period, for the cost value of all (each)inventories on hand and credit the profit and loss account to which the items were charged. 470. Credit, by journal entry, sundry re- source inventories under the proper heading, at the beginning or close of the next fiscal period, for all (each) inventories debited to this account at the close of the last preceding fiscal period and debit each account which was credited at that time. 471. Transactions Illustrating the Above Rules. Resource inventories. At the close of the fiscal period, December 31, inven- tories were taken of the various materials and supplies on hand, the total amount of each inventory being as follows: sales expense account, $36.50; administration expense, $24.19; general expense, $16.50; accrued interest receivable, $14.50. («i359m) Journal entry, rule ^469. Illustration 76. '/^Z^^c^r^yj^i.^Sc^J/, /f ^a-Z^^ C^- X-^i.e^fT-^L£^ I CC-ei'yt-i-i^ t-^i. -c^^^^^ L'iX.-iii-^y'-A^ C^ 3-J- C/W^m. / iSz^^-tftT^-^-g: 1 3 / . . ^^^/y £cc ^£ f Rule for Debiting and Crediting Liability Inventories Affecting Profit and Loss Accounts. 472. Dchil by journal entry, sundry lia- bility inventories under the proper heading, at the beginning or close of the next fiscal 'period, for all inven- tories credited to this account at the close of the last preceding fiscal period, and debit each account which was credited at that time. 473. Credit by journal entry, sundry lia- bilities inventories under one or separate headings, attheclose of each fiscal period, for the amount owed for expenses which have accrued, and which have not been entered on the books debiting the proper accounts. 474. Transactions Illustrating the Above Rules. Liability inventories: At the close of the fiscal period, December 31, inventories for unpaid expense bills were as follows: accrued interest payable, $36.25 (358/); accrued taxes, $46; unpaid rent, $75. Journal entry, rule 1473. Illustration 81. Jy2^^c^-'y>^■S^^^ J /, /f Cc-^t^>^^JV^^^ „ /2,' ACCOUNTANCY 137 Journal entry, rule 1[472. Illustration /•^ ^^ /S-*^ ^ t:^?^^?^:^ / 2, / _ 4746. The above is the journal entry for debiting the sundry liability inven- tories account at the beginning of the next fiscal period. The entry could properly be made at any time, either during or at the close of the next fiscal period. Observe that the journal entry has the effect of placing the various inventories back in the accounts to which the items were originally charged, in the fiscal period in which the expense was incurred. When the account balances, it should be ruled and footed. Illustration 8-1. '-A.<'€Z-^<.oc^^Kj'h'Z''t4-A.-ri^^^ - T- ■ UIUI ~ ■ / j^^, / t:^^T^-2S^t^ n ^ 3/ <:J}-uZZyLe^^ 36, 2S / /S-?^-^ r-'^ix-^iL-i^ /2/ i 4- S/ /G^^tJ-P^^^t^i^ic^ /2/ 1 1 /ST 2-5^ 1 /S7- IS 1 1 474c. The total of the liability inventories may be entered in the ledger account instead of each one separately, as shown in illustration 80 for resource inventories. CLOSING THE BOOKS, STATEMENTS, ETC. 475. Statements. There are three principal statements usually prepared from the final trial balance, (a) the trading statement, described in paragraphs 233-250, (6) the profit and loss statement, described in paragraphs 435-453, and (c) the statement of resources and liabilities (^487), which consists of a list of all the resources and liabilities of the concern, as shown by the books after all accounts showing gains and losses have been closed and the net profit or the net loss has been transferred to the proper capital, undivided profits, surplus and reserve accounts. 138 BOOKKEEPING AM) ACCOUNTANCY 476. The trading and the profit and loss statements which are shown separately in illustrations 40 and 65 are usually combined and made up as a single statement, which includes the distribution of the net profit or the disposition of the net loss. Such a statement is really divided into three sections, the first section showing the trading statement, the second section showing the profit and loss statement, and the third section showing the distribution of the net profits or the disposition of the net loss. 477. When the trading and profit and loss statements are combined into one statement, it is customary to prepare therefrom a single journal entry to close not only the trading and the profit and loss accounts included in the statement, but also to dispose of the net profit or the net loss, as shown in the distribution section of the statement. Illustration 88 shows such an entry. 478. Separate journal entries for each section of the combined trading and pro- fit and loss statement may be made, one for the first section to close the accounts included in the trading statement, one for the second section to close the accounts in- cluded in the profit and loss statement, and one for the third section to transfer the net profit or the net loss to the proper capital, surplus or reserve accounts. This method is illustrated in the journal entries shown in illustrations 41, 42, 66, 71, etc. 478a. For beginning students, a separate journal entry for each section i& preferable, as it makes a distinct separation of the various accounts included in each section of the complete trading and profit and loss statement, and besides, it conforms with the necessary practice when the conditions described in the following paragraphs (^479, •i480) exist, when it is not convenient to combine them in one entry for the entire statement. 479. Some accountants and business men prefer to have formal trading and profit and loss accounts opened in the ledger at the time of closing the books, each showing the same debit and credit items as are shown m the trading ajul in the profit and loss statements, on the theory that all items appearing in tiiese statements should be supported by corresp(jnding accounts in the ledger. When this plan is followed, these accounts are opened and closed at the time of closing the ledger and remain closed until the next closing of the ledger, unless current items of loss or gain not properly belonging to any other account should be entered into the profit and loss account during the period. ('1248, ^448) 480. In very large concerns having many accounts, it is practically necessary, on account of their size, to make separate statements for the trading accounts and the profit and loss accounts, as shown in illustrations 40 and 65, as well as for the dis- FINAL TRIAL BALANCE 139 tribution of the net profit or loss. This is particularly true of the statement showing the distribution of the net profit to the proper capital or reserve accounts, which in corporations must be determined by action of the board of directors. Not infrequently this action is not taken until several days after the close of the fiscal period. . ' Principles Involved in Determining the Results Shown by the Various Accounts in the Trial Balance. 481. Each account in the ledger (excepting those referred to in If 460a) shows one of four different results, as stated in 11460— a resource, a liability, a loss, or a gain. Debit items in the ledger show resources or losses: credit items in the ledger show liabilities or gains. 482. A study and comparison of the following principles will assist greatly in an understanding of the accounts shown in atrial balance: a. All resources are debits, and are invaria- bly found on the debit side of the ledger. b. All losses are debits, and are always found on the debit side of the ledger. c. Losses always result in a decrease in the resources or an increase in the liabilities. d. In every instance when an account is debited, the resources or losses are in- creased or the liabilities are decreased. e. All accounts shoeing losses have de- creased the resources or increased the liabilities, and consequently, have de- creased the net capital or increased the net insolvency. /. The total losses, if the larger, less the total gains, will give the net loss, and consequently, the net decrease in the resources or the net increase in the lia- bilities. g. All liabilities are credits, and are invari- ably found on the credit side of the ledger- h. All gains are credits and are always found on the credit side of the ledger. i. Gains always result in an increase in the resources or a decrease in the liabili' ties. j. In every instance when an account is credited, the liabilities or gains are in- creased or the resources are decreased. k. Ail accounts showing gains have in- creased the resources or decreased the liabilities, and consequently, have in- creased the net capital or decreased the net insolvency. I. The total gains, if the larger, less the total losses, will give the net gain and consequently, the net increase in the re- sources or the net decrease in the liabilities. 483. To take a trial balance. When all transactions and items belonging to the period have been entered and posted, as stated in ^463, list the ledger accounts as instructed in ^458. The final trial balance taken from the accounts illustrated on the preceding pages is shown in illustration 85. 140 BOOKKEEPING AND ACCOUNTANCY Illustraiion 85. ^i^H^C€ZX^As''rzJ^i^lyyiy<^^^CZy^^^ /f '=^(^^Zy^^2''2j«^;»?'Z-e?^?'Z-<3^ ^j:^ ^ / ' / /B- T {2^>C'e7%<^-yi^ /G!^c^'i-ly^-el^^'^^-' 3i> (>2\S-0 j ^S27 -Z> ^!2<:<:w?-«-t-»-£-i^/^^-^^>cz-<^v2i-^ XX (y ^c5^(i^^^'Se,-ys-^7<-i^->-i.ta^ C;tj;6-<;^^S-(^ •^;!'W ,, /Sg'OJ e^ // K^. li^^'S«,-y'7^>-l,^,^^'yT--i.'t-Z'C.^d-Z^>-'e!l.^C^^'l,*.-e^ C^rC^b^e-'y-z-^^^^ 22S ^ S3 S^ SS ,^&^£-t^L.C^L32 f'/ 2f(?3x r-^ 484. The accounts contained in the final trial balance, illustration 85, are en- tered in the order in which they appear in the preceding pages, to correspond with the order in which they are usually taken from the ledger. (1[458) Illustration 86 shows the same accounts arranged in groups — one for the trading, another for the pro- fit and loss, and the third for the resource and liability statements, in the order in which they usually appear in those statements. This is sometimes done to facilitate the preparation of the statements, and is valuable in assisting the student to dis- tinguish between the various accounts. Note that the merchandise inventory ac- count appears not only in the trading statement, but also in the statement of resources FINAL TRIAL BALANCE 1^1 and liabilities. The statement in which each account appears is also indi- cated by letters on the left-hand margin of the trial balance in illustration 85. 484a. Observe the following distinctions at the time of closing the books between the merchandise inventory taken at the close of the preceding fiscal period and the inventory taken at the close of the present fiscal period: (1) That the inventory of the preceding period is the only one which at the time of closing the books is shown on the face of the ledger and in the trial balance, and that it is used in making up the trading statement, but that it does not appear in the statement of resources and liabilities. (2) That the inventory taken at the close of the present period does not appear in the trial balance, and will not be shown on the face of the ledger until after the closing entry for the period has been posted, but that it does appear in the statement of resources and liabilities. (3) Note in other words that while both inventories appear in the trading statement, one appears in the trial balance but not in the statement of resources and liabilities, and the other appears in the statement of resources and liabilities but not in the trial balance. Illustration 86. TRIAL BALANCE, JANUAHY 31, 19 , F. A. RAYMOND. T^^L T=>yL Cash 2444.21 Accounts Receivable 3667.50 Notes Receivable 900. Real Estate Investment a/c 9100, Fumitiu-e & Fixtures 392.50 Delivery Equipment 413.50 Inaurance - Unexpired Premiums 82,50 F. A. Raymond, Personal 200, F. A. Raymond, Capital 15807. Notes Payable 1500. Accounts Payable 4527.22 Mdse. Inventory 7516.45 Purchases 2156.47 Warehouse Labor 120. Warehouse Supplies 61.35 Sales Discount 171.64 Sales 7025.11 Purchase Discount 173.51 Selling Expense 315.20 Freight 65.40 Administrative Expense 275. General Expense 85.56 Insurance Expense 7.50 Real Estate Expense & Income 31.06 Furniture & Fixtures Repairs & Renewals 20. Interest 7. 29032.64 29032.64 142 BOOKKEEPING AND ACCOUNTANCY COMBINED TRADING AND PROFIT AND LOSS STATEMENT. 485. Full instructions for preparing the trading statement and the profit and loss statement separately are given in preceding chapters, beginning vnih ^233 and 1435. Illustration 87 shows the trading and profit and loss statements combined into a single statement, including the distribution of the net profit. Illustration 87. TRADING AKD PROFIT & LOSS STATEMENT, JANUARY 31, 19 F. A. RAYKOKD. Returns 27.40 40.16 Gross sales Less Rebates and allowances Goods returned Deduct Sales disccunts Ket returns from sales Costs Inventory, December 31, 19 Purchases Less Rebates and allowances Goods returned Add Warehouse supplies Warehouse labor Total cost of purchases Deduct Purchase discounts Net cost of purchases Less Inventory, January 31, 19 Cost of merchandise sold Gross trading profit Esrpenses Selling expenses Sales Ex. a/c Sample cases Advertising and preraiuraa Delivery charges Salesmen's salaries and commissions Traveling expenses Miscellaneous Total Freight Administrative expenses Add. Ex. a/c Office supplies Legal advice Salaries office help Manager's salary Miscellaneous General ejopenses Light and heat Rent Miscellaneous Insurance Interest Real estate repairs and renewals Furniture and fixtures repairs and renewals 1 Net profit for month to F. A. Raymond's capital a/c 7124.36 35.14 64.13 3224.03 67.56 20..15 66.65 35. 130. 30.90 32.50 315.20 65.40 17.50 10. 92.30 150. 5.20 15.31 65. 5.25 99.27 7025.11 171.04 1 1 6855:47 7516.45 3156.47 61.35 120. .1 10854.27 1 173.51 "10660.76 5836.47 4844.29 ^2009.18 380.60 275. 85.56 7.50 7. J 1 31.06 20. 806.72 1202.46 PROFIT AND LOSS STATEMENT 143 485a. Review 'previous instructions for preparing trading and profit and loss statements, and then prepare a combined trading and profit and loss statement from the trial balance, as shown in illustrations 85 and 86, using illustration 87 as a model, and present for approval. Closing the Ledger by a Single Journal Entry. 486. Illustration 88 shows the journal entry made up from the final trial bal- ance and the inventories at the date of closing, to close all accounts in the ledger ex- cept those showing resources and habilities, including reserve surplus, undivided profits and ownership accounts. This journal entry is, in fact, the journal entries shown in illustrations 42, 66 and 71, combined into a single journal entry. Illustration i/^^'yz^K.ifC4.^fS/, /f J^aA^ . / /3 J-/ &k&i£^am^i£^^^^^kdb?^ i'L^yl.e-A.n<.d^¥ _ J/S 2-0 t_-fi£^^. 7 ?^, i>/ /soo u^uy u. 2.2- /sro7. 146 BOOKKEEPING AND ACCOUNTANCY 4876. The current liabilities are likewise given precedence in the order of their importance. Other liabilities, such as bonds or mortgages payable, which are more remote as to the time of payment, are frequently designated as "fixed liabilities," which usually appear, however, in connection with the business of a corporation, and therefore are not included in the illustration. 488. The difference between the total resources and the total liabilities shows the 7ict resources or the net liabilities of the concern, which must equal the net cap- ital or the net insolvency at the close of the last fiscal period plus the net profit or minus the net loss for the present period. 488a. Observe that the difference between the total resources and the total liabilities equals the net resources, which represents the owner's equity or owner- ship in the business and is shown by the amount of his capital at the beginning of the period represented in the statement plus the net profit for the period, or minus the net loss for the period. The illustration shows the personal account of the proprietor deducted from his investment, the difference equaling the net resources, i. e., the net capital. 4886. The net capital represented in the ownership accounts may properly be classed as a secondary liability of the concern. After all creditors have been paid, the capital accounts show ivhat is left for the owner; but to say that the capital of a concern is a liability would be equivalent to saying that the owner of the busi- ness owes himself the amount of his net capital. Read chapters on ownership ac- counts, 1155 and ^[69. Exercises in Preparing Combined Til-vding and Profit and Loss Statements AND Statements of Resources and Liabilities. 489. Prepare a trading and profit and loss statement and a statement of resources and liabilities from each of the trial balances shown, and present for approval. Example two is almost an exact duplication of the trial balance shown in illustration 85, except that the business is owned by a firm instead of a single proprietor; therefore, illustrations 87, 88, 90 and 93 may be used as models in the preparation of the statements and the journal entry. (1) Prepare a trading and profit and loss statement, including detailed in- formation relating to purchases and sales (see ^242a-2 and 3; also ^242a-8), with journal entry to close, and a statement of the resources and liabilities shown on the trial balance (illustration 85), including the merchandise inventory of January 31 of $5836.47. (2) The trial balance of Hicks & Anthony for the year ending December 31, when the inventory of the merchandise on hand at that date was $9524.15, showed the following debits and credits : ANALYSIS SHEETS 147 Accounts receivable Accounts payable N. W. Hicks capital a/c N. W. Hicks personal a/c A. R. Anthony capital a 'c A. R. Anthony personal a/c Notes Receivable Notes Payable Cash Purchases Sales Inventory Warehouse supplies Warehouse labor for the year Purchase Discounts Sales Discounts Sales Expense Administrative Expense General Expense Insurance (Unexpired Premiums) Insurance Expense Interest Real Estate and Building Real Estate Expense Furniture and Fixtures Delivery Equipment 7946.27 1200. 1150. 1690. 916.36 12618.35 19444.50 221.50 1560.45 1425.80 2436. 1833.75 721.60 61.50 528.37 72.12 6500. 114.50 286.90 554.32 6423.19 11174.93 11174.92 2346.12 29341.37 821.76 61282.29 61282.29 ANALYSIS SHEETS. 490. Analysis sheets have been referred to a number of times in the preceding pages. "Analysis sheet" is a general term applied to any working paper used for the purpose of analyzing or separating the various items appearing in an account. They have no set form or arrangement, but may be designed and ruled up for whatever purpose desired. An analysis sheet may contain any number of columns required for the purpose intended. 490a. Two forms of an analysis sheet are shown — one separating into groups the various items shown in a single account and the other showing the cumulative additions to the items shown in the account month by month. These forms can be used to analyze any account, as they admit of expansion to any degree necessary . 148 Illusiration 95. BOOKKEEPING AND ACCOUNTANCY ^'^^<:^?^M^ez/' i ?7-z.U.,i.^.££c^- / / z / 2. / 3.S- o ss so s-s zs- 3 3 V - / s-o J-0 z / 7S- / 3 / O ZS" /J / 9:^ / 70 Z- frr OS- / f 7" 2?_ £6><^ — ^2<2=e= &4c^^3I. .^^ /V?^// // . ( y(y//c^* e^^^^^^ i.^ f//^^ ^^ ^;;??7^ , \-ffr,i?^ ^^x^a&>n£ BUSINESS PAPERS 177 5715 Sio-ht drafts are used principally as a means for collecting accounts, in which ease th?y are usually drawn in favor of the bank at which the drawer keeps Ms account, as shown in the illustration above, or he may draw it m his own favor and endors; it to the bank. When such drafts are deposited for collection, he npVount of the drawer is not credited until the collection has been made. In the St mustrated,the01d Detroit National Bank would forward the draft to a cor- ^espoiS^a^^^^^ Ind., which would present the draft to the drawee and rer^it the amount to the Old Detroit National Bank, which in turn would credit the account of the Artcraft Lithographing Company. A •■Collection" Time Dhaft. New York Camden. N- * ^k^.^ D 571c. The above illustration shows a draft which is similar to the oiie explained in t571& except that it is drawn at five days' sight, which means that it is due and payable five days after it has been accepted by the drawees, Foster Brothers; and, therefore, the date of maturity is calculated from the date of the acceptance and not from the date of the draft. In this draft is included a miniature stateiiKmt of account which is intended to show the items for which the draft is drawn. This is a popular addition to the ordinary draft used for collecting bills. Note that the draft is made payable to the drawer, the drawer and payee thus being the same party. Such drafts are usually remitted direct ly to the drawee, who writ es his acceptance across the face of it and returns it to the drawer. It is then known as an acceptance. The drawer then deposits it in bank f oi' collection, writing the proper endorsement across the back. When the drawee accepts the draft, he obligates himself to pay it the same as if he had signed a promissory note. In some cases the draft is placed in bank for collec- tion before acceptance, when it is forwarded to a correspondent bank at the point of payment, which presents it for acceptance and holds the acceptance until it is due, when it collects the money and forwards it to the l)ank from which the draft >vas received, the same as explained in illustration 5716. 178 An Accepted Draft. BOOKKEEPING AN'D ACCOUNTANCY ^;^^:^,££^c^-.ii<^f-j 77-^:r.^^~ (^^jC^i^i.^y^^ 571d. This draft illustrates an ordinary sixty-day draft, which becomes due and payable sixty days after the date of the acceptance, August 20, which is Octo- ber 19. An Accepted Time Draft. IIl]RININCHMia:Qi ^ ^ Cfau^^y:^^ec^(^^/e^^^€^^?^^;y^l<'f(Yr ,/:>■_ i^y/r-r^r-t.t'^'i^y^y^ l^;;^^^?^^^?^^^^/^//:^^^^:?^' I WtUt Current rate o/Ezt^ange on A'cM^yori:. St-cretary- ^Irrasurer 571e. This draft differs from the preceding draft in being drawn ''after date" instead of "after sight;" consequently, after acceptance, it becomes due and pay- able thirty days after March 15, or April 14, irrespective of the date on which it was accepted. 572. Drafts are of two kinds as to time of payment, as shown in the preceding illustrations. Those payable "at sight" are known as sight drafts and are usually payable on presentation. Those payable " after sight " or " after date " are known as time drafts. After a time draft has been accepted, it is known as an acceptance. BUSINESS PAfEfiS 179 573. Accepting a draft is agreeing to pay it when it is due by writing the word "Accepted" across the face, followed by the date and the name of the drawee, who thus becomes the " acceptor," and the draft is known thereafter as an " acceptance," as stated in the preceding paragraph. 574. The date of maturity is the date on which the note or draft falls due. When the, time is indicated in days, the exact number of days is meant, not counting the date of making or of acceptance, l^ut counting the date of maturity. When the time is indicated in months, the same day of the maturing month is the date of maturity. 575. A draft drawn "after sight" l)egins to mature Jrotn the date of the accept- ance, and when drawn "after date" it begins to mature from the date the draft was drawn without regard to the date of acceptance. A note begins to mature from the. date it is made. 576. Due on Sunday or a legal holiday. The law in nearly all states is that when the due date falls on Sunday or a legal holiday, the paper falls due on the next following business day. In a very few states they are due on the last preceding business day. 577. Days of grace are three days formerly allowed in addition to the time specified for the payment of commercial paper. They have been abolished in all but a few states, and will doubtless be abolished in all states within a short time. 578. Negotiable notes and drafts are those which can be transferred by one party to another. To be negotiable, a commercial paper must contain the words "or order" or "or bearer." When it does not contain these words it is said to be non- negotiable, which means that it cannot be transferred by simple endorsement and delivery. In most states special statutes provide that such papers can be transferred by assignment, though the transferee gets no better title to the paper than the origi- nal holder has. 579. Transfer. When a payee transfers a negotiable note or acceptance, he does so by writing his name across the back, and then delivers the paper to the en- dorsee. This is known as an endorsement. When a note is transferred, the payee becomes the first endorser; when an acceptance is transferred, he becomes the second endorser, unless the draft is drawn by him in his own favor, when he is the first endorser. 579a. When commercial paper is made payable "to' bearer," it is not neces- sary for the holder to endorse it when transferring it to another, but for prudential reasons it is generally requested and usually required. The different forms of endorsement are shown on another page. The endorsements shown apply not only to notes and drafts but to checks and all forms of negotiable paper. 180 BOOKKEEPING AND ACCOUNTANCY Check. ■^/.r- ^7~ '^ ':::=''^^-^^-^:A^C€^^^y^^^=X4L'^y^y - .r^ ^ y-^^. {J(9U^/. ^^^ Mil ^Sf«, 580. A check is a written order directing a bank or banker to pay money as stated therein. It is presumed that the party writing the check has funds on deposit against which he issues the check. A check is, in reality, no different from a sight draft except in form, the drawee being a bank instead of an individual firm or corporation. Certified Check. S.I3.TlLJFCIVX^V:rV 8^ CO. IXXLAJL, Et»X/*LXK, RKTVX'EMO ScltXiA-fi^. ^ar TO rrax: order TO The Fou f JUX- A3CXlA3V TIA., GlA^ V.,^ y t i^y-^>>S^£^--f-iZrh^^ (.^:ryyz ^ ^^ ^7/ 7^ ^^ 'r:^-^^-7...<:^i^ ' irr 13 ox^i-^vx* ** ^ -^ lONAL BANK I ATLANTA. GA. J S. B. TURiMATW 8t CO. 581. When a check has been "certified" by a bank as shown in the illustration, the bank becomes responsible for its payment. When a bank certifies a check it is immediately charged to the account of the drawer. BUSINESS PAPERS 181 582. A cashier's check is a form of check issued by banks in paying money to those who are not depositors, and is usually signed by the cashier, or it may be signed by the president or any authorized officer. CABHiBe's Check. Des Moines National Bank DeaMoines. Io^*'a. y^ . ^/ No.^/ BWTOT ORDER R OF "^^fe^^^-X^^Vfe^^-^j ^-^^^ LJtr^^L^^'^.^t>->^.^<^^^^ ^a^^^L-^gZ^rr^f^^ ^^^^ //r •##^#^# -%/sai^ Doi>r.^vRS CASHIEH. 583. A certificate of deposit is an instrument issued by banks certifying that the party named therein has deposited funds to the amount stated. Such deposits draw interest when made for a definite period, but, unless otherwise stated, certifi- cates of deposit are payable on presentation. Certificate of Deposit. ^^ 'if../^^'?:::.^^.^^ 584. A receipt is a written acknowledgment of money received, generally setting forth the purpose for which it was paid. BOOKKEEPING AND ACCOUNTANCY % .^-^^^^^r-/7> ^(^ j^^^-J^ij^^^?-?^*^;^-?./ 585. A bill is a statement setting forth the amount of a debt, usually for goods sold or services rendered, with items, prices and terms stated in detail. A bill, when received from others, is often known as an invoice. Bill. ^Zlciaems^co/yrctionmiiStlier/ia/ismffunijetaysefiiafeo/'imoice. ^/&/y,-Aj^/ f^ ?f^^^^^^^ /^. TELEPHONE 6700 RfVERSlDE STORAGE.REPAI RS.su PPLIES. ETC. 51-55 WEST 93"'STREEr. / Zc^u^^t^ Jj^^-^^^^^ :^^z-.^^d^,^ o^o-^ *7. ? 7. / Z^^y?. A/?.J^^^.^.,^^c<,.^y y^ / z 2000 'ISJL / C.f:-r. cS) ^^- firm, for which he has received stock in the ^> -L^f- new company at par. Capita] Slock, Cr. CORPORATION ACCOUNTS 199 If they desire to open a ne\ • set of books, the accounts shown by the staitement of resources and liabiUties would be debited and credited for the amounts shown therein, in connection with the entry shown above. If stock was sold to additioi al stockholders, the entry would in every way be similar to those given in previous examples under like conditions. g. H and I are partners, each with a net capital of $25,000 ^hown in their capital accounts. They decide to incorporate with a capital stock of $100,000, of which they are to receive $75,000 par value in payment of their interest in the former business, represented by their capital stock, the $25,000 being for good-wiil. The remaining $25,000 was disposed of to outsiders, at par value. The entry to adjust is: H, Cap. %, Dr $25,000 To close capital % I, Cap. %, Dr 25,000 To close capital % Good-will, Dr 25,000 To open Gash, Dr 1' 5,000 To transfer to new books Capital Stock, Cr $100,000 "Cost of Property" is a term that is used to designate the difference between the current assets and liabilities of a business or prop(Tty purchased and the purchase price. Oftentimes, when it is desired to state the assets purchased, at their cost, on the books of the company, it is necessary to set up an account called ".Reserve for Capital Investment." This reserve is sometimes referred to as "Capital Reserve.' ' h. Where both common and preferred s'ock are issued to stockholders, their sum equaij the capital stock of the company, although separate accounts are opened for each; for instance, in example g, if the capital stock of $100,000 was divided into $50,000 preferred stock, $50,000 of common stock, instead of capital stock beii'g credited, preferred stock would be credited $50,000, and common stock $50,000. i. When stock is sold at a discount, i.e., if J and K purchase ten shares of stock, par value $100, at $75 per share,, if the shares are paid for in cash the entry is: Cash, Dr $1500 Discount on Stock Sold, Dr 500 Capital Stock, Cr $20a') j. In the above transaction, if one-half is to be paid in cash, the entry is: J, Dr $750 K, Dr 750 Discount on Stock Sold, Dr 500 Subscription %, Cr $2000 As the stock is paid for, "Cash" is debited and J and K credited. When each has paid $750 for the stock and it is issued, the entry to adjust is: Subscription %, Dr $2000 For the par value of the stock issued. Capital Stock, Cr $2000 Note — The preceding examples illustrate the simpler entries required in opening the stock- holders' accounts of a corporation. In these days of holding companies, subsidiary companies, and the many other combinations in corporate ownership, there are many conditions contin- ually arising which require special treatment at the hands of the accountant. This, therefore, is a subject which properly belongs to the moFt advanced part of higher accounting work and, consequently, la omitted in this text. 200 BOOKKEEPING AN)V ACCOUNTANCY MANUFACTURING ACCOUNTS. 638. Commercial and industrial pursuits may be divided into two classes: those of traders or distributors, who are known as merchants, and those of makers or producers, who are known as manufacturers. 639. The merchant buys and sells; the manufacturer mafces and sells, i.e., the merchant buys and sells the finished product, while the manufacturer buys the materials and hires the labor to turn these materials into the finished product which he sells to the merchant. Sometimes the manufacturer acts as his own merchant or distributor by selling his product directly to the user or the consumer, just as occasionally the merchant may manufacture some part of that which he sells. 640. Just as the principal profit of a mercantile or trading business is derived from the purchase and sale of commodities and is ascertained from that group of accounts known as trading accounts, so, in like manner, the principal profit of a manufacturing or industrial business is derived from the manufacture and sale of commodities, the cost of manufacture being ascertained from that group of accounts known as manufacturing accounts. The cost of finished goods sold in a manufacturing business corresponds with the "cost of merchandise sold" in a trading business, the only difference being that in one case the concern makes the goods and in the other it buys them already made. Similarly, the gross trading profit shown by the trading accounts of a merchant corresponds with the gross profit from sales shown by the accounts of a manufacturing concern. 641. WhUe there are marked similarities between trading and manufac- turing accounts, as indicated in the preceding paragraph, they differ in some im- portant respects owing to the great difference in the elements of cost entering into the manufacture of goods and the corresponding difference in the units of information desired. While the accounts of a small factory may be very simple, in large establishments, where every detail of cost and expense must be shown, elaborate systems must be installed which exemplify the highest expressions of scientific aiccountancy, and for that reason manufacturing accounts, cost systems, etc., are of special interest. ELEMENTS OF COST. 642. There are three principal elements of cost in manufacturing, namely: the cost of materials, the cost of labor, and the cost of manufacturing expenses. The items showing these costs are entered into corresponding accounts known as material accounts, l^bpr accounts, and factory expense accounts. The items ELEMENTS OF COST 201 entering into each of these accounts may be further classified in separate accounts to any extent desired, in a manner similar to the classification of items in the prin- cipal and subsidiary accounts of a trading business. (Read ^134 to 139) 643. Materials. In a manufacturing sense, material is that of which any- thing is made. Raw material is material in its natural state, or nearly so, such as coal, cotton or wool. Many materials pass through several stages of manu- facture before they reach their final form in the finished product; for instance, iron ore is converted into metal by one process, into steel by another, and into its final form by a third and, not infrequently, by a fourth or fifth operation. Con- sequently, the finished product of one concern or factory or department may become the material of another; for instance, the finished product of the pig iron manufacturer becomes the material of the steel manufacturer, and his finished product, in turn, becomes the material of the engine builder or the tool maker, etc. 644. Labor. This is a most important element entering into the cost of manu- facture. It represents the cost of converting the material into the finished prod- uct, whether the labor is expended direct^ upon the material, in the operation of machines, or in other ways connected with the processes of manufacture. 645. Factory expenses, or "shop," or ''manufacturing," expenses, as they are variously designated, include the cost of superintendence, incidental labor, supplies, rent, fuel and light, power, taxes on plant, insurance on plant, mainte- nance, repairs, renewals, depreciation, and such other items as enter into the cost of production. These expenses are, in a general way, similar to the general expenses of a trading business, but they include only those that relate to the particular shop or factory covered in the manufacturing accounts and not to the general expenses of the business, unless they are all included in factory expense, which would be permissible only in rare instances and under very unusual circumstances. (Read 1[310, 314, etc.) 646. To the manufacturer, a thorough understanding of the different ele- ments of cost entering into the manufacture of the goods he makes or produces is of the utmost importance, and since the accounts of a manufacturing concern are, in a large part, a record of these various costs, it is also important that the student of accounts should understand them and their relations to the various manufac- turing processes before he proceeds to a detailed study of these processes and of the various manufacturing accounts and records. This leads us to a considera- tion of cost accounting. 202 BOOKKEEPING AND ACCOUNTANCY COST ACCOUNTING. 647. Cost accounting refers to that department of accountancy which has for its purpose the ascertaining and recording of the actual cost of making things, i.e., the actual manufacturing cost of a given article or product. It is sometimes called "Costing," and when installed in connection with a particular concern it is generally referred to as a "cost system." 648. Cost accounting is perhaps the least understood of the many subjects relating to accountancy. It is also considered to be one of the most difficult subjects an accountant has to deal with, not because its general underlying principles and the objects to be obtained are so hard to understand, for they are quite simple, but rather because of the trouble experienced in applying these principles to meet the infinite variety of conditions found in connection with different manufacturing processes and establishments. A high order of profes- sional experience and skill is required to work out the details of a satisfactory cost system for a concern of any considerable size, where the manufacturing processes are at all complicated. Cost accounting is, therefore, given a some- what fuller explanation in this work than would otherwise be necessary, although the discussion is directed to the records and bookkeeping features of the subject rather than to those that relate to shop organization, shop man- agement, labor efficiency, cost installation, etc., which are subjects outside the main purpose of this text, although they are given some incidental attention. 649. It should be understood that cost accounting is not a system of book- keeping so much as a system of cost records and of methods to ascertain the actual cost of the material, labor, and expenses entering into the finished manufactured product. Cost books and records are separate and distinct from the regular, or commercial, account books of the concern, although the closer they are inter- woven and articulated with the various manufacturing accounts of the principal books the better the results flowing from the cost system installed are likely to be. It is, in fact, a study of " cost of production" as well as of cost accounts. 650. Cost-keeping, or cost finding, is frequently considered a specialty in factory management. While a cost-keeper should know accountancy, he may not rank high outside of his specialty. The ability to ascertain, analyze, and compare the facts and conditions of a particular factory or concern is the first requisite. The second is the ability to work out a practical cost system that will suit the facts and conditions as they exist, and give the "units of information" required for efficient management. COST ACCOUNTING 203 651. Modern commercial and industrial methods have made cost account- ing a necessity. The margin of profit between cost and selling price of standard commodities has been narrowing steadily as our natural resources have been devel- oped and our trade and manufacturing conditions have become more clearly defined and settled. The consumer — the man who buys— is in the market to purchase as cheaply as possible; in fact, all other things being equal, he will invari- ably buy where he can get "the same goods for less money" or "more goods for the same money." The merchant, or trader — the man who sells to the consumer and buys from the manufacturer or producer— transmits this pressure of competi- tion for the lowest possible price back from the man who buys to the man who makes the goods. 652. The manufacturer— the man who makes things— must find his profit between the price for which he can sell his products and their "cost to make." He cannot fix his prices higher than the prices of other manufacturers for the same article. He must meet competition. If he would make a profit he must manu- facture as cheaply as his competitors, and if he can reduce his "cost to make" below the cost to make of his competitors, he can increase his profit to that extent, and still meet competition. 653. Here we are brought face to face with the necessity of cost accounting, i.e., a system of records and accounts that will show the actual cost of producing any given article or number of articles through every process of manufacture, covering the entire period from the time materials are put in process and the labor is employed which will transform them into manufactured products, until the time the finished article is ready for sale and dehvery, and, indeed, until the time when it is sold and delivered to the buyer. 654. What constitutes cost. The cost of an article, as already indicated, may be divided into three parts, namely: cost of material and labor, which are known as "direct charges," and cost of factory expenses, which are known as "indirect charges." (1) Cost of material includes cost of: (a) The raw article. (b) Completed parts purchased. (c) Partially completed parts purchased. (2) Cost of labor includes the cost of productive labor directly employed in the manu- facturing processes, but does not include incidental labor about the factory or shop not emploj-ed directly in the manufacturing processes. (3) Cost of factory expenses ("burden") includes: (1) Rent and taxes of factory. C2) Depreciation and maintenance of plant, machinery and tools. 204 BOOKKEEPING AND ACCOUNTANCY (3) Motive power, lighting and heating. (4) Superintendence. (5) Unproductive labor, including wages of timeke^sperS, storekeepers, and those employed for other purposes, such, as cleaning factory, distributing and col- lecting tools, etc. (6) Interest on capital invested in materials, supplies, plant, machinery and tools. 654a. In addition to the cost of material, the cost of labor, and the cost of factory expenses, stated above, it is sometimes considered that some part of the administrative or "overhead" expenses should be inchided in the "cost to make." (1) Administrative expenses include: (1) Salaries of managers, clerks and directors. (2) Rent, taxes, etc., of show-rooms, and office and general office expenses. (3) Discounts, allowances, and bad debts. (4) Interest on capital other than that included under "factory expenses." (2) Factory expenses, or "burden," are always included in the "cost to make," i.e., the pro- duction cost of the article. Administrative expenses, on the other hand, are never included in the cost of production unless they contain items which are clearly manufacturing expenses. However, both administrative and selling expenses, with the profit, must be included in finding the se/Zz'n^ pn'ce of the article. 655. A thorough understanding of the different elements of cost entering into the total cost of manufacturing and marketing a given article or line of goods is fundamental in the study and practice of cost accounting. The elements of cost are cumulative in their finding, beginning with the first, or prime cost, to which other elements are added until, fiDally, the selling price of the finished product is determined. The primary elements of cost are invariably material and labor, although the proportions of each entering into different products may vary greatly. 656. Finding costs. The costs represented in material and labor are not hard to determine because they are represented by the actual cost of the materials used and the cost of direct labor as shown on the time cards and pay-roll. The costs of factory expenses, or "burden," and such administration expenses or other "overhead" charges as may be considered manufacturing expenses, are somewhat more difficult to determine and, particularly, to properly distribute over the various articles manufactured. 657. Factory expenses consist of all incidental expenses for indirect labor, supplies and material, and other items of expense necessary in operating the factory which are chargeable directly to the cost of manufacture. (11645) These expenses are known as "burden," doubtless for the reason that they must be borne and provided for as a part of the factory cost of the articles produced. COST ACCOUNTING 205 658. Overhead expenses are those which are incurred in the administrative department of the concern but which have, in fact, increased the cost of produc- tion in the factory, works or plant, either in their management or in technical or clerical service rendered, although instead of being charged directly to factory expense, which is always preferable, are charged in the general or administrative expense accounts of the concern. These are known as ''overhead" expenses, doubtless because they represent a manufacturing cost over and above those included under the head of factory expense, or burden. 659. It is sometimes diflficult to distinguish between what should properly be classed as administrative expenses and those which should properly be con- sidered as manufacturing expenses. An illustration is where part of the services of officers or office employes are given to the manufacturing department and part to the selling or financial departments. Another illustration relates to the proper account to be charged for drawings and patterns. 660. Just what overhead expenses should be included in "factory cost," or "works cost," or "cost of production," as it is variously designated, is aquestion about which there are differences of opinion. Some hold that all expenses out- side of those incurred in effecting sales and in the management of the financial affairs of the concern are necessarily incurred in connection with the manufactur- ing processes and that they should, therefore, be included in the manufacturing costs in ascertaining the "factory," or "works" cost, or the "cost of production." This view is opposed by the argument that it might very easily be carried to the extreme of including a large part of the administrative or other general expenses in factory expense, which would, in fact, capitalize them by including them in the cost of the goods manufactured, as shown in the finished goods account, and would thus show them as assets in the final statements of the business instead of expenses chargeable against income. 661. . Others hold that manufacturing costs should include only those that are incurred in the factory or works proper, and that those incurred in connection with the administration or financial departments of the business, even when including the cost of technical or clerical service rendered to the factory, should in no way be considered as factory expenses and, therefore, should not be included among the elements of cost of production chargeable to orders, jobs or contracts. The point at which the line is drawn between factory and other expenses by those who hold this view is illustrated in a concern having its plant in the country and its commercial office in the city, where only the expenses of the former would be included in factory cost, the expenses of the latter being classed as expenses of conducting the business that, in a bookkeeping sense, should be charged against income. 206 BOOKKEEPING AND ACCOUNTANCY 662. There is general agreement, however, that the best practice is to charge all expenses that are classed as factory expenses directly to that account at the time the entry is made, which will avoid any later question as to their proper disposition and will eliminate all questionable items from the adminis- trative or general expense accounts, so that these accounts will then clearly repre- sent balances which should be charged against income and should appear only in the trading and profit and loss statement. 663. A careful consideration of these views would seem to indicate that the line between factory costs and administrative and other costs should be drawn at that point which would include as manufacturing expenses only those items that are clearly a direct element of cost in the production of the manufactured article, no matter in what account they may be found. In any event, what should be considered manufacturing costs and what should constitute administrative and other expenses, and the place at which the former should end and the latter begin, must be decided separately for each establishment in which a cost system is installed, either by the owners or by the accountant. (1[752) 664. The cost formula given below clearly shows the various elements of cost entering into the finished product, from the prime cost to selling price. It agrees substantially with the cost formulas prepared by a number of the leading cost specialists, which are generally accepted as being as nearly accurate as they can be made. The elements of cost may be thoroughly understood from a study of this formula and the graphic illustrations showing cost elements which follow, particularly if the accompanying explanations are carefully considered. COST FORMULA. (1) Cost of Material + Direct Labor = First or Prime Cost. (2) Prime Cost + Factory Expense, or "burden," = Factory Cost, or Cost of Production. (3) Factory Cost + General and Administration Expenses, or ''Overhead," = Total Cost. (4) Total Cost + Selling Expense and Profit = Selling Price. 665. Wliile "prime cost," "factory cost," and "total cost" are terms com- monly used and accepted, there are other terms used to express the same costs which are preferred by some writers. There is general agreement as to what should be included as first or prime cost, but there is some difference of opinion as to what should be included under "factory cost" and "total cost," and as to what propor- tion, if any, of administrative and general expenses should be included as factory costs, as has already been explained in ^660, 661. COST ACCOUNTING 207 666. Explanation Showing the Relation between the Elements ob^ Cost in the Formula and the Manufacturing Accounts in the General Ledger. a. The first, or prime cost is made up of the cost of material and direct labor, and corre- sponds exactly with the items charged to materials in process and productive labor accounts. (11711a, 716a) These items are shown on the shop cards or in the job ledger at the time when thf order, job or contract is completed. (1[750, 741a) b. Factory cost represents the prime cost, plus manufacturing expense, or "burden.'' (11719) Theitemsof factory expense are indicated in 1[645, 734a, b. The items referred to art those of the factory or works only and not those of the office or general establishment. Thesf factory costs, when distributed, a^gree exactly with the items credited to the contra manufp.4' turing expense account. (1[722c) c. Total cost equals factory cost, plus such general, administrative or other "overhead'' expenses, etc., as may be charged to the various orders, jobs or contracts. The items included in the "total cost," or "total cost to make," correspond exactly with those charged to finished goods account. (11741a) d. The selling price equals the total cost, plus such percentages or other proportions of that cost as are added for selling expenses and for the profit to be made on the goods sold. Selling expenses are not and should never be considered as manufacturing expenses, and should never be included in the production cost of goods manufactured. "Selling price" exactly corresponds to the amount credited to sales count. (1[745) e. The selling expense account of a manufacturing business corresponds exactly with the same account for a trading business. (1[264 to 277) It is a profit and loss account and, like other similar accounts, must be deducted from the gross income shown by the trading statement before the net profit can be ascertained. 667. The cost formula following ^664 may be further illustrated by the following diagram, in which it will be noted that 100% represents the "total cost," the percentages below representing the proportions of the different elements Entering into the total cost and those above representing the additions to find the sellirg price after providing for selling expenses and profit. ^.f# ^ 8-0% Mt&in^i^^ Siod^ '^^^ ^ 208 BOOKKEEPING AND ACCOUNTANCY ANOTHER COST FORMULA. 668. The following formula is described as " Analysis of Sale Price of a Man- ufactured Article."* In this formula it will be seen that there is some difference in the terms used to express the various costs as they are cumulated, "shop charge" being substituted for factory expense, or burden, and "general establishment charge" being substituted for administrative and general expenses, or over- head. In like manner, "works cost" and "inclusive costs" are substituted for factory costs and total costs. selling Price $505 Inclusive or ITo. 3 Cost $420- -Worto or Ko. 2 Coat ->> , .29j* .25+ 17 ^ .48 ■f .25 + ted to each factor in the proportion of the value of that factor to the total value of the faC' tors insured. Repairs and renewals must necessarily be allotted to each factor in proportion to the cost of maintaining that factor, based upon previous experience or costs. The same is true of suppHes, oils, etc., and tool repairs. Depreciation and interest are figured upon a certain percentage of the cost of each machine and other depreciable equipment. The expense of superintendence and incidental labor is distributed in the proportion of the total time that each factor requires in its operation. Overhead expenses are usually distributed equally over the various factors, but they may be distributed in different proportions where any part of this expense can be properly allocated to a particular factor or factors. (c) The hourly machine rate for each factor shown on the statement is the cost of oper- ating that factor. (1[684d) When part of the factors are idle, idle tune and other cost elements do not increase the production cost of those factors which are in operation, but they do increase the production cost of the factory, i. e., each article will cost more to make. (d) On the statement showing the distribution of the estimated manufacturing expenses for the year, the average monthly and hourly operating cost of each factor is shown. This is known as the "production cost" of each factor, to which must be added such additional costs, determined through the supplementary rate, as will cover the loss from unproductive factors and other sources to find the hourly charge for work performed on any order or job by each productive factor. (1|G84i) (e) When the cost of operating any particular productive factor increases or decreases because of unexpected or contingent circumstances, the monthly and also the hourly produc- tion cost should be increased or decreased accordingly. To illustrate, the hourly production cost of factor No. 1 is shown in the statement to be IH. Supposing an additional charge of 7 cents per hour, determined by the supplementary rate, is necessary to cover the cost of idle factors, etc., the hourly charge for factor No. 1 i.- 26$^. When more productive factors are in operation, this hourly rate for machine No. 1 would he lowerml. When fewer factors are in operation, it would be increased, and the same would be true of all thc^- factors. If any of the elements of cost in the estimate of manufacturing r:tpenses for the period are increased or daninishcd, corrections should be made in the hourly production cost of each factor accordingly. THE DEPARTMENT METHOD OF MANUFACTURING ACCOUNTS 221 METHODS AND SYSTEMS IN MANUFACTURING ACCOUNTS. 686. Methods and systems of conducting manufacturing accounts vary greatly, depending upon the nature and extent of the business conducted, and more particularly upon the U7iits of information which the accounts are intended to supply. 687. There are two principal methods of conducting manufacturing accounts, one which may be designated as the "department" method and the other as the "cost" method. 688 In the department method, the accounts are planned to show the cost of operating an entire shop or factory, or some department of it, including the cost of the labor and the various materials and expenses, the object being to show the gross manufacturing cost of the shop, factory or de-partment for a given period and, finally, the gross profit on the manufactured goods sold. 689. In the cost method, the accounts are planned to show the manufact- uring or production cost of the articles called for in a particular order, job or contract, without reference to the profit of a particular shop or department, the object being to show the total cost of each order, job or contract and, finally, the gross profit between cost and selling price. 690. It is not impossible to construct a system of accounts that will show both department and cost accounts in the same set of books; indeed, in the books of many of the best organized manufacturing concerns, where the product is at all varied in its character, the books are kept to show the results of both methods. THE DEPARTMENT METHOD OF MANUFACTURING ACCOUNTS. 691. When the department method is followed, which has for its unit of consideration the plant, factory or department, if it is desired to show only the gross cost and the grqss profit derived therefrom for the period, it is necessary to open a single account, only which is debited for all costs, including materials, labor and expenses. If it is desired to know the seplirate costs of the materials, labor and expenses, an account should be kept with each. If there are several materials, various expenses or other elements of cost entering into the finished product, and it is desired to know the cost of each, separate account should be kept with them or they should be separated on analysis sheets before the manufacturing statement is prepared. 222 BOOKKEEPING AND ACCOUNTANCY 692. Manufacturing accounts of this description are in all essential partic- ulars similar to the ordinary trading accounts, and when kept in connection with the proper sales accounts, the gross profit of a plant, factory, shop or depart- ment can be readily and accurately ascertained. By opening the necessary accounts, the manufacturing statements can be made to show the results of the transactions for the period in whatever detail is desired. Where accounts are kept for a number of departments in the same establishment, they closely resem- ble the accounts of a department store in a trading business. 693. When the department method of conducting manufacturing accounts is followed, it is frequently supplemented by cost sheets and other memorandums which are depended upon for figuring the costs and the selling prices of the differ- ent articles manufactured. In many instances fairly efficient cost systems are thus maintained. Rules for Debiting and Crediting Manufacturing Accounts whbn the Department Method is Followed. 694. The following rules are for accounts opened under the department plan, where the balances shown by the various material, labor and expense accounts, after being credited with inventories, represent the various elements of cost that enter into and make up the total manufacturing cost. These accounts and the rules therefor should not be confused with those given when the cost method is followed. HuLE FOR Debiting and Crediting Material Accounts When Kept to Show the Cost of Material Used. 695a. Debit material accounts, under proper headings, for costs of all material purchased, including freight, drayage, and all other charges necessary to place the material in the factory ready for use. 6. Credit material accounts for all deductions from cost, and at cost price for all materials previously charged to this account which are sold or otherwise disposed of. c. The balance, less the inventory of materials on hiind taken at cost, shows the cost of the material 'U«e. For such an amount as will meet the de- ficit caused by an under -esiimale of ex- penses for the period or for the amount necessary to provide for the supplemen- tary rate to be charged to work in process. i%84:h,i) 722. Credit "manufacturing," or "fac- tors" expense account, — c. For the amount of manufacturing ex- penses, at cost, distributed and charged to orders, jobs or contracts as they are in process or when completed during the period, as shown by factory cost cards, per finished goods journal. (11750) d. For such an amount as will equal an overcharge to the account caused bj' an over-estimate of the expenses for che period, transferred to following pef-lod. THE COST MrrrHOD OF MANUFACTURING ACCOUNTS 220 723. The balance of the account, shows t!io cost of tlio manufacturing ex- penses that have been charged or are yet to be charged on the cost cards of the various unfinished orders, jobs or contracts, at the close of the period, i.e., it should equal the inventory of this account. (^754dj Any difference between the balance of the account and the inventory will show an over- or under-estimate of manufacturing expenses for the period — an over-estimate if the balance is the larger, an under-estimate if the inventory is the larger. 723a. Items %721a, h, may he and frequently are omitted by omitting the entry from the manufacturing expense estimate book debiting manufacturing or factors expense account and crediting factory expense account for the estimated expenses for the month or other period. (Read ^752) 7236. If the entries required for 721a, b, are omitted the balance will then show the cost of the factory expenses distributed for the period. This balance should substantially equal the balance shown by its contra account, "factory ex- pense" account, described in ^736, when the items called for in ^IZbd are omitted. Any difference would show over- or under-distribution of manufacturing expenses, described in ^[723. 724. If manufacturing expenses are distributed through hourly machine, productive factor, or productive ceviter time, in which case the account should be kept under the title of "Factors Expense" (^719), the balance of the account will include the value of the idle, or unproductive time of machine factors or centers, unless the idle time has been distributed monthly in the supplementary rate. This idle time may be accounted for by a daily shop record of the idle time of each machine, factor or center, in a separate book kept for that purpose, which should be totaled for the month. This total is an unfailing barometer of the productive efficiency of the plant. (^684//) The difference between this total and the balance (inventory) of the account will show that part of the manu- facturing expenses coming from other sources than idle time which is yet to be distributed. 725. Under-estimates of manufacturing expenses (^721^) must be dis- tributed as a supplemeniary charge over the work in process for the period, or it may be carried into the next period, with a corresponding increase of the charges on the goods manufactured in that period; otherwise, they represent a dead loss to the concern. Over-estimates, on the other hand (^722d), have the advantage of creating a reserve, which can be carried forward to subsequent periods, with corresponding reductions in the charges against the goods then in process of manu- facture. Either extreme should be avoided, if possible. (1I684/i, i} 230 bookkeeping and accountancy Manufacturing Account. 726. The three preceding accounts, viz., "materials in process," "produc- tive labor," and "manufacturing expense" accounts, may be combined and kept as one account, under the title of "manufacturing account," in which case the various elements of cost shown in the separate accounts may be ascertained from an analysis sheet made up from the single account. The accounts are kept separately to provide control accounts that will give an absolute check upon the records kept of material, labor and expenses of the factory, and to guard against loss of materials through neglect to charge them or by theft, for loss of labor time through neglect to charge or caused by idleness of workmen, and to quickly discover inaccuracies in prorating burden and overhead expenses. Rule for Debiting and Crediting Manufacturing Account, Combining Materials in Process, Productive Labor and Manufacturing Ex- penses. 727. Debit 'manufacturing" account, — 728. Credit "manufacturing" account, — ■ fl» For cost of all materials. (^711a) e. For cost of materials returned to stock- h. For cost of all direct labor. room. (^7126) C* For estimated cost of manufacturing ex- /. For cost of materials in finished goods. penses for the period. (l[721a) (11712c) d. For cost of manufacturing expenses dis- g. For cost of direct labor in finished goods, tributed through the supplementary (117176) rate. (1[7216) h. For cost of manufacturing expenses charged to finished goods. (1[722c) i. The balance of this account consists of: (a) the cost of the materials in process of manufacture (1[713); (b) the cost of direct laoor expended on uncompleted work in process (1[718) ; and (c) the cost of manufacturing expenses charged or to be charged to work in process. (1[723) 729. The balance shows the cost of materials, productive labor and manufacturing expenses included in the work in process not completed. If manufacturing expenses are distributed through hourly machine, productive factor, or productive center time, the balance will include the value of unpro- ductive machine hours, factors, or centers. (11724) 730. When the estimated manufacturing expenses are not charged to this account (^727c), the balance of the account will show the amount of manufac- turing expenses distributed, including the value of idle machine time, although the balance may also contain inaccuracies relating to the materials and labor, which would be revealed only through an analysis of the account, which would virtually separate it into the three accounts indicated. THE COST METHOD OP MANUFACTURING ACCOUNTS 231 731. Shop cards and job ledger. Shop cards accompany each order, job or contract during the time the work is in process, and receive entriea for all items of material, labor and other direct charges that belong to the work called foF on the cards, and also for the charges covering burden and overhead expenses when these costs are recorded concurrently with the charges for materials and labor. On small jobs, these cards are frequently bound in loose-leaf style or indexed by one of the many card systems. Where there are many items entering into the cost of the product it is necessary to keep a job ledger, for which the loose-leaf ledger form is usually preferred. In any event, the card or ledger account finally shows the total cost of materials, labor and other direct charges entering into the cost of the finished product, and also the cost of burden and overhead expenses whether charged concurrently with materials and labor by the machine rate method or not. There are many forms of ruling and arrangement for the cards and stock ledger accounts, the design being determined by the organization of the shop processes and the system of accounts. Shop cards and job ledgers may also be used when the department method of conducting manufacturing accounts is followed. Factory or Shop Expenses. 732. These expenses are described and the principal items enumerated in ^645, page 201, It should be noted that they do not include either material or direct labor, which are charged to their own accounts, but that they do include incidental labor and supplies, as well as all other items of factory expense which enter into the cost of production. (Read 1[657, 1f658) While a single expense account is usually kept for factory expenses, they may be classified to any extent desired by opening separate accounts for each class of items, or they may be classified on an analysis sheet, either monthly or at the close of the fiscal period. 733. A sharp distinction should be made between factory expense account, here described, and manufacturing, or factors expense account, described in 1[719 to *!725. Factory expense account receives the charges for the current expenses of the factory, shop or works, and it corresponds in principle with the general expense account, described in ^310 to ^324, while manufacturing, or factors expense account shows these expenses distributed over the manufactured product; conse- quently it will be seen that the items debited to factory expense account are finally credits to the masnufacturing, or factors expense account. All items credited to manufacturing expense account in the finished goods journal (T750) might be credited directly to factory expense account, but it would have the result of confusing such items with credits in the account from other sources, and besides, it would make factory expense account show two results instead of one, which is always objectionable and in opposition to one of the well-established rules of accountancy. 232 BOOKKEEPING AND ACCOUNTANCY Rule for Debiting and Crediteng Factory Expenses. 734. Debit "factory expenses," under ap- propriate headings, — a. For the cost of all indirect labor and sup- plies entering into the cost of goods manufactured. ;. For the cost of rent, fuel and light, pow- er, taxes, insurance, maintenance, re- pairs and renewals, depreciation, and such other expenses as are incurred in carrying on the work of the shop or factory. 735. Credit " factory expenses," under ap- propriate headings, — c. For any deductions or rebates from items charged to this account. d. For the estimated amount of "manu- facturing," or "factors" expenses for a given period, charged to those accounts when they are kept. (^721a) e. For expense items previously charged to this account transferred to other ac- counts. 736. The balance (or the sum of the balances if more than one account is opened), shows the over- or under-distribution of manufacturing, or factors ex- penses. (^724, ^{725) If items in ^736d are not credited to this account (read •117236), then the balance of this account should substantially equal the balance shown by its contra account, the manufacturing, or factors expense account (^721, 1|722), the difference between the balances showing the over or under-dis- tribution of factory expenses. 737. Each factory expense account in a cost system is usually accompanied by a complementary or contra account, which shows the debit items of one account as the credit items of the other, as indicated in the preceding paragraph. For instance, manufacturing, or factors expense account is the contra account to fac- tory expense account and is, therefore, an offset account to it. As has already been suggested, the transfer entry between these accounts may be omitted, in which case the balances should practically cancel each other. 738. Prorating and distributing general and administrative expenses. Apart from and in addition to factory expenses, or burden, which with the cost of material and labor, gives the total factory cost (see formula 1[664), there are usually certain other items of expense incurred known as overhead expenses. (Read ^654, ^658) These overhead expenses must not be confused with the regular administrative and general expenses incurred in the general or financial management of the concern, and which correspond in every particular with those of a trading business, as set forth in ^[297, 11301, 1f302, T310, ^314and 11315; and it should be noted, also, that they rarely comprise more than a small proportion of the items charged to the administrative and general expense accounts, and that in all instances Vv^here it is possible, they should be charged directly to the factory expense account and should never appear in the general or administrative expense a9counts, in which case, of course, their consideration as separate items in the distribution of expense is unnecessary. (Read 1[658 to 11663) THE COST METHOD OF MANUFACTURCCG ACCOUNTS 233 739. "When factory expenses are charged in general, or administrative expense accounts, or when some proportion of general or administrative expenses are to be included as part of the cost of production of goods manufactured, their amount should be ascertained and included in the schedule, or inventory, of manufacturing expenses for the period. (^720) When it is desired to show separately such general or administrative expense items as have been thus dis- tributed it is necessary to open contra accounts similar to the contra account for the factory expense account or, preferably, they should be listed separately and charged by journal entry to the factory expense account and credited to the proper general or administrative expense account. 740. Manufactured goods consist of the articles which have been completed and delivered ready for sale to the shipping department or for storage in the ware- house. An account with manufactured goods is kept under the title of " Finished Goods" (usually abbreviated to "Fin. Goods") or "Manufactured Goods." Rule for Debiting and Crediting Finished Goods Account. 741. Debit "finished goods" account,— 742. Credit "finished goods" account,— a. For the cost of goods manufactured dur- 6. For the cost of goods sold for the month ing the period, at cost of production, or other period, per "cost of sales" rec- i.e., cost of materials, labor and manu- ord, stock delivery orders, etc., per facturing expense (burden and over- stock deliveries journal. (1f751) head), as shown on cost cards for each c. The inventory consists of the finished order, job or contract when completed, goods on hand, at cost, per finished goods jouraal. (11750) 743. The balance of the account equals the total cost, or inventory value oj the manufactured goods in stock, as shown by inventory or by the stock ledger, when kept. This account, therefore, controls the finished goods, or stock ledger. The total footing of the account for the year or other period, after the inventory for the previous period has been deducted, shows the total cost of the goods manu- factured for the period. 744. After the process of manufacture has been completed and the finished goods have been charged to that account, cost of production ends (11664) and selling, administrative and general expenses begin. It is, therefore, at this point that the manufacturing statement ends and the trading statement begins. The conneo-tion between the manufacturing accounts and the trading accounts is through the entry debiting cost of sales account for the cost of the goods sold and crediting finished goods account, mentioned in 1^7425 234 BOOKKEEPING AND ACCOUNTANCY 745. "Cost of goods sold," or ' 'cost of sales' ' account is debited for the cost of the manufactured goods sold. It is an offset, or contra account, to the sales account, the difference between them showing the trading profit for the period. The debit to this account is invariably the credit to finished goods account, as previously stated. Its only purpose is to eliminate the cost of goods sold from the sales account, so that its debit footing will show only those items called for in ^159a, b,c. Various methods for recording costs of goods sold are employed. One is to enter both cost and selling price on orders, from which the cost price is tabulated for the period; another is to enter the cost price of each article sold in the sales book, or on sales ticket, their sum being the total cost of the goods sold for the period ; the third is to make up a similar record from stock delivery orders. An entry for the month or period, debiting sales account and crediting finished goods account, is required. The sales account of a manufacturing concern is in every respect similar to the sales account of a trading business, described in 1[156 to ^169 of this text. To eliminate an extra account, sales account may be debited for the cost of goods sold, instead of "cost of goods sold" account as stated. The difference between the two sides of the sales account would then show the gross trading profit for the period. 746. The various manufacturing accounts, as has already been stated under the several accounts, are connected with each other and with the factory cost accounts kept in subordinate ledgers and other account books of the factory, shop or works, which they control, through a series of entry books, variously designated as journals, or books, the name "journal," seeming to have the prefer- ence among accountants. These journals are as follows: 747. Invoice, or purchases joiiraal. This book receives the entries for all materials purchased, whether raw or partly manufactured, which enter directly into the manufactured product, including freight and drayage and all other charges necessary to place the material in the stock-room ready for use. (^705a) The entries are made from the invoices, and the freight, drayage, and other bills received. The total footing is debited to materials account and credited to accounts payable in the general ledger, the various items being debited in the mate- rials, stock, or stores ledger, as described in 1[708. When the voucher system for recording purchase accounts is used, the debit to materials account is made from the vouchers payable register, which, of course, eliminates a separate purchases ledger which would otherwise be kept. THE COST METHOD OF MANUFACTURING ACCOUNTS 235 748. Transfer outward or requisition journal. All materials taken from stock on requisition, for work in process, are entered in this book from the requi- sition blanks, at cost. The total footing for the month is debited to materials in process account (^7 11a) and credited to materials account ("([TOBc), while the items are credited to the proper accounts in the material, stock, or stores ledger. (^(708) When a single manufacturing account is kept (^726), the total footing is debited to that account. (^727a) 749. Transfer inward journal. In this book is recorded from "stock returned" cards, all entries for materials returned to the stock, or stores room, at cost price, which were previously credited to materials account. The total footing for the month is debited to the materials account in the general ledger (^7056) and credited to materials in process account. (1[7126) The separate items are debited to the proper accounts in the materials, stock, or stores ledger, at cost price. (1[708) 750. Finished goods journal. When each order, job or contract Is com- pleted and the finished goods are ready for sale or have been placed in warehouse, an entry is made in this book from the factory cost cards, or job ledger, on which have been entered and totaled the separate costs of material, direct labor, and man- ufacturing expenses. This journal should, therefore, contain columns to receive these items. At the end of the month, the footing of the total column is posted to the debit of finished goods account (^741a), while the footings of the credit columns are posted to the credit of materials in process account (^7 12c), labor account (^7176), and manufacturing, or factors expense account (^722c) When a single manufacturing account, combining these credit accounts, is kept, they are credited to that account. (^728/, h, g) 751. Stock deliveries journal. When this book is kept, it is necessary to enter only the numbers of the stock delivery orders Oi* sales tickets, and the total cost of production price of each aiticle, which may be taken from the original cost cards for the article or from the j ob ledger. The total for the month is posted to the debit of cost of sales account or to the debit of sales account, when that account is not kept. (11745) It is credited to finished goods account. (1|7426) 752. Manufacturing expense estimate book. In this book is entered, at the beginning of each period, the estimated cost of each factory expense for the period covered in the estimate, which may be for the fiscal year or for a quarter or month. (1[720) The cost of these expenses is based largely upon the actual expenses of previous similar periods, with such changes as may be necessary. The total of these factory expenses equals the total manufacturing expense which is to be distributed over the work of the period then beginning, by one or the other of the 236 BOOKKEEPING AND ACCOUNTANCY methods employed. (^678, 11679) It should be divided into monthly amounts which should be debited to manufacturing, or factors expense account (11721a) and credited to factory expense account. (1l735rf) If no entry is made of the estimated monthly manufacturing expenses, as suggested in 1|723(Z, 1[736, it should be carefully compared monthly with the balance shown by the manufacturing, or factors expense account, as well as with the balance shown by the factory expense account. Varying conditions shown by idle productive factors caused by decreased production, labor troubles, overtime, and the various other elements affecting manufacturing costs, will usually require frequent changes to be made in the monthly estimate of manufacturing expenses (burden and overhead). This book, therefore, is of great importance in the efficient and economical adminis- tration of a manufacturing business. Series of Entries Illustrating the Routine for Debiting and Crediting Accounts Under the Cost Method, From the Time Materials are Purchased Until the Finished Product is Sold. 753. Each step in the usual course of procedure in manufacturing is indi- cated in the following entries : a. When materials are purchased to be used up in the manufacture of goods, the f ollowinj; accounts are debited and credited in the invoice, or purchases journal (11747) : "Materials," Dr. (11705a) Forcostof allmaterials,includingtrans- "Accounts Payable," Cr. portation and other charges necessary to place the materials in the stock-room ready for use. 6. When materials are taken from the stock-room on requisition, for use in the work-shop, the following accounts are debited and credited in the transfer outward journal (11748) : "Materials in Process," Dr. (11711a) For the cost price of all materials re- "Materials" Cr. (11706c) ceived from the stock-room. c. When unused materials are returned to the stock-room, the following accounts are debited and credited in the transfer inward journal (11749) : "Materials," Dr. (117056) For unused material returned to the "Materials in Process," Cr. (117126) stockroom, at cost price. d. When the daily, weekly or monthly pay-roll is made up, the accounts debited and cred- ited from the pay-roll, time book or a list of the time cards, are as follows : "Labor," Dr. (1i716a) For direct labor. "Factory Expense," Dr. (11734a) For indirect labor. "Cash," Cr. (or) When paid in cash. "Vouchers Payable," Cr. (or) When the voucher system is used and voucher is issued for pay-roll. "Pay-Roll" Cr. When such an account is kept for pur- pose described in 11563. Note.— The proper account to be credited in connection with the pay-roll depends upon the system of accounts followed. THE COST METHOD OF MANUFACTURING ACCOUNTS 237 e. When orders, jobs or contracts are completed and the finished goods are ready for Bale or have been placed in warehouse, and ^e burden and overhead expenses have been pro- rated and distributed on factory co'st cards or job ledger, and the total cost of production, or "cost to make," has been determined, the following accounts are debited and credited in the finished goods journal (1f750): "Finished Goods," Dr. (11741a) For the cost of materials, direct labor, "Materials in Process," Cr. (1[712c) and of burden and overhead charges en- " Labor," Cr. (117176) tering into the total cost of production. "Manufacturing," or "Factors Ex- pense" Cr. (11722c) /. When manufactured goods are sold, the following accounts are debited and credited: "Accounts Receivable," Dr. For the selling price of the goods sold. "Sales," Cr. g. When the cost of the goods sold is determined at the end of the month, the following accounts are debited and credited in the stock deliveries journal (1[751): "Cost of Sales," Dr. (11745) For the cost of the goods sold. "Finished Goods," Cr. (117426) h. When a "cost of sales" account is not kept, sales account is debited in the foregoing transaction instead of "cost of sales" account. (1[745) 753a In addition to the routine entries outlined in the preceding paragraphs, there are a number of other entries which may be made necessary when there is a departure from the usual routine in the manufacturing processes; for instance, it is not unusual in manufacturing estab- lishme-nts, during dull seasons or when work is slack in any department, to partly manufacture or complete stock parts or materials ahead of the time when they are required for the comple- tion of articles, by doing such machine or other work upon them as opportunity will permit. When this is done, an order is prepared, the materials are requisitioned, at cost price;, from the stock-room, and the manufacturing process, whatever it may be, proceeds Cjxactly as though they were to be at once completed, the productive labor and burden being charged as usual. When the work is carried as far as possible or until it is found necessary to discontinue it, the cost cards are made up for whatever work has been accomplished, and the new cost price deter- mined, when the materials or parts are returned to the stock-room. When this is done, the entry shown in H 753e would be made, at the new cost price, except that materials account would be debited instead of finished goods account, and the entry, of course, would be made in the general journal instead of in the finished goods journal. (6) Another instance is where finished parts or materials in the stock-room are sold as in the case of automobile or other machine parts. While the article would be credited to sales account at selling price, it must be credited to materials account at cost price, which would require a general journal entry, debiting cost of goods sold account and crediting materials account to adjust. (c) A third illustration is where finished parts or articles that have been charged to fin- ished goods account and placed in the sales-room or warehouse, are returned to the work -shop to be used for the completion of some other article; for instance, where finished valves, oil cups or the like are used in the completion of an engine in process of building. In such case^, materials in process should be debited and finished goods credited, at the total factory cost of the article, through the general journal or through a special journ:.] kept for that purpose. Other transfers of materials or products in various stages of manufacture, outside of the usual routine, may require corresponding entries, which may be easily determined by a consideration of the accounts involved. 238 BOOKKEEPING AND ACCOUNTANCY 754. Inventories of manufacturing accounts. Separate inventortes are required of materials, (^706e) materials, in process, (1[712c) labor, (^717c) manu- facturing expenses, (^722e) factory expenses, (^735/) and finished goods, (1[742c) prior to the preparation of the manufacturing statement. These inven- tories are invariably taken at cost price. a. The materials inventory consists of a list of the materials on hand in the stock, or stores room, taken at cost price, which must agree with the accounts in the stock, or stores ledger or on cards. Where purchases of the same article are made at different prices, the average price must be ascertained or separate accounts for different prices may be opened. h. The materials in process inventory is made up from the cost cards or from the job ledger for each of the orders, jobs or contracts which are uncompleted. Where the materials were purchased at different times at different prices, the average price for the materials in each order, job or contract must be ascertained, or separate accounts may be kept with the same items at different prices. c. The labor inventory consists of the direct labor on uncompleted orders, jobs or con- tracts, made up from the cost cards or job ledger. d. The manufacturing expense inventory consists of all manufacturing expenses yet to be charged to work in process. When manufacturing expenses are distributed on a percentage basis, this inventory is found by calculating the manufacturing expenses that have accrued on the uncompleted work in process. (Read 1[723 ; then read ^724) . If manufacturing expenses are distributed through machine, productive factor or productive center time, the inven- tory would include any productive hours that have not been charged on the cost cards or i n the job ledger, and any idle machine hours if idle time has not been included in the supplementary rate. A separate record should be kept of idle machine hours, which, taken in connection with the results shown by the manufacturing account, would give a complete analysis of manufac- turing expenses and shop, or works, efficiency. e. Factory expense inventory is similar to the ordinary expense inventory. (1[464-474c) These inventories, like the other manufacturing account inventories should be treated as directed in rule 172. /. Finished goods inventory is in every way similar to merchandise inventory, described in If 169, except that it is always taken at cost price, whereas, if there has been any depreciation or change in value, it should be disposed of as instructed in 1[169a. MANUFACTURING STATEMENTS 239 MANUFACTURING STATEMENTS. 755. Four principal statements are usually prepared at the close of each fiscal period from the books of a manufacturing business: the manufacturing statement, to show the cost of production of goods manufactured during the year or other fiscal period; the trading statement, to show the gross trading profit or the gross trading loss from sales for the period (^234); the profit and loss state- ment, to show the net profit or the net loss for the period and its disposition at the close of the period (1[437); and the statement of resources and liabilities, or balance sheet, for the period (^487). The first of these statements is peculiar to the manufacturing business; the last three are in every way similar to those of a trading business, which are fully explained in previous chapters. 756. The form of the manufacturing statement is determined, to some extent, by the classification of the accounts in the general ledger, which is also true of the results shown in the final trial balance from which the statement is prepared. When the department method of accounts is followed, the final trial balance supplies most of the data for a very comprehensive proof statement show- ing the disposition of the various cost elements in the manufacturing processes. When the cost method of accounts is followed, the trial balance and the accom- panying statement are usually much briefer, as the various cost elements are fully accounted for, proven and disposed of in the current control accounts, although the manufacturing statement may be made as complete as desired by going to the ledger accounts for supplementary information. 756a. The difference in results shown in the trial balances of two groups of manufacturing accounts, both made up from the same series of transactions, one group kept by the department method and the other group by the cost method, is strikingly illustrated in the trial balances shown in illustrations 103 and 108, and the manufacturing statements made up from each. These differences are noted in the explanatiojns showing the reconciliation between them. 757. To show cost elements and their disposition in detail, manufacturing statements should be prepared in two parts, the first part to show the prime cost of the goods manufactured or partly m'-inufactured for the period, the second part to show the factory cost, or cost of production, of the goods manufactured for the period, corresponding with the first two items in the cost formula, ^664. Part 1 is made up from those accounts which show cost of materials and of direct labor, and of any other items that enter into the prime cost of the goods manufac- tured or partly manufactured. Part 2 is made up from those accounts which show the cost of the manufacturing expenses (burden and overhead), and of any other items which, added to prime cost, snter into the total cost of prodimtion of the goods manufactured. 240 BOOKKEEPING AND ACCOUNTANCT FORMULA FOR MANUFACTURING STATEMENT Part 1, showing prime cost. 75S. Elements of cost for period consist of: a. Cost of materials on hand at the begin- ning of period, as shown by inventory or by balance of materials account. (H 707) b. Cost of partly manufactured goods on hand at the beginning of period, includ- ing cost of materials and direct labor (prime cost), as shown by inventories; or, when the cost method of accounts is followed, by balances of "materials in process" and "productive labor" ac- counts for the previous period. (1[ 713, 718) c. Cost of purchases for the period, less returns and allowances, as sho\vn by the material accounts when kept under either the department or cost method. (11705a) d. Cost of productive labor (direct labor) for the period, as shown by the labor account. (U'716a) 759. Disposition of costs shown in: e. Cost of goods manufactured during period, including cost of material and direct labor (prime cost), as shown by the material and labor accounts; or, when the cost method of accounts is followed, as shown by credits to the "materials in process" (If 712c) and "productive labor" (1[ 7176) accounts, the contra of which is charged to fin ished goods account. /. Cost of partly manufactured goods on hand at the close of the period, valued at prime cost, as shown by unfinished orders, jobs or contracts; or, when the cost method of accounts is followed, by the sum of the balances of "materials in process" (1[ 713) and "productive labor" accounts (prime cost). {^ 718) g. Cost of materials on hand at the close of the period, shown by the inventory; or, when the cost method of accounts is followed, by the balance of the mate- rials account. (1[ 707) Part 2, Bhov/ing cost of production. 760. Elements of cost consist of: h. Cost of manufacturing expenses at beginning of period, as shown by inven- tory; or, when the cost method of ac- counts is followed, by the balance of manufacturing expense account at the beginning of period. (1f723) i. Cost of goods manufactured during the period, as described in item "e ' above (prime cost). J. Cost of manufacturing expenses for the period, as shown by the manufac- turing expense account or accounts for the period. (^ 721o, 6) 761. Disposition of costs shown in: k. Cost of manufacturing expenses on partly manufactured goods, at the close of the period, as shown by the balance of manufacturing expense account or accounts. (If 723) I. Cost of goods manufactured during the period, at total cost of production, as shown by finished cost sheets or orders; or, when the cost method of accounts is followed, by the amoiuit charged to finished goods account for the period. (H 741a) MANUFACTURING STATEMENTS 241 762. The elements of cost included in a complete manufacturing statement for a given period may be cleariy understood from the formula opposite, in which the items are shown in the position and order in which they should appear in the statement. It will be observed that a statement prepared after this formula will show not only the various elements of cost entering into the total cost of production, but also a proof of the correct distribution of these costs by account- ing for them in the completed and partly manufactured goods for the period, and in the proven balances shown by the control accounts. 763. A final trial balance, taken from a set of books in which the manu- facturing accounts are kept by the department method (^687), is shown in illus- tration 103. The manufacturing accounts are indicated by the letter "M" in the margin. Illustration 103 TRIAL BAT.ANCS, IEC3EMBER 31, 19 TOED IIFS. CO. Cash - par C. B. 10200 00 3^/X^ Cash - petty 200 00 u Materials and supplies 3600 00 u Uatorial in procosa 2700 00 M Labor in process > Inventories, Jan. 1, 19 1400 00 U Manufacturing ejcpenses Finished goods 650 7000 00 00 Accovmts Receivable 17500 00 Machinery 29000 00 Small Tools 1800 00 Office furniture and fixtures 500 00 Store Fixtures 500 00 Accrued Taxes 100 00 Accrued Pay-roll 1200 00 Accounts Payable 6000 00 Smrplus 8200 00 Reserve for Uncollectable Acooiints 350 00 Reserve for Depreciation on Uachinery, etc. 1500 00 Capital Stock - Preferred 250 shares at $100 25000 00 Capital Stock - Comnon 250 " 25000 00 U Materials Purchased 53000 00 M Labor 34000 00 Sales, less returns, allowances & discounts 116200 00 U Manufacturing Expenses 12000 00 Selling Expenses 5000 00 Administrative Expenses 4100 00 183550 00 183550 00 764. Inventories. The inventories at the close of the period, December 31, are as follows: materials and supplies, $8500; materials in process, $4200; labor in process, $1750; manufacturing expenses, $1480; finished goods, $9420, 242 Illustration 104 Th^J. BOOKKEEPING AND A(?COUNTANCY MAiriTFACTOTIKG SOlATEJElCr FOP. YEAR BKDIKG IEC51IBER 31, 19 Prlmo Cost. c-y yoy IWENTOHIES, Jan. 1, 19 , Uatorials and supplies at cost c Matsrials in process - partly mfg'd goods I Labor in process - " PDBCHASES OF MATERIALS and other manufacturine 8\q>plioa during period, including inward freight and oxpress- age. less returns, allowances, discounts, etc. PRODUCTIVE LABOR for period Production Cost . 'MANUFACTURIHG EXPENSES of preceding period applloahlo to partly manufactured goods PRIME COST of goods namifactured during period, brought MAKUPACTURINO EXPENSES during period: - Rent of factory Taxes of factory Stationery and supplies Insurance on materials sind machinery Superintendence Wages of forenan and factory clerics Wages of firemen, engineers and oilers Fuel and lighting Rei^airs and renewals on machinery Depreciation on machinery dam 2700 1400 2200 200 100 500 1500 2400 2500 500 600 1500 3800 4100 53000 34000 94900 850 80450 12000 93300 765. Manufacturing statement — department method of accounts. The statement in illustration 104 is made up from the trial balance, illustration 103, and the inventories at the close of the period. The American, or standard form of statement is shown in the illustration. The items in detail, entering into the total manufacturing expenses as shown on the statement, were found by an analy- sis of the manufacturing expense account. The same is true of the items making up the total selling expenses and the total administrative expenses shown in illustrations 105 and 106. 766. Preparation of the manufacturing statement when manufacturing accounts are kept by the department method. Explanation: Notice that Part 1 of the statement shows 'prime cost, and that Part 2 shows cost of production, in agreement with the formula for manufacturing statement. (11664) Part 1. (1) Inveritories, January 1, 19 , consisting of three items, are, inventories at the close of the last preceding fiscal period, taken from the trial balance. (H 174) (2) Purchases of materials are shown by the debit balance of materials account in the trial balance. (3) Productive labor is shown by the debit balance of the labor account in the trial balance. MANUFACTURING STATEMENTS TOB TQIiD MMFACTimiiro CO.. PITTSBUBG. PA. 243 ■jCa 2.2- PBIME COST (natorials and labor) of eoods manufacturod during period, carried down . lOTEKTOEIES, Dec. 31, 19 , Materials and supplies, at cost Materials in process - partly mfg'd goods Labor in proooss MAmrFACTURIira EHCTSES applicable to partly manufactured goods .H , PKODUCTIOH COST of goods manufaoturod dxiring period, camp to trading statement 4200 1750 80450 8500 5950 94900 1480 91820 93300 (4) Frime cost is the difference between the debit items showing cost of material and productive labor, and the credit items showing the inventories at the close of the period, i.e., it represents the cost of the material and labor entering into the goods manufactured during the period. (5) Inventories, December 31, 19 , consisting of three items, are the inven- tories at the close of the present fiscal period. (1[174) Af ':er this item is entered, Part 1 of the statement should be footed and ruled, as shown in the illustration. Part 2. (6) Manufacturing expenses during preceding period, the first item on the debit side of Part 2, is the inventory of manufacturing expense accou;nt at the close of the last preceding fiscal period, as shown in the trial balance. (7) Prime cost is the first item on the credit side of Part 1 brought down. (8) Manufacturing expenses for the period are found in the debit balance of manufacturing expense account in the trial balance, th,e various items being found by an analysis of that account. (9) Manufacturing expenses, the first item on the credit side, is the amount of the inventory of these expenses at the close of the present fiscal period. (10) The production cost of the goods manufactured during the period is the difference between the sum of the debit and the credit items, which completes Part 2 of the statement. The production cost, represented in the last credit item, is the connecting link between the manufacturing and the trading statement, that item being shown as the second item on the debit side of the trading state- ment. 244 BOOKKEEPING AND ACCOUNTANCY IlXUSTBATION 106 TRADIKG STATJSffiirr POR YEAS EKDIKG DECKT.TFSER 31, 19 IHVEUTORY, Deo. 31, 19 , Uanufaotured goods on hand at closo of preceding period GOODS I'JIITUFACTURED during period, per nanufacturing' statement Total cost of manufacttired product Le93 INVEirrORY manufactured goods on hand, at close of this period, Dec. 31, 19 , Cost of goods sold Gross trading profit carried down SELLIHG AlH) DISTRIBUTING EXESUSES, Freight outward Cooaisslon for selling Salesmen's salaries Wages of shippers and pacltora Insurance on stock, etc. Traveling expenses Supplies Advertising Heat and light Rent show-room Storage, - outside warehouse Depreciation on fixtures lET TRADING PROFIT carried to profit and loss statement 100 20C 2500 600 5C 1230 50 100 10 100 50 10 7000 91820 98820 9420 69400 26800 116200 5000 21800 26800 767. Trading statement. This statement is similar in all essential partic- ulars to the trading statement of a mercantile business. (^240) It is shown in illustration 105. The statement of resources and liabilities is shown in illus- tration 107. Illustration 108 PROFIT ATO L063 STATEMENT FOR YEAR EUDING DECEUBSR 31, 19 ABIIUI STRATI VE EXPENSES Rent of offices Insurance on furniture 4 fixtuxoa Taxes - proportion Interest on loans Officers' salaries Clerks* salaries Audit fee Stationery and office supplies Heat and light Repairs, office furniture Reserve for doubtful accounts Depreciation on furniture NET PROFIT for period, carried down DIVIDEND Preferred stock, $25000, at 1% Conmon stock, $25000, at 10% SURPLUS PROFITS carried down Surplus, Dec. 31, 19 , as shown on balance sbsat 100 18 50 30 2000 1000 200 50 100 60 400 92 1750 2600 4100 17700 21800 4250 13450 17750 21650 £1650 MANUFACTURING STATEMENTS TlIE TODD UAHDFACTUBIHG CO. , PITTSEUBG, PA. 245 Sales - less retuma, allowances and dlsoounta Gross trading profit bi-o't down 11620C 116200 26800 26600 768. Profit and loss statement. This statement, shown in illustration 106, while similar to the profit and loss statement explained in ^[435-445 is divided into three parts, the first showing the net profit for the period, the second showing the distribution of the net profits for the period, and the third showing the undivided profits, or surplus, of the business at the close of the period. THE TODD ILMOTACTTOIHG CO., PITTSBDBG, PA. HET TRADINO PROFIT from trading statement UET PBOPIT bro't down SUBPLU3 PROFIT, sxirpl'as a/o, Jan. 1, 19 SURPLUS profit for period, bro't doTOi 21600 21800 17700 17750 8200 15450 21650 246 Illustration 107 BOOKKEEPING AND ACCOUNTANCY ST4TE:XEET of KESOOBCES Aim liabilities, lECBaiBEE 31, 19 Cash in offlco Cash In banic Inventories, - Materials in stock Materials in process Labor on materials in process Manufacturing expenses Finished eoods in stock Accounts receivable Less reserve for uncollectablo aocpunts Total current resources (assets) Machinery Less reserve for depreciation Small tools Office furniture and fixtures Store fixtures Total resources 200 10200 6500 4200 1750 1480 9420 17500 550 29000 1500 500 500 Illustration 108 nHAL TBIAL BALAITCE, DECEMBER 31, 19 THE TODD MFG. CO: Cash - per C. B. Cash - petty Materials Materials In Process Productive Labor Manufacturing Expense Finished Goods Accounts Receivable Machinery Small Tools Office Furniture & Pirturfls Store Fixtures Accrued Taxes Accrued Pay-roll Accotmts Payable Surplus Reserve for Uncollectable Acoounts (contra in admr. ex. a/c) Reserve for Depreciation on Machinery, etc. (contra in Mfg. Exp. 4 Factory Exp.) Capital Stock Preferred Capital Stock Comnon Cost of Sales Sales Selling Expense Administrative Expense 250 shares at $100 250 " "100 10200 200 8500 420C 1750 1460 9420 17500 29000 1800 500 500 894CC 500C 410C 183550 10400 25350 17150 52900 27500 1800 1000 83200 100 1200 6000 6200 350 1500 25000 25000 116200 18355C 769. The final trial balance, taken from a set of books in which the manu- facturing accounts are kept by the cost method (^689), is shown in illustration 108. The amounts were made up from exactly the same transactions that entered into the accounts shown in the trial balance in illustration 103. It will be noted that the trial balance under the cost method is considerably shorter, and that the balances shown by the manufacturing accounts differ from those MANUFACTURING STATEMENTS 247 THE TODD MAITUFACTOBIKG CO. , PITTSBURG, PA. Aocrued taxes, - estloatad Acomed labor Acoounts payable Total current llabilltleB Dividends declared Preferred stock, $25000, at 7% Common " 25000, " 10^ Total liabilities Capital stock issued Preferred Cofflfflon General Profit arid Loss aoco\int Surplus, Jan. 1, 19 , Deo. 31, 19 , 1750 2500 25000 25000 6200 13450 IOC 1200 6CO0 730C 4250 11550 50OO0 21650 63200 showTi in the trial balance under the department method. When both methods are thoroughly understood, however, it is not difficult to reconcib the manufac- turing accounts of one trial balance with those of the other, as is explamed in 1[771. It should also be noted that while the balances of the materials, materials in process, productive labor, manufacturing expense, and finished goods accounts in illustration 108 show the inventory value of those accounts at the close of the present fiscal period, the balances shown by similar accounts in illustration 103, under the department method of accounts, show the inventory values at the close of the last preceding fiscal period. 770. An interesting exhibit of the manufacturing accounts under the cost method may be had by opening each account with the inventories shown in the trial balance, illustration 103, and posting the journal entries, shown in illustration 109, which represent in totals the entries made during the year in the various cost journals. It will be seen that the balances shown by these accounts at the close of the period agree with the balances shown in trial balance, illustration 108. Analysis Showing Agreement of Manufacturing Accounts in Trial Balance, Illustration 108, with Similar Accounts in Trial Balance, Illustration 103. 771 . This analysis explains the essential differences between the cost and the department methods of accounts. It shows also that while the results are different in each corresponding account, they are, in fact, harnaonious, each being correct under the method employed for keeping it. 248 BOOKKEEPING AND ACCOUNTANCY Illustration 109 SERIES OF EUTPIES SHOVTIKG AGGREGATE AITOUKTS DEBITED AUD CEEDITED Po». MARUFACTUEING ACCOUin'3 FOR THE YEAP, EEri TH3 COST KSTHOD. TO 747 748 749 750 751 Ifaterlals • Accounts Payable Materials In Process Materials Materials Materials in Process Productive Labor Cash Manufacturing Expenses Factory Expenses Finished Goods liaterlals in Process Productive Labor Manufacturing E:q)ense Cost of Sales Finished Goods Purchases Pequisltions Eetumed to stores Pay-roll fron cash book Estimate for jrear, per general journal General journal 53000 50600 2300 34000 12000 91820 89400 Illustration 110 M^:Z^^^y:iAi 53000 50600 2300 34000 12000 46800 33650 11370 89400 f9 yhyj^ ^17 ^(2/^-S7-€r^c£P".0 Q .^/ (%ayO /yia£e.^voaAi ^ QG Qa^y ^OJ/ Ar t>^ /V^rr^r^^ fS'^iTon (a) Materials account. This account, illustration 110, is debited, first, with the balance brought do^vn from the last preceding fiscal period, December 31, $3800. This amount corresponds with the amount shown as the inventory of materials and supplies in trial balance, illustration 103. The materials account is then charged with the materials purchased for the period, $53000 (5[705a), and with the materials returned from work in process, $2300. (^7056) It is credited with the amount of material requisitioned for work in process during the period, $50600 (^706c), the balance of the account, $8500, being the amount shown on trial balance, illustratiop 10^ (^707) MANUFACTURING STATEMENTS 24S Illustration 111 myOlM^^Zo <=h?j(^y(77Xdjy -I 1/2:201 ^ .? / I y 7^y2^:<^^<^,^Z£<^^ v^-7^. ', ^Cz£;.Srt^ c£^:rvin^l Si-y ory v^g Coo im JLZ. >^±. My/ft , A^xz^y,^,^// <^^2ft^^y^.e.c^/^crr/r^ J1300 ^ /',>!? Oft -RjJrp -^X r?)aJ?/Ouwcit-^/YunAAtflTbi _lLJLM \55ryJ^y^r-Tri'£)UrZfrt^ U-20O (b) Materials in process account. The balance in this account, $2700, illustration 111, agrees with the item for that account in trial balance, illustration 103. It is then charged with all goods requisitioned from the materials account for the period. (^71 la) The account is credited for any materials returned to the store-room and charged back to the materials account (7126), and for the amount of material used in finished orders, jobs or contracts, at cost. (712c) The balance of the account shows the cost of the material in the uncompleted work in process, $4200, being the amount shown on trial balance, illustration 108. (!i713) Illustbation 112 (^^.r/r/y./W^y/rJfmJm/ /da£<.ySrvi^C^,n.(n^y /^^oo y'yCyf^U^^J'y^^^A/ 3'-/'aoo rpi.<^ ii. CJU-VArx/viJjyvt^ \ \5 C / /^a//Arrr^ c^^rvvT^ / 7'S-O (c) Productive labor. The balance brought down in this account is $1400, agreeing with the inventory of labor in process in trial balance, illustration 103. The account is then charged with direct labor for the period (^716a), and is credited with the direct labor expended in goods manufactured for the period (117176), the balance of the account, $1750, agreeing with trial balance, illus- tration 108. (11718) [liLTJSTRATION 113 M7/?^y/^/7^^^^^^ ^^fyyj^^^y 250 BOOKKEEPING AND ACCOUNTANCY (d) Manufacturing expense. On trial balance, illustration 103, $850 is shown as the amount of the inventory for this account, brought down from the previous period, which agrees with illustration 113. It is then charged with the estimated manufacturing expenses, $12000. (1|721a, b) It is credited for the expenses distributed in the goods manufactured (^722c), the balance, $1480, agreeing with the item in trial balance, illustration 108. (^723) Illustration 114 m^^AA/y// ^,/7Pl/jy ^ /?!K7j'^^rifi^c/.^r-^tr>^ -7^ c/M^(^^^J- &CH^^ ^a/t^ /i ^^4. : S< ?'/^ c M 'ZZZ. ±L i/?Mc/rX^i <^"^' (v8g^o ^gF.2-<) -^ /^r/^Arrrf' c/^,t'->^ ryq^^o (e) Finished goods account shows a balance brought down of $7000, corresponding with the inventory in trial balance, illustration 103. It is charged with S91820, the cost of the goods manufactured during the period. (^741a) It is credited for the cost of the goods sold during the period, $89400 (*[[7426), the balance of the account, $9420, agreeing with trial balance,, illustration 108. (11743) 772. A careful study of these ledger accounts and the references given, will show that all the elements of cost included in the manufacturing statement, made up from the manufacturing accounts kept by the department method, illustration 103, have been included, proven and disposed of in the manufacturing accounts kept by the cost method, the final results being shown in the balances of the accounts and in the debit of $91820 to finished goods account, the connect- ing item between the group of manufacturing accounts and the group of selling accounts being the cost of the goods sold, $89400, which is the total credit to finished goods account for the period. 773. Manufacturing statement — cost method of accounts. When the manufacturing accounts are kept by the cost method, the manufacturing state- ment shown in illustration 104 may be prepared, but the accounts in the ledger must be referred to for part of the information necessary, as follows: Part 1. (1) Inventories, January 1, 19 , instead of being taken from the trial balance, illustration 103, are found in the inventory balances of the materials, materials in process, and productive labor accounts, brought down from the preceding fiscal period, January 1, as s^own in the accounts in illustrations 110-114. MANUFACTURING STATEMENTS 251 (2) Purchases of materials, $53000, is the sum of the purchases for the period shown on the debit side of the materials account, exclusive of the items for materials returned from work in process and the balance of the account at the beginning of the period. See illustration 110. (3) Productive labor. $34000, is shown by the debit footing of productive labor account, exclusive of the inventory at the beginning of the period. (4) Prime cost of goods manufactured, $80450, is the sum of the credit footing of materials in process account less items of materials returned to stock- room, $46800, and the credit footing of productive labor account, $33650. (5) Inventories, December SI, 19 , are shown by the balances of the materi- als, materials in process, and productive labor accounts, as shown in the trial balance, illustration 108. These balances equal the inventory value, at cost price of the materials in stock, materials in process of manufacture, and produc- tive labor charged to work in process. (Tj 707, 713, 718) This completes Part 1 of the manufacturing statement, under the cost method, and the footings of the two sides of the statement must be equal, i.e., all of the costs charged on the debit side of the statement are accounted for on the credit side of the statement, the balances being supported by inventories, which are again proven by the various subordinate factory books and journals, such as the materials ledger, etc. Part 2 (6) Manufacturing expenses during preceding period, the first item on the debit side of Part 2, is the balance of the manufacturing expense account brought down from the preceding fiscal period, as shown in that account in illustration 113. (7) Prime cost of goods manufactured during the period is the amount shown in item 1 on the credit side of Part 1 of the statement, brought down. (See H 773 (5) ). (8) Manufacturing expenses for the period are shown by the debit footing of manufacturing expense account, exclusive of the inventory of the preceding period, brought down January 1. (9) Manufacturing expenses, the first item on the credit side of Part 2, is the inventory value of these expenses at the close of the present fiscal period, shown by the balance of manufacturing expense account. (H 723) dO) The production cost of goods manufactured during the period $91820 is the debit footing of finished goods account, exclusive of the balance of the account for the preceding fiscal period, brought down January 1. It is the amount charged to finished goods account during the period from the finished goods journal and equals the sum of the credits to materials in process ($46800), productive labor ($33650), and manufacturing expenses ($11370). (1[712c, 7176, 722c) 252 BOOKKEEPING AND ACCOUNTANCY 774. Manufacturing accounts, under the cost method, are self-proving. On the debit side they show the costs of material, labor and manufacturing expenses; on the credit side they show the disposition of these costs through the various manufacturing processes until the final result, shown in the total cost of produc- tion, is reached, for which finished goods account is debited. (1[741a) The balance shown by each account is also self-proving, as it must agree with the inventories and the results shown by the various supplementary cost books and records, such as the materials and stock ledgers, cost cards, sheets, and summa- ries. For this reason, the manufacturing statement is frequently omitted, the "cost of merchandise sold" being the connecting item between the manufactur- ing and the trading accounts, as shown in illustration 114. It will be noticed that the trading and profit and loss statement, illustration 115, is in report form. It may be prepared in the standard form, as shown in illustrations 105, 106. Illustbation 115 TPuADITO AND PROFIT & LOSS STATEMEHT, DECEMBEE 31, 19 Gross Sales Less returns, allowances & dlacoiints Ket Sales Less cost of merchandise sold Gross trading profit for period Less Selling expenses, viz.. Freight outward Coinnlssions Saleemen'B salaries Wages shippers and pactors Insurance on stock Traveling expenses Supplies Advertising Gas, fuel and light Bent Storage (outside warehouae) Depreciation on Fixtures Net Trading profit for period Administrative expenses, - Bent (proportion) Insurance on fixturea Taxes (proportion) Int. on tenp. loan Officers* salaries Salaries of office clerks Audit fee Stationery & office supplies Gas, fuel and lighting (proportion) Repairs - office fixtures Uncolloctable accounts (Charge for contra to reserve) Depreciation on firturoa Eet profit for period Dividend declared, - Preferred stock, $25000, at 7% Common " 25000, " lOjS Balance to Surplus a/c 116500 300 100 200 2500 600 50 1230 50 100 10 100 50 10 100 18 £0 30 2000 1000 200 50 100 60 400 92 1750 2500 116200 89400 26800 5000 21800 4100 17700 4250 MANUFACTURING STATEMENTS 253 775 . A statement of manufacturing operations may be prepared to accom- pany the preceding trading and profit and loss statement, if desired. By refer- ring to the ledger accounts, illustrations 110-114, it will be seen that this state- ment is nothing more than a statement in report form of the facts shown by those accounts. Illustration 116 j' l'ATSJJSOT OF MAITOFACTDRIiro OFERATIOHS F9B TRATi EirPIlTO lECEIIBEB 31, 19 . THE TODD MFG. CO.. PITTSBUBG. PA. UATEHALS a/c Inventory and supplies, Jan. 1, 19 , Purchases during period Materials requisitioned for work in process Less materials returned to stock Cost of materials transferred to work in process, during period Balance a/c - l^terials on band, per inventory MATEEIALS IN PE0CE33 a/c Inventory materials in prooeBS partly manu- factured, Jan. 1, 19 , Materials requisitioned during period, less returns teas Cost of materials in the completed product of the period Balance a/c - Eaterials in process at close of the period PRODUCTIVE UBOR a/c Inventory of labor on materials- In process, partly manufactured Jan. 1, 19 , Labor on completed and partly manufactured goods for the period Less Labor expended on completed goods Balance a/c - Labor on uncompleted work In process, at close of period UajTOFACTORIUG EXEEKSE a/C Inventory of ezjxsnses on goods in process, partly manufactured Jan. 1, 19 , Uaaufacturing eirpenses for period Lass Mfg. expenses charged to completed goods Balance a/c - Expenses on uncompleted work is process, at close of period PIHISHED GOODS a/C Inventory, Jan. 1, 19 , Cost of goods manufactured ^during period Matorials 46800 , Labor 33650 Mfg. Expenses 11370 Less - Coaft of goods sold during tha period, carried to trading statement Balance - Inventory on hand Dec. 31, 19 » 3800 530C0 50600 2300 2700 48300 1400 34000 850 12000 7000 91620 56800 48300 8500 51000 46800 4200 35400 35650 1750 12850 11370 1480 98820 89400 9420 254 bookkeeping and accountancy Forms of Cost Records, Reports, Books, Accounts, Statements, Etc. 776 . These forms may be designed in great variety, and for many purposes. Those shown in the following illustrations are general in character, and are intended to offer suggestions for forms that could be used for the purposes named, tather than to be considered as exact models, since they would likely have to be changed considerably, in size and descriptive matter, to meet the requirements of a particular cost system. The various journals receiving entries from these forms are frequently ruled to correspond. Such of the forms as can be conveniently printed and made out in copying ink, may be copied in the appropriate journals made up of copy paper, from which abstracts, or recapitulations, may be made up at the close of each month. Il^l.n«»TBATION 117 OTHER Date 19_. Ko. Make f o r Addres s Date Wanted Date Conpleted Here follows description of article, with instractions, drawings, etc. Material Keg. ITo. Eouted by. Pat In process Shop order Ho. Illustration 117. This is a suggestion for the form of an order, issued by the office to the superintendent of the factory or works for the making of a certain article or goods. It is usu- ally accompanied by a requisition for the materials, and not infrequently by drawings, blue- prints, detailed instructions and, where works are thoroughly organized, by a routine, or pro- cess sheet, indicatingexactly, in detail, the various processes to be followed and the productive factors to be employed, from the time the order is received in the works until the finished goods are completed. Illustration 118. This is a suggestion for a requisition blank, which is made out in the ©ffice, usually in triplicate, one copy going to the store, or stock-keeper, another following the goods to the work-shop, the third being retained in the office, where it is entered in the requisi- tion journal. (^. 748) MAMOFACTURING STATEMENTS 255 Illustbation 118 Req. No. REQUISITION FORM. Date Storekeeper - Delivery accormt of Order Number Stock Number Quantity Particulara Coot Amount -^~.^~^--^~' _^ — _ . . Delivered by Received above Signed. Ent'd Mat. Stock Ledg. , page Order charged. Cost Bee. Ent'd Req. Journal, page Illtjstration 119 MATERIALS RETURNED. Return KTo. Tftte Storolceeper - Credit returned material accoimt of- Order I'umber Stock Kunber Quantity Particulars Cost Amount _~~-^-^_— ^___-— — . — •^--«— ~-_-^_ Storekeeper receipt Returned by Ent. Raw Kat. Stock Ledg. Order credited, Cost Rec. Ent. Trans. In. Jour., page. Signed page. Illustration 119. This is a suggestion for a blank which is made out when materials r.re returned from the work-shop to the stock-room. It is entered in the transfer inward journal. (H. 749) The items atid the amounts in this, as well as in the requisition form, shown above, are entered in the stock ledger. Illustration 120 shows the form of a stock card, where the card system is used, or the rulings of a materials ledger. Not infrequently the ordinary form of ledger is used. Many prefer the loose-leaf form of ledger for this purpose. 256 Illustration 120 BOOKKEEPING AND ACCOUNTANCY STOCK CABD ClasB ifica t-.lnn TTn. Raw Material Kinin Locat Artl -In mm ion Received Delivered Balance | Date Sheet Ko. Quantity Price ^otmt Date Sheet Ho. Quantity- Price ifflount rate Quantity Price Anount Illustration 121 MILY TIMS TICKET Dopartment Date. name. Occupation. Clock Ko. Room Order Ko. Kind Operation Quantity Time Bate Amount Quantity 0. K. Price 0. K. Amoxmt 0. K. Tlldstration 122 Machine Ko. Article Time begvm . Total time. Chg'd by MACHIKS TIME TICKET Operator _ Finished. E'rly rate. Amt. $. Cost sheet Ko. Detail Eate Operation Bemarks No. fars. Illustrations 121 and 122. These are simple forms, which explain themselves. The Waily time ticket shows the time of the workman for the day. It may be made in the rorm of a weekly time statement. The machine time ticket is used to record the daily work performed by each machine, and should check against the order or job cards following each article through the factory. The pay-roll is made up from the daily time tickets. THE VOUCHER SYSTEM 267 Illustration 123 COST SHEET Cost of For. Address. Order Ho.. . rate Issued . . Comploted . . Billed . Materials Prod-uctive Labor Mamifactui Ing Ezpenses iBte Peg. Ho. Quantity Amoimt Eate Ticket Ho. Ho. hr'B Amoiait lector No. Time Pate AmoTint 1 — r m SrSffllAPT Coot Estimated Increase Decrease How Accounted For Hate rial 3 Productive Labor Ufg. Earpensea Total Fac. Cost Selling Exp. Profit Selling Price Correct Ezamined Supt. Approved Uer. Illustraiion 123. Cost sheets are usually kept in the office, but a cost card, ruled like the form of the cost sheet shown above the summary, usually follows each order, j ob or contract through the factory. This job card^ as it is usually called, is sent to the office daily, and it is from this card that the cost sheet is made up. Whenboundthey are called job ledgers. When the work is completed, the summary is filled out and proper entries are made in the finished goods journal (^i750), which completes the record of the manufacturing proeess. The illus- tration shows only one of many different forms of cost sheets and of j ob cards, which vary accord- ing to the requirements of the shop in which they are used. Frequently they are bound in loose leaf ledger form. It should be noted that in all the illustrations of forms, no attempt has been made to show the proper width of columns or maintain uniformity in the spaces, that being determined in the forms by the size of the headings. THE VOUCHER SYSTEM 777. This is a name given to a method of recording purchase transao- tions, whereby a separate account witli each person from whom a purchase is made becomes unnecessary, the aggregate total of such accounts being carried in an accounts payable, or vouchers payable, account, which in every particular corre- sponds with the accounts payable account described in ^50, illustration 9. 258 iLLUSTiaATION 124 BOOKKEEPING AND ACCOUNTANCY VOUCHSK Sate Vo. ro. Kane Address Productive Selling Expense | Materials Dr. Labor Dr. Advertising Dr. Otlier Expense Dr. 778. The advantages of the voucher system are so many that it has been adapted to meet the requirements of all lines of business. It is particularly use- ful in distributing costs in department accounts, cost accounts, supplementary expense accounts, and, in fact, all classes of accounts where considerable detail is desired. It may be used with almost equal facility whether a cash or credit business is conducted. 779. A voucher, in the ordinary business sense, is a name that is applied to any approved paper or document which is accepted as a truthful exhibit of business transactions, such as receipts, paid notes, acceptances and checks, certi- fied bnis, invoices, etc. A voucher is also termed a "warranty of title." As applied to the voucher system of accounts, it refers to a printed form attached to or relating to bills purchased, which contains a statement certifying to the cor- rectness of the bills and the purpose for which the amount called for in the voucher is contracted. iLLrSTRATION 125 Todd m inafi loturing Co., To_ Pittsburg, Pa. ,_ 19 Dato Deaoription Amovnt ^ — ' ^ — ■>./*— 'V^-v^^-V^./^--- i ^■~~— -^_--->J Approved Pres. Examined. Mgr. THE VOUCHER SYSTEM 259 REGISTEH Administration Ezponm iia^u. & Too la Totichere Pay. Stmdry Accts. Dr. When & How Paid Dr. Dr. Aoct. Cr. ABt. Nanio of aoct. iBte Ck. Ko. Aat. 780. Vouchers are prepared in a great variety of forms. In some forms, the check issued in payment of the voucher is included as part of it, while in other forms the check is omitted which, under ordinary conditions, is preferable, as voucher accounts may be paid by note or in other ways, as well as by check. 781. Illustration 125 shows the open voucher or "folder" as it is sometimes called. Illustration 126 shows the back of the same voucher folded, with debit accounts indicated. ter. Vouchor TJo. Data. .19- Paid by $- MATERIALS . 782 . Vouchers are recorded in a vouchers payable book, or vouchers regis- The form of this book varies, to conform with the classification of accounts in the general ledger, and usually contains a separate column for each account that is likely to be debited, with an additional column to receive items for which a separate column is not provided. Illustration 124 shows the form of a vouchers payable book, designed to receive the entries of a manufacturing business con- ducting a cost system of accounts, with separate col- umns for the various cost and expense accounts called for in the trial balance shown in illustration 108. The footings of these columns are posted in the general ledg- er to the debit of the accounts named, at the end of each month, while the total footing of the vouchers pay- able column is posted to the credit of vouchers payable account. The vouchers payable account is debited at the end of each month from the cash book, notes paya- ble book or other books receiving entries for payments of vouchers, in each of which a separate column should be kept to reeeiye such items. The balance of the vouchers payable account in the general ledger shows the balance owing on unpaid vouchers, i.e., bills thaC have been vouchered and recorded, but not paid. PROD. LABOR. . SELLiro EXP: Advertising ether Exp. ADMIKIS. EX?._ TOOLS & UACH. OTHER ACGTS. INDEX Accepted Drafts 178 Accountancy, defined 1 Account Books 186 Accounting, Cost, defined 202 Account Sales 184 Accounts, defined 3 Accounts Payable 15 Accounts Receivable 14 Administration Expense Account 88 Administrators and Executors' Accounts 165 Advantages of a Cost System 209 Agent, defined 154 Agents' Accounts 167 Analysis Sheets 147 Assets, defined 132 Bank Drafts 185 Bills 182 Bills of Exchange 185 Bill of Lading 185 Board of Directors, defined 194 Bonds 31, 164 Bonus Accounts 170 Bookkeeping, defined 1 Branch Store Accounts 161 Burden, defined 204 Burden, Distribution of 213 Business Capital 17 Business Papers 173 Capital Accounts 17 Capital Expense and Income Accounts.. 104 Capital Investment Accounts 104 Capital Stock ^ 193 Cartage 56 Cash 37 Cash Account 37 Cash Book 38, 187 Cashier's Check 181 Certificate of Deposit 181 Certified Check 180 Charges Prepaid 56 Check 180 Checking 130 Closing the Books 137 Closing Ledger Accounts Shown in Profit and Loss Statement by Separate JournalEntry 123 Closing Ledger Accounts Shown in Trad- ing Statement by Separate Journal Entry 74 Closing Ledger Accounts by Single Jour- nal Entry 143 Closing the Ledger (See Journal Entries to Close) 190 C. O. D., defined 166 C. O. D. Accounts 166 Collection and Exchange Account 165 Collection Sight Draft 176 Collection Time Draft 177 Commission, defined 155 Commission Account 160 Consignee, defined 154 Consignor, defined 154 Consignment Accounts 157 Consignments and Shipments 154 Controlling Accounts 15, 172 Copyright and Patent Accounts 171 Corporations 193 Corporation Accounts 196 Corporations and Partnerships, Differ- ence between 195 Cost Accounting 202 Cost, Elements of 200 Cost Formula 206-208 Cost Method of Manufacturing Accounts 223 Cost of Merchandise Sold (Cost of Sales) 69 Cost of Production, defined 200-206 Cost of Purchases, defined 69 Cost of Sales Account 234 Cost Records, etc.. Forms of 254 Cost System, Advantages of 209 Crediting Accounts 4 Creditor, defined 2 Creditors' Capital, defined 17 Creditors, Sundry 164 262 INDEX Current Expenses and Incomes 81 Current Liabilities, defined. 132, 146 Current Resources, defined 132, 145 Customers' Ledger 15 Days of Grace, defined 179 Debiting Accounts 4 Debit and Credit Items, Classification of 5 Debiting and Crediting Accounts, Gener- al Rule for 5 Debtor, defined 2 Debtors, Sundry 164 Delivery Equipment Account 117 Delivery Expense Account 87 Department Method of Manufacturing Accounts 221 Difference between Partnerships and Corporations 195 Discount, Interest and 100 Distribution of Indirect Expenses 213 Distribution of Manufacturing Expenses 213 Distribution of Burden 213 Distribution of Undivided Profits 127 Dividend Account 171 Doubtful Accounts 172 Drafts 176-178 Drayage 56 Elements of Cost 200 Errors in Trial Balances 190 Executors and Administrators' Accounts 165 Expense Account, Administrative 88 Expense Account, Delivery 87 Expense Accounts, General 91 Expense Account, Insurance 98 Expense Account, Selling 81 Expenses and Incomes: Use and Service Accounts 81 Expense and Income Accounts Property 104 Expense and Income Account, Real Es- tate 108 Expenses, Manufacturing 228 Express 56 Factors Expense Account 228 Factory Expenses 201, 204, 231 Factory Expense Account 232 Final Trial Balance 132, 241, 246 Finished Goods Account 233, 250 Finished Goods Journal 235 First Cost of Purchases, defined 46 Fixed Liabilities, defined 146 Fixed Resources, defined 132, 145 F. O. B., defined 56 Forms of Cost Records, etc 254 Formula for Manufacturing Statement. . 240 Franchise Account 172 Freight 56 Freight, Express, Drayage, etc., Out- going 85 Freight In Account 57 Freight Out Account 85 Furniture and Fixtures Investment Ac- count 112 Furniture and Fixtures Repairs and Re- newals Account 114 General Ledger 15 General Expense Account 91 Goods Returned 72 Good-Will Account 166 Gross Sales, defined 69-71 Gross Trading Profit, defined 70 Gross Trading Loss, defined 70 Indirect Expenses, Distribution of 213 Insurance Account 94 Insurance Expense Account 98 Interest and Discount Account 100 Inventories 53, 131,132 Inventory Account 53 Invoice 183 Invoice Journal 234 Journal, The 189 Journalizing 130 Journal Entries to Close Trading Accounts and Statement. .74, 143 Profit and Loss Accounts and State- ment 123,143 Labor 201 Labor Account 171, 227 Leasehold Account 165 Ledger, The 3, 189 Ledger, Customers 15 Ledger, General 15 Ledger, Materials 225 Ledger, Purchases 15 Ledger, Sales 15 Ledger, Stock 225 INDEX 263 Ledger, Stores 225 Liability, defined 132 Liability Inventories 133 Manufacturing Accounts 200-230 Manufacturing Accounts, Cost Method.. 223 Manufacturing Accounts, Department Method 221 Manufacturing Expenses 201, 228 Manufacturing Expenses, Distribution of 213 Manufacturing Expense Account. . . 228, 249 Manufacturing Expense Estimate Book. 235 Manufacturing Statements 239-253 Manufacturing Statement, Formula for. 240 Materials 201 Materials Account 225, 248 Materials in Process Account 226, 249 Materials Ledger 225 Merchandise Accounts Principal Trading Accounts 42 Purchases Account 43 Sales Account 49 Inventory Account 53 Subsidiary Trading Accounts Freight In Account 57 Warehouse Labor Account 60 Warehouse Supplies Account 58 Purchase Reb. and All. Account 62 Sales Reb. and All. Account 62 Purchase Discounts Account 64 Sales Discount Account 66 Merchandise Discounts 63 Merchandise Inventory 53 Shop-Worn Goods 53 Goods out of Style or Date 53 Mortgages Payable 31 Negotiable Instruments 25, 179 Net Capital, defined 20 Net Cost of Purchases, defined 46, 09 Net Insolvency, defined 20 Net Invoice Price, defined 46 Net Liabilities, defined 146 Net Resources, defined 146 Net Sales, defined 70 Net Returns from Sales, defined 69 Net Trading Loss, defined 122 Net Trading Profit, defined 122 Non-Ledger Inventories 133 Note and Acceptance Books 28, 34, 188 Notes Payable, defined 24, 173 Notes Receivable, defined 24, 173 Notes, Promissory 173-175 Notes Payable Account 31 Notes Receivable Account 25 Owner's Capital, defined 17 Ownership Accounts 16 Overhead Expenses, defined 205 Overhead Expenses, Distribution of 213 Partnerships and Corporations, Differ- ence between 195 Patent and Copyright Accounts 170 Payroll 222, 227 Personal Accounts 5 Ruling Personal Accounts 10 Grouping Personal Accounts 14 Plant Account 171 Posting 130 President, defined 194 Prime Cost of Purchases, defined 46 Principal Trading Accounts 42 Principles Involved in Profit and Loss Statement 122 Principles Involved in Taking Trial Bal- ance 139 Principles Involved in Trading Statement 72 Production Cost 200-206 Production Factor or Center 216 Productive Labor Account 227, 249 Promissory Notes 174 Profit and Loss Accounts 79-118 Profit and Loss Statements 118-130, 244, 245 Preparation of 121 Principles Livolved 122 Comparison of Facts 123 Property Investment Accounts 104 Property Expense and Income Accounts 104 Proprietor's and Partner's Capital Ac- counts 17 Proprietor's and Partner's Personal Ac- counts 22 Purchases Account 43 Purchases Book 187 Purchase Discounts, defined 64 Purchase Discounts Account 64 Purchases Journal 234 264 INDEX Purchase Ledger 15 Purchase Reb. and All. Account 62 Purchases Returned 44, 45, 71 Real Estate, defined 106 Real Estate Expense and Income Account 108 Real Estate Investment Account 106 Rebates and Allowances 62 Receipt, defined 182 Redemption Fund Accounts 168 Relationship between Owner and Busi- ness 21 Requisition Journal 235 Reserve Accounts 167 Resource, defined 132, 145 Resource Inventories 133 Resources and Liabilities, Statement of. 145 Sales Account 49 Sales Book 187 Sales Discounts, defined 66 Sales Discounts Account 66 Sales Ledger 15 Sales Reb. and All. Account 62 Sales Returned 50, 51,71 Secondary Liabilities, defined 17, 146 Secretary, defined 194 Selling Expense Accounts 81 Delivery Expense Account 87 Freight Out Account 85 Sales E.xpense 82 Shipping Invoice 183 Shipment Accounts 155 Shipments and Consignments 154 Sight Drafts 176 Sinking Fund Accounts 168 Shop Expenses 201 Shop-Worn Goods 53 State.ments 131 American Form 149-153 Continental Form 149-153 Manufacturing 239-253 Profit and Loss 118-130, 244 Report Form 142-145 Resources and Liabilities. . . . 145, 152, 246 Trading 69-79, 244 Trading and Profit and Loss. . 142, 150, 252 Statements of Account 1 83 Stockholders 194 Stock Certificate 194 Stock Deliveries Journal 235 Stock Ledger 225 Stocks and Bonds 164 Stores Ledger 225 Subscription Account 197 Subsidiary Trading Accounts 42 Sundry Creditors' Accounts 164 Sundry Debtors' Accounts 161 Sundry Liability Inventories 134-137 Sundry Resource Inventories 134-137 Taking Trial Balances 131 Term of Credit, defined 1 Time Cards or Tickets 222, 227 Total Cost of Purchases, defined 69 Trading Accounts 42 Trading Statements 69-79, 244 Preparation of 71 Principles Involved 72 Comparison of Facts 73 Trading and Profit and Loss Statements 142, 150 Transaction, defined 1 Completed 1 Uncompleted 1 Transfer, defined 179 Transfer Inward J,Durnal 235 Transfer Outward Journal 235 Treasurer, defined 194 Treasury Stock, defined 194 Treasury Stock Account 197 Trial Balances.. 131, 140, 141, 147, 241, 246 Undivided Profits Account 167 Undivided Profits, Distribution of 127 Use and Service Accounts 81 Value, defined 1 Voucher, defined 185 Voucher System 257 Wage Systems 212 Warehouse Accounts 58 Warehouse Labor Account 60 Warehouse Supplies Account 58 Work in Process, defined 226 TU i:l^Dbf M511295 f ft ] ' 5 ;